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 ?