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Recently I had a conversation about the Greek debt reduction of 2012 and it seems that a lot of people still analyze that period using the nominal haircuts imposed on Greek bondholders with the PSI and the debt buyback of December 2012. The reality though is that the actual reduction in the Excessive Deficit Procedure (EDP) government debt of Greece in that year was far lower.

The PSI exercise reduced Greek debt by a nominal amount of €106bn while the debt buyback resulted in another €20.5bn nominal debt haircut for a combined result of €126.5bn. Yet the PSI also involved reducing debt held by government entities (such as pension funds) which are not counted in the EDP debt (since they are intergovernmental holdings) while it also required a large increase in government liabilities in order to provide the banking system with the necessary funds for recapitalization. As a result, the stock-flow adjustment for 2012 (based on Ameco data) was only -€68bn. If one also takes into account that the 2012 government budget included €5.3bn in support for financial institutions, the end result is a haircut of only €63bn meaning that every Euro in nominal debt haircut actually reduced EDP debt by 50%.

It is true that the recapitalization also created a government asset in the form of bank shares which will result in a future improvement of the headline debt figure. Nevertheless, the Greek financial stability fund (HFSF) has already ‘lost’ close to €10.5bn in covering funding gaps while its bank shares holdings were valued at €17bn at the end of 2014Q3. It still has around €11bn in unused funds although the government’s intention is to use them in creating a ‘bad bank scheme’ to clear banks from NPLs (something with which Ι agree completely). Overall, the room for debt reduction through the HFSF assets seems a bit thin and will probably not produce a drastic improvement of the headline debt figure.

Given that the PSI did not include the SMP and ANFA holdings of the Eurosystem it resulted in a large hit on Greek debtholders with a much lower reduction of the stock-flow adjusted debt (and even of net debt). It is mostly a proof that postponing debt restructuring (and creating a debt seniority hierarchy in the meantime) almost always results in inefficient outcomes.


Since ELSTAT released the GDP figures for 2014Q4 recently I ‘d like to take the opportunity for a few quick comments on the Greek economy.

According to available seasonally adjusted data, Greek GDP decreased 0.4% during 2014Q4 (compared to the previous quarter). a larger movement than the 0.2% figure available in the first flash estimate. Compared to 2013Q4, it increased 1.3% compared to 2013Q4, lower than the initial 1.7% estimate. Overall, during 2014 Greek GDP registered its first increase in volume terms with a growth rate of 0.77%. Nevertheless, nominal GDP decreased significantly from €182.4bn to €179.1bn (a loss of 1.84%), implying a very large GDP deflator change of -2.61%. As a result all debt figures (which are calculated in terms of GDP) continued deteriorating during 2014. Given the ongoing deep deflation (inflation is -2.8%) it is quite possible that even a material increase in the GDP growth rate during 2015 will not be reflected in an actual increase of  nominal GDP.

Looking at the income method in current prices what is evident is the substantial increase in compensation of employees during the second half of 2014 (compared to 2013) with the seasonally adjusted figure (table 5) increasing 3.2% from €29.3bn to €30.2bn. Gross Operating Surplus on the other hand registered a significant fall from €49.84bn to €46.36bn (-7%). A large part of the fall appeared in an increase in taxes on production and imports which increased from €11.96bn to €14.18bn (+18.5%). The increase in compensation is highly important since it signals an improvement in employment (given that wages are falling or stagnant). On the other hand, the large fall in GOS (of the order of €3.5bn in half a year) is not a positive sign, especially since a large part of the fall was reflected in higher tax incomes (which increased €2.2bn during the same period).

Table 7 (which shows the chain-linked volume changes compared to the same quarter of the preceding year) paints a similar picture in terms of the tax burden with taxes on products (production method) increasing close to 7% during 2014H2. Positive signals are:

  • The stable increase in private consumption during most of 2014.
  • The almost double digit increase in exports (with the growth driven mainly by services exports) and
  • The impressive growth (+17.9%) in gross fixed capital formation during 2014Q4, especially compared to the fact that fixed investment was decreasing until 2014Q2. As long as this pattern continues it will signify a shift towards higher investment and eventually allow net investment to also become positive (and increase the Greek economy capital stock). Nevertheless, looking into the detailed breakdown of investment one will notice that the large increase was the result of a substantial (one-off?) growth of transport investment during 2014Q4 which probably reflects new ships. Construction is still in negative territory while equipment investment is only slowly starting to gain momentum.

Overall, the GDP figures provide both positive and negative signs. The large tax burden and the fall in GOS are obviously negative while the increase in labor compensation and fixed investment can become drivers of economic growth in the future (along with exports). The persistent and strong deflationary forces are the most important negative factor since they make debt stabilization a daunting task and create the need for further austerity measures.

Given the latest Greek government debt figures (2014Q3 – €315.5bn), government debt is now 176.2% of GDP. Just for comparison, the latest program review by the IMF (June 2014) was projecting 174.2% (table 1) with a nominal GDP of €181.9bn and a GDP deflator of -0.7%. If the projected figure of nominal gross debt for 2014 is reached (€317bn), then debt will reach 177%. Given the ongoing deflationary dynamics in the Greek economy it is quite probable that the ongoing negotiations about the completion of the program review between the Greek authorities and the ‘institutions’ will quickly reach the conclusion that the debt sustainability analysis is obsolete.

This will be a quick follow-up post on the 2014Q3 employment figures post. The Greek Ministry of Employment publishes monthly figures of employment announcements by employers on an online registration system called ‘Ergani’. Based on the recently announced numbers for December of 2014 (sorry the document is in Greek) I ‘d like to make a few projections on the current state of unemployment in Greece:

Greece Net Employment figures 2014H2 - Ergani

It is quite evident that net employment flows were negative during 2014H2 due to 2014Q4 dynamics (which are not yet reflected on the unemployment survey numbers published by ELSTAT). Compared to 2013 the total difference was 120,000 jobs (from a positive net flow of 43,000 jobs to an outflow of 77,000 employees) with the fourth quarter loosing almost 90,000 jobs, a figure close to three times that of 2013.

Since seasonal adjustment of employment is always a smoothing mechanism which requires a large number of observations my feeling is that October/November monthly employment surveys, as well as the quarterly 2014Q4 survey, will register a significant fall in employment which might result into an increase of the unemployment rate. With a labour force of 4,830 thousand people, the 88,000 jobs shortfall during 2014Q4 is equal to almost 2% which should appear in the unemployment numbers during the upcoming months. Something to definitely keep an eye on.

So it seems that a European QE program is highly probable although Greek government debt is at risk of not being included since it is not rated investment grade and the ECB will only include it in the list of assets purchased if Greece remains in a refinancing program.

In this short post I ‘d like to note a few things on the magnitude of the impact that such a program would have on Greek bonds. Based on the Greek ECB capital key (2%) and the anticipated QE size (which most analysts put around €500bn), the ECB might end up buying around €10bn of Greek debt securities. PSI related bonds principal is now around €29.6bn while long-term bonds issued by the Greek government during 2014 totaled another €6.9bn. Bonds with a residual maturity of up to 10 years are only €12,2bn which, given current market prices, are worth much less than €10bn.

Greek bonds till 2029

As a result, ECB will ultimately be making a bid for all the outstanding market value of long-term Greek bonds (with a residual maturity of up to 10 years), increasing liquidity in the bond market considerably (and making it the largest holder of Greek debt). That will obviously drive current market prices much higher and also allow the Greek government to immediately return to the market since bidders will have a (free) put option of selling most of their holdings to the ECB. As long as the upcoming QE is pari passu with private bondholders (as is the OMT program) and the Greek government establishes a credit line program (which creates another put option for bondholders) the (QE) program will allow an orderly return of the Greek government to private bond markets.

Since the Greek debt maturity profile suggests that only mostly 2015 and 2019 are years that involve large debt refinancing needs (which lowers any default risk post 2015) a QE program will have long-lasting stabilization effects. These effects will be even higher if ECB profits from the program are returned to the corresponding Treasuries (which I suspect will happen if eventually the program involves each NCB buying its own government debt securities).

nov14 Greek debt maturity profile en

Personally I would also like to see a second buyback of Greek debt to take advantage of low market prices and also to lower the nominal value of post-PSI bonds which, due to the EFSF co-financing scheme, are senior to newer bonds issued by the Greek government (a fact that can create difficulties for Greece issuing bonds that have similar maturity dates as outstanding PSI bonds). A possible buyback could be combined with an exchange offer to consolidate the current series (which stretch a 20 year period with low nominal values per bond of less than €1.5bn) into two or three securities that will be of much larger nominal value and liquidity and thus improve market making and secondary market trading.

Greek ELSTAT released the unemployment figures for 2014Q3 today which marked the fall of the unemployment rate to 25.5%, down from 27.2% during the corresponding quarter of 2013. Given the positive outlook of the release I ‘d like to take a closer look at the details of Greek employment and if this drop of the unemployment rate really signifies a substantial improvement of the economy.

Based on various tables of the quarterly employment figures I have constructed the following table of certain numbers that I feel are important:

Greek employment 2013Q3 - 2014Q3

Personally I usually pass through the unemployment rate and go straight to the employment figure. As we can see, although unemployment dropped by 91 thousand people (compared to the same quarter of 2013), employment increased by 53 thousand which resulted in the labor force decreasing by 38,000. What is even more interesting is the fact that a large part of the drop in the labor force was due to a fall of the population over 15yr (-30,000). Obviously the fall in the unemployment rate becomes much less impressive if one looks only at employment while the (steady) fall in the 15+ population and the labor force are certainly not positive signs for the future.

Taking a closer look at the unemployed we see that the fall in that category was only due to people who were unemployed for less than a year while the long-term unemployed actually increased by another 10 thousand to reach close to 930,000 persons. These opposite movements are a worrying sign for the future since they might be indicators for the presence of hysteresis among the long-term unemployment. This will make reducing unemployment much more difficult (given that short-term unemployed are only 6% of the labor force with long-term unemployment reaching 19%).

Moving to employment we observe that the increase came almost entirely from part-time employment. If one also notices that under-employment was the major driver of employment (with under-employed now being close to 6.8% of employment) it is clear that employment growth is driven mainly by short-term, part-time unsecured jobs which probably pay very low salaries. The fall in the unemployment rate actually hides an increase in under-utilization of labor which finds it very hard to enter into full-time steady jobs while long-term unemployed seem to be left out of even these part-time employment opportunities.

Following the tradition of decomposing accounting identities, an exercise that can still provide some very interesting results, this post will decompose the Unit Labor Costs (ULC) paths for Greece and Spain during the past couple of decades. According to Ameco ULC can be decomposed as:

ULC = Compensation per employee / Real GDP per person or ULC = (Compensation of employees / Employees) / (Real GDP / Employment)


Looking at the first relationship we can observe that since 2009 ULCs were driven mainly by compensation per employee which dropped significantly while real GDP per person exhibited much smaller contributions:

Greece ULC

A much closer look at each factor which drives ULCs can provide important conclusions:

Greece Compensation per employee

Compensation per employee shows a large drop since 2009 which was driven by the fall in total compensation. Although employment was much lower each year, total compensation fell even more lowering the wage costs for each remaining employee.

Greece Real GDP per person

Real GDP per person shows a rather ‘cyclical’ behavior. Between 2008 and 2012 it fell mainly due to the general Greek recession and the drop in real GDP which was not compensated by a corresponding fall in employment (there was some form of labor hoarding). Nevertheless, during 2012 and 2013 the fall in employment was much larger which resulted into a marginal increase in real GDP per person (which can be regarded as ‘productivity per person’) and contributed to the decrease of ULCs.

Overall the ULC decrease since 2009 was accounted mainly by the large fall in employment (which has a positive impact on productivity) and the even larger drop in compensation. These forces probably fed on each other with the fall in employment and compensation eating real GDP and not allowing real GDP per person to contribute significantly to an improvement (fall) in ULCs.


The Spanish case seems to display rather different dynamics compared to Greece:

Spain ULC

Instead of compensation per employee (which only had marginal contributions), labor productivity was the main driver of ULCs in Spain after 2009.

Spain Compensation per employeeAlthough since 2009 compensation and employment show large changes, these forces managed to counteract each other pointing to the fact that compensation of current employers did not change significantly and only drops in employment lead to corresponding falls in compensation.

Spain Real GDP per personReal GDP per person developments show that productivity was improved mainly through the large fall of employment which was not accompanied by a corresponding drop in real GDP. Although Spain displays unemployment figures similar to Greece the drop in real GDP was only 7% between 2008 and 2013 compared to 24% for Greece.

In general it seems that the ULC improvement in Spain was accomplished on the back of the unemployed while in Greece employed persons also contributed significantly through a large fall of their compensation. This difference can probably also explain (combined with the state of the Greek banking sector) why the fall in Greek GDP was much steeper than Spain’s.

* I am also uploading the relevant excel file which might prove useful for any similar decomposition for other periphery countries such as Italy and Portugal.

I ‘m going to take a quick look on the updated figures for Greek GDP 2013Q3:

Greek GDP 2013Q3 volume change

Obviously the lower volume loss is quite significant although it remains a fact that nominal GDP is still contracting at -5.9% (Q2 and Q3) with the lower volume contraction attributed exclusively to deeper deflation (which is now at -2.9%). Nevertheless, Gross Value Added is now dropping at -3.1%, almost half the rate during 2012. Looking into the expenditure breakdown the most obvious observations are:

  • Household consumption is still contracting significantly at -8.1%. The -6.6% change is attributed only to government consumption rising slightly at +0.1%.
  • Gross fixed capital formation is still at around -10/12% with inventories being the driver of the positive growth in GCF during Q3.
  • Exports of goods and services grew substantially (mainly exports of services) although imports also posted a positive sign, probably driven by the much larger tourist visits.

An alternative way to examine the GDP statistics is to calculate the relative contributions of each expenditure category:

Greek GDP 2013Q3 contributions to volume change

What is quite evident from the table above is that any positive contributions are the result only of inventories and the external sector (usually imports). During 2013Q3 household consumption contribution increased to -60% with the other two positive contributions coming from inventories (29.5%) and services exports (mainly tourism, 16.20%) while imports have now turned negative. Contributions of fixed investment and consumption will need to improve significantly in order for a Greek recovery to be sustainable.

Another interesting exercise is to take a look at the GDP deflators by category (nominal – real growth rates):

Greek GDP Deflators 2013Q3

Its is quite evident that especially during Q2/Q3, deflation accelerated significantly with rates close to -3%. Deflation is present in all expenditure categories while it seems that lower prices in exports are driven up to a point by corresponding import prices reductions. It is rather difficult to expect a turnover in the Greek recession without first observing a reversal of the deflationary forces in the major expenditure categories.

Overall, there are some marginally positive signs yet growth is the result of only a few categories (tourism and inventories) while the deepening deflation cannot easily be regarded as welcome news since it usually coincides with larger output gaps.

Bank of Greece Balance Sheet

Bank of Greece released its balance sheet for October 2013:

Bank of Greece Balance Sheet Oct 2013

One has to acknowledge that the data point to a relative stabilization. MRO borrowing was lower €1.3bn while ‘Other claims’ dropped about €1bn. This was reflected in both the Target2 (-€2.7bn) and banknotes (-€0.3bn) liabilities. Although haircuts remained relatively stable, the €1bn fall in ELA contributed to a fall of €12bn in posted collateral.

Current Account

Bank of Greece also released data on the September current account. Looking into various categories a few clear conclusions are:

  • The trade balance is still driven mainly by fuel imports and exports with exports higher by €0.64bn in the first 9 months and imports down €1.5bn for an overall improvement of more than €2.1bn.
  • Other goods exports are showing considerable signs of weakness with the total increase in the first 3 quarters being only 3.6%. Imports actually increased in September compared to one year ago, probably due to the stronger tourist wave. It seems that other goods might end up posting only a marginal total improvement during 2013.
  • Tourist revenue has been the main sector posting healthy growth this year. They increased €1.34bn although transport revenue was lower €1.13 leaving the total services income only slightly higher (+€0.2bn or +0.9%).
  • What is quite worrying is the fact that profit/interest/dividends payments abroad are already higher than last year both for the 9-month period and September. The PSI effects are over and interest payments are again a drug on economic growth.
  • EU receipts have played a major role in improving the current account with funds being higher by €1.63bn.

In general, although a few sectors show considerable strength (mainly tourism and oil exports), other goods exports are stalling while import contraction has reached its limits and cannot provide any further relief. Given the above trends it seems that the external sector will not be able to assist during the final 2013 quarter and won’t be the growth engine for 2014.

ELSTAT updated its early flash estimate for the Greek 2013Q2 GDP with revised detailed data. Since I had analyzed the original release, let’s take a look at what has changed since then:

Table 1

Volume change is now -3,8% compared to the original estimate of -4.6%. This is attributed completely to the nominal GDP growth rate which registered at -6.1%, far less than the original -6.9%. The GDP deflator estimate is unchanged, yet nominal values have been revised upwards which is certainly a positive development.

Table 2

Only the income method is not provided in constant prices so I will focus on this one. Labor compensation is still highly negative at -13.9% (from -14.1% in 2013Q1) and the same happened for Gross Operating Surplus/Mixed Income (-3.5%). What actually increased was… taxes, which increased 5.5% and subsidies 10.3%. So it seems that income of both labor and corporations did not post and positive developments with the slowdown in the nominal change explained by taxes (on production and imports).

Table 4

Gross Value Added decreased with a lower rate, as well as household consumption (and general government). Gross fixed capital formation is still negative (with no significant change) at -11%, although the rate is half that observed till 2012Q2 (when it was over -20%). The positive impact of inventories during the previous two quarters was not repeated in this one.

In the field of net exports, exports (of goods and services) only posted an increase of 0.9%, negating any hope of an ‘export-led recovery’. What actually declined with higher speed was imports, at -11.8%, compared to -7.7% during the previous quarter.


My personal opinion is that households are starting to hit their ‘autonomous consumption’ limits. Although their income is still falling with roughly the same rate, they are not able to adjust their consumption to current income in the same magnitude anymore. Although this will tend to redistribute income and wealth from low income households to corporations and employed persons, it will also slowly put a floor on the current recession. Import contraction and outright deflation will also help (the currently implied inflation rate in household consumption is close to -1%).

On the other hand, autonomous factors (investment, exports, government consumption) do not point to any upcoming demand boom. On the contrary, despite the extreme drop in the ULC-based REER, exports volume growth is mostly negative (2012Q2 – 2013Q1) or just barely positive.

One last thing to note is that, ever since 2012, the adjustment process is happening mainly through labor compensation, rather than corporate profits. Compensation is around -12% to -14% per quarter while GOS has stabilized around -2,5-3,5%. This is a very large and important income redistribution process which will have long-term effects. As long as consumption is the major source of demand (and investment is a function of current and expected consumption), households will eventually become ‘income-constrained’ and unable to increase their consumption in the future.

Greek National Accounts Income Approach Quartely Changes

A quick post on the topic of Greek imports/exports and their connection to domestic demand. The graph below shows the share of intra/extra-EU Greek imports to domestic demand as well as the share of intra-EU Greek exports to EU domestic demand (minus Greek demand) and Greek demand. An increasing share of imports and a declining share of exports (in terms of EU demand) would point to a loss of competitiveness. A stable share on the contrary would be in favor of the trade/income connection:

Greek Imports Exports share of domestic demand

What is clear is that:

  1. Intra-EU imports were very stable at 12-13% share during 2003 – 2008.
  2. Intra-EU exports as a share of internal demand were also very stable during the same period.
  3. Intra-EU exports as a share of EU internal demand not only kept their share but also managed to increase it from 7.4% in 2002 to 10.6% in 2008 (scaled by 100). Since they remained stable as a share of Greek domestic demand this implies that Greece was growing faster than the rest of EU. Although it managed to increase its share of exports, its high growth contributed to exports not increasing as a share of domestic demand. Actually, during 2002-2008 Greek domestic demand either in constant or current prices increased at close to double speed than the EU figure. One has to acknowledge though that domestic inflation also increased faster, making Greece less competitive in CPI terms (which mainly hurts the services/tourism sector).
  4. Extra-EU imports was the only category showing an increase, at least after 2005 (from 8.5% in 2004 to 10.9% in 2008). This category though includes imports of oil and ships and is affected by the exchange rate.

The idea of a loss in competitiveness does not appear to be supported by the data. This is also evident if one checks Greek Real ULC relative to competitor groups (series OLCDO in Ameco). Real ULC are very stable after 2002 with a declining trend:

Greece Real ULC relative to competitor groups