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).
Epilogue
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.
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