A Casual Observer s Guide to the Greek Economy March 2015

Transcription

1 A Casual Observer s Guide to the Greek Economy March 2015 Ilias Lekkos Irini Staggel Anastasia Aggelopoulou Dimitris Gavalas Lekkosi@piraeusbank.gr Staggelir@piraeusbank.gr Aggelopouloua@piraeusbank.gr Gavalasd@piraeusbank.gr researchdivision@piraeusbank.gr Bloomberg Page: <PBGR> Piraeus Bank 4 Amerikis Street, , Athens, Greece Tel: (+30) , Fax: (+30)

2 A casual observer of the Greek political discourse should be excused for feeling completely confused by the cacophony created by a litany of the comments regarding the issue of Greek sovereign debt sustainability, re-negotiation, alleviation or even repudiation. While these comments reflect the importance of these issues for the future of the Greek economy, the way this dialogue is conducted obscures rather than clarifies the true nature of the problems that need to be addressed. In what follows, we focus on some of the hot topics relevant to the Greek economy: What has been the course of events since. Where we stand now regarding the business cycle. What is the cyclical position of the Greek economy. What is the state of affairs regarding the Greek debt. 2

3 270,000 GDP ( mn, constant prices) 70,000 Gross Fixed Capital Formation ( mn, constant prices) 250,000 60, ,000 50, ,000 40, ,000 30, ,000 20, ,000 10, GDP Gross Fixed Capital Formation 180,000 Private Consumption ( mn, constant prices) 55,000 Public Consumption ( mn, constant prices) 170, ,000 50, ,000 45, ,000 40, , ,000 35, ,000 30,000 Private Consumption Public Consumption Source: ELSTAT, Piraeus Bank Research 3

4 Imports of goods & services ( mn, constant prices) Exports of goods & services ( mn, constant prices) 100,000 65,000 90,000 60,000 80,000 55,000 70,000 50,000 45,000 60,000 40,000 50,000 35,000 40,000 30, Imports of Goods & Services Exports of Goods & Services Source: ELSTAT, Piraeus Bank Research 4

5 2000Q1 2000Q4 2001Q3 2002Q2 2003Q1 2003Q4 2004Q3 2005Q2 2006Q1 2006Q4 2007Q3 2008Q2 2009Q1 2009Q4 Q3 Q2 Q1 Q4 Q3 Q2 level Based on our two complementary methodologies of accessing the phase of the business cycle the following picture emerges: Since the middle of the Greek economy entered in an improving trajectory that culminated in a brief period of GDP growth. The recent rise of political uncertainty and instability is threatening to push back the Greek economy to a recessionary phase. Economic Climate Tracer Pro-cyclical and Non-cyclical components of GDP (ΥοΥ% change) 1.0 downswing expansion Jan.'06 Feb.' contraction upswing mom change Pro - Cyclical (YoY% change), LHS Non - Cyclical (YoY % change), RHS Source: European Commission DG ECFIN, Eurostat, Piraeus Bank Research 5

6 The downward revision of Q4- real GDP growth rate to -0.4% QoQ minimized the momentum of the Greek economy, drastically reducing the carry over effect to just 0.1% forcing us to revise our forecast for real GDP to 0.8% and for nominal GDP to -0.9%. Real GDP (YoY% change) Nominal GDP (YoY% change) carry - over effect growth dynamics within the year total % change carry - over effect growth dynamics within the year total % change Source: EL.STAT., Piraeus Bank Research 6

7 HICP constant tax yoy% change Given the substantial negative output gap in the Greek economy and taking into account the global lowflationary environment, we expect the Greek economy to remain in a deflationary mode with inflation at -1.2%. Inflation & Output Gap Headline Inflation (CPI) vs GDP deflator Output Gap GDP deflator Inflation Source: European Commission DG ECFIN, EL.STAT., Eurostat, Piraeus Bank Research 7

8 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 Yearly change % unemployment Job creation schemes have supported employment in recent times but uncertainty is beginning to spill over to the labour market. Economic Growth vs Unemployment rate Hiring Intentions (normalized data, sa, 3m moving average) vs Employment (YoY% change, sa data) 8.0 y = x R² = Real GDP (YoY % change) Εmployed (YoY % change, sa), LHS Hiring Intention (3m ma), RHS Source: European Commission DG ECFIN, EL.STAT., Piraeus Bank Research 8

9 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 The recent outflow of deposits and the dependency of Greek bank to the Eurosystem funding to the turn of 104bn will have an adverse impact to the total credit formation, leading total loans growth to -2.5%. Total Credit Total Credit (% of GDP) , , , , , , , , , ,000 net flow, mn -RHS YoY% change - LFS Outstanding amount (mn ), RHS Greece (% of GDP), LHS Euroarea (% of GDP), LHS Source: EL.STAT., Eurostat, Bank of Greece, Piraeus Bank Research 9

10 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Q2/10 Q3/10 Q4/10 Q1/11 Q2/11 Q3/11 Q4/11 Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 Q3/14 Q4/14 2/1/ 11/2/ 23/3/ 2/5/ 11/6/ 21/7/ 30/8/ 9/10/ 18/11/20 28/12/20 6/2/ 18/3/ 27/4/ 6/6/ 16/7/ 25/8/ 4/10/ 13/11/20 23/12/20 1/2/ /3/2015 One of the biggest side effects of the lack of liquidity and the political uncertainty is the high cost of funding for Greek Corporates. Average Real Interest Rate on New bank loans (< 1mn) to Non Financial Corporations (nominal rate minus change in HICP, %) Piraeus Bank Greek Corporate Bond Index Weighted Average Yield Euroarea Greece Source: ELSTAT, Eurostat, Bank of Greece, ECB, Bloomberg, Piraeus Bank Research 10

11 Last time that the issue of the sustainability of Greek debt was seriously addressed by the institutions was during the November Eurogroup meeting. The outcome of that meeting was very favourable for the Greek economy. Yet Eurogroup had to satisfy two important, politically imposed, constraints: Debt had to appear to be sustainable (based on IMF s sustainability analysis) Estimated funding needs could not exceed the amount of 245 bn originally allocated to Greece, i.e. no new money. These constraints are satisfied under a unique set of conditions that maybe achievable in a physics lab (or more appropriately in an Excel spreadsheet) but not in the real world. More specifically, debt sustainability requires a specific trajectory for growth, inflation, Euribor rates, fiscal surpluses and privatization revenues. At the same time the lack of new financing means that all fiscal surpluses, ANFA & SMP profits and privatizations revenues have to be directed towards repaying Greece s external debt. 11

12 The key feature of the IMF estimates are the overoptimistic projections of the initial reports (May -July ) regarding deficits in and, as well as the very high primary surpluses particularly between and A significant rationalization is recorded over time. The main feature is that the last three reports (January, June and July ) contain a much more realistic profile for, and 2015, which progressively becomes less realistic from 2016 onwards. 10 Primary Balance (% GDP) May (a) Sep. (a/1) Dec. (a/2) Mar. (a/3) July. (a/4) Dec. (a/5) Mar. (b) Jan. (b/1) June. (b/2,3) July. (b/4) Source: IMF, Piraeus Bank Research 12

13 The profile of the price level evolution - as expressed by the GDP deflator - was also very aggressive for and, while there was no provision for negative inflation rates in, and probably. The actual inflation rate is well below what was expected in the initial reports and it certainly has an aggravating effect on the intertemporal de-escalation of the debt as a % of GDP. As regards the period , the latest reports predict a gradual convergence of inflation with the targets of the ECB, namely just below 2%. GDP Deflator May (a) Sep. (a/1) Dec. (a/2) Mar. (a/3) July. (a/4) Dec. (a/5) Mar. (b) Jan. (b/1) June. (b/2,3) July. (b/4) Source: IMF, Piraeus Bank Research 13

14 The interest rate profile in the 5 first reports (May to July ) ranged from 5% to 7%, which was clearly unrealistic and unsustainable. On the contrary the 3 last reports (January to July ) reflect both the decisions to reduce rates which were taken in February and November and the pragmatic admittance that public debt can enter a de-escalation path only if financed at low cost. However, it is interesting that, even in the latest reports, the borrowing cost of the Greek state stands at about 3% which leaves room for further reductions. 8 Interest Rates 7 6 (a/1) (a/2) 5 4 (a) (a/3) (a/4) (a/5) (b) 3 2 (b/1) (b/2,3) (b/4) 1 0 May (a) Sep. (a/1) Dec. (a/2) Mar. (a/3) July. (a/4) Dec. (a/5) Mar. (b) Jan. (b/1) June. (b/2,3) July. (b/4) Source: IMF, Piraeus Bank Research 14

15 The IMF predictions regarding the evolution of the privatization program may be the most striking example of how the assumptions of the IMF methodology can be adjusted so that the conclusions converge on a more desirable debt evolution. The initial reports (May, September ) comprise a highly conservative estimate on the course of privatization. Conversely, the subsequent reports have revised upwards the ability to raise revenue from the sale of assets. The extreme example is the report of July which predicted revenues of 50 billion for the period In subsequent reports, the amount of privatization revenue has been limited; however it is possible that these estimates may also prove to be overoptimistic. Finally, for the correct valuation of the estimates - particularly in the initial reports - one must take into account the fact that they did not include revenue from the sale of the HFSF bank shares and warrants given the fact they had been drafted before the PSI and the recapitalization of the 4 systemic banks. 15

16 Privatization Revenue (in billions of ) May (a) Sep. (a/1) Dec. (a/2) Mar. (a/3) July. (a/4) Dec. (a/5) Mar. (b) Jan. (b/1) June. (b/2,3) July. (b/4) Source: IMF, Piraeus Bank Research 16

17 The following Chart depicts the successive revisions of the real GDP predictions by the troika and vividly illustrates the inability of the IMF to predict with any degree of accuracy the recessionary effects of the two economic adjustment programs on the Greek economy. For example, it must be mentioned that according to initial estimates, the recession in would be limited to -2.6% (against what was ultimately a recession of -7.1%), in it predicted growth of 1.1% (against an actual recession of -7.0%) and in growth of 2.1% (against an actual recession of -3.9%). It is particularly interesting that in September the IMF economists predicted an explosion of growth of 4.7% for only one year in 2016 and then a retreat to previous levels of 2.7%. This prediction does not include any significant insight from the IMF staff on the causes of this important growth of the Greek economy in this particular year. On the contrary, this prediction was necessary in order to change the dynamics of debt in this September report. 17

18 GDP (constant 2005 prices, % of change) May (a) Sep. (a/1) Dec. (a/2) Mar. (a/3) July. (a/4) Dec. (a/5) Mar. (b) Jan. (b/1) June. (b/2,3) July. (b/4) Source: IMF, Piraeus Bank Research 18

19 Based on the initial amount of Greek debt and the intertemporal evolution of all variables we have discussed so far, the evolution of the debt as a % of GDP becomes clear. According to the first report of May and particularly of September, the sustainability of the General Government debt was a matter of minor importance. Starting from the level of 115%, it would peak in at 144% and then the combination of high growth, inflation and primary surpluses would lead to a decrease to 111% in The defining moment, which raises the issue of sustainability as a key issue in the Greek programme and which ultimately determines all subsequent developments, is the revision of the 2009 debt by Eurostat at the end of from 115% to 127%. From that moment on Greek debt becomes problematic and despite the significant reduction of the private sector debt (through the PSI process) in the latest reports it is predicted that it will peak in at 176% and then rapidly fall to 124% in In the last available assessment review of the European Commission (Fourth Review, April, Occasional Paper 192) the public debt is expected to reach its highest value in at 177.2% of GDP and it shall be declining from 2015 onwards. 19

20 Public Debt (% GDP) (a/4) (b/1) (b/2,3) (b/4) (b) (a/3) (a/2) (a/5) (a) (a/1) May (a) Sep. (a/1) Dec. (a/2) Mar. (a/3) July. (a/4) Dec. (a/5) Mar. (b) Jan. (b/1) June. (b/2,3) July. (b/4) Source: IMF, Piraeus Bank Research 20

21 From the mere presentation of the revision of the IMF forecasts regarding the development of the public debt we can draw a number of conclusions: i. The valuation of debt sustainability is not a pure statistical modelling exercise. ii. iii. iv. On the contrary, it is the product of projections and subjective assumptions on a number of variables over a long period of time. Consequently, these projections involve a significant margin of error. It is natural that the margin of error as well as non-realistic (namely overoptimistic) estimations, are larger for projections regarding the distant future. As the time horizon of the predictions shrinks, the predictions are (unavoidably) revised towards more realistic levels. v. In the first two reports of the IMF (May and September ) the debt dynamics were problematic, but in no way could the General Government debt be treated as non-sustainable. vi. The revision by Eurostat of the total amount of the 2009 public debt by 12% of GDP (from 115% to 127%) at the end of was critical. From this point onwards, the trajectory of Greek debt enters non-viable levels and decisions to reduce interest rates in the formal sector and for the debt haircut through PSI became inevitable. 21

22 The point that we are trying to make is that debt is one of the variables in that system of equations but it is the end- rather the starting-point. Rather than starting a negotiation on the level of debt we should start from a reasonable set of macro assumptions, allowing for achievable primary surpluses that can be recycled into the Greek economy in the form of infrastructure spending and keeping debt/gdp as a free variable which will be determined at the end. If that exercise leads to unrealistic levels of sovereign indebtness at the end-horizon of the simulation then corrective action should be taken to reduce the debt accordingly. 22

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