A subject which has exercised me greatly over what is now more than a decade is the economic depression which was inflicted on Greece. For newer readers it was accompanied by claims of success – “shock and awe” according to Christine Lagarde who was then French Finance Minister – and was supposed to lead to economic growth quickly recovering to 2% per annum according to the IMF forecasts. The reality was that the economy collapsed ( a fall of around 10% in one year) combining both a recession and depression.
Recently there are claims of success again as there was this from The Economist on the 19th of April.
Greece is a European success story
A pretty extraordinary claim you might think and it would need a fair bit of backing considering the past, but in fact it seems to boil down to this.
On his watch, last year Greece grew almost twice as fast the euro zone’s average, and is projected to be well ahead of it this year too………Greece can now borrow from the markets in the regular way, paying a spread of less than two points over the German government’s rate, about the same as Italy’s.
Oh and they also try this.
yet still managed to reduce Greece’s sky-high debt-to-gdp ratio, though that is mostly due to the effects of inflation, which has raised nominal revenues faster than nominal outgoings.
Perhaps the Greeks do not consider that inflation of 9.3% in 2022 and expected by the European Commission to be 4.2% this year is a “success story”?! Maybe they are feeling poorer leading to this.
But the prime minister may not get the credit for it in the coming election
Let us move on from something which at times looks like a puff piece for the Greek government.
Kyriakos mitsotakis, 55 but looking much younger, fizzes with energy and satisfaction as he reviews his four years in the Greek prime minister’s office with a rapid-fire list of achievements and successes.
Instead let us take a perspective on the situation.
Economic Growth
Firstly we can welcome what is for these times some decent growth.
The available seasonally adjusted data indicate that in the 4
th quarter of 2022 the Gross Domestic Product (GDP) in volume terms increased by 1.4% in comparison with the 3
rd quarter of 2022, while in comparison with the 4
th quarter of 2021, it increased by 5.2%
Although there is an echo of a past issue.
Exports of goods and services decreased by 3.5% in comparison with the 4 th quarter of
2021………. Imports of goods and services increased by 7.5% in comparison with the 4th quarter of 2021.
But as we look further we see a problem because if we look back to the third quarter of 2007 we see that Greek quarterly GDP peaked at 63.35 billion Euros. Whereas in the last quarter of 2022 it was 48.74 billion Euros. Or it is still some 23% below the previous peak if we use 2015 prices. That means that not only is Greece still in a depression but it seems that any prospect of getting out of it is still a long way off. This decade seems likely to end with Greece still in a depression.
Greek Borrowing
This pops up pretty frequently in the media and an example from last week is below.
The US now has higher credit risk than Mexico, Greece, and Brazil ( @GRDecter )
That is a dig at the US but along the way there is some implied praise for Greece. I am no great fan of CDs spreads as a measure due to their illiquidity. So let us switch to bond yields where Greece was compared to Italy by the Economist. If we stay with the example of the US then at 4.02% compared to 3.63% it has a higher ten-year yield but not by much. Actually it is quite close to the UK which has just nudged 4%.
But there is a massive caveat to this which gets forgotten often.
Greek Loan Facility (bilateral loans and IMF, 2010-2011)
EFSF and IMF programme (2012-2015)
ESM programme (2015-2018)
Lenders: EFSF: €141.8 billion; ESM: €61.9 billion; euro area countries (under GLF): €52.9 billion; International Monetary Fund (€32.1 billion).
I think the IMF was repaid and the EFSF loan was trimmed a little.
In this programme, the EFSF disbursed a total of €141.8 billion, of which €130.9 is outstanding.
But much of Greece’s debt was taken over by the Euro area via the European Stability Mechanism and kicked like a can into the 2030s. Now with the ongoing depression the can may need to be kicked into the 2040s as well, but my main point is that so much Greek debt is effectively off its hands and in the case of the ESM locked into a yield of around 1%, meaning it has to issue less compared to others. Ordinarily countries issue a lot of debt simply to replace bonds which mature. Putting it another way it means this.
The country is also relatively less exposed to higher regional borrowing costs, as the average maturity of its debt is 20 years, compared with seven years for the average advanced economy. ( Financial Times)
Oh and I nearly forgot that the ECB bought just under 38 billion Euros of Greek debt under its PEPP programme.
So Greece’s bond yield should come with an asterisk.
Inflation
This links into the bond issue above.
“Greek nominal GDP is now up over 25 per cent in the last two years. Their nominal debt is up just 4 per cent,” said Jeffrey. “A further big improvement [in the debt-to-GDP ratio] is likely this year, bringing an upgrade back to investment grade before long.” ( Financial Times)
I see quite a bit of this which is misleading to some extent. This is that whilst in terms of the debt using nominal rather than real GDP has a meaning because most of the debt is nominal ( fixed-coupon). For the ordinary worker and consumer they will be feeling the pinch as much of this is the inflation numbers we looked at earlier. So for them the real GDP numbers matter more and as we have seen there has been some but nothing like the nominal change.
Wages
The situation here was summed up by the Financial Times.
Painful austerity measures have left their mark on a country that now has one of the highest rates of relative poverty in the EU(opens a new window). At €832 per month, the country’s minimum wage is €30 lower than it was in 2010. In real terms, the average wage is about a quarter less than what it was 12 years ago.
Comment
What we have is an economy that has seen some growth essentially because real wages have been suppressed. This puts a different spin on the period of export growth as it will have also put downwards pressure on wages in other countries. Is that what counts as a “success story” these days?
That is not for me as a more realistic view welcomes the recent economic growth but realises if you look at the ongoing economic depression and real wage cuts that there are elements of what is called The Lost Decade in Japan, with the difference being larger numbers. Also it looks that just like Japan The Lost Decade will become The Lost Decades.