Tuesday, 22 March 2011


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.  

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. 

[Cue trivia point: everyone please look at the title of this paper]

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!!!


  1. Dimitris Vlachos23 March 2011 at 08:37

    I have a couple of issues with this post. First and foremost, the GDP growth comparison between projected and actual you mention in the beginning is very misleading. The 6.6% contraction you cite for 2010 is the annualized figure for Q4, not the actual contraction for the entire year. You actually contradict yourself later when you post the table of GDP growth projections, with the actual figure for 2010 also included at 4.5%. The 0.3% discrepancy is way less than “just over half”, and the original IMF projections did expect Q4 to be the worst in 2010.
    Regarding the spread against German bunds, the 500 bps assumption is an average spread projection. Yes, currently spreads are over 900 bps, but, given the successful implementation of the memorandum, should drop eventually. Otherwise, Greece will never be able to raise debt from capital markets. As with the GDP figure before, currently Greece is undergoing the worst part of the slump, and relevant metrics (such as bond and CDS spreads) should reflect that. However, it is a fallacy to extrapolate the bottom for the entirety of the rescue package. Also, given how the EFSF will be able to bid for Greek bonds in the primary market, whenever there is an auction prices will be pressured upwards, thus reducing the yield spread.
    Finally, while I always enjoy reading your sceptical comments on this blog, I would love to read your take on the EU leaders’ summit decisions, which I think have essentially solved Greece’s liquidity issues until 2012 (if not 2013).

  2. @Dimitri: a breath of fresh air as always. My answers in brief.

    You are right regarding my 'contradiction'. The -4.5% figure is the comparable one. I will correct this.

    However the -6.6 figure I cite is not annualised. It is the yoy change from Q4 2009 to Q4 2010 without seasonal adjustment, as explained here: http://www.statistics.gr/portal/page/portal/ESYE/BUCKET/A0704/PressReleases/A0704_SEL84_DT_QQ_04_2010_01_P_GR.pdf

    As for our spreads over bunds, I agree successful implementation of the Memo would ensure that they fall, but this is assuming the Memo *can* work. Under several scenarios including some highlighted by the IMF it cannot actually work, in the sense that our debt will keep growing as a share of GDP ad infinitum.

    Let's rephrase. The 2011 figures assume 500bps spreads. Would you care to go on the record as saying spreads will come down to 500bps over more than half of the trading days of 2011? Just half, Dimitri, I'm not asking for much.

    Me, I wouldn't bet a scabby donkey on it.

    Is this the worst of the slump? I hope it is but I don't believe so. We can discuss if you want how we would estimate this, as timing business cycles is contentious enough without seriously activist policy thrown in.

    Regarding the summit decisions I agree this solves our *liquidity* problems until 2012. It doesn't solve our solvency problems. It does help that we have less interest to pay back but frankly we're coming to a point where the principal on this debt is untenable. I say this because as we continue to tackle liquidity rather than solvency, and refuse to accept that the latter is a much larger problem, we will continue to borrow in exchange for austerity measures - in fact, as I would, our creditors will continue to impose these for fear of moral hazard. The result is a growing pile of really iffy debt.

    So while I agree that our liquidity concerns are solved for now, I don't see how the markets are meant to discount this into higher prices for our bonds while we continue to be insolvent, even with a modest push from the EFSF. Someone, somewhere down the line will need to still want even our short-term debt in order for it to be priced high today. People have learned the hard way about playing musical chairs with iffy assets the last couple of years.

    I also have another objection; being fully annexed by Germany or a consortium of EU states would solve our liquidity and solvency problems forever. It doesn't mean we ought to do it. While this is not anyone's plan, we could still find ourselves only nominally sovereign when we wake up one day to find we haven't drafted our own budget for the last 10 years. It could yet happen.

    Far from being a nationalist, I simply say this because believe that it's very difficult to maintain proper democratic functions is a very large and very centralised federal state. I haven't seen many examples yet of the EU institutions saying 'oh well this is outside my remit' except as an excuse. Tax used to be one of these areas that the member states guarded jealously and look where that's going.


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