The latest review of our stand-by arrangement by the IMF staff has come out and it is apocalyptically hilarious. The IMF still refuses to publicly accept its mission for what it is: to act as administrator as we negotiate our default. The suits introduce the show with the following remark:
“The economy has been evolving broadly as projected.”
Translation: Our original GDP forecast was only off by about one eighth. The Greek economy contracted by 4.5% in 2010 or 6.6% minus seasonal adjustments, against initial expectations of a 4% drop. And we’ve reached our 2011 unemployment ‘target’ already, a year early.
In their headline figures, the IMF have somehow managed to maintain the fiction of Greek debt/GDP stabilising by 2012. Riiiight. As always the background figures tell the unmassaged truth. Expressed as a percentage of government revenues (a more accurate measure of sustainability), debt will now peak at 392% in 2014, not at 343% in 2012 as previously believed.
With no additional measures put in place, the IMF expect our debt to simply never come down, exceeding 211% of GDP in their forecast scenario. Even better, with key variables at their long-term averages, debt will stick to 141% of GDP and pretty much stay there.
Not bad enough for you? Even with the current measures in place, the IMF concedes that if we consistently miss its growth targets by 1 percentage point, as shown below, Greece’s debt will never return to a downward trajectory. Last year, the IMF overestimated growth by .6 percentage points so things are on a knife’s edge; a statistically insignificant misstep away from oblivion, even with a perpetual IMF loan facility. Weisbrot reports that the IMF typically gets it wrong by much more than that. Almost half of all adjustment programme reports make adjustments of 3% or more.
Another way of looking at this is to consider that 2010 GDP growth (-4.5%) came in at the very end of the range of estimates. This year’s lowest estimate is -4.1% (courtesy of the Economist Intelligence Unit, although Pireaus comes close at -4%, for those of you who don’t trust foreigners). The IMF’s projection is [drumroll] -3%. Checkmate.
Appropriately, the IMF makes some allowances for error in its scenarios. Under one of these, our debt will have exploded to 250% of GDP by 2019. Importantly, these downside risks (recognition of implicit liabilities, bank recapitalisation, lower growth, failure of reform, low inflation) are strongly correlated, so the combined adverse shock scenario is hardly an outlier.
Even more amazing: the interest cost projections of the IMF assume a spread of 500bp against German bunds. This may be twice what the original plan projected but it’s almost half the actual figure. [Ed: ZOMFG this is the most PWNED figure in the history of IMF and Greek Gov’t muppetry. WTF?????] That such a crucial figure is so far wrong in black and white can only mean one thing – the IMF have given up and are just cooking the books.
Now I must concede that even with moderate success the Memorandum should bring spreads down somewhat. How far down though? As I explain here, we've lost the glamour of a safe bet, so our spreads can't go back to where they were before the crisis. With the same fundamentals they should be about one third higher at the very least. And we're insolvent, so unless we can perpetually find investors willing to flip our short-term debt to others and pray the musical chairs don't stop while they're still in the game, insolvency will at some point mean illiquidity.
Now I must concede that even with moderate success the Memorandum should bring spreads down somewhat. How far down though? As I explain here, we've lost the glamour of a safe bet, so our spreads can't go back to where they were before the crisis. With the same fundamentals they should be about one third higher at the very least. And we're insolvent, so unless we can perpetually find investors willing to flip our short-term debt to others and pray the musical chairs don't stop while they're still in the game, insolvency will at some point mean illiquidity.
Actually I’ve got a theory about this stupid number. It’s the average of two states. State 1 is Greece as an independent but mostly bankrupt country, with spreads of 1000bps. State 2 is Greece as a German protectorate, without debt of its own, and therefore a spread of 0. Like one of the twisted souvlaki vendors of old, the IMF is serving us Schrödinger’s cat on a skewer. More to the point, it's entirely likely that with EFSF intervention our spreads could fall because German bonds will start to become junkier. The IMF will get their wish but we won't get cheaper debt.
But incredibly this LOLfest gets better.
‘In the banking system, deposit outflows have continued at a modest pace, and credit has begun to contract, but financial system stability has been preserved with the assistance of exceptional liquidity support from the ECB’
Translation: None of our banks would survive one day without the ECB, which provides 19.5% of the system’s funding. In fact in net terms the system can’t even lend any money. It only takes one badly written note allegedly forwarded by 10 nobodies to get deposits out of the system at the ‘modest pace’ of EUR200m in a couple of hours. Things are so bad that even the merger of two of our major banks cannot produce one creditworthy institution. And here’s the belly laugh : the IMF’s new projections anticipate EUR4bn less in bank recapitalisations over the next three years than the original plan! F*ck knows why, perhaps more wonder mergers like the Alpha NBG deal are meant to materialise somehow.
So when do we get to default? Under the IMF’s projections, our primary deficit is still on track to reach zero in 2012. Better start working on that debt audit.
All of this hot stuff comes hot on the heels of our latest Labour Force Survey (LFS) data, revealing that unemployment has rocketed to 14.2%. My favourite LFS metric is actually the % of the unemployed who received a job offer but turned it down. Because it’s not a headline unemployment figure there is very little incentive to game it and it’s indicative of much more than just labour supply and demand – including growth expectations and public sector jobs growth, as I explain here.
This figure is now 7.4%, less than half what it used to be in the good days of 2006 but still some way to go from zero. The closer it gets there, the more desperate the people will become. Other highlights include 17.4% unemployment in our worst-performing border region, and near-record differences in unemployment rates between graduates and school leavers as well as Greeks and foreigners. This kind of bifurcation bodes ill for everyone concerned.
Happy end of the world everyone!!!
