Greece’s Prime Minister recently flew to China, to woo Chinese investors. In his bid to be persuasive, he adopted a radical narrative: Greece is a Success Story. A country that almost perished in 2012 is now on the mend; on the road to stabilisation and growth; a wonderful opportunity, currently, for investors to pick up ultra cheap investments and to benefit from the forthcoming growth. How much of this is true, however?
Greek Prime Ministers and Finance Ministers have been upbeat for the past three catastrophic years. Mr Samaras’ narrative is, therefore, neither here nor there per se. Indeed, one may credibly argue that it is his job to put on a brave face and to be upbeat, especially when in a country like China where he is struggling to beat up some investments for his suffering country. However, what makes the Greek Success Story (GSS) narrative interesting is that the international press and the money markets seem to concur.
Six reasons are bandied about in support of GSS:
- Yields of Greek government bonds have collapsed from 30% to 8% while two of the three credit rating agencies have upgraded the Greek state’s creditworthiness
- The economy’s rate of shrinkage is falling
- Wages have fallen drastically giving a major boost to Greek competitiveness
- The government has managed, through an impressive series of cutbacks and tax hikes, to deliver a small but nevertheless significant primary budget surplus
- The Athens stock exchange has doubled in value over the past few months
- Greece’s banks are consolidating and are being recapitalised, with some help from international investors
Taken together, these six observations seem to support the GSS narrative. But do they? Let us look at them one at a time:
1. Yields of Greek government bonds have collapsed from 30% to 8% while two of the three credit rating agencies have upgraded the Greek state’s creditworthiness
All this is true. But it is also ridiculously irrelevant. Greece does not issue bonds. It is well and truly excluded from money market financing. The last ten-year bonds it issued for the purposes of financing the state were before May 2010. Since then, it issued a whole pack of them in March of 2012 as part of the so-called PSI; the massive haircut of the existing government bonds (except the ones that the ECB had already purchased – see here). The newly minted 2012 bonds were used to swap for the older ones; the ones that were being haircut. Each older bond was replaced by a new one with a face value almost half that of the older bond it replaced.
Even then Greece’s debt was unsustainable. So, last December we saw another haircut – that was euphimistically presented as a ‘debt buyback’. Whatever the intricacies of that operation, the gist of it was that the Greek state borrowed €11 billion from the ESM (European Stability Mechanism) in order to buy back most of those fresh, PSI-era, bonds at… 35% of their face value. By the end of that second haircut, only 13% of Greece’s debt remains in the form of government bonds in the hands of private sector investors. In summary, when the financial press talks about the ‘yields of Greece’s government bonds’, they are referring to this ultra-thin market of bond relics.
Still, why are these few remaining Greek bonds appreciating in value (and their yields are falling)? The answer is as simple as it is depressing: Because the markets have worked out (quiet correctly) that, while Greece’s public debt still remains unsustainable (despite the two haircuts in one year), the next time it is written down it will be the European taxpayer that gets hit – not the investors who still hold on to the few Greek government bonds left in the market. Put differently, when Europe re-visits the Greek debt issue, the headache from imposing another haircut on these privateers (who will threaten Greece with expensive hold-outs) will not be worthwhile given the meagre benefits in terms of debt reduction. Thus, markets expect that these bonds will be redeemed fully and Greece’s debt to the European Union (but not the ECB or the IMF) will be haircut instead.
In summary, there are excellent reasons why the Greek government bonds remaining in the hands of private investors are appreciating in value while everyone knows that the Greek state remains hopelessly bankrupt.
2. The economy’s rate of shrinkage is falling
When political prisoners go on hunger strike, during the first week they lose a considerable proportion of their body weight. As the weeks pass, the rate of diminution in their weight drops. On the week of their death, if they continue to the bitter end, the rate of shrinkage is at its lowest, as they is precious little fat and muscle to be lost. This is precisely what is happening to the Greek economy.
3. Wages have fallen drastically giving a major boost to Greek competitiveness and thus heralding an investment boom
Wages have fallen sharply and labour unit costs have followed suit. The question however is: Is this a reason for investors, Greek or foreign, to loosen up their purse-strings and go on an investment spree? That investors like to see wages fall, there is no doubt. But does this suffice? Most certainly not. There are only two reasons for investing in the productive sectors of a country like Greece presently: One is if you think that, in addition to the falling labour costs, there will be effective demand for the goods and services domestically. There is no reason to expect this for Greece any time in the foreseeable future, since both the private and the public sector are continuing to deleverage. (The fact that prices are hardly falling, at a time of collapsing wages, signals a precipitoys fall in domestic demand.) A second reason is to believe that goods and services can be produced in Greece (taking advantage of the falling costs) for the purposes of exporting them. There is very little scope for this either, since the rest of Europe is recessionary and, more importantly, excess capacity exists elsewhere so that, if there is a boost in demand outside of Greece, production can be cranked up at minimal start-up cost to cover it in countries like Germany and the Netherlands. The only exception to that is tourism in which it may make sense for smart investors to buy cheaply some boutique hotels or even resorts and take advantage of the collapse of Egypt’s tourist industry in the context of the Eastern Mediterranean market. However, such investments will make next to no difference to Greece’s macro-economy since the funds imported to purchase the properties are most likely to be exported immediately by the former owners and new investment/jobs will be negligible.
In summary, the Greek government’s own statistical agency tells us that in 2012 investment fell by 20% from the already ridiculously low levels of fixed capital investment in 2011. Moreover, the government is predicting a further fall in investment in 2013. The investment boom that is talked about is, therefore, a figment of someone’s imagination at best or a piece of vile propaganda more likely
4. The government has managed, through an impressive series of cutbacks and tax hikes, to deliver a small but nevertheless significant primary budget surplus
This is also true. The state has reneged on its obligations to cancer patients, school children, the elderly and the infirm, its own suppliers (who are owed billions for supplies and services delivered long ago), small businesses which receive VAT rebates with many months delay, etc. Now, all that would have been understandable if the government’s task were to create, however brutally, a primary surplus in order to bolster its bargaining position with the troika, giving itself the opportunity to survive without the troika’s loans during a period of tough negotiations. But the government is not interested in the slightest in playing tough with the troika. Only with its own people, trying to impress the troika with its ruthlessness within. Even though everyone knows that these primary surpluses, built on what I call ‘blood money’, cannot be the basis for Greece to repay its loans to the troika (requiring another write down of Greece’s public debt), the Athens government is pretending it can repay everything in this manner. (See here for a recent example.)
In summary, the reported primary surpluses, built on blood money as they are, cannot be thought of seriously as a sign that Greece has returned to public debt sustainability.
5. The Athens stock exchange has doubled in value over the past few months
So it has, alongside all stock exchanges around the world who seem determined to ‘go it alone’; to climb inexorable QE-fuelled heights in response to the news that the real economy is… faltering, stuttering, stumbling. In the case of Greece, there is of course another, important twofold element: Germany’s decision (a) not to amputate Greece from the Eurozone and (b) not to allow a proper probe in Greece’s banks (in fear of what it would show and of the potential knock on effect of such probes in the realm of Germany’s own Bankruptocracy). These two ‘signals’ have caused Athens’ stock exchange (which was almost annihilated last year) to double its value – to thelevel it had reache back in… 1995. The only genuine improvement, that adds to the rally, concerns three large monopolistic companies that have managed to regain access to international finance through a bond issue. This is of course due to (i) the removal of the immediate threat that their assets will be converted to drachmas and (ii) their monopolistic position in Greece, that guarantees them a profit stream.
In summary, the recent rise of Athens’ stock exchange is utterly devoid of any signs regarding an improvement in Greece’s economy.
6. Greece’s banks are consolidating and are being recapitalised, with some help from international investors
This is the grossest and most monstrous of all hyperbolae regarding GSS. Greece’s banks are huge black holes, the epitome of zombie-banks. They need at least €150 billion to be properly recapitalised but only €35 is available (after last December’s ‘debt buyback’ operation ate into the recap fund to be provided by the ESM). In addition, Greece’s bankers are jostling for position, pulling political strings and entering into unsavoury deals with our wider Cleptocracy, so as to remain in control of ‘their’ banks, at the expense of course of the banks’ capacity to borrow and to lend. See here for a whiff of the coalescence of Bankruptocracy and Cleptocracy that delivers a banking system which acts as a dead weight on Greece’s private and household sector, pushing Greece’s social economy deeper and further into a mire.
In summary, Greece’s banking sector remains a black hole that destroys any source of dynamism within the country’s social economy. The recapitalisation will prove a certain failure while the consolidations are effected with the sole criterion of bolstering the social and economic power of certain ‘bankers’ who want to use it in order to extract rents from the rest of Greek society. To speak of Greece’s banking sector as a source of ‘good news’ for Greece is to molest the truth and to insult the intelligence of Europe’s taxpayers (who are providing Greece’s bankers with the funds that allow them to ‘pretend and extend’ at the expense of Greece’s economy).
For three years now, Greece’s establishment regime is attempting to convince the world, and the Greek people, that all is well in the best of all possible worlds. The difference now is that the international press seems to be buying this propaganda. Speaking personally, I am tired of having to counter ‘good news’ stories with analyses like the above for four long years now. I wish I could also rejoice in the ‘good news’. Alas, it remains our moral duty to knock down ‘good news’ stories the purpose of which is to propagate narratives the explicit purpse of which is to impede policy changes that may bring us genuinely good news.