Archive for the ‘Greece’ Category

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There are two types of haircuts people dread. One involves a barber called Sweeny Todd and pies. The other involves debt. Of the two types of haircuts, the former never seems to be justifiable, the latter can be. And would you believe it, the latter may be back on again for the euro area. It is the story that the powers that be in the euro region want to die. It is the story that won’t die because when it comes to facing up to reality, euro leaders are as clueless as Bruce Willis’s pate is hairless.

Wolfgang Schaeuble, Germany’s finance minister, has owned up to a truth. Hard data tells an even more unpalatable truth, but the great and good in the euro area seem to be unable to spot this truth even when it is staring them in the face

Elections are difficult, and for those at the top in politics they are especially challenging. You can feel sorry for Wolfgang Schaeuble. The German election is but weeks away, and Mr Schaeuble was on the campaign trail. No doubt he was pressed hard; no doubt he would rather have kept quiet, but it spilled out anyway. Greece, admitted Mr Schaeuble, will need more money. But, he added, it won’t have any more of its debt cancelled. It won’t, to use the emotive word that has come to mean debt write-off, experience a haircut. Meanwhile, Capital Economics has done some number crunching and drawn conclusions to make the hairs stand up on the most follically challenged person.

Let’s assume that Greece, Spain, Portugal, Ireland and Italy can maintain their future fiscal deficits at their expected 2013 level. Then, according to Capital Economics, in order for each country to reduce government debt to 90 per cent of GDP within 20 years they must average annual growth of 5.4 per cent, 6.5 per cent, 6.0 per cent, 7.5 per cent and 3.0 per cent respectively. If they could somehow find a way of moving their primary fiscal budget into balance (primary in this case means before interest), the required growth would be 5.4 per cent, 2.3 per cent, 4.7 per cent, 4.1 per cent and 3.0 per cent.

In other words, the only way they can realistically bring their debt down is if the economies manage a pretty remarkable 20 years of impressive growth. What they really need, of course, is one of those haircuts, and investment. Or do they?

The EU’s economic and monetary commissioner Olli Rehn said that what Greece needs is more time. No new money, no haircut, just more time to repay its debts.

Angela Merkel chose to avoid the topic, and just to answer the question: will Greece need more money? she said, again on the campaign trail: “Greece has been making very, very good progress in recent months and we want that progress to be continued.”

Well is it making progress? Most of us had that written about us in our reports when we were at school. “Making good progress,” may be appropriate when applied to a seven year old, but it seems a tad patronising when applied to Greece.

The truth is that the Greek crisis just goes on and on. And it will continue to go on and on, because its targets are impossible. What it needs is a cheaper currency, less debt and more investment. Maybe it can get away without the cheaper currency if there were more money transfers between Germany and Greece. Then again, you only need to look at how some regions of the UK are impoverished to see how even full political union cannot fix the problem of regional economic disparity.

Sorry, to repeat a message that was stated here three years ago. But the euro is very much a part of Greece’s problem, and no matter how many haircuts it receives; no matter how much investment it obtains, without a cheaper currency the recovery may never happen.

© Investment & Business News 2013

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Beware of the TROIKA bearing gifts. The TROIKA is the collection of letters we use to describe the IMF, ECB and EU Commission and the organisations that, have clubbed together to provide money to Greece.

And everyone, with the exception of people living on Mars and members of the TROIKA, knows that the conditions imposed on Greece in return for providing more loans have caused the country to suffer economic depression. The IMF has already broken ranks, and said the TROIKA should have realised that Greek debt was not sustainable much sooner than it did, and should have agreed a haircut, in the process greatly alleviating Greek pain, at around a year earlier than it did.

Now a trio of economists – Dimitri Papadimitriou, Gennaro Zezza, and Michalis Nikiforos – have produced a model based on stock flow analysis, which suggests that Greek unemployment might rise from the horrendous 27.4 per cent level it is currently at, to 34 per cent by the end of 2016.

The lexicon is bare. Words fail. If 27.4 per cent is horrendous what is 34 per cent unemployment?

The three economists say Greece needs a kind of latter day Marshall Plan. They are right. Austerity in some sectors of the Greek economy, in particular the public sector, has to be tempered with equally significant levels of investment.

If Greece was Germany, global leaders would not agree to such austerity because they would fear the political repercussions. But this is little Greece. It may have been a superpower 2,500 year ago, but Alexander is dead, Sparta defeated, and the TROIKA vents its fury like the Titans escaped from Hades. For more see: A New Stock-Flow Model for Greece Shows the Worst is Yet to come 

© Investment & Business News 2013

The recession continues, but maybe there were a couple of bits of good (ish) news lurking in the latest data on the economies that make up the Eurozone.

The Eurozone is still in recession. GDP contracted by 0.2 per cent in Q1 of this year, according to data out yesterday. The region has now contracted for six quarters on the trot.

Germany and Belgium both expanded, but of the region’s major economies they were the only ones to see growth. The growth was nothing special either – 0.1 per cent in both cases. To put that in context, Germany contracted by 0.7 per cent in the final quarter of last year.

France contracted by 0.2 per cent, Italy and Spain both by 0.5 per cent, Portugal by 0.3 per cent, and the Netherlands by 0.1 per cent. In Austria the economy was flat. Ben May, European Economist at Capital Economics, said: “We still think that the consensus forecast of a 0.4 per cent fall in euro-zone GDP this year is too optimistic and expect something closer to a 2 per cent decline.”

Chris Williamson at Markit said: “The worse than anticipated start to the year will clearly worry policymakers at the ECB. The central bank has already responded to signs of a renewed weakening in the region’s economy, cutting its main policy rate to a record low of 0.5 per cent on 2nd May, but today’s data will add to calls that more action is required beyond what many see as a token gesture of a rate cut. The focus is turning to how the ECB might possibly emulate recent successful-looking efforts by the Bank of England to stimulate lending to small and medium sized companies.” The news on Greece, however, is oddly encouraging. Then again, everything is relative.

The Greek economy contracted by 5.3 per cent in Q1 over the same period last year. You might not think that is very good. But in fact that was the smallest contraction in Greece since the third quarter of 2011. Furthermore, credit ratings agency Fitch, recently upgraded Greece.

Then again, with unemployment at 27 per cent, further austerity yet to take its toll, and lending to businesses and households still falling, there are still reasons to be cynical about such optimism.

Capital Economics has long been predicting the partial break-up of the euro. It concedes that thanks to better than expected data on Greece, the chance of this happening imminently is “zero”. It still reckons a Greek exit is possible in a few years’ time, however.

© Investment & Business News 2013