BoG recently released the Greek balance of payments for July 2015 (which is actually the first release where the data are based on ELSTAT rather than bank transactions). The release is the first after the imposition of capital controls (following the announcement of the Greek referendum) and includes some quite interesting developments.

Compared to July of 2014 the balance of payments increased to €4.25bn (from €1.27bn), an increase of close to €3bn. The major movements in specific categories are as follows:

  • The fuel balance dropped from -€726mn to -€227mn mostly due to a large fall in fuel imports of €731mn (although exports also fell €241mn). A large part of the drop is probably due to much lower oil prices compared to a year ago.
  • Purchases of ships were nil compared to €114mn last year.
  • Other goods imports fell strongly by €730mn to a little more than €2bn (while the average figure during the first 7 months of 2015 was around €2.6bn).
  • Apart from travel receipts all categories of the services balance dropped significantly, especially payments abroad (-€690mn) and transport receipts (-€700mn).
  • Secondary income receipts (basically government receipts from the EU) increased substantially by €1.75bn.

The effects of capital controls were very strong on most elements of the goods and services balances. It is helpful that exports of other goods did not seem to be affected and actually increased by €50mn. It will be interesting to observe August figures (when they do get released) to determine to what extent the drop in goods and services imports was permanent or just postdated.

The improvement of the goods and services balance was €1.24bn in a single month. As long as this improvement is permanent I think it is reason enough to not expect a large fall in Greek GDP during 2015Q3. Even a nominal drop of 6% during the third quarter (which is consistent with a fall of 5% in real GDP if the VAT increases are taken into consideration) is equal to roughly €2.9bn. In other words, the improvement of the July balance of goods and services is close to 40% of that drop. As long as the August external balance figures are also positive news it is very hard for Greek internal demand to negate the positive impact of the external sector. Third quarter GDP might actually prove to be quite resilient.

Despite the large economic losses in the Eurozone since 2008 one will hear the same constant argument: Most countries (especially those in the periphery) lived ‘beyond their means’ and the correction that followed was inevitable. Austerity might cause short-term pain but the subsequent economic recovery (however weak and thin) vindicates its use and merits.

In this short post I will take a rather simplistic approach. Since the ECB inflation target is 2% while the usual assumption about long-run growth in per capita real output is also 2% we can compare the path of NGDP per capita in European countries to a 4% trend:

Euro Countries NGDP per head

What we see is quite significant. It is true that before 2008 Greece and Spain had a NGDP path that constantly diverged from the 4% long-run trend (this pattern is especially strong in the Greek case). France, Italy and Portugal roughly followed the long-run trend while Germany quickly suffered significant losses due to its stagnant domestic demand environment and low inflation.

What is especially interesting is the path of NGDP/capita since the Great Recession. All countries seem to have suffered significant and permanent losses with their expected expansion path moving to a new and lower level. This is even more visible in the case of Greece and Italy where their projected 2016 NGDP per capita level will only be 70% of the long-term trend. Interestingly, Spain seems to be the country that has suffered the least losses compared to the trend line while France, Germany and Portugal are quite far from the 4% growth path (France at 74% while Germany and Portugal are close to 78%) with France actually growing only by 1.5% since 2012.

Yes, the path of Greece and Spain up to 2008 seems to have been unsustainable (in the context of a monetary union). Yet their correction entailed significant and permanent losses while the whole of the Eurozone is now on a new growth path at least 20-25% lower than the long-term 4% trend. Austerity and tight monetary conditions result in large output losses that are lost forever. Adding a few years of income 20-25% lower than trend implies a permanent loss of more than a year’s worth of income which in the context of a person’s lifespan is more than important.

Olivier Blanchard, the IMF’s Chief Economist who is stepping down from that position at the end of September gave an interesting interview on his term at the IMF which focused, among other things, on the issue of fiscal multipliers as one of the main topics where the IMF had to update its beliefs and change its assumptions on the relationship between fiscal consolidation and growth. Given this opportunity I would like to use this space as a small reference on the existing literature on the topic.

Up until the crisis, fiscal multipliers were calculated usually through an SVAR system IRFs based on a methodology pioneered by Blanchard himself (Blanchard and Perotti 2002) . Based on that research, fiscal multipliers were considered to be rather small with estimates ranging between 0.3 and 0.6 for tax multipliers and 0.3 and 1 for spending multipliers. The large (and persistent) output gaps since the crisis, the presence of the ZLB which limited monetary accommodation as well as the inability to devalue at least in the Eurozone countries changed the focus of the research away from a roughly balanced growth path where fiscal effects are only temporary (and Ricardian equivalence holds) and towards a methodology focused on regime-switching models, usually implemented through Smooth-Transition VARs. Early and significant contributions to this literature were made by Auerbach and Gorodnichenko whose work is still the primary reference on the subject.

Under this kind of framework, fiscal multipliers are different in downturns and upturns measured by a state variable such as the output gap. Moreover, in order to avoid bias problems, fiscal shocks were not specified using the cyclically adjusted primary balance approach (as originally used by Alesina in his ‘expansionary austerity’ papers) but rather using either the ‘narrative approach’ where fiscal shocks are determined based on the examination of policy documents to identify episodes of exogenous fiscal measures or where shocks are identified as forecast errors based on professional forecasts of fiscal policy.

Fiscal multipliers in the G-7

One of the earliest research notes on the subject was during 2012 by the IMF (which was also presented in the Fiscal Monitor of that year) on the fiscal multipliers in G-7 countries. The paper used a TVAR methodology to calculate spending and tax multipliers for six G7 countries.The results showed that multipliers are significantly different between regimes with spending shocks having a substantially higher effect on output:

Fiscal Multipliers in G-7 Economies

Growth forecast errors and multipliers

Following the strong Greek disappointment the IMF and its Chief Economist published significant research on its WEO 2012 and as a separate paper on the fiscal multipliers during the fiscal consolidation period. The idea was actually rather simple and elegant:

regress forecast error for real GDP growth on forecasts of fiscal consolidation. Under rational expectations, and assuming that forecasters used the correct model for forecasting, the coefficient on the fiscal consolidation forecast should be zero. If, on the other hand, forecasters underestimated fiscal multipliers, there should be a negative relation between fiscal consolidation forecasts and subsequent growth forecast errors

The results indicated that forecasters had significantly underestimated the impact of fiscal consolidation on economic growth and especially on consumption and investment (in other words, on internal demand):

Our forecast data come from the spring 2010 IMF World Economic Outlook (IMF, 2010c), which includes forecasts of growth and fiscal consolidation—measured by the change in the structural fiscal balance—for 26 European economies. We find that a 1 percentage point of GDP rise in the fiscal consolidation forecast for 2010-11 was associated with a real GDP loss during 2010-11 of about 1 percent, relative to forecast. Figure 1 illustrates this result using a scatter plot. A natural interpretation of this finding is that multipliers implicit in the forecasts were, on average, too low by about 1.

Table 1 reports our baseline estimation results. We find a significant negative relation between fiscal consolidation forecasts made in 2010 and subsequent growth forecast errors. In the baseline specification, the estimate of β, the coefficient on the forecast of fiscal consolidation, is –1.095 (t-statistic = –4.294), implying that, for every additional percentage point of GDP of fiscal consolidation, GDP was about 1 percent lower than forecast. Figure 1 illustrates this result using a scatter plot. The coefficient is statistically significant at the 1% level, and the R² is 0.496.

As Table 1 reports, when we remove the two largest policy changes (those for Germany and Greece), the estimate of β declines to –0.776 (t-statistic = –2.249) but remains statistically significant at the 5 percent level.

As Table 6 reports, when we decompose the effect on GDP in this way, we find that planned fiscal consolidation is associated with significantly lower-than-expected consumption and investment growth. The coefficient for investment growth (–2.681) is about three times larger than that for private consumption growth (–0.816), which is consistent with research showing that investment varies relatively strongly in response to overall economic conditions.

Overall, we find that, for the baseline sample, forecasters significantly underestimated the increase in unemployment and the decline in domestic demand associated with fiscal consolidation.

Expansionary austerity? Not so fast

Another important piece of research by the IMF is a paper which focused on the ‘expansionary austerity’ narrative championed mainly by Alesina. The paper argued that using the cyclically adjusted primary balance (CAPB) suffered from serious bias problems and using instead a narrative approach (focusing on historical data of discretionary fiscal consolidation measures) changed the impact on growth significantly, especially compared to the CAPB estimation:

The conventional approach is to identify discretionary changes in fiscal policy using a statistical concept such as the change in the cyclically-adjusted primary balance (CAPB). As this paper explains, changes in cyclically-adjusted fiscal variables often include non-policy changes correlated with other developments affecting economic activity. For example, a boom in the stock market improves the CAPB by increasing capital gains and cyclically-adjusted tax revenues. It is also likely to reflect developments that will raise private consumption and investment. Such measurement error is thus likely to bias the analysis towards downplaying contractionary effects of deliberate fiscal consolidation. Moreover, a rise in the CAPB may reflect a government’s decision to raise taxes or cut spending to restrain domestic demand and reduce the risk of overheating. In this case, using the rise in the CAPB to measure the effect of fiscal consolidation on economic activity would suffer from reverse causality and bias the analysis towards supporting the expansionary fiscal contractions hypothesis.

To address these possible shortcomings, we examine the behavior of economic activity following discretionary changes in fiscal policy that historical sources suggest are not correlated with the short-term domestic economic outlook. In particular, we consult a wide range of contemporaneous policy documents to identify cases of fiscal consolidation motivated not by a desire to restrain domestic demand in an overheated economy, but instead by a desire to reduce the budget deficit.

A comparison of our measure of fiscal consolidation with the change in the CAPB reveals large differences between the two series, and suggests that, in these cases, the CAPB based approach tends to misidentify deficit-driven fiscal consolidations.

Based on our new dataset, Section III estimates the short-term effect of fiscal consolidation on economic activity. Our estimates imply that a 1 percent of GDP fiscal consolidation reduces real private consumption over the next two years by 0.75 percent, while real GDP declines by 0.62 percent. In contrast, repeating the analysis using the change in the CAPB to measure discretionary policy changes provides evidence consistent with the expansionary austerity hypothesis. On average, a rise in the CAPB-to-GDP ratio is associated with a mild expansion in private consumption and GDP. The large difference in these estimates also arises for a subset of large fiscal adjustments––those greater or equal to 1.5 percent of GDP. These results suggest that the biases associated with using cyclically-adjusted data may be substantial.

Meta-Regression: Effects on Eurozone and Greece

Apart from presenting the results of specific papers it is also interesting to note the conclusions of a large meta-regression on the available literature on the topic. This research was also used in order to determine the actual effects of fiscal consolidation within Europe and in Greece. Its main results are:

The meta-analysis finds that the fiscal multiplier estimates are significantly higher during economic downturns than in average economic circumstances or in booms.

For example, the multiplier of unspecific government expenditures on goods and services robustly rises by an average of 0.6 to 0.8 units during a downturn. And for some specific instruments, for instance fiscal transfers, the multiplier increases by much more, turning transfers from the second least effective expenditure instrument into the most effective one. Part of the strong increase of the transfer multiplier might be explained by an increase in the share of liquidity constrained private households in downturns.

Importantly, and by contrast, there does not appear to be any such regime dependence in the impacts of tax changes. In fact, the spending multipliers exceed tax multipliers by about 0.3 units across the board in normal times and even more so in recession periods. Furthermore, during average economic times and in boom periods, the fiscal multipliers are not only lower than in downturns but also tend to vary less across different fiscal instruments.

Gechert and Rannenberg (2014) find that for all expenditure categories other than increases in unspecified government spending, the cumulative multipliers robustly exceed one in the downturn regime.

Spending multipliers tend to be larger than tax multipliers,

More open economies have significantly lower multipliers than more closed economies, and

The multipliers generally vary significantly across spending and tax categories, so that studies which look at the strength of general fiscal multipliers (or deficit multipliers) on average can produce very misleading results.

Looking into the effects of Euro wide fiscal consolidation the authors find that:

the fiscal consolidation in the Eurozone reduced GDP by 4.3% relative to a no-consolidation baseline in 2011, with the deviation from the baseline increasing to 7.7% in 2013. Thus, the austerity measures came at a big cost. By far the biggest contribution to this GDP decline comes from transfer cuts

estimated effects of EU fiscal consolidation

This is especially evident in Greece where austerity can explain more or less the full extent of the loss of output since 2009, as well as the return to growth during 2014 (since that was the time when fiscal consolidation was largely put on hold) :

We estimate that austerity almost entirely explains the collapse of Greek GDP after 2009. This result suggests that ceteris paribus in the absence of austerity, the Greek economy would have entered a prolonged period of stagnation, rather than a depression.

We find that the fiscal consolidation in Greece reduced GDP by more than 10% in 2010, with the cumulative GDP decline increasing to 28% in 2013, after which it decreases to about 26% in 2014, as – according to our estimates – fiscal austerity was relaxed somewhat on the expenditure side in 2014.

consolidation measures expenditures revenues - impact on GDP based on multipliers

Fiscal multipliers: Monetary accommodation and medium-term effects

I will end this post with a look at two more papers on the subject that do not attempt to just re-estimate fiscal multipliers for specific countries but rather to answer some important policy questions. Mainly whether monetary accommodation plays a role on the impact of fiscal consolidation (economic theory and common logic suggests it does) and how fiscal consolidation affects economic growth in the medium-term (which can have negative effects on potential output through lower growth of the capital stock and hysteresis effects on the labour market).

The first paper finds that fiscal policy is much more effective when monetary policy is accommodative. This also answers the crowding-in/out question of government spending since controlling for the stance of monetary policy can determine to a large extent the effects of fiscal measures.

Clearly, the response of output is conditional on the state of monetary policy: output increases to a large extent following a federal spending shock when monetary policy accommodates, while it falls, albeit not significantly, when monetary policy does not accommodate. This result holds over time and is consistent with the findings in Auerbach and Gorodnichenko (2012). The authors find that government spending tend to be slightly recessionary during expansions when expectations are controlled for.

Estimation results suggest that output increases by 2.5 dollars within a year for a dollar increase in federal spending when monetary policy is accommodative and decreases by 1.6 dollars when monetary policy is non-accommodative. The peak multiplier when the accommodative state prevails is equal 5.5 and only equals 2.8 under non-accommodative monetary policy.

GDP cumulative and peak multiplier

The second paper tries to study the effects of fiscal consolidation on output and employment over a 5-year period for a sample of OECD countries during periods of deep recession defined as economic contractions lasting at least two consecutive years. It  Fiscal shocks are identified using the narrative approach while separate expenditure and tax multipliers are calculated. An important contribution of this paper is the fact that it also tries to estimate employment and unemployment multipliers.

Its findings suggest that multipliers are indeed significantly larger during prolonged recessions while the asymmetry between long and ‘normal’ recessions exists mainly for expenditure based adjustments:

Our empirical findings suggest that the medium-term fiscal multiplier on output is significantly larger during PRs. Specifically, the medium-term multiplier is approximately -2 at a five-year horizon during PRs, compared to -0.6 during normal times. This means that during PR episodes a cumulative increase in the primary surplus of 1 dollar leads to a cumulative decrease in output of 2 dollars over a five-year horizon. We also find that the employment ratio persistently declines after a fiscal consolidation during periods of PR, resulting in a medium-term employment multiplier above -3 compared to -0.5 on average. The unemployment rate also persistently increases with an estimated medium-term multiplier of around 1.5, indicating that a cumulative increase in the primary surplus of 1 percent of GDP leads to a cumulative rise in the unemployment rate by 1.5 percentage points at a five-year horizon.

Our empirical results show that the asymmetry in the size of multipliers between PR and non-PR only exist for expenditure-based (EB) adjustments for which medium-term multipliers on output, employment or unemployment, are significantly higher during PR episodes compared to the average response in non-PR periods. Our results for tax-based (TB) consolidations are in line with previous literature, which finds large and symmetric effects of TB consolidations on output (Romer and Romer, 2010). These results are robust to several alternative specifications, including different definitions of the cycle, credit growth, and exclusion of countries with financial crises or with constrained monetary policy.

cumulative multiplier per variable

It is also highly significant that protracted recessions appear to have a serious impact on variables such as the capital stock, the NAIRU and (as a direct result) on potential output. Consumption, investment and private-sector employment are also seriously affected.

fiscal impulse response per variable table


Overall I think it is quite clear that fiscal multipliers (especially expenditure multipliers) are high and significant during times of recession and negative output gap. They are able to explain the largest part of the output losses and stagnation in the Eurozone since 2010. The ‘confidence fairy’ does not seem to exist while continued consolidation during a deep and prolonged recession can have very serious effects not only on current output but also on potential output and future growth due to its impact on structural unemployment and the capital stock. Monetary policy accommodation (which is even more important in times when the ZLB has been hit or inside the Eurozone) determined to a large extent whether fiscal policy will have expansionary results or not and answers the crowding-in/out question.

Recently I have been going through the excellent blog of Dietz Vollrath (which is mainly focused on long-term economic growth and its drivers) and have found a number of points on long-term growth which are highly related to the Greek case. As the IMF debt sustainability analysis made clear, Greek long-term growth expectations of 2% annually were based on Greece achieving a steady TFP growth rate equal to the best Euro performer (Ireland). These expectations have already proven way too optimistic and economic growth projections have been lowered to 1.5% yearly. Yet, as the DSA states, if Greece were to achieve a labor force participation rate close to the highest of the Euro area, unemployment fell to German levels and TFP growth reached the average in the euro area since 1980, real GDP growth would average 0.8 percent of GDP. As a result, any long-term growth projection higher than 1% per year seems highly optimistic and conditional on extremely favorable TFP growth rates. In this blog post I would like to explore a few of the headwinds that are likely to put a serious break on Greek long-term growth and how the structural reforms blue pill will not be able to help.

Structural Reforms long-term impacts

Before looking into specific issues let me remind people that the IMF’s own research indicates that most of the proposed reforms in the Greek case (labor and product markets) have low impact on long-term TFP growth rates. The reforms that do impact technical change and productivity in a positive and permanent manner are those that involve actually investing large sums of funds on R&D, ICT capital and infrastructure. Labor market reforms on the other hand have negative effects in the short-term and no impact on long-terms horizons yet they remain high on the reform agenda, even after Greece has already implemented a whole set of measures that have reduced labor bargaining power, minimum wages and allowed for much more flexible working conditions (something which is evident in the very large share of non-permanent work contracts in new hires):

Short and medium term impact of structural reforms on total factor productivity

Sectoral Composition and Growth

Dietz Vollrath also makes a very valid point when analyzing the services sector. He highlights the fact that when someone buys a service what he is ultimately purchasing is time, not a thing. When you buy a massage you are buying 60 minutes of a professional’s time. Increasing productivity in services is not even very difficult, it is also not desirable. We could increase productivity in schools by enlarging the number of children in each class but no parent would be overly fond of such an idea. Ultimately, what the services sector can achieve is either to increase its mark-ups by offering higher quality services (ie in restaurants and tourism) or provide massive, high productivity services (think large retail stores like Zara or large super-markets) which require closing down most SMEs and lowering labor inputs (since much less labor will be required to provide these services). In any case, both avenues require real investment and restructuring of the economy and not just having the state ‘reform and get out of the way’. Obviously taking the second route can increase productivity but at the expense of employment, markups, competition and most probably quality.

In any case, what the above highlights is that one cannot expect that economies with very different sectoral composition between services and industry can achieve comparable TFP/productivity gains without a long and painful process of economic restructuring. This is especially true in the case of Greece when compared to Ireland and Germany:

Sectoral Value Added Shares Germany Ireland Greece

* Source: OECD STAN archives

Economic Restructuring and the financial sector

Closely related to the argument above is the fact that economic restructuring (which means moving resources from low-productivity firms and sectors to high-productivity ones) requires a working financial sector. As long as banks carry a large pool of NPLs on their balance sheets they will mainly attempt to ‘postpone the day of reckoning’ and not help in moving capital towards high-growth/efficient sectors. This phenomenon is highlighted in recent research by BoE on the impaired capital reallocation mechanism in the UK. The high increase in the standard deviation of firm rates of return since the crisis is a significant indicator of such ‘distortions’:

figure 4 - SD of firm rates of return relative to change in capital stock

Obviously Japan is also another example of how NPLs can become a long-term bottleneck for economic restructuring and a drag on new bank lending and economic growth. As long as Greek banks are not properly recapitalized and cleared of their NPLs (which will probably reach €100bn) they will remain a barrier for restructuring the Greek economy and increasing long-term growth.

This is even more important for Greece because of the relative dominance of SMEs in the economy since SMEs are much more reliant on bank financing for their continued operation and growth:

Source of SME financing

Poverty and risk-aversion

Another point emphasized by Dietz Vollrath is the fact that there is a close (and probably non-linear) relationship between poverty and risk-aversion. High growth is usually closely related to high risk and opening an enterprise in a high growth/export oriented sector requires, apart from capital, risk taking individuals. As long as people face the risk of poverty and social exclusion (over 37% of Greek nationals aged 18-64 faced that risk during 2014) and are in trouble of securing their most basic needs such as food and shelter they are bound to be extremely risk averse and not willing to take business risks. You cannot have almost 40% of the population risk poverty and still expect strong productivity growth based on implementing risky and cutting-edge entrepreneurial ideas.

Sectoral Balances

Furthermore, whatever our projections about economic growth, the economy should be able to achieve it without creating (or worse, increasing) economic imbalances. One of the most basic tools to guarantee consistency on this front is to use the sectoral balances which involves the basic macroeconomic accounting identity that the sum of savings in an economy should balance to zero. In the Greek case this revolves around the fact that ‘debt sustainability’ requires a long-term fiscal primary balance of 3.5% from 2018 onwards. This large fiscal surplus requires a corresponding balance for the private domestic and external sector. Either the current account surplus will have to reach and remain at close to 3.5% of GDP or the private domestic sector will face a constant deficit of its net accumulation of financial assets.

Given the fact that Greece has achieved a current account surplus of less than 1.5% GDP and an output gap that is probably close to 10% its cyclically adjusted external position is still close to deficit. A quick way to determine that is to assume an import-to-GDP ratio of 25% and a low correlation between the output gap and exports (since the latter depend on external demand). As a result, closing the output gap and bringing the Greek economy back to potential will mean a deterioration of the current account balance by 2-2.5% of GDP which will bring it back to deficit. Consequently, achieving the 3.5% long-term fiscal primary surplus target implies a domestic private sector deficit of close to 4% GDP. Basing long-term growth on the accumulation of large imbalances is obviously not the way to make credible projections.

Fiscal financing of growth

One last thing that is related with the long-run target of a 3.5% primary surplus has to do with the simple fact that achieving high growth cannot be decoupled from the availability of public financing. An economy cannot grow without a strong and high quality public capital stock, nor without heavy investment in public education and R&D (especially since Greek growth will depend mainly on moving resources between non-tradable/tradable and low/high growth sectors). Nor can a country achieve high employment in the context of an aging population without finding ways to increase participation rates of women and people close to retirement which require financing of things such as (re-)educational initiatives and childcare (see the IMF on the related German case).


Overall, the point of this post is not to make any long-term projections for TFP/economic growth (a task which is clearly very hard) but rather to highlight the fact that achieving the IMF ambitious targets does not (mainly) rely on structural reforms but rather on actual investment (which requires large fund injections), financial sector restructuring, NPL clearance and reduction of poverty all while respecting sectoral balances which most probably requires an upfront debt restructuring and much more realistic fiscal surplus targets.

Το στατιστικό δελτίο του Ιουλίου του πληροφοριακού συστήματος Εργάνη έλαβε αρκετά μεγάλη δημοσιότητα καθώς επρόκειτο για τα πρώτα στατιστικά στοιχεία για την απασχόληση μετά την επιβολή των capital controls. Καθώς σήμερα δημοσιεύτηκε το ίδιο το δελτίο θα ήθελα να εξετάσω λίγο αναλυτικότερα τα στοιχεία τα οποία περιέχονται σε αυτό, ιδιαίτερα σε αντιπαραβολή με το δελτίο του Ιουλίου 2014.

Ισοζύγιο Προσλήψεων - Αποχωρήσεων Ιούλιος 2015

Το στατιστικό στοιχείο το οποίο κέρδισε το μεγαλύτερο μέρος της προσοχής ήταν βεβαίως το γενικό ισοζύγιο προσλήψεων – αποχωρήσεων. Όπως είναι σαφές, στο φετινό Ιούλιο παρατηρήθηκε σημαντική αύξηση των αποχωρήσεων κατά 16.650 άτομα και παράλληλη μείωση των προσλήψεων κατά 13.280 άτομα με συνέπεια η συνολική διαφορά σε σχέση με τον Ιούλιο του 2014 να φτάσει τις 30.000 θέσεις εργασίας. Κατά συνέπεια το ισοζύγιο από θετικό κατά 13.000 θέσεις ένα χρόνο πριν έγινε αρνητικό 16.650 θέσεις φέτος.

Το στατιστικό στοιχείο το οποίο φαίνεται να έχει ιδιαίτερη σημασία είναι η διάρθρωση των νέων προσλήψεων ανά είδος σύμβασης εργασίας:

Προσλήψεις αν΄είδος θέσεων Εργασίας Ιούλιος 2015

ιδιαίτερα σε σχέση με ένα χρόνο πριν:

Προσλήψεις αν΄είδος θέσεων Εργασίας Ιούλιος 2014

Είναι σαφές ότι η μεγάλη διαφοροποίηση παρατηρείται στην κατανομή των προσλήψεων ανάμεσα σε πλήρη και εκ περιτροπής απασχόληση με την αναλογία να είναι ουσιαστικά αντιδιαμετρικά αντίθετη από 3:1 υπέρ της πλήρους απασχόλησης το 2014 σε 1:3 το 2015. Επιπλέον, το άθροισμα των αναγγελιών αυτών μειώθηκε από περίπου 100.000 θέσεις το 2014 σε 90.000 φέτος. Βλέπουμε λοιπόν ότι η επιβολή των capital controls είχε σημαντική επίδραση πάνω στη ‘βραχυπρόθεσμη αβεβαιότητα’ των επιχειρήσεων οι οποίες φαίνεται ότι επέλεξαν (προσωρινά;) πιο ευέλικτες μορφές απασχόλησης προκειμένου, κατά μία έννοια, να περάσουν το ρίσκο τους στους εργαζόμενους.

Η αυξημένη αβεβαιότητα είναι εμφανής και στις αυξημένες μετατροπές συμβάσεων εργασίας από πλήρη απασχόληση σε άλλες μορφές εργασίας οι οποίες έφτασαν τις 8.300 περιπτώσεις σε σχέση με 3.300 ένα έτος νωρίτερα:

Μετατροπές Πλήρους απασχόλησης σε άλλες μορφές

Το έλλειμμα των περίπου 10.000 προσλήψεων φαίνεται ότι πιθανότατα εξηγείται από την μείωση των προσλήψεων στο λιανικό εμπόριο (οι οποίες δεν εμφανίζονται καν στο δελτίο του 2015).

Δραστηριότητες Ιούλιος 2015

σε σχέση με το 2014:

Δραστηριότητες Ιούλιος 2014

Παρότι οι αποχωρήσεις είναι αρκετά αυξημένες σε σχέση με το 2014 (κυρίως όμως λόγω οικειοθελών αποχωρήσεων και λήξεων συμβάσεων ορισμένου χρόνου) οι αναγγελίες προσλήψεων στις βασικές κατηγορίες δραστηριοτήτων (εστίαση, καταλύματα, βιομηχανία τροφίμων) δεν παρουσιάζουν ουσιώδη μεταβολή ενώ και το ισοζύγιο της εκπαίδευσης είναι παρόμοιο με ένα χρόνο πριν. Φαίνεται ότι το λιανικό εμπόριο (το οποίο δεν εμφανίζεται φέτος στον πίνακα ΙΧ) αλλά και οι δραστηριότητες πολιτικού μηχανικού (με το προσωρινό πάγωμα των μεγάλων έργων) ήταν οι δραστηριότητες οι οποίες πιθανότατα συνέβαλαν στην μείωση των προσλήψεων.

Το γενικό συμπέρασμα λοιπόν είναι ότι οι τομείς της οικονομίας οι οποίοι βασίζονται στον εξωτερικό τομέα (εστίαση, καταλύματα) ή έχουν ανελαστική σχετικά ζήτηση (βιομηχανία τροφίμων) διατήρησαν τη δυναμική των προσλήψεων που πραγματοποίησαν το 2014 αλλά με πολύ μεγάλη έμφαση σε ευέλικτες μορφές εργασίας προκειμένου να μειώσουν το ρίσκο των capital controls και τυχόν διακοπών στη δραστηριότητα τους. Οι τομείς που βασίζονται στην εσωτερική ζήτηση ή σε σταθερές χρηματοροές από το Ελληνικό δημόσιο (λιανικό εμπόριο και έργα πολιτικού μηχανικού) πιθανότατα ήταν αυτοί που μείωσαν σχετικά άμεσα τη ζήτηση τους για εργαζόμενους.

Τα στοιχεία του Ιουλίου λοιπόν αναδεικνύουν μία περισσότερο ευέλικτη αλλά στάσιμη οικονομική δραστηριότητα με τις επιχειρήσεις να ‘ασφαλίζονται’ έναντι των εξελίξεων μέσω μεταβολής των μορφών εργασίας στις νέες προσλήψεις. Τομείς που βασίζονται στην εσωτερική ζήτηση δείχνουν να υπέστησαν ισχυρή πίεση από την τραπεζική αργία η οποία πίεση μένει να φανεί κατά πόσο μειώθηκε μετά την μαζική έκδοση χρεωστικών καρτών και τη χαλάρωση των περιορισμών στις συναλλαγές ή έχει πάρει περισσότερο μόνιμα χαρακτηριστικά μείωσης της οικονομικής δραστηριότητας.

Just a small post on the newly released June monthly statement by BoG:

BoG monthly statement June 2015

The large increase in central bank lending to Greek banks is quite evident: BoG loans were used to finance increased banknotes hoarding (+€5bn in a month) and deposit outflows (+€7.5bn). This increase stretched posted collateral which reached close to €200bn. Given that debt securities and credit claims held by Greek banks amount at a bit less than €300bn (with around €18bn being securities in currencies other than the Euro) with a significant part encumbered in various covered bonds and other securities it is obvious that banks were running out of available collateral and capital controls were really around the corner as long as ELA financing needs did not decrease. Obviously the increase in haircuts at the 6th Jule meeting only made matters worse. Based on the above numbers it is clear that it will be extremely difficult to relax capital controls without cash/deposits returning to the Greek banking system.

Another interesting observation is the extremely low figure for the government account which amounted at only €600mn. This reflects the large effort by the Greek government to keep paying official creditors during 2015 and the slow deterioration of state finances due to the ongoing recession. Since ELA was capped before the end of June the above figure suggests that the Greek government was in no position to pay the IMF on 30 June even if it wished to do so (since it could only use funds available at the BoG). Its financial position was extremely stretched and it would have to quickly decide whether to resist creditor demands by issuing IOUs or accepting the terms of a new bailout.

Even if government entities still had funds in bank accounts that could be tapped by the central government, the ELA cap made transferring them to the government account held at BoG close to impossible. These funds might be able to help in domestic payments to government employees and pensioners but would not allow paying (principal and interest on holdings of) foreign debtholders making Grexit very likely in order to avoid a general default on government debt.

One last issue that I don’t see people touching often is the fact that the very large ELA amount will result in significant windfall profits for BoG during 2015 which will be remitted back to the government. Assuming an ELA spread of 150bps over the MRO rate (BoG has to pay the MRO rate on its liabilities towards the Eurosystem), BoG should have already earned an amount close to €450mn in profits (although a part will probably be set aside as provisions). These profits might prove significant for the 2016 state budget execution.

I ‘ve been going through the detailed FAQ and legal documentation of ESM financial assistance procedures, available at the ESM website (see here and here) in order to determine how Greek banks will be recapitalized. What I have been able to determine so far is that the legal framework provides significant flexibility in managing the recapitalization exercise and can be used to justify both a (uninsured) depositor bail-in as well as capital injection through a loan to the Greek HFSF.

What is quite clear is that should the ESM be involved through the direct recapitalization instrument (DRI) a depositor bail-in is more or less certain since a contribution of 8% of total funds will be required. Bruegel does a very nice job in analyzing the various scenarios and probable scenarios. One should bear in mind though that these numbers are a moving target since the insured/uninsured deposits mix is not known, while any increase in central bank financing (through ELA) will lead to higher haircuts on deposits (since central bank exposure is fully collateralized and does not participate in bail-ins). As a result, every small cash redrawal (even from small insured deposit accounts) makes the required deposit haircut a bit higher.

What is not clear is whether Greece will be able to use the ESM loan to recapitalize its banks through the HFSF (as it did in 2012/2013) and avoid a depositor bail-in. In principle, the ESM legal guidelines allow an ESM loan for such purpose while the €25bn of the Greek privatization fund earmarked for use in the recapitalization exercise make such a loan easier (since it will be ‘collateralized’ by Greek assets). Yet in a strange twist of events, the fact that Greek debt is considered (by almost all parties involved) unsustainable makes granting a large loan instead of direct recapitalization a bit problematic. According to articles 2 and 3 of the relevant ESM guideline:

The aim of the financial assistance to institutions is to preserve the financial stability of the euro area as a whole and of its Member States by catering for those specific cases in which an ESM Member experiences acute difficulties with its financial sector that cannot be remedied without significantly endangering its fiscal sustainability due to a severe risk of contagion from the financial sector to the sovereign. The use of this instrument could also be considered if other alternatives would have the effect of endangering the continuous market access of an ESM Member. As far as the use of the instrument of an ESM loan for the recapitalisation of financial institutions is not possible, such financial assistance shall thus seek to help remove the risk of contagion from the financial sector to the sovereign by allowing the recapitalisation of institutions directly, thereby reducing the effect of a vicious circle between a fragile financial sector and a deteriorating creditworthiness of the sovereign.


The following criteria related to the requesting ESM Member shall be met in order for a request for financial assistance for the purpose of directly recapitalising institutions to be considered eligible:

  1. The requesting ESM Member is unable to provide financial assistance to the institutions in full without very adverse effects on its own fiscal sustainability, including via the instrument of an ESM loan for the recapitalisation of financial institutions. The use of the instrument can also be considered if it is established that other alternatives would have the effect of endangering the continuous market access of the requesting ESM Member and consequently require the financing of its sovereign needs via the ESM.

So it is clear that debt sustainability can be used as an excuse by creditors in order to push for the use of the direct recapitalization tool and increase the Greek ‘own contribution’ to the third financing package. The fact that the ESM envisions its contribution to be limited to €50bn – which are only enough the cover amortization of existing debt obligations and interest payments – makes the above scenario somewhat more probable given the IMF’s reluctance to continue its involvement in the Greek program.

On the other hand, since most retail uninsured deposits have already left the Greek banking system (and foreign deposits of significant amounts are almost non-existent), a depositor bail-in will mostly hit NFC working capital and create serious short-term problems on the economy (while also push a large percentage of these firms into insolvency). This is another reason to favor an ESM loan over the DRI although it requires that Greek and creditors motives to be .. aligned.

Overall I think that the ESM guidelines provide a great deal of flexibility for Greece and its creditors to use either instrument. Which one will eventually be used will be another indicator of whether creditors are determined to accept a larger part of ‘Greek risk’ or not. A possible large haircut in NFC deposits obviously makes a large part of the theoretical Grexit cost moot.

Update: Yiannis Koutsomitis mentioned on twitter that the ESM confirmed the availability of €10b in a segregated account to be used for future bank recapitalization (should the third package proceed as expected). That is definitely good news and hopefully makes things a bit clearer. I would like to take this opportunity to stress that, in this particular case, I am not trying to predict what course of action will be taken concerning Greek bank capital needs but rather to collect and analyze the available information and consider the political/economic implications of each option.

 Update2: The ECB published its opinion on the bank resolution draft law to be voted into effect on Wednesday 22/7. It seems that the bail-in tool will only be available after 1/1/2016. Here are the relevant interesting parts:

 ECB Opinion on Bank Resolution draft law

Frances Coppola also does a great job in analyzing the recap exercise.

Yesterday, I received an interesting comment on my Grexit post by Frances Coppola, a comment that is actually not that far from my point of view as would seem on first impression. I ‘d like to use this post to elaborate a bit on this interesting subject.

In my view, Grexit involves (among other things) a trade-off between a balance of payments constraint and large limitations on internal economic policy (and the winners and losers in social groups that policy implementation can create). It is true that the Target2 monetary construction, along with a loose central bank collateral framework can accommodate very large capital flows in the Euro area (BoG Target2 liabilities currently stand at more than €100bn, roughly 55% of GDP). Although most of these capital flows are not directly trade related, the sheer magnitude of Target2 accommodation (and the relative strength of the Euro as a reserve currency) do provide a way around balance of payments constraints for Euro countries, at least for a significant time span. Nevertheless, this relative freedom comes with the cost of well known Euro problems (a fit-for-all monetary policy, low labour mobility, small net fiscal transfers) and the prospect of a loss of a large part of sovereignty if a country is forced to borrow from the ESM and sign an MoU.

A return to a national currency (especially for small deficit countries such as Greece) reintroduces a balance of payments constraint on economic growth. The country has to apply an economic policy consistent with a positive (or at least balanced) long-run balance of payments which allow it to improve/stabilize its NIIP and slowly accumulate FX reserves, which is consistent with relative exchange rate stability. Since most deficit countries are currently experiencing large output gaps, one has to look at cyclically-adjusted current account balances, most probably based on the IMF framework. The EC has performed such an exercise which estimates that Southern European countries still have a structural current account deficit:

EC Cyclically Adjusted Current Account Euro Countries

One can even do a back-of-the-envelope calculation based on the long-run import/domestic demand ratio. For the Greek case, this is around 27-30% which implies, given a 10% output gap, that imports would most probably be 2.5-3% of GDP higher if the Greek economy was running at potential. Since external demand is not closely related to the output gap (at least for a small economy) this implies that the external balance would deteriorate by roughly the same amount if Greece were to slowly try to close its output gap.

An initial devaluation of the newly introduced currency would most likely change the above figure, although I am not a fan of external adjustments through relative price changes (it is my belief that most of the external realignment happens through changes in relative income growth). Nevertheless, a devaluation could result in a (slow) favorable sectoral realignment since (as long as the devaluation did not translate into higher nominal wages) it would increase the profit margins of exporting firms and sectors. That would change the sectoral mix towards export oriented enterprises and help improve the structural external balance up to point.

Still, it is true that Greece (or any similar Euro country) would trade more internal ‘policy flexibility’ for a binding external constraint. This constraint would be made stronger by the fact that debt hierarchy (senior official debt higher than 120% of GDP in the Greek case) would not allow tapping external markets, at least in large quantities.It might be relaxed through a mechanism such as ERM II (which I touched on my previous post on the subject). Ultimately, this becomes a political choice, dependent on the constraints imposed by each choice (Euro membership or a return to national currency). What the July Eurosummit made clear is to what extent austerity is a binding policy constraint inside the Eurozone, at least for highly indebted countries.

A few details of the new Greek loan package have been published during the last few days. Based on these I ‘d like to take a look at the financing sources of the package.

The European Commission paper on the loan request tries to analyze Greek financing needs and sources. It also includes a helpful table:

Greece ESM loan financing needs and sources

Based on the above gross financing needs (excluding cumulative primary surpluses and privatization proceeds) are around €90bn. It is true that the bank recapitalization package might be less than expected so one can assume actual needs at €80-90bn.

Looking into financing sources we see an expected cumulative primary surplus contribution of €6bn. This is based on a projection of 0-1% primary deficit in 2015, 0.5-1% primary surplus in 2016, 2% in 2017 and 3.5% 2018 (and onwards). Privatization proceeds are expected at €2.5bn although IMF itself estimates them at €1.5bn.

SMP/ANFA profits contribute a bit over €7.5bn. This creates a financing gap of €64-74bn which must be covered through other sources. The head of the ESM stated today that the ESM contribution will be around €50bn. This leaves €14-24bn uncovered which must be contributed by the IMF (which could theoretically contribute €16bn under the outstanding program) and private investors (?).

Given the outstanding arrears to the IMF and the latter’s thesis that Greek debt is most probably unsustainable, I am not sure that the IMF will be able to contribute the expected amount of funds. It is actually probable that board pressure by emerging economies (and the program’s negative track record) will not allow it to continue participating in the program and make it seek an early exit. Primary surplus and privatization proceeds contributions also carry high risk of being missed (especially given the fact that the IMF is already projecting €1bn lower privatization proceeds) which could create a shortfall of a few more billions.

Overall, given the stated limit of €50bn for the ESM contribution I believe that at least €16-26bn (which actually correspond to the bank recap package) are not secured even in the baseline scenario. As a result, I am not so sure that a deposit bail-in has been avoided (at least not yet and based on the available information), since it might end up being the Greek ‘contribution’ part in order to secure financing and ‘debt sustainability’.

A few days ago, this article would have started with the statement that Grexit is closer than ever. Today it seems that Grexit has been postponed for a few months. Yet I fail to understand the underlying strategy of the Greek government since the proposed austerity measures (along with capital controls and low confidence) are destined to push the economy in a deep recession. This recession will make achieving the primary surplus targets even harder and government debt clearly unsustainable (even based on the IMF’s quite optimistic projections). The current program will fail in 2016 and Grexit will come back on the table with a Greek government that enjoys a much more fragile domestic political support and an even weaker economy with a higher output gap.

Probably the biggest problem of returning to the drachma is the fact that there are certain (probable) scenarios where the economy almost collapses and others where we observe the usual path of a large devaluation following an unsustainable currency peg: A short-lived large fall in output followed by a long path of economic growth. Usually people will just choose the scenario that fits their story and ideology and not consider (or even imagine) any other possible paths. The ‘ugly scenario’ basically includes official creditors accelerating Greek debt in the form of EFSF loans and the Greek Loan Facility. That will push Greece in a permanent default state and most probably not make it able to accumulate any foreign reserves (since they would be claimed by creditors). EU structural funds will most likely be lost and Europe will not support the newly created currency exchange rate in any way. Greece will have to function in a ‘semi-pariah’ state with strict and permanent capital controls and an economy that will slowly lose most of its human capital and internationally oriented sectors (such as shipping).

In this blog post I will not analyze the above scenario any further but rather take a closer look at a controlled exit from the Eurozone which will include the help of the other Euro member countries (if not for anything else but to enhance the recovery of their official loans).

First of all let me remind people that currency movements happen mostly because of large gross capital flows and not due to the underlying real trade flows (this paper from BIS Claudio Borio is quite informative). Capital flows, at least in the short-term, will happen for only a few reasons:

  • RoW liquidating domestic claims in order to transform them in foreign currency (think of other Euro banks not rolling over repos with Greek banks or equity investors exiting the Greek stock exchange).
  • Domestic firms and households trying to exchange their liquid assets (mostly deposits) for foreign currency.
  • Institutional players taking large currency positions. This requires being able to borrow large amounts of the currency that will be shorted at favorable terms.

In the Greek case we know that a Grexit will happen under strict capital controls (which are already present), while the terms and price (interest rate) under which the RoW will access the drachma will be determined exclusively by Bank of Greece. Since drachma does not exist in any way, a Eurodollar market is not present and cannot help anyone to circumvent capital controls. Private players outside Greece have already liquidated most of their claims (either equity or interbank loans) while the bulk of Greek liabilities are long-term official loans by other Eurozone member countries. The same is true to a large extent for Greeks themselves who have moved large amounts of liquidity outside Greece. This is the main reason why BoG has more than €120bn in liabilities towards the Eurosystem (Target2 and extra banknotes combined).

As a result, coupled with the presence of capital controls and the fact that Greece already has a strong current account surplus (on a yearly basis) there is actually small scope for strong pressure on the exchange rate of a newly introduced drachma. It is probably one of the few times that capital controls can truly be used as a policy tool and not to trap large funds looking for a way out (as was the case in Iceland). As long as outstanding Greek debt to the ECB (in the form of SMP bonds) and the IMF is rescheduled in the form of a long-term loan by the ESM, the GLF spread over Euribor is lowered to  5bps and interest payments postponed until 2020 (as has already happened with the EFSF loan) Greece will have truly minimal refinancing needs (in terms of foreign currency obligations) for the rest of the decade and be able to slowly accumulate FX reserves through its current account surpluses.

The main subject where a host of different opinions exist is what will happen with ELA financing by BoG and the corresponding liabilities towards the Eurosystem. The story usually goes that BoG will have to default on these liabilities and the Eurosystem having to perform a large capital injection. In my view any such claim is most probably false, at least in the favorable scenario. EU already has an exchange rate mechanism for EU members that do not participate in the Euro area but wish to maintain a controlled exchange rate relationship, called ERM II. This mechanism defines a ‘central exchange rate’ with the Euro, with a fluctuation band of +/- 15%. Intervention at the margins is automatic and unlimited while a short-term financing facility exists with a maturity of 3 months (which can be renewed at least once):

for the currency of each participating non-euro area Member State (hereinafter ‘participating non-euro area currency’) a central rate against the euro is defined;

there is one standard fluctuation band of ± 15 % around the central rates;

intervention at the margins is in principle automatic and unlimited, with very short-term financing available.

For the purpose of intervention in euro and in the participating non-euro area currencies, the ECB and each participating non-euro area NCB shall open for each other very short-term credit facilities. The initial maturity for a very short-term financing operation shall be three months.

The financing operations under these facilities shall take the form of spot sales and purchases of participating currencies giving rise to corresponding claims and liabilities, denominated in the creditor’s currency, between the ECB and the participating non-euro area NCBs. The value date of the financing operations shall be identical to the value date of the intervention in the market. The ECB shall keep a record of all transactions conducted in the context of these facilities.

The very short-term financing facility is in principle automatically available and unlimited in amount for the purpose of financing intervention in participating currencies at the margins.

For the purpose of intramarginal intervention, the very short-term financing facility may, with the agreement of the central bank issuing the intervention currency, be made available subject to the following conditions: (a) the cumulative amount of such financing made available to the debtor central bank shall not exceed the latter’s ceiling as laid down in Annex II; (b) the debtor central bank shall make appropriate use of its foreign reserve holdings prior to drawing on the facility.

Outstanding very short-term financing balances shall be remunerated at the representative domestic three-month money market rate of the creditor’s currency prevailing on the trade date of the initial financing operation or, in the event of a renewal pursuant to Articles 10 and 11 of this Agreement, the three-month money market rate of the creditor’s currency prevailing two business days before the date on which the initial financing operation to be renewed falls due.

My view is that in the case of a Grexit current BoG liabilities towards the Eurosystem will be transformed into a long-term financing facility, capped somewhere close to their current level. BoG will have to pay interest to the Eurosystem, either the 3-month rate applicable to ERM II financing facility or the MRO (as it happens today for Target2 liabilities) with the clear agreement that BoG will use its FX reserves in order to slowly pay back the facility (through annual current account surpluses). This will obviously mean that BoG financing towards Greek banks will remain significant, absent a domestic QE program. Short-term financing by the Eurosystem will be provided in order to facilitate temporary FX needs (the Greek current account is actually in deficit during the first months of a year) and to allow the smooth payment of government liabilities denominated in Euros. Obviously this financing facility will be capped for intramarginal interventions.

As long as the central rate is reasonable and both sides are determined to defend it through monetary policy (interest rates), capital controls and automatic interventions, confidence on the drachma will quickly be strengthened and domestic players will have little reason to try to convert their assets into foreign currency.

Obviously one important problem is the fact that creating the actual physical currency will take time. Electronic payments as well as the over €50bn in Euro banknotes circulating in Greece right now (for a GDP of less than €179bn) will help minimize the short-term impact.

Although I hope the above will remain only a scenario exercise, it is my view that, given the political climate inside Europe and the short-term economic reality, Grexit will emerge again during 2016, especially if the current package is not accompanied by serious debt restructuring.


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