Greece: A reality check

Petros Giannakouris/Associated Press

Petros Giannakouris/Associated Press

And like that… poof, the crisis is gone. More bailout loans approved by the Eurogroup, a sovereign rating upgrade from Fitch, economic sentiment at the highest it’s been for the last 40 months, the Athens Stock Exchange becoming the best-performing stock market in the European Union and Greek bond yields dropping below 9 percent for the first time since 2010 have helped give the impression Greece has overcome the worst of its problems and that recovery is within touching distance.

This is certainly the story that the government will, understandably, run with. The three parties in the coalition have taken on considerable political cost in sticking with the EU-IMF fiscal adjustment program and their only hope of survival is to convince a large enough section of the Greek population that the chosen path leads from economic catastrophe to stability and then prosperity.

In Athens, there is also a belief, which seems to be shared by decision makers in Brussels, Berlin and elsewhere, that a change in mood alone will make a significant contribution toward overcoming the crisis. This rising tide to lift Greece’s boat will not only make the program more acceptable to the public, it will also make investors more buoyant, the thinking goes.

There is something to be said for the idea of generating confidence. For much of last year, Greece was in the doghouse: a tanking economy, a protesting public and an unstable political system had made it the eurozone’s outcast. In contrast, Portugal was talked up as a model pupil applying the consolidation program with vigor and which would make a quick return to the markets.

Only last week Portugal did indeed issue its first government bonds since the crisis began but in doing so only underlined that there is a question of perception or interpretation that needs to be addressed. Portugal’s decision to tap the markets for 3 billion euros must be tempered by the fact that the country is mired in a deepening recession and by the wider investment trends in the sovereign debt market. Also, it is worth noting that at the same time Portugal was being praised as a model pupil by many in the eurozone, its advocates were granting the country an extra year to meet its deficit target.

German Chancellor Angela Merkel visited Lisbon last November, a few weeks after Portugal received an extension, amid crumbling political consensus and growing social unrest. Without a hint of irony, she declared that the Portuguese program was “being fulfilled in an excellent way.” Nothing could have made it clearer that perceptions were being used as the yardstick to measure success rather than any quantifiable indicators.

Many commentators have pinpointed Merkel’s visit to Athens a month earlier as the moment that Greece put the worst of the crisis behind it. Certainly, her visit carried symbolism and strengthened the impression that the eurozone and the recently formed coalition had a sound basis for cooperation. The government used the meeting, as well as others Prime Minister Antonis Samaras had around that time with several more European leaders, to drive home the message that a rehabilitated Greece was being allowed back into the fold. While Portugal proved that there are merits to this strategy in terms of easing the pressure from eurozone partners, convincing the international media to follow a particular narrative and beguiling markets, ultimately it is an exercise in managing impressions. This strategy can only get a country so far. There is a point at which reality kicks in and actual needs cannot be met by perceived gains.

Greece may soon find itself at this point, when no amount of good will, positive press and market confidence will make up for the fact that the real economy is spluttering toward a standstill after 19 consecutive quarters of contraction.

To start talking about a “success story” now would be to insult the feelings and intelligence of 1.3 million Greeks that are out of work, some 400,000 families that have nobody earning an income, about 300,000 workers whose employers have not paid them for months, hundreds of thousands who have work but are finding it difficult to make ends meet and numerous young people who see their future away from Greece.

Improving economic sentiment means little to those who fear stepping out of their front doors for fear of being mauled by neo-Nazis. The disbursal of another bailout loan to Greece does not register with the 800,000 or so long-term unemployed who have lost access to benefits and free healthcare. Even in its note accompanying this week’s upgrade, Fitch warned of taking a cautious approach to the prospects of a Greek recovery, the possibility of “renewed political and social instability” and that public debt sustainability is “still far from assured.” It should not be forgotten that Greece’s upgrade to B- comes almost a year to the day Fitch downgraded Greek sovereign debt to CCC. Being back where we were about a year ago, amid paralyzing political uncertainty, is hardly something to shout about from the rooftops.

Even when one examines the “twin rebalancing” (fiscal and current account) Greece has achieved, there is much to be wary of. The primary fiscal adjustment of almost 10 percent since the crisis began is a notable achievement that has come at a huge cost: A number of public services, such as health, have been ravaged, while the incessant rise in taxes has flattened domestic demand and put terrible pressure on even the healthiest of businesses. The current account deficit has shrunk by about 7 percent during the same period – also an important step toward making the economy healthier. But on closer examination, it’s clear to see that this reduction has been achieved largely on the back of a substantial fall in imports rather than a significant rise in exports.

Finally, how can one speak of success when only a couple of weeks ago, the International Monetary Fund underlined that the burden in Greece is not being shared equally? “The rich and self-employed are simply not paying their fair share, which has forced an excessive reliance on across-the-board expenditure cuts and higher taxes on those earning a salary or a pension,” the IMF mission said in its report. For all the advances that there have been in tax collection (and there have been some notable ones), this statement should make the country’s politicians hang their heads in shame.

That’s why it’s vital that Greece does not lose itself in the rapture of the markets and the obsession of altering perceptions at the expense of confronting real problems. We should understand, for instance that while the market interest in Greece is an indication that the country may be “bottoming out,” it is also driven by investors looking for handsome returns at a time when yields around the world are mostly low. The talk of funds betting on Greece and bulls charging in tells a story of its own. A few weeks ago, this hunt for yields contributed to Rwanda issuing bonds with a return of just under 7 percent.

There is a long way to go from this type of foreign capital coming into Greece to the kind of investment that will create jobs and sustainable prospects for growth. Greece has yet to see this kind of investment in any significant amounts. The privatization process has finally got under way but the sale of a share in state gambling monopoly OPAP hardly proved a marquee event.

Of course, there is a clear upside to the renewed market confidence in Greece as it allows Greek firms to tap investors for funds. Hellenic Petroleum and Frigoglass have recently issued corporate bonds worth 750 million euros, for example. Again, though, this should be balanced against the fact that smaller businesses in Greece are paying an interest rate of around 7 percent if they are among the select few able to borrow from the country’s semi-comatose banking system. In contrast, similar firms in Germany borrow at half that rate. It should also be kept in mind that the coupon for Frigoglass was 8.25 percent for a five-year issue, while ELPE’s rate was 8 percent for a four-year bond.

Immersing ourselves in vainglory is as dangerous as wallowing in gloom and self-pity. Somehow a balance has to be struck between acknowledging the progress that has been made and the work there is still to do. It is right to recognize the failings that have been shed but it is also vital not to ignore the people that have been left behind. No matter what positive signs have emerged over the past few days, Greece’s future remains finely balanced. Tipping it in favor of recovery will not be achieved just through altering perceptions, reality needs to change as well.

Nick Malkoutzis

24 responses to “Greece: A reality check

  1. Nick:

    If you try to rationalize this as a Greek citizen then you got it wrong.

    This is all about how outsiders look at Greece and not whether Greek citizens feel that the optimism is justified.

    For starters, Greek citizens are at the lowest pecking order. No one asked their opinion about austerity and no one is about to ask them if they feel things are turning around. We are fooling ourselves if we ever thought that citizen feedback was ever asked and that it ought to be given.

    This is 100% from the foreign lender’s point of view. The tranches will soon exhaust(the amounts left in comparison to the total is nothing; chicken feed is the word for it). Therefore leverage for the lenders(cash for reform) is about to exhaust if not exhausted already.

    In such an environment, Germany for example has no reason to beat up Greece any longer. To the contrary, Germany now is in full support and praise of Greece because if deficit gaps are soon not covered then Germany would be asked to do more (a part which Germany would rather avoid).

    Therefore in such environment you become an optimist – if you are an outsider to Greece – because otherwise you have much more to lose. If Greece fails to heal at this point, you the outsider you still pick up the tab (that will be bigger with pessimism).

    Grexit fear does not work anymore on exhausted citizens, so now you switch tunes and play the optimism card if you are the task master.

    The story is all about 10-yr bond yields. If Greece breaks below the 4% threshold, then Greece could return to markets and start substituting European loans with market loans (that’s the only way of repayment for outside lenders BTW).

    Therefore, optimism is an outside construct because Germany is paralyzed until her elections. It’s the old “if you can’t beat them, join them” sort of thing.

    No need to be looking for internal justifications of whether Greek citizens see enough evidence to affirm the trend. The trend is on and is 100% foreign driven for self-serving reasons.

    http://www.bloomberg.com/quote/GGGB10YR:IND/chart

    • Dean, I don’t disagree with your analysis but don’t forget that this “feelgood factor” is also being cultivated domestically. Again, I understand the reasons for it but there’s a fine line between trying to lift the mood and becoming a bit like Chemical Ali refusing to accept that the tanks are rolling through Baghdad. Ultimately, it could prove counterproductive. If you convince people that things are getting better, then pretty soon you have to deliver on that.

      • True. But I think the average people would be the last to know. This is a game played at a different level (European). It’s now Brussels that is trying to convince itself that the Greek program was a success because admitting failure has its own problems to deal with. As to the locals spinning the same line, well, they are part of the European fashion. When did you see Greece innovate or lead throughout this drama? Greece is always a distant second parroting the European line.

  2. As far as trade is concerned I find it absolutely ridiculous that Germany is for Greece an export market of about the same significance as Bulgaria and Cyprus, while Germany outsells Greece on a 3:1 basis.(in other words, despite a horrific economy Germany has a permanent positive trade lock on Greece at least twice of what it has with the rest of Europe – Germany outsells the average European country by 1.30: 1 margin).

    I also find it ridiculous that while Greece tippled her exports to FYROM, FYROM outsells Germany (has a positive trade balance with Germany) while Greece has a permanent trade deficit with Germany. In other words, Germany finds products to import from a much less developed country but can’t find product to import from Greece. And speaking of less developed countries check this out:

    During 2012 Germany had a trade deficit with Bangladesh of 2.733 Bil. euros while at the same time a trade surplus of roughly 2.8 Bil. euros with Greece. In other words, Germany wiped off her trade deficit with Bangladesh through an almost equal trade surplus with Greece.

    http://www.investingreece.gov.gr/default.asp?pid=56&la=1

    and,

    https://docs.google.com/file/d/0BxDio482GnisTTUwY2RDdFZpZE0/edit?usp=sharing

  3. As far as trade is concerned I find it absolutely ridiculous that Germany is for Greece an export market of about the same significance as Bulgaria and Cyprus, while Germany outsells Greece on a 3:1 basis.(in other words, despite a horrific economy Germany has a permanent positive trade lock on Greece at least twice of what it has with the rest of Europe – Germany outsells the average European country 1.30: 1).

    I also find it ridiculous that while Greece tippled her exports to FYROM, FYROM outsells Germany (has a positive trade balance with Germany) and Greece has a permanent trade deficit with Germany. In other words, Germany finds products to import from a much less developed country but can’t find product to import from Greece. And speaking of less developed countries check this out:

    During 2012 Germany had a trade deficit with Bangladesh of 2.733 Bil. euros while at the same time a trade surplus of 2.8 Bil. euros with Greece. In other words, Germany wiped off her trade deficit with Bangladesh through an almost equal trade surplus with Greece.

    http://www.investingreece.gov.gr/default.asp?pid=56&la=1

  4. I think readers need to be reminded of the 4 EU-Freedoms, one of which is the ‘Free Movement of Goods and Services’.

    Exporters/importers are companies (or private individuals) who buy/sell in an essentially free EU-market (i. e. free of trade barriers). No government can take direct influence on who exports what to whom and how much. Governments can take indirect influence through export promotion agencies (Coface, Hermes, Kontollbank, etc.) but that only within EU-guidelines. Governments can also take indirect influence by focusing on domestic economic frameworks which make it attractive for companies to produce and export competitive products.

    If one country exports more than another one in a currency union, it is simply a function of competitiveness in terms of quaility, quantity and pricing of the products which its economy produces. Blaming one country, say Germany, for exporting too much to another country, say Greece, and not importing enough from it is nothing other than admitting that the economy of the other country is not competitive enough to make and sell its own products. If FYROM has a trade surplus with Germany, it only means that FYROM is pretty smart in terms of its own competitiveness. Having once attended a country presentation by FYROM in Munich, I can confirm that this is the case. These are smart people who understand that they can only increase their country’s welfare if they produce internationally competitive products and if they attract foreign investment.

    • If trade is free as you say, so how come Germany anticipates a fall in exports which is perfectly coordinated with a fall in imports to maintain maximum trade balance?

      http://www.tradingeconomics.com/germany/balance-of-trade

      How is it possible a month in advance for Germany to know that its exports would fall and then “manage” its imports so that it maintains always the same or greater surplus difference?

      http://www.tradingeconomics.com/germany/exports

      http://www.tradingeconomics.com/germany/imports

    • If trade is free as you say, so how come Germany anticipates a fall in exports which is perfectly coordinated with a fall in imports to maintain maximum trade balance?

      http://www.tradingeconomics.com/germany/balance-of-trade

      How is it possible a month in advance for Germany to know that its exports would fall and then “manage” its imports so that it maintains always the same or greater surplus difference?

      • If trade is free, then how could you explain this perfect coordination? Click on the graph picture which shows exports compared to imports in absolute perfect unison:

        https://www.destatis.de/EN/FactsFigures/NationalEconomyEnvironment/ForeignTrade/Current.html

      • Dean, please define for me who that “Germany” is which manages the level of German exports and imports!

      • I will in a minute. But first, let’s frame the problem:

        Germany, like the U.S., is nominally a free-trading country. The difference is that while the U.S. genuinely believes in free trade, Germany quietly follows a contrary tradition that goes back to the 19th-century German economist Friedrich List (who was, ironically, a student of Alexander Hamilton). So despite Germany’s nominal policy of free trade, in reality, a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers.

      • Furthermore:

        “Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some good and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members.”

        In other words all the areas that might affect possible Greek exports to Germany.

      • And now that we have defined the problem, back to your original question Klaus. Have you ever heard of a little German institution called BAFA?

        http://www.bafa.de/bafa/en/

      • BTW, Klaus. In case you missed the point. Holding imports to a flat line while increasing exports exponentially is considered to be “managed trade”. Even the Washington Post says so, using different words for obvious reasons:

        http://www.washingtonpost.com/wp-dyn/content/graphic/2010/06/01/GR2010060104145.html

      • Yes, Dean, you have defined the problem as you see it but I don’t see how you support your argument. No, I have never heard of BAFA but as it says in the text “Another relevant task of BAFA in the area of foreign trade is to implement the import regulations adopted as part of the European Union’s common trade policy”. Are you familiar with how the EU works? EU laws supersede national laws (or rather: national laws have to be adapted to EU laws). Whatever BAFA does (and I don’t know what it does), it has to be within the ‘European Union’s common trade policy’. Or else they would get sued.

        I have had quite a few contacts with Greek businessmen who export and lately I have had meetings with 2 Greek consultants specializing in export consulting. No one has ever mentioned to me anything along the lines which you insinuate.

        A lot of Greek agricultural products are flown into Munich every day. They go to the warehouse of a Greek distributor and the Viktualienmarkt and restaurant owners go there to buy what they need. Well, that’s one way of stimulating exports. Another way is what other countries do. They have built up distribution channels through chains and you see all their products on supermarket shelves. The prices are very competitive. The Greek products you have to look for in specialized locations and you have to pay a premium for them.

        That’s practical experience instead of theory.

      • Klaus:

        Federal Office of Economics and Export Control (BAFA) is a euphemism. In reality it stands for Federal Office of Economics and IMPORT control. According to the “rules”, meaning how to prevent imports to Germany according to the rules.

        As to the quality of the the so called exports experts that you talked about, I would be more than happy to give you a free evaluation of their practices and reputation, if you care to reveal their names and some of their top clients. I hope you are not speaking about that Thessaloniki fellow because last time I checked his website I found nothing encouraging.

        Your problem re: Greece is as follows in a few words. You resemble a fellow who hit a pedestrian with his car and then he proceeds to give the pedestrian advice towards a speedy recovery instead of giving him his license number, insurance information and last but not least calling the police on the scene of the crime.

        Instead of telling us how Greece could find ihersea legs, and thus avoid an embarassement to Germany which is responsible for an unbeleivable mess, why don’t you spend some time understanding the historical background of Greco-German trade in which Germany had asked and received the exact same treatment of Greece that I am now asking Greece to obtain from Germany. Fair is fair. (hint: read all the books by Morgens Pelt on the subject of Greece and the very long history and well documented history of Greco-German trade).

      • Perhaps this will give you a clue why Germany does not care at all, as long as the trade surplus game prevails:

        http://www.thelocal.de/money/20121230-47047.html

  5. Below is an article which I recently published in my blog and where I also made reference to this article by Nick Malkoutzis. To be sure: I was not blaming Nick for being negative. Instead, I agreed with his article and then wondered why I couldn’t be more positive at this time. This despite having tried to always focus on positive alternatives for Greece.

    http://klauskastner.blogspot.gr/2013/05/time-for-jubilation-yet.html

  6. This is what Paul Krugman wrote on June 12, 2012 (almost 1 year ago). It is significant because even today we seem to be addressing the wrong problem:

    “Ever since Greece hit the skids, we’ve heard a lot about what’s wrong with everything Greek. Some of the accusations are true, some are false — but all of them are beside the point. Yes, there are big failings in Greece’s economy, its politics and no doubt its society. But those failings aren’t what caused the crisis that is tearing Greece apart, and threatens to spread across Europe.

    No, the origins of this disaster lie farther north, in Brussels, Frankfurt and Berlin, where officials created a deeply — perhaps fatally — flawed monetary system, then compounded the problems of that system by substituting moralizing for analysis. And the solution to the crisis, if there is one, will have to come from the same places.

    So, about those Greek failings: Greece does indeed have a lot of corruption and a lot of tax evasion, and the Greek government has had a habit of living beyond its means. Beyond that, Greek labor productivity is low by European standards — about 25 percent below the European Union average. It’s worth noting, however, that labor productivity in, say, Mississippi is similarly low by American standards — and by about the same margin.

    On the other hand, many things you hear about Greece just aren’t true. The Greeks aren’t lazy — on the contrary, they work longer hours than almost anyone else in Europe, and much longer hours than the Germans in particular. Nor does Greece have a runaway welfare state, as conservatives like to claim; social expenditure as a percentage of G.D.P., the standard measure of the size of the welfare state, is substantially lower in Greece than in, say, Sweden or Germany, countries that have so far weathered the European crisis pretty well.

    So how did Greece get into so much trouble? Blame the euro.

    Fifteen years ago Greece was no paradise, but it wasn’t in crisis either. Unemployment was high but not catastrophic, and the nation more or less paid its way on world markets, earning enough from exports, tourism, shipping and other sources to more or less pay for its imports.

    Then Greece joined the euro, and a terrible thing happened: people started believing that it was a safe place to invest. Foreign money poured into Greece, some but not all of it financing government deficits; the economy boomed; inflation rose; and Greece became increasingly uncompetitive. To be sure, the Greeks squandered much if not most of the money that came flooding in, but then so did everyone else who got caught up in the euro bubble.

    And then the bubble burst, at which point the fundamental flaws in the whole euro system became all too apparent.

    Ask yourself, why does the dollar area — also known as the United States of America — more or less work, without the kind of severe regional crises now afflicting Europe? The answer is that we have a strong central government, and the activities of this government in effect provide automatic bailouts to states that get in trouble.

    Consider, for example, what would be happening to Florida right now, in the aftermath of its huge housing bubble, if the state had to come up with the money for Social Security and Medicare out of its own suddenly reduced revenues. Luckily for Florida, Washington rather than Tallahassee is picking up the tab, which means that Florida is in effect receiving a bailout on a scale no European nation could dream of.

    Or consider an older example, the savings and loan crisis of the 1980s, which was largely a Texas affair. Taxpayers ended up paying a huge sum to clean up the mess — but the vast majority of those taxpayers were in states other than Texas. Again, the state received an automatic bailout on a scale inconceivable in modern Europe.

    So Greece, although not without sin, is mainly in trouble thanks to the arrogance of European officials, mostly from richer countries, who convinced themselves that they could make a single currency work without a single government. And these same officials have made the situation even worse by insisting, in the teeth of the evidence, that all the currency’s troubles were caused by irresponsible behavior on the part of those Southern Europeans, and that everything would work out if only people were willing to suffer some more.

    Which brings us to Sunday’s Greek election, which ended up settling nothing. The governing coalition may have managed to stay in power, although even that’s not clear (the junior partner in the coalition is threatening to defect). But the Greeks can’t solve this crisis anyway.

    The only way the euro might — might — be saved is if the Germans and the European Central Bank realize that they’re the ones who need to change their behavior, spending more and, yes, accepting higher inflation. If not — well, Greece will basically go down in history as the victim of other people’s hubris.”

  7. Estevao Veiga

    There is some justice in this world:
    BBC poll: Germany most popular country in the world
    http://www.bbc.co.uk/news/world-europe-22624104

  8. “There are two main reasons that explain the optimism penetrating the current coverage. The first is the ongoing survival of the coalition government – led by conservative New Democracy and supported by PA.SO.K and the Democratic Left party. The cohesion of this government had been significantly doubted in autumn 2012 during voting procedures in the Parliament on new austerity measures.

    And the second reason is the significant reduction of the Greek twin deficits, the budget and the current account one. German politicians have not been economical in acknowledging this reality. Speaking in the Bundestag on 30 November 2012, German Finance Minister Wolfgang Schäuble framed – for the first time – the debate on Greece on the basis of the country’s achievements and not failures or omissions.”

    http://english.capital.gr/News.asp?id=1801078

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