Spiralling into the moussaka

From the morning links:

Explosive growth of unemployment recorded in Greece, with a total number of unemployed is at 733,645, according to data from the Greek Statistical Authority (ELSTAT) that were released Wednesday.

The percentage of registered unemployed reached 14.8% in December 2010 an increase of one percentage point compared with November.

The number of the employed workforce in the country fell to 4.23 million from 4.3 million the same period. Record low unemployment, record the ages of 15 -24 which rose 39% from 28.9% compared with December 2009.

Based on the geographical breakdown of the population, residents of the Ionian islands hardest hit as unemployment reached 23.1% due to the dramatic drop in tourist traffic.

It is significant that the region of Attica, the official jobless rate rose to 14%.

The new employment figures are in contrast to the moderate estimates of the government and the IMF experts are talking about “restraint” in unemployment to 14.5% in 2011 and increased slightly to 15% next year.

I am sorry but  “IMF expert” is a oxymoron.  This outcome was completely inevitable. Let us remember exactly what the Greeks  signed up for under the illusion of a rapid prosperous outcome:

Greece will not restructure its debt and will not need more cuts to achieve fiscal targets set in the emergency funding programme it agreed with the European Union and the IMF, its finance minister told a Sunday paper.

The debt-laden country has been offered a 110 billion euro ($134 billion) bailout to avoid defaulting on its debt and in return promised to cut the deficit by 11 percentage points of GDP and bring it below the EU’s cap of 3 percent by 2013.

Markets fear the drastic belt-tightening to secure the deal may plunge the economy into deeper recession and threaten its meeting fiscal targets, prolonging the country’s debt crisis.

“Greece will not need additional measures, especially ‘painful’ measures. I see only one option ahead, delivering on our targets with consistency,” Finance Minister George Papaconstantinou told Sunday’s Eleftherotypia newspaper.

Greece’s economy, which makes up about 2.5 percent of the euro zone, is expected to stay in recession for a second year in 2010 after a 2 percent slump in 2009.

The Bank of Greece projects the economic downturn will deepen, with GDP seen contracting by 4 percent this year, as tax increases and cuts in wages and pensions take a toll.

“The recession will be deepest in 2010 and thereafter there will be a gradual recovery,” the minister told the paper. “I remain optimistic and believe we will recover fast.”

So with 15% of the willing labour force sitting around twiddling its thumbs please explain how the country is supposedly going to recover ? Bring on Moody’s:

Moody’s Investors Service cut Greece’s sovereign-debt rating Monday by three notches to B1, infuriating the Greek government and temporarily denting the euro amid renewed worries about the ability of Greece and other debt-loaded euro-zone governments to avoid default.

The ratings agency, which also assigned a negative outlook to Greece’s ratings, highlighted the government’s difficulties with revenue collection and noted a risk that Athens might not meet the criteria for continued support from the International Monetary Fund and the European Union after 2013.

Difficulties with revenue collection? Translation : you can’t tax unemployed people:

That could result in a voluntary restructuring of existing debt, the ratings agency said. Last June, Moody’s cut Greece’s rating from A3 to junk status at BA1.

The decision to deliver a further multinotch cut Monday reflected concerns that the “fiscal consolidation measures and structural reforms that are needed to stabilize the country’s debt metrics remain very ambitious and are subject to significant implementation risks, despite the progress that has been made to date,” Moody’s said.

Seriously I actually laughed out loud when I read that.  What progress ? The Greeks are trying to implement the strict austerity regime as requested by the IMF and the EU. Moody’s are now punishing the Greeks for implementing that exact plan because guess what, the outcome doesn’t fit the deluded perception of what should be happening. It is a tag team of stupidity.

Here is the Greek past and predicted current account deficits chart:

And here is what I said would happen back in May 2010:

… if you think you can cut your GDP by 11% and suddenly your economy will be all roses you are utterly delusional.

If Greece cannot improve its current account balance ( which is nearly impossible given that it threw away control of its exchange rate when it joined the EU), then simple maths states that Greeces’ private entities need to reduce their current net saving position by 11% of GDP over the next three years. Realistically this means , more unemployment and probably debt deflation.

Just to make it clear, it is impossible for Greece to have deleveraging of both the public sector and the domestic private sector at the same time, because it does not run a trade surplus. The only way they could turn their trade balance around is to suddenly start producing a revolutionary new product the world must have, or for the Euro to fall much further so their export goods become cheaper to non-Euro countries. Given we can’t think of any up and coming Greek products ( although we hear they have a lot of uranium ) and given that a fair percentage of their trade is intra-European and their currency is tied to other bigger countries that have stated they will do “anything” to keep the Euro high then this seems impossible.

History is also against them in regards to deleveraging of the private sector. People usually want to spend money ( ie. lower savings , take on debt ) at times when the economy is good and/or their is a speculative bubble that urges them to move their money from cash savings. I think it is pretty fair to say that Greece is not going to suddenly see a tech/housing boom anytime in the near future and it is obviously that its economy is not good.

Also note that as unemployment rises ( one of the inevitable outcomes of this policy position ) then the government will need to provide the private sector with more unemployment and other benefits, this works against the exact thing they are trying to achieve ( less govt spending ).

The only conclusions that we can see is if Greece actually attempts to reach its imposed IMF targets then either private sector have to spend savings and take on debt , as we said above not something people usually do when the economy is in the cr*pper, or nominal private income will deflate.

It is therefore quite possible that they are heading for a “debt deflation” cycle because as the private sector attempt to pay down debt they are indirectly lowering their nominal income which leads to even more indebtedness.

But that is not the worst of it. As I explained in my recent post on Europes continuing mess, Greece was always going to be in trouble as soon as there was an economic downturn in Europe because they are trapped between the domestic policies of Germany and the inflexibility of the monetary system they signed up to when they joined the Euro.  The austerity package is failing, but it is only failing to fix the symptoms.  Without currency deflation the only possible outcome is lower wages for the Greeks, which will inevitably lead to default on loans, the exact thing the Germans and French are attempting to stop happening.

However I have to ask exactly what the EU are hoping to achieve. Let us for a minute pretend that the Austerity package does work without the collapse of the Euro banks and the Greeks accept the fact that they need to move onto a lower pay structure. Once the debt is cleared away Greece will suddenly appear as modern stable well educated economy with a low wage base that is extremely attractive to international companies. Under these conditions they may even become a net exporter into Europe.

Does anyone think that this will be acceptable to the French or the Germans ?

Comments

  1. first, love the quip about IMF experts…..

    second, I’m not so sure about the final paragraph. Whehter the Greeks can get themselves into this situation is one thing, but it’s completely another to think about under what time frame this can occur, and whether they they can really produce a viable export alternative to the high-tech Germans. Germans may be basking in an undervalued currency (to them…….a real Mark would be far higher), and wages being kept in check, but I just don’t see the Greeks being on same playing field.

    which brings me to third, the elephant in the room, unseen by the IMF by all accounts, is that an internal devaluation is a catastrophe. As Aussies, we know how an external devaluation (Aussie to 50c….remember that?) can be beneficial. Imagine if we’d had our wages cut by 20-30-40%…

    • FrankieFourFingers

      I can’t see the Greeks collectively accepting a pay cut. I can see them ditching the Euro and reverting to a devalued Souvlaki currency in order to maintain existing pay scales.

    • >second, I’m not so sure about the final paragraph. Whehter the Greeks can get themselves into this situation is one thing, but it’s completely another to think about under what time frame this can occur, and whether they they can really produce a viable export alternative to the high-tech Germans. Germans may be basking in an undervalued currency (to them…….a real Mark would be far higher), and wages being kept in check, but I just don’t see the Greeks being on same playing field.

      Well firstly my proposition was totally hypothetical, however my point was that once the wage base has declined then this would attract international companies to Greece. So it is not so much to say that Greece would be competing with Germany, but international companies using Greek labour would be.

  2. It’s lunacy. They are going to have to default or at least restructure their debt, and the sooner the better.

    Of course this would involve addressing the fiction that France and Germany’s banks are actually solvent…

  3. The Greek government have trouble with tax collection for a long time, and the government pension system is unsustainable. Greece has 2 choices : they can tighten their belt for a decade and pay off all the debt, or they can exit the Euro and default. Moody is basically saying that in 3 years time, the Greek government will default and leave the EU. Of course, the action will end up hurting so much that after another 3 years, Greece be begging to rejoin the EU.

    • >they can tighten their belt for a decade and pay off all the debt

      But can they without monetary changes?

      The point is that while they are trying are tightening their belts they are destroying their economy. At the same time they are still net importers and still importing debt from the Germans.

      >Moody is basically saying that in 3 years time, the Greek government will default and leave the EU. Of course, the action will end up hurting so much that after another 3 years, Greece be begging to rejoin the EU.

      Are you sure ? Can you explain exactly why if Greece defaulted on its Euro denominated debt and rolled back to the Drachma why it would be begging to join the EU again.

    • I agree with DE.

      By defaulting on its debt – not explicitly – but going back to the drachma, the debt is paid off. The French and German banks will just have to suck it, like any normal business does when it makes a bad investment.

      This will allow the Greek economy to re-balance – it will never be like a German style economy, rather a tier-two or three, but most of the imbalances will be sorted.

      There would be pain, and austerity as well (mainly no imports and a higher cost of living) but employment will rise due to lack of income used to pay down debt.

  4. “Difficulties with revenue collection? Translation : you can’t tax unemployed people:”

    Supposedly tax evasion is extremely common, which wasn’t a problem when the country was floating on easy money. But habits like that die hard, especially if people are already being squeezed by the economic contraction.

  5. I could not agree more. I’ve been telling that to my friends for quite a long time. Without haircuts, no solution. And the solution does not please the Germans.

    Keep up the good work

  6. Your analysis is only partly correct:
    The EU/IMF program provides a policy framework and specific targets. Policies to achieve the targets are, for the most part, the choice of the Greek government. For example the Greek government chose not to stimulate the supply side of the economy by liberalizing and deregulating the (stalinist) product and labor markets. It chose not to effectively deregulate closed professions. It chose to increase indirect (and direct) taxes taxes to extraordinary levels and drastically cut public investment instead of curtailing public (state) consumption. It chose not to get rid of superfluous public employees or restructure the public administration in order to improve effectiveness. In addition it has failed to curb tax evasion (which is at gigantic levels), failed to address the problems of health expenditure and corruption (estimated at 4-5% of GDP p.a.) and failed to sell any state assets, eventhough these were all commitments on the basis of which the EU/IMF program was designed.
    Of course debt restructuring is now unavoidable. However Greek banks and pension funds hold a large chunk of the debt (around 20%). It is difficult to envisage a way that the Greek economy does not collapse completely at a haircut of 30%, even if the Greek state puts the money back into the bank and pension system, because it still won’t have it and because some money will get “lost in translation”. An exit from the Euro will also not help because the banks would simply collapse (barring full scale nationalization and outright default). the only solution is that Greece stays within the Euro and undertakes full blown political and economic reform with massive privatizations, probably with a different/government prime minister. It will cost the EU at least another € 100 billion over the next few years. An interesting exercise in bad ways to give up sovereignty

    • Constantine Pikoulas

      You are spot on, the Vanity Fair article is the best writing on the Greek Crisis that has been written so far.