Category Archives: Greece

18/7/17: Greece in Recession. Again.

Per recent data release, Greece is now back in an official recession, with 1Q 2017 growth coming in at -0.1%, following 4Q 2016 contraction of 1.2%. Worse, on seasonally-adjusted basis, Greek economy tanked 0.5% in 1Q 2017. The news shaved off some 0.9 percentage terms from 2017 FY growth outlook by the Government (from 2.7% to 1.8%), with EU Commission May forecasting growth of 2.1% and the IMF April forecast of 2.15%, down from October forecast of 2.77%.

Greece has been hammered by a combination of severe fiscal contractions (austerity), rounds of botched debt restructuring, and extreme fiscal and economic policy uncertainty since 2010, having previously fallen into a deep recession starting with 2008. Structural problems with the economy and demographics come on top of this and, at this stage in the game, are secondary to the above-listed factors in terms of driving down the country growth.

In simple terms, this - already 10 years long - crisis is fully down to the dysfunctional European policy making.

In real terms, Greek economy is now down almost 3 percentage points on where it was at the end of 2000 and even if we are to assume that the economy expands 2.15% in 2017, as projected by the IMF, Greece will still end 2017 some 0.76 percentage points below where it was at the start of its tenure in the euro area.

Meanwhile, the 2.1-2.15% forecasts are likely to be optimistic. Past record shows that, so far, since the start of the crisis, IMF’s forecasts were woefully inadequate in terms of capturing the true extent of the crisis in Greece.

As chart above shows, with exception of just two forecasts’ vintages, covering same year estimates (not actual forward forecasts), all forecasts forward turned out to be optimistic compared to the outrun (thick grey line for April 2017).

Another feature of the more recent forecast is that 2017 IMF outlook for Greece factors in worse expectations for 2018-2021 growth than ALL previous forecasts:

The key driver for this disaster is the EU-imposed set of policies and the resulting policy and economic uncertainty. In fact, if we were to take the lower envelope of growth projections by the IMF - projections that were based on the Fund’s assumptions that the EU will live up to its commitments to accommodate significant debt relief for the Greek economy from around 2013 on, today’s Greek real GDP would have been around 20-21 percent higher than it currently stands.

All in, Greece has sustained absolute and total economic devastation at the hands of the EU and its institutions, including ESM, ECB and EFSF. Yes, structurally, the Greek economy is far from being sound. In fact, it is completely, comprehensively rotten to the core and requires deep reforms. But this fact is a mere back row of violins to the real drama played out by the Eurogroup, the ESM and the ECB. The nation with already woeful demographics has lived through sixteen lost years, going onto seventeenth. Several generations are either face permanently damaged prospects of future careers, or have to deal with demolished hopes for a dignified retirement from the current ones, and a couple of generations currently in lower and higher education are about to join them.

11/6/16: Sovereign to Corporate Risk Spillovers

As noted recently in my posts on the new iteration in the Greek Crisis, we are now into the sixth year (officially) of the Euro area sovereign debt crisis. Alas, of course by unofficial, yet more realistic metrics, we are really into the ninth year of the crisis (who cares what you call it).

Now, you might just think that at the present, there is little to worry about, as the crisis seemed to have abated, if not completely gone away. But the problem is that the real lesson from the 2008-present crisis should be exactly the acquired awareness that such thinking is dangerous.

Here’s why. In a recent ECB working paper,  Augustin, Patrick and Boustanifar, Hamid and Breckenfelder, Johannes H. and Schnitzler, Jan, titled “Sovereign to Corporate Risk Spillovers” (January 18, 2016, ECB Working Paper No. 1878: “quantify significant spillover effects from sovereign to corporate credit risk in Europe” in the wake of the announcement of the first Greek bailout on April 11, 2010.

“A ten percent increase in sovereign credit risk raises corporate credit risk on average by 1.1 percent after the bailout. These effects are more pronounced in countries that belong to the Eurozone and that are more financially distressed. Bank dependence, public ownership and the sovereign ceiling are channels that enhance the sovereign to corporate risk transfer.”

We should worry.

1) Corporate and sovereign bond risks are tied at a hip. And guess what we are witnessing today? A massive bubble in sovereign bonds and a bubble in corporate bonds. When one blows, the other will too. Be warned, per my contribution to the Summer edition of Manning Financial (LINK HERE).

2) Eurozone countries are at a greater contagion risk. Doh… like we never heard that before. But, still, good reminder to remember. I wrote a paper on that for the EU Parliament not long ago (LINK HERE).

3) Bank dependence is bad for contagion - in a sense that it increases contagion, not reduces it. And guess what the Eurozone been doing lately via ECB’s policy and via CMU and EBU? Right… increasing bank dependency. (LINK HERE)

In short, things might be a bit brighter today than they were yesterday, but tomorrow might bring another hurricane.

25/5/16: IMF’s Epic Flip Flopping on Greece

IMF published the full Transcript of a Conference Call on Greece from Wednesday, May 25, 2016 (see: And it is simply bizarre.

Let me quote here from the transcript (quotes in black italics) against quotes from the Eurogroup statement last night (available here: Eurogroup statement link) marked with blue text in italics. Emphasis in bold is mine

On debt, I certainly think that we have made progress, Europe is making progress. Debt relief is firmly on the agenda now. Our European partners and all the other stakeholders all now recognize that Greece debt is unsustainable, is highly unsustainable, they accept that debt relief is needed.

Do they? Let’s take a look at the Eurogroup official statement:

Is debt relief firmly on the agenda and does Eurogroup 'accept that debt relief is needed'? "The Eurogroup agrees to assess debt sustainability" Note: the Eurogroup did not agree to deliver debt relief, but simply to assess it. Which might put debt relief on the agenda, but it is hardly a meaningful commitment, as similar promises were made before, not only for Greece, but also for other peripheral states.

Does Eurogroup "recognize that Greece debt is unsustainable, is highly unsustainable"? No. There is no mentioning of words 'unsustainable' or 'highly unsustainable' in the Eurogroup document. None. Nada. Instead, here is what the Eurogroup says about the extent of Greek debt sustainability: "The Eurogroup recognises that over the exceptionally long time horizon of assessing debt sustainability there can be no forecasts, only assumptions, given the sizable degree of uncertainty over macroeconomic developments." Does this sound to you like the Eurogroup recognized 'highly unsustainable' nature of Greek debt? Not to me...

Furthermore, relating to debt relief measures, the Eurogroup notes: “For the medium term, the Eurogroup expects to implement a possible second set of measures following the successful implementation of the ESM programme. These measures will be implemented if an update of the debt sustainability analysis produced by the institutions at the end of the programme shows they are needed to meet the agreed GFN benchmark, subject to a positive assessment from the institutions and the Eurogroup on programme implementation.” Again, there is no admission by the Eurogroup of unsustainable nature of Greek debt, and in fact there is a statement that only 'if' debt is deemed to be unsustainable at the medium-term future, then debt relief measures can be contemplated as possible. This neither amounts to (1) statement that does not agree with the IMF assertion that the Eurogroup realizes unsustainable nature of Greek debt burden; and (2) statement that does not agree with the IMF assertion that the Eurogroup put debt relief 'firmly on the table'.

More per IMF: Eurogroup “…accept the methodology that should be used to calibrate the necessary debt relief. They accept the objectives in terms of the gross financing need in the near term and in the long run. They even accept the time periods, a very long time period, over which this debt has to be met through 2060. And I think they are also beginning to accept more realism in the assumption.

Again, do they? Let’s go back to the Eurogroup statement: “The Eurogroup recognises that over the exceptionally long time horizon of assessing debt sustainability there can be no forecasts, only assumptions, given the sizable degree of uncertainty over macroeconomic developments.” Have the Eurogroup accepted IMF’s assumptions? No. It simply said that things might change and if they do, well, then we’ll get back to you.

Things get worse from there on.

IMF: “We have not changed our view on how the outlook for debt is looking. We have not gone back. We want to assure you that we will not want big primary surpluses.” This statement, of course, refers to the IMF stating (see here) that Greek primary surpluses of 3.5% assumed under the DSA for Bailout 3.0 were unrealistic. And yet, quoting the Eurogroup document: the new agreement “provides further reassurances that Greece will meet the primary surplus targets of the ESM programme (3.5% of GDP in the medium-term), without prejudice to the obligations of Greece under the SGP and the Fiscal Compact.”  So, IMF says it did not surrender on 3.5% primary surplus for Greece being unrealistic, yet Eurogroup says 3.5% target is here to stay. Who’s spinning what?

IMF: “...I cannot see us facing this on a primary surplus that is above 1.5 [ percent of GDP]. I know it's just not credible in our view. And you will see that there is nothing in the European statement anymore that says 3.5 should be used for the DSA. So there, too, Europe is moving.” As I just quoted from the eurogroup statement clearly saying 3.5% surplus is staying.

IMF is again tangled up in long tales of courage played against short strides to surrender. PR balancing, face-savings, twisting, turning, obscuring… you name it, the IMF got it going here.

24/5/16: Greek Crisis: Old Can, Old Foot, New Flight

So Eurogroup has hammered out yet another 'breakthrough deal' with Greece, not even 12 months after the previous 'breakthrough deal' was hammered out in August 2015. And there are no modalities to discuss at this stage, but here's what we know:

  1. IMF is on board. Tsipras lost the insane target of getting rid of the Fund; and Europe gained an insane stamp of approval that Greece remains within the IMF programme. Why is this important for Europe? Because everyone - from the Greeks to the Eurocrats to the insane asylum patients - knows that Greece is insolvent and that any deal absent massive upfront commitments to debt writedowns is not sustainable. However, if the IMF joins the group of the reality deniers, then at least pro forma there is a claim of sustainability to be had. Europe is not about achieving real solutions. It is about propping up the PR facade.
  2. With the IMF on board we can assume one of two things: either the deal is more realistic and closer to being in tune with Greek needs (see modalities here: or IMF once again aligned itself with the EU as a face-saving exercise. The Fund, like Brussels, has a strong incentive to extend and pretend the Greek problem: if the Fund walks away from the new 'breakthrough deal', it will validate the argument that IMF lending to Greece was a major error. The proverbial egg hits the IMF's face. If the Fund were to stay in the deal, even if the EU does not deliver on any of its promises on debt relief, the IMF will retain a right to say: "Look, we warned everyone. EU promised, but did not deliver. So Greek failure is not our fault." To figure out which happened, we will need to see deal modalities.
  3. What we do know is that Greece will be able to meet its scheduled repayments to EFSF and ECB and the IMF this year, thanks to the 'breakthrough'. In other words, Greece will be given already promised loans (Bailout 3.0 agreed in 2015) so it can pay back previous extended loans (Bailouts 1.0 & 2.0). There are no 'new funds' - just new credit card to repay previous credit card. Worse, Greece will be given the money in tranches, so as to ensure that Tsipras does not decide to use 'new-old' credit on things like hospitals supplies. 
  4. Greece is to get some debt reprofiling before 2018 - one can only speculate what this means, but Eurogroup pressie suggested that it will be in the form of changing debt maturities. There are two big peaks of redemptions coming in 2017-2019, which can be smoothed out by loading some of that debt into 2020 and 2021. See chart below. Tricky bit is the Treasury notes which come due within the year window of maturity and will cause some hardship in smoothing other debts maturities. However, this measure is unlikely to be of significant benefit in terms of overall debt sustainability. Again, as I note here: Greece requires tens of billions in writeoffs (and that is in NPV terms).
  5. All potentially significant measures on debt relief are delayed until post-2018 to appease Germany and a number of other member states. Which means one simple thing: by mid-2018 we will be in yet another Greek crisis. And by the end of 2018, no one in Europe will give a diddly squat about Greece, its debt and the sustainability of that debt because, or so the hope goes, general recovery from the acute crisis will be over by then and Europeans will slip back into the slumber of 1.5 percent growth with 1.2 percent inflation and 8-9 percent unemployment, where everyone is happy and Greece is, predictably, boringly and expectedly bankrupt.


Funny thing: Greece is currently illiquid, the financing deal is expected to be 'more than' EUR10 billion. Greek debt maturity from June 1 through December 31 is around EUR17.8 billion. Spot the problem? How much more than EUR10 billion it will be? Ugh?..So technically, Greece got money to cover money it got before and it is not enough to cover all the money it got before, so it looks like Greece is out of money already, after getting money.

As usual, we have can, foot, kick... the thing flies. And as always, not far enough. Pre-book your seats for the next Greek Crisis, coming up around 2018, if not before.

Or more accurately, the dead-beaten can sort of flies. 

Remember IMF saying 3.5% surplus was fiction for Greece? Well, here's the EU statement: "Greece will meet the primary surplus targets of the ESM programme (3.5% of GDP in the medium-term), without prejudice to the obligations of Greece under the SGP and the Fiscal Compact." No,  I have no idea how exactly it is that the IMF agreed to that.

And if you thought I was kidding that Greece was getting money solely to repay debts due, I was not: "The second tranche under the ESM programme amounting to EUR 10.3 bn will be disbursed to Greece in several disbursements, starting with a first disbursement in June (EUR 7.5 bn) to cover debt servicing needs and to allow a clearance of an initial part of arrears as a means to support the real economy." So no money for hospitals, folks. Bugger off to the corner and sit there.

And guess what: there won't be any money coming up for the 'real economy' as: "The subsequent disbursements to be used for arrears clearance and further debt servicing needs will be made after the summer." This is from the official Eurogroup statement.

Here's what the IMF got: "The Eurogroup agrees to assess debt sustainability with reference to the following benchmark for gross financing needs (GFN): under the baseline scenario, GFN should remain below 15% of GDP during the post programme period for the medium term, and below 20% of GDP thereafter." So the framework changed, and a target got more realistic, but... there is still no real commitment - just a promise to assess debt sustainability at some point in time. Whenever it comes. In whatever shape it may be.

Short term measures, as noted above, are barely a nod to the need for debt writedowns: "Smoothening the EFSF repayment profile under the current weighted average maturity: Use EFSF/ESM diversified funding strategy to reduce interest rate risk without incurring any additional costs for former programme countries; Waiver of the step-up interest rate margin related to the debt buy-back tranche of the 2nd Greek programme for the year 2017". So no, there is no real debt relief. Just limited re-loading of debt and slight re-pricing to reflect current funding conditions. 

Medium term measures are also not quite impressive and amount to more of the same short term measures being continued, conditionally, and 'possible' - stress that word 'possible', for they might turn out to be impossible too.

Yep. Can + foot + some air... ah, good thing Europe is so consistent...