Posts tagged ‘Greece’
This week saw headlines appear about the possibility of another debt crisis in Greece. A multi-billion loan repayment to the ECB is due this summer; the European Commission and the IMF – the other two members of the “troika” governing the bailout arrangement – are divided on the scale of deficit reduction required to allow funds to be released; and in the meantime the country has just gone out on a general strike today in protest at any further “austerity”.
It feels, rather sadly, just like old times.
Yet things have changed in Greece since the pandemonium over her original bailout and debt restructuring. The governing leftist coalition, Syriza, has learned through bitter experience that it really does have no option but to comply with its creditors’ requests. And while books will doubtless continue to be written on the fiscal consolidation undergone by western countries since the Great Recession it is undeniable that Greece has been getting on with the job: the budget deficit there, as a proportion of GDP, has been falling from its 2009 peak of -15.2% at almost twice the pace at which it had grown during the course of Greece’s eurozone membership up to that point. This has had the effect of containing the national debt to GDP ratio, which while eye-wateringly high (177% for 2015) has fallen since 2014 despite the suffering brought about as a result of the Greek government’s hubris a year ago. Indeed, take out the effect of the debt restructuring in 2012 and last year’s fall in this ratio was the first since 2007.
There were also tentative signs of recuperation on the broader economic front too. The European Commission’s spring economic forecast was published on Tuesday and the expected contraction in Greek GDP this year was revised down from -0.7% to -0.3%. (Growth of +2.7% is projected for 2017.) The slow turnaround in employment might have halted for now, stuck between 24%-25% over the nine months to January, but with growth beginning to return again this should continue to tick down – and remains below the peak of 28% reached three years ago.
In the meantime, bond markets in Greece and elsewhere on the eurozone periphery are not showing any sign of panic. Ten year Greek government paper is trading down towards its lows for the year to date (just over 8% at present), well short of the over 11% reached during February’s market-wide funk. Italian and Spanish bonds have been priced around the 1.5% mark in recent weeks, just like ten year gilts.
It is worth reflecting that five short years ago – when many respected commentators were confidently predicting the demise of the euro – this was unthinkable. Greece might have been in the headlines again but there is absolutely no contagion in evidence today. Today, markets are not even bothering to try taking on Mr Draghi and his “bazooka”.
It is also worth reflecting that economic growth in the eurozone as a whole is projected at +1.6% this year and +1.7% next – a breakneck pace compared to the average rate of +0.9% over the last 15 years. And talking of headlines, it drew some attention last week when data emerged to show that the zone’s GDP had finally surpassed its pre-Great Recession peak in real terms. Numbers out last month showed its deficit falling as a percentage of GDP for the sixth consecutive year in 2015 to -2.1%, and confirmed that total debt to GDP peaked a year earlier. The unemployment rate might already have dropped back below 10% this month for the first time since April 2011.
There are political risks ahead for Europe but to say that the eurozone as a whole has moved on from the debt crisis is beginning to look like an understatement. It is to be hoped that Greece manages to continue her recuperation. If she does so the “European debt crisis” will soon be history.
One of the unforeseen consequences of the sovereign debt crisis has been the proliferation of English portmanteau words. “Greece” plus “exit” has given us “Grexit”; more recently, and less successfully, there was an attempt to promulgate “Greferendum”. But as the odds of a Grexit recede again – for the moment – the prospect of “Brexit” seems to be drawing closer. It was predictable that the Greek experience might play a part in this, but as with the spawning of some rather inelegant language, nobody seems to have seen it coming.
For people in Britain, our membership of the European Union is supposed to be a boring issue. It regularly comes 94th in the rankings of things which opinion pollsters find we care about. Some years ago the Prime Minister famously instructed members of his party to stop even talking about it. Two or so decades back the middlebrow tabloids would print stories of the impertinent substitution of kilograms for Fahrenheit, and so on, but all that blew over long ago. We may not feel European but we have got very used to belonging to the Union and that, until very recently, seemed to be that.
Then a little over a year ago a ragtag rabble of a political party called UKIP won the expensive exercise in window-dressing known as a European Election. Front and centre of their campaign was the topic of immigration policy. Rather than no. 94 down the list of people’s concerns this subject has been no. 1 for most of the last ten and more years. Despite some absurd protestations to the contrary there is a very material effect here from EU policy on freedom of movement – and crucially, the right to reside anywhere in the Union – and our own parliament has no control over this policy whatsoever. UKIP itself was painted as the most racist political party anywhere since the US Democrats. Its supporters were authoritatively presented as poor, ill-educated, “left behind” working class knuckle-draggers incapable of adapting to the progressive glories of the modern world. The party polled 27%, winning the election hands down.
One of the consequences of UKIP’s success was the Conservative party’s commitment to an in / out referendum on Britain’s membership of the EU. After Mr Cameron’s surprise election victory he was lumbered with actually having to deliver this, and given the tiny size of his majority in parliament has already been unsuccessful in his early attempts to stitch it up. Still, opinion polling has almost always favoured the “in” side. This is not surprising when one considers that EU membership is an issue which for the last twenty years has only exercised the country’s political right, and a minority of it at that.
Enter the Greeks.
Readers of this blog will know that the attitude of the Greek government to negotiations with its creditors has been childish and dangerous. Readers of the news will know too that despite a referendum in which the Greek people voted not to accept their creditors’ terms of a month ago, the Greek parliament has just voted to accept terms more stringent – including a large majority of the ruling far-left Syriza coalition.
This has widened ancient cracks in the support for EU membership on Britain’s own left. Only a month ago it was down to Ms Kate Hoey MP, no longer a high-profile figure, to remind us in the words of the New Statesman that “it was once Labour that was the Eurosceptic party of British politics”. Since the Greek experience, however, support for EU withdrawal in the Labour movement is growing. Like Syriza there are many in this country who believe that balancing the nation’s books is an unacceptably “austere” approach to fiscal policy and they are dismayed that the Greek government has given in to reality so easily. Leftist media commentator Owen Jones gave an excellent account of this position in the Guardian this week:
At first, only a few dipped their toes in the water; then others, hesitantly, followed their lead, all the time looking at each other for reassurance. As austerity-ravaged Greece was placed under what Yanis Varoufakis terms a “postmodern occupation”, its sovereignty overturned and compelled to implement more of the policies that have achieved nothing but economic ruin, Britain’s left is turning against the European Union, and fast.
“Everything good about the EU is in retreat; everything bad is on the rampage,” writes George Monbiot, explaining his about-turn. “All my life I’ve been pro-Europe,” says Caitlin Moran, “but seeing how Germany is treating Greece, I am finding it increasingly distasteful.” Nick Cohen believes the EU is being portrayed “with some truth, as a cruel, fanatical and stupid institution”. “How can the left support what is being done?” asks Suzanne Moore. “The European ‘Union’. Not in my name.” There are senior Labour figures in Westminster and Holyrood privately moving to an “out” position too.
“Its sovereignty overturned”. A few weeks ago it would have been unthinkable to find anyone significant on the left of politics in this country remotely concerned about a backward-looking hangup like that.
Most significantly of all, Mr Len McCluskey of the Unite mega-union – who has the Labour party in his pocket – told the Financial Times yesterday that if Mr Cameron succeeds in watering down the employment law component of the EU’s imperium his organisation may join the “out” campaign:
“My union is a pro-Europe union [but] if Cameron was successful and watered down workers’ rights, I believe my union would need to seriously consider its position,” Mr McCluskey told the Financial Times.
Asked explicitly if the union could switch to the No camp, he said: “The whole question about what Cameron does to workers’ rights would require us to review fully our position, and that could be anything.”
We began by observing that this series of events was predictable. Succumbing to technocratic hegemony from Brussels in several key areas of one’s national life can appear sensible so long as Brussels makes decisions which are to one’s liking. While the Commission was whimsically busying itself with the destruction of coal-fired power stations and such like the Joneses and McCluskeys had nothing to say about it. But get in the way of double socialism before breakfast? Heaven forfend!
So the Greek fiasco has now whipped up secessionist sentiment on the left as well as the right of British politics. The odds of Brexit have therefore increased.
This is of huge political significance of course. The economic consequences will equally obviously be argued over with increasing volume as the date for the Breferendum approaches. There is little to be gained by getting into that argument now as the actual consequences would depend on the options available to the UK should the decision to leave the EU be taken. From an investment perspective, however, that increased likelihood of uncertainty itself could have an impact.
The Big Two ratings companies have both threatened the UK with downgrades should Brexit come to look more likely. International portfolio flows might well put downward pressure on sterling and on British assets. Confidence might be impacted and growth could suffer, which would jeopardize our already rather fragile debt arithmetic.
There are, in that immortal phrase, several “known unknowns” to consider. The Greek story has made UK withdrawal from the EU thinkable for the first time since the chaos of the Maastricht Treaty. As that referendum approaches times might just get very interesting indeed.
The continued negotiations over emergency lending to Greece have been an obvious political risk for some time, and one which increased with the change of government there in January. This week’s leading stories have been dominated by the latest down-to-the-wire developments. The shock deferral of a payment due to the IMF until the end of the month was followed by recriminations between the Greek government and its creditors at the highest political level and the IMF team itself has now stormed off from Brussels in despair: EU Prepares For Worst As Greece Drives Finances To Brink (Bloomberg)
We have already looked at the possible consequences, and certain pain, that would ensue following a Greek sovereign default (The Joy Of Negotiating). In any case an indebted Greece would still require emergency funding of some kind in the aftermath of such a default as the bond market would be closed. Its emergency creditors would likely be exactly the same bunch it is dealing with today, or wild card lenders like Russia or China who on the evidence of previous discussions would require security over the nation’s land or other assets that even Greece’s previous government was unwilling to consider.
The Greek public appears to be more alive to the reality of their situation than their government. According to a poll conducted at the beginning of the month, 47 percent disapprove of its brinkmanship (and 74 percent want Greece to remain in the euro).
Even as time truly begins to run out, however, markets are still relatively sanguine about the possibility of default. Peripheral country bond spreads to Germany have widened a bit but remain below levels reached last summer, before Greece resurfaced as an issue. The euro is 3% up on the month to date. Equity markets have shown some nerves but there have been absolutely no signs of panic in the pricing of haven assets such as US Treasuries or gold. This is nothing more than reasonable: Greece is a small economy (GDP of $242bn in 2013 on World Bank numbers, less than 2% of the eurozone total), so the level of contagion occurring naturally from its collapse would be relatively muted.
Which brings us on to the real tragedy of these negotiations: the effect they are having on Greece. Economic sentiment has withered back towards the level it occupied during the final quarters of the country’s last recession in 2013. The banking system has been weakened – again – by the offshoring of deposits. Another recession is guaranteed. This is doubly disastrous when one considers that the budget deficit last year, at €6.4bn, was its lowest since 2000 and down from a peak of €36.2b in 2009. The country had exited recession, was running a primary surplus, meeting its debt obligations and seeing the number of unemployed decline for the first time since 2008. That has all been thrown away. Only yesterday employment data showed that the economy has gone back to shedding jobs. And in a year when European growth and consumer spending have been picking up notably and the currency is internationally weak, Greece’s key tourism industry might well have been expected to put on its strongest showing since the financial crisis. It would be astounding if the heightened uncertainty and bad press arising from the government’s actions have not turned many of those tourists away now.
The bottom line is that Greece needs its credit lines more than its creditors need to spend time playing games with the Greek government. The question the members of that government ought to be asking themselves, again and again, is: who benefits?
Let us leave the last word to an economist quoted in this post’s first linked article:
“People are really fed up with this,” UniCredit SpA Chief Global Economist Erik Nielsen said in a television interview. “They’ve never seen anything so completely ridiculous, frankly speaking, from a debtor country.”
While they may not yet be making headlines across the broader media as in days gone by, the ongoing negotiations between Greece and her creditors are the subject of the most widely-read article on Bloomberg today. Entitled German-Led Bloc Willing To Let Greece Leave Euro, the piece has the following money quote from Edward Scicluna, finance minister of Malta:
Germany, the Netherlands and others will be hard and they will insist that Greece repays back the solidarity shown by the member states by respecting the conditions … They’ve now reached a point where they will tell Greece ‘if you really want to leave, leave.’
It is now nearly five years since the downgrade of Greek debt caused worldwide panic over the condition of Europe’s sovereign balance sheets, and for much of that time there have been some who have advocated euro withdrawal and default as the solution to the country’s problems. Somewhere near the zenith of this view’s popularity readers may remember that it was Titanically flawed:
First of all, the currency … There would be rapid depreciation – indeed, the possibility that [it] could cease to be transferable internationally. (The Icelandic krone threatened this at the nadir of the recent crisis with the result that the supply of imported food was jeopardized.) Even if the drachma were tradeable, immediate, rapid inflation would occur. At the same time, bank deposits and other assets would have to be re-denominated, decimating the wealth of the nation overnight. These twin effects would demolish household and business consumption and consign the country to a further period of sharp economic contraction.
All well and good, say the defaultists. But at least Greece would be free of her debt!
Yes, and no. Greece is still running a budget deficit and in the catastrophe scenario this would get worse. So unless the Greeks wanted total state shutdown, they would still have to borrow money. Who would be the lenders? The EU; the IMF: exactly the same people who are lending to them at the moment. The conditions imposed by those lenders – who would still have effective control of the country’s economy until their loans were repaid – would be at least as punitive as the conditions they’re imposing now. In other words, there would be at least as much austerity to contend with, and possibly more.
One key feature of the economic landscape has changed since then, however: Greece has been running a primary budget surplus since the middle of 2013. This means that, ignoring debt interest, the government is raising more in tax than it spends. The last available data from the Bank of Greece (for November) has this primary surplus running at 2% of GDP. There are suspicions that the position has deteriorated since, but the key point is that – in theory – the Greek government could walk away from its debt and let its creditors go hang as it would no longer need to borrow money.
Bearing in mind the point about the currency, banking system and the rest, this surplus would likely not last very long in the event of a “Grexit”, so it isn’t that strong a negotiating point. It does, however, make such a decision appear less obviously stupid. This might well reduce the extent to which political will is bent to economic fear. The Greek situation today is therefore arguably more volatile than it was in 2011.
This is certainly not how it seems. The market reaction to Syriza’s election and Greece’s return to the repetitive circus of down-to-the-wire debt talks every few months has been pretty muted. The country’s ten year debt is priced at over 60 cents on the dollar, below the 80 cent level reached before last autumn but nowhere near reflective of the 74% loss incurred by bondholders in the 2012 restructuring. The Athens Stock Exchange index has fallen 24% over the past six months, but that is pretty tame compared to the 69% fall it suffered over calendar 2010 and ’11 – and it is actually some 3% up on the year to date.
The overall market view, then, seems to be either that the current talks are nothing to worry about, or that Grexit doesn’t matter very much. And besides, the Euro Stoxx 50 is up 11% since the end of 2014, last week’s GDP data for the eurozone was a little ahead of expectations, today’s stronger-than-forecast PMI numbers suggested the outlook here remains bright, and while it has bounced a bit recently the oil price remains about 45% lower than where it spent the first half of 2014. (If you add up the individual members you find that the eurozone, not the US or China, is the world’s biggest oil importer by some distance.)
It appears highly unlikely that another major debt restructuring is on the cards for Greece (as opposed to changes to its existing terms). On this basis the relatively sanguine market view looks right. Prime Minister Tsipras could of course decide to give the world a shock, but it remains clear on balance that this wouldn’t do his country much good.
This week saw Greece return to the bond market. The five year syndicated deal, out yesterday, was originally intended to raise €2.5bn at 5-5.25%. Such was the level of demand, however – reported at €20bn – that the eventual issue size was €3bn at a yield of 4.95%.
So much for the detail. Greece has returned to the bond market! A key milestone along the global path to recovery from the credit crunch has been reached. This is the first Greek government bond (as opposed to short-dated money market instrument) to be issued since March 2010. And the day before it was officially announced, the ten year Greek bond yield reached 5.89%, the lowest closing level since January 2010.
Greece has not figured much on the world’s radar this year but there have been a few other noteworthy firsts as well.
Two months ago, Prime Minister Samaras gave an interview in which he estimated the country would reach a primary budget surplus of €1.5bn for 2013, one year earlier than planned. European officials expressed some scepticism and cautioned that euphoria should be postponed until the figures are formally released on the 23rd of this month. The Eurostat / ECB data on the subject does suggest this would be a stretch, but it also shows that such a surplus (which ignores the cost of debt interest) would be the first to have been run by Greece since 2002.
Less uncertainly, there was another first announced at around the same time: 2013 saw the country’s first current account surplus since records began in 1948. This was partly due to falling imports – but tourist receipts were up 15% to reach a new record and exports rose too as lower wages led to greater competitiveness.
As ever it is imprudent to consider only the upside. Greek unemployment seems at last to have peaked, but remains at an eye-watering 26.7%. Serious civil unrest remains a threat; only yesterday a car bomb in Athens went off outside the central bank building (though no one was hurt). Politics is still an area of concern too, with an unpredictable radical left coalition leading polls and the nationalist far right coming in a consistent third.
Nevertheless: forecast data from the EU Commission produced in February shows recovery finally taking hold in Greece this year and strengthening into next. This is consistent both with the broader European outlook as it stands, and with the consensus – though the latter’s forecasts are more bearish in numbers terms. The road ahead is dangerous but the new bond issue is another step in the right direction. Eurydice is almost at the threshold of Hades; it is now more believable that she will not have to turn back after all.
It is now seven years since the first signs of strain and balance sheet writedowns signalled trouble in the US subprime mortgage market. A few months later – in June 2007 – the first credit rating downgrades of securities backed by pools of these mortgages occurred. The collateralization and ownership restrictions placed on institutional investors in the vast “asset backed” market were superglued to these ratings. On the back of the downgrades, Bear Stearns put up $3.2bn of lending to prop up one of its two subprime hedge funds. Amid collateral calls the entire subprime mortgage market collapsed. In July Bear announced that both its funds were worthless, and for the next few months an explosion in downgrades (and underlying mortgage defaults) began to focus the financial world’s attention.
So it may seem surprising to say that we are only really at the end of the beginning of this crisis. Seven years is a long time. And yet …
Last week saw the release of Q4 mortgage delinquency data for the US. The headline number showed that delinquencies – loans at various stages of falling behind with payments up to and including foreclosure – as a proportion of the whole mortgage market fell again, to 6.4%, as they have done steadily since peaking at 10.1% in March 2010. But dig deeper and we find that the subprime delinquency rate ticked up. In fact it has been stuck in a 20-22% range for the last two calendar years, not far shy of its 27% peak in ’10. The overall improvement in delinquencies has been entirely due to improvements in the prime mortgage market over that period. Subprime foreclosures are running at over 10% of loans, still materially higher than at the peak of the previous default cycle in 2000. For that reason, there are still plenty of ratings downgrades on mortgage-backed securities working their way through the system.
At the same time it is right that the US mortgage market has lost its power to terrify. Overall, as we know, the real estate market has been picking up again (with a recent setback driven by the execrable weather). And bank balance sheets have improved steadily and considerably in line with the mortgage market overall. Reserves for losses on loans across the Big Four US banks – JP Morgan, Bank of America, Citigroup and Wells Fargo – peaked at $158.8bn in Q1 2010. The current reporting season showed that had fallen by almost 60% to $67.8bn in the quarter just gone. That’s some way north of the $42.2bn reported at the end of 2007, but still pretty impressive.
Perhaps this partly explains why it looks too cautious from a US perspective to say we are only at the end of the beginning of the credit crunch. From a more global perspective, however, the description fits more clearly.
Here in the UK our banks have not recovered so well. At Barclays, loan loss reserves only trickled slightly lower last year and are roughly 41% below their reported peak. For Lloyds the figure is 38% and at RBS of course reserves hit a new high of £25.2bn for Q4 – 39% higher than the amount provisioned for at the end of 2010.
Turning to Europe, where banks are at least as far adrift, we have another aspect of the crunch to contend with. In some cases (most notoriously perhaps in that of Iceland), bank distress led directly to a sovereign debt crisis. In most countries it played a significant role – as did the crunch’s recessionary effects on the wider economy, of course. And we should remember that the Cypriot banking system went down less than a year ago, all part of the same protracted drama of downgrade, writedown, bailout and default.
Symptoms of the sovereign crisis remain. The yield on ten year Greek government debt fell below 7% only today for instance, the first time since the country’s ignominious junking by S&P in April 2010.
Which brings us on to the next stage. Greek government debt to GDP for 2013 is forecast by the IMF to reach 175.7% – more than 5% above the peak reached prior to the debt restructuring of 2012. It is still not certain whether another restructuring of one kind or another will be needed to make this manageable on a 5-10 year view. Much will depend on how the economy performs this year. And it is still less certain when Greece will be able to consider re-entering the bond market, as some less severely crippled bailout economies have already done.
Once we know that the Greek debt position is settled it could be the beginning of the end of the credit crunch, and not before. Then Greece – as others, including the rest of the eurozone, UK and the US – will be set on the path of managing its economic affairs with a huge burden of borrowing round its neck that will mark fiscal planning with servicing costs for many years to come. That is the lasting legacy of the insane credit markets of the mid-2000s. Only when that borrowing, weighing down across most of the developed world, has been firmly established on a reducing path for some time – only then will we be able to say that the credit crunch is over.
In terms of what all this means for markets let me make one observation.
Risk markets became absurdly optimistic in a short period of time during the end of the Great Recession in 2009, not at all seeming to understand the scale or possible longevity of the problem. Then came the sovereign debt crisis and a period of complete panic in 2011, and then, pretty steadily since the most successful example of Open Mouth Operations in history (by the ECB in mid-2012), risk has come back into favour.
The key point is this: by backing fundamentals, and so being sceptical of risk in late 2009 and more constructive thereafter (and especially in the autumn of 2011), investors would have done pretty well.
The gargantuan upheaval of the credit crunch and the hysteria which followed have left their mark in different ways at different times. There are still plenty of anomalies out there both between and within asset classes. As and when (and if) the ripples from that giant explosion seven years ago continue to fade, there is every reason to continue to expect that backing the fundamentals will remain a profitable thing to do.
This year’s positive start was strengthened again today by better-than-expected data on US employment. Markets have continued to shrug off the messy political situation in Italy and the UK downgrade a couple of weeks ago. For the time being at least, sentiment is taking the relative robustness of America as its example and putting the problems of Europe to one side.
We have been here before. Almost exactly a year ago we saw good data from the US on the one hand and a sovereign default from Greece on the other. At the time this blog asked: who will win the tug of war: the US, or Europe?
The answer – eventually – was the US. Greek elections last spring plunged markets into a familiar state of uncertainty, but 2012 as a whole passed without various long-awaited disasters and constructively for risk assets overall. Part of the reason for this is of course that time is a healer (as well as an essential ingredient in the transmission mechanisms of monetary policy).
In any event it seems an apposite moment to consider a few of the anniversaries we’re passing this March.
First of all, 2007. It was at the beginning of this year that movements in something called the ABX index began to draw the attention of a few structured credit professionals. This index – then a new product – tracks the prices of sub-prime mortgage-backed securities. Coupled with occasional news of fraud and other problems in the origination market, it was telling a select crowd of market pariticipants that something was going very wrong. It was a forerunner of a huge slew of CDO and other ratings downgrades in the summer which would begin to widen interest in the subject of American mortgages.
2008. By the spring of this year, some smaller banks were being bailed out (Northern Rock, Bear Stearns), confidence was sagging, recession was dawning and stock markets had begun to suspect that something was amiss. Plenty of complacency still lingered though: oil was rising to new records, RBS was still rated Aa1 and Chancellor Darling announced in his budget speech that “the British economy will continue to grow through this year and beyond.”
2009. In March this year we were all doomed. Unprecedented crisis, leading to unprecedented recession, had brought about unprecedented debt and everyone by this stage was feeling a level of pessimism which was utterly without precedent. Those few banks which had not been nationalized had stopped lending. Ratings company staff had gone into hiding. Iceland had gone bust. Stock markets had collapsed through the floor. And then the recession ended, confidence returned and the MSCI World Index ended the year 27% up.
2010. For most of the year’s early months, optimism persisted. We knew that various countries were on the verge of posting eye-wateringly abysmal budget deficits for the previous year, but the recession was over! Recovery was on the way! Then the ratings companies, who had suddenly become rather less obliging, began to suggest that it wasn’t just little out-of-the-way places like Iceland that were vulnerable to default after all. Shortly after Easter, S&P junked Greece and the first eurozone bailout programme was born.
And now, here we are. It has been an interesting few years. Not wishing to read too much into it, but it is the same markets and observers who were so slow to spot that something was wrong in the first place that have been equally cautious in more recent times of entertaining the idea that things also go right.
The same tug of war we wrote about a year ago is still being played out. The further we get from the financial crisis and its historic events, the closer the contest gets to being decided – in favour of one side or the other.