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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Thursday, December 10, 2009

It's All Greek To Me

In the long run we are all dead. But as someone else famously put it: we ain't dead yet, and in the space between these two undeniable truths move forex traders, financial markets and a host of other would be economic participants. The financial press is full right now of headline catching stories about how Greece is at imminent risk of sovereign default. The German newspaper Die Welt even had a lengthy piece this weekend with the catchy title After Dubai, Who Will Be Next (the answer is obvious isn't, otherwise what is the point of the question). One has the impression of a Europe filled to the brim with financial journalists busily rumaging the entrails, in search of the least glimmer of light which will confirm that something decisive and earthshattering might actually happen (soon), what with the German Der Spiegel announcing at the weekend that Greece's growing public deficit problem is to be an item on the agenda at the next Governing Council meeting of the European Central Bank on December 17 (surely the big news would be if it wasn't going to be there), and Bloomberg's Maria Petrakis telling us that Greek Prime Minister George Papandreou is toiling away in what many might consider was a vain attempt to "convince investors he can tackle the worst fiscal crisis in 15 years".

To add even more theatricality to the "drama" groups of protestors predictably battled it out with police on Athen's streets, in marches that were ostensibly to commenorate the death of a young teenager in last years riots. Even the normally staid and prudent Economist throws its weight in behind the charge with a piece whose title tells it all: "Default Lines" (perhaps the words "in the sand" could have been thrown in to add a bit more tension), which goes so far as to suggest that a partial Greek default might even be welcomed by some Eurozone member states, since it might take some of the heat off a hard pressed euro.

As if to add a little more spice to the story, Standard and Poor's decided to pick this Monday to announce it was putting Greece's A- long-term sovereign credit rating on Credit Watch with negative implications, with the unusual little "extra" that it gave the Greek government only 60 days, as opposed to the customary 90, to respond with adequate information to avoid the decision of downgrading to BBB+ (a level which if it was generalised across the rating agencies would imply that Greek Bonds would no longer be eligible as collateral at the ECB once the temporary relaxation of normal criteria which accompanies the extraordinary liqidity measures is withdrawn - although who really knows when this is likely to be). Naturally bondholders were not slow in reacting to the news and the spread on the 10-year Greek/German bond yield widened again, to 201 basis points from the 174 basis points level of late last Friday.

Actually, this is far from the first time that investors and journalists have been getting excited about the default risk on Greek public debt. In fact that very same Spiegel had an article headlined Greece Teeters on the Brink of Bankruptcy as far back as last April (that's a hell of a lot of "teetering" that has been going on), while the ever interesting Willem Buiter had a lengthy and influential blog post back in January on the worthy topic of whether or not it was structurally possible for a member state to default on its sovereign debt and remain in the eurozone (his conclusion was that it was, and in fact I don't disagree with him).

But gentlemen are we not getting rather ahead of ourselves. As I said at the start, in the long run Greek Sovereign debt may be dead than the deadest of ducks, but it ain't dead yet, nor is it likely to be in the most immediate future, there is far too much at stake for all of us for this to simply be allowed to happen, "sin mas". In fact it was the much more cautious Moody's who made the relevant points here in a press release issued last Wednesday where it argued forcefully that investors' fears that the Greek government may be exposed to a liquidity crisis in the short term are totally misplaced.

Now words here do matter, Moody's are completely right, the Greek government will not be exposed to a liquidity crisis in the short term (as opposed to a sabre rattling threat of one from the ECB among others), but this does not mean that they do not face a solvency issue in the longer term. That is, in the longer term I am absolutely sure that Greek public finances are deader than that proverbial dodo, the thing is, the long run simply hasn't arrived yet.

Let Moody's talk, since they do talk sense in this case:

"the risk that the Greek government cannot roll over its existing debt or finance its deficit over the next few years is not materially different from that faced by several other euro area member states".

So here's the first point, the Greek situation is a bad one, but it is not "materially different" from that of a number of other eurozone member states (I will return to this) even if the risk of its losing sovereign bond collateral eligibility is greater than that of any other member state, at this point. In the second place what Greece is inevitably facing is not a liquidity crisis (I'm sorry Maria, no financial crisis at this point), but a long term solvency one if it can't raise its trend growth rate in the context of the looming cost of maintaining an ever larger dependent population with a declining and ageing workforce. That is to say, the strategic problem for Greek public finance is not the quantity of debt accumulated to date, but rather the impending dead weight of future liabilities, and how these can be met. In this case, short term technical default to wipe the slate partially clean and start-up again would resolve nothing, since without a much higher underlying growth rate (without the aid of government deficit funding) the impending liabilites are not supportable, and decision takers at Ecofin and the ECB know this perfectly well, which is why they may well rattle the sabres, but in the short term at least we will see little in the way of exemplary action. For a sovereign default in Greece (a mature developed economy) would be a complete first, and would take us all into very new, and uncertain territory, since it could quite literally become a default from which there was no viable route for return.

So What Is The ECB Up To?

The FT's Frank Atkins has confessed to having been struck by the comments on Greece made by Jean-Claude Trichet, European Central Bank president, at the press conference which followed last weeks ECB rate setting meeting. I am sure he was not the only one who was listening, and given food for thought.

When asked about the country’s acute fiscal difficulties and the risk of a possible default, M Trichet simply stated he had every "confidence that the government of Greece will take the appropriate decisions”. This remark, as Frank Atkins says, was notable for its lack of forecfulness and could suggest he does not entirely rule out Greece facing sufficient problems servicing its debt that it might be forced into the hands of an external agency like the International Monetary Fund.

Indeed M Trichet's statement could be interpreted as meaning that an exasperated ECB would almost welcome such an eventuality, and might by withdrawing easy short term funding from Greek Banks even give things a hefty shove in the direction of just such an outcome. But an ECB which does not frown on the possibility of their most recalcitrant pupil being steered briskly towards the welcoming arms of the IMF is not the same thing as an ECB which envisaging, contemplating, or even in its wildest dreams vaguely imagining a Greek sovereign default. Any suchbdefault would surely follow, and not precede a (flawed and failed) IMF intervention, or would be the inevitable by prooduct of Greece being unceremoniously ejected from the Eurozone by sheer market forces, with the ECB relegated to meer spectator, unable despite its best efforts to contain the situation.

So my reading of the situation as it stands now, is that policymakers will do all that is in the power (which is a lot) to avoid the markets having so much say in the matter, but that what they do want to do is keep up the pressure on the new Socialist administration in Athens. Their aim is surely to try to turn back the “moral hazard” screw whereby European Union authorities, in giving the impression that they will always and ever ride to the rescue, no matter what the provocation (and Greek statistical authorities sure have been doing some provoking), simply encourage member state governments to continue to act recklessly. And this becomes all the more important given the fact, as I mentioned earlier, that Greece is only one among several problem pupils, and that more than the credibility of the Greek government (of which surely there is little left), what is being tested is the credibility of the European Union's institutional structure.

We might be forgiven for getting the impression that to date rather than acting as a stimulus to deep economic reform, Euro membership has rather acted to reward those countries who would get into more and more debt, with ever less sustainable economic models, by supplying them with funding at far cheaper rates of interest than the markets would otherwise make available. It is this particular clockhand that Europe's leaders would now dearly like to turn backwards, and this is why I have little doubt that it is in Greece that a stand will now be taken. If not, then that longest of long runs may arrive rather sooner than some of us, at least, are comfortable with.


Gurús Mundi said...

A la UE li han faltat dècades de bonança per a poder fer viable la unió monetaria entre països divergents. Em nego a pensar que amb una aposta tan arriscada no es contemplés, al moment de la creació, la possibilitat de que la unió monetaria fes fallida, i que el trencament de la política monetaria única no estigui definit en el full de ruta com a opció B:

"Yogur griego, café irlandés y carajillo"

Salut y € (o el que sigui)

I. De Diego said...


I have translate an article of Mr R. Centeno, university professor of economist in Spain ( I tried my best). Is the best one about economy in Spain today.

What's happening in Spain?

What happens in Spain? Was the question posed a few days ago by a primarily responsible for a large multinational with interests in Spain. In a country with a decent government, central bank and a decent statistical system would be a rhetorical question. In the Spain of Zapatero, with a insolvent government that lies massively, a central bank who lies and a statistical system who lies also, the question is most relevant. And the answer is: They do not know. "Zapatero has lost credibility," said The Economist a couple of weeks ago. And as they do not know it, they stop investing, that simple. The foreign investments have collapsed a 90% in the first semester.

Zapatero said on Thursday in the presentation of the Economic Report that "recovery is imminent", that is, has ordered the political commissar of the National Sadistic Institution (INE) and the governor of the Bank of Spain that the fourth-quarter growth must be positive "as is " Never mind that the main indicators of output and demand say otherwise, it does not exceed the five million unemployed, no matter who is taking Spain to the ruins, they are lying without limit and make it back to their boss to start the EU Presidency with a vibrating "We have also come out of the crisis!", A must since its objective is "to make Europe stronger economically." Finally we are the laughingstock of Occident.

I. De Diego said...

What we know

And yet, nothing is further from the truth. In the final of this year 2009, the economy not only keeps falling, it falling faster. But above all, the increasing restriction of credit to households and businesses, reducing the incentives for third party, the rise in interest rates and the upcoming brutal tax increases, fees and prices for all services, will further reduce investment and private consumption, 87% of the GDP in 2010 and successive years

We see the last independent indicators of production and demand.

Consumption of electricity: -3,6% in November against -1,3% in October corrected of temperature and calendar.

Fuel consumption: -4,6% in November of 2009 versus. equal month of 2008, and also worse than in October, -2,8% versus October 2008. But in addition the gasolines collapse a -7,6%, which the past gives to an idea of the landslide of the private consumption month.

Gas consumption: -19% in November versus. equal month previous year; much worse than third trimester - 12% with respect to equal period of the previous year.

Sales of the great supermarkets: -5% with respect to November of 2008 and clearly worse than in October, and we are speaking here of products of first necessity.

Sales of electric home appliances: they have fallen, according to ANEL, a 16.06% in November, against an accumulated fall of the 15,68% in the first eleven months.

In summary, a serious worsening of the economic situation in November. Considering the GDP of October and November, through consumption of diesel automovile, a variable strongly correlated, this a 4% have fallen, and in 2010 with less rent available, less more expensive credit and, the situation only can get worse. And this can not be change by the lies to it of the central Bank of Spain(BdE) or the National Statistic Institution (INE). The last one: the National statistic Institution (INE) has corrected the expenditure by family in 2008:-4,2% in real terms, fall far beyond the published one

And now regarding the government accounts, the Achilles heel of our economy. The Net borrowing-emissions minus depreciation-, amounted to 24 November at 110.492 million euros, and since December, I repeat, is the worst month deficit effect,it will close the year around the 130,000 million Euros, which will elevate the debt of the State to 47.5% of the GDP. But the national debt more things are many: the alive debt of the CCAA, 81,981 million in the second trimester of 2009, with a year-end estimate of the order of 100,000 million and the outstanding debt of municipalities and County Councils, 32,000 million at end 2008, with an estimate of around 45,000 million at end 2009.

But even this is all, is the back door to hide the debt, the state public enterprises, regional and local authorities, which have grown exponentially: there are almost 4,000 companies to day of today, whose alive debt to February 2009 ascended to 44,598 million Euros, and one 55,000 estimation of in order year. In summary, total national debt in order 2009, 67.5% of the GDP. And the worse thing is not the absolute number, that already is brutal, but its dizzying growth rate and that almost all of this increase is current expenditure, ie structural.

I. De Diego said...

What we do not know but we can estimate:

Real unemployment and rate of increase. Neither the EPA (active population survey) and even less in unemployment, show the reality of unemployment, but can be estimated by adding the excluded groups to the lies of Zapatero. The EPA(active population survey) ruled last 550,000 people, mostly educated young people because "not actively seeking" work are "discouraged", and classified as inactive. Additionally, the 2005 methodological change as workers to part-timers to 600,000 unemployed. Therefore, real unemployment in the third quarter: 5.2 million. Registered unemployment excludes the “DENOS”(Unoccupied Job Seekers [1]) that the INE( National statistic Institution) considered unemployed and not included as unemployed jobseekers excludes by Minister Caldera, self employers ( they have no compensation when they loss the job), the unemployed perceiving the 420 euros and discouraged that no longer re-enroll every month. Total 5.4 million through November, where he also has devised a new lies from Zapatero: 140,000 unemployed received the 420 euros help were excluded from unemployment[2], ie the official unemployment in November rose to 200,600, a figure that compares with 175,000 in November 2008, ie, the rate of increase grows not decreasing.

Deficit and public debt by 2010. According to PGE (General state finances) 2010, gross financing requirements would amount to 212,000 state million and a net 76,177. PGE in 2009, the gross were 104,500 million and net 28,500.Ex-minister Solbes was a phenomenon! And now is the same and the same reasons, mostly understated expenses and overstated revenue. The best estimate of the needs of the state debt amounted to 200.000 million net today.

To this one adds to predicted indebtedness 2010 for CCAA and Local Beings, 60,000 million; debt overcome and not paid with independent SMEs and, 30,000 million; debt of public companies, 15,000, a total debt of 98% of the GIP, the temporary margin has disappeared. I cannot understand from where it has removed S&P the number of 67% in 2.010, an analysis frivolity, because here “beans are counted”. As it indicated to Friday Marc Vidal here, “the debt only has a foreseeable way: its collapse”.

And what happens in the financial system? I merely summarize. BDE, rather than undertake sector restructuring as it was obliged, closing the unviable and capitalizing on the viable, dedicated their time and efforts to hide the truth by every means at their disposal.

CCM intervention has been an unmitigated disaster, and theft from taxpayers, the politicization of rural banks has led to the unprecedented, and worst, there has been some deleveraging, institutions are refinancing a huge debt to guarantee the state without any analysis of who can and who can not repay, which ultimately became a historical dispossession, because now they are not themselves but we, the people responsible for their return. The ending, will bankrupt half of the sector as the cost of their rescue is out of the country's chances.

As it affirms Credit Suisse, we are worse than Greece, because our deficit is structural due to a model of nonviable State, 18% in 2009 versus 12% Greece; because the debt grows the triple that the rest; by the unstoppable deterioration of the real economy and by the inevitable collapse of the financial system.

What really happens? We are at the cliff edge. At the Abyss.

Roberto Centeno

Professor of Economics of UPM University

1.- Unoccupied Job Seekers: Applicants will be known as pre-employment services and will help the regions, for example, which governs the PSOE, be drawn from lists of registered unemployed to those who feel they need to complete a training course for employment in another sector.

2.- They are considered like persons in formation.

Spanish version here :

I. De Diego said...

You can see a version of the translate article whit backs words here

Sorry, my English is not perfect.