Commentary on the economic , geopolitical and simply fascinating things going on. Served occasionally with a side of snark.
Sunday, April 27, 2014
Greece Updates April 27 , 2014 -- Concerning Greece fiscal condition whether the so called primary budget surplus is allegedly 3.4 billion ( or is it 1.5 billion as per Troika calculations ) , just note the Greek debt sinkhole is now at 175 percent of GDP ! Other items of note , present FM Stournaras scurrrying away from the frontlines to run the bank of Greece after May Election for European Parliament and Local Authority Elections - smart move ...... Pasok finances a tad shady ( shocking , now let's look at New Democracy ) ....... Hmm , thought there would absolutely be no further needs for austerity measures , thought Greece was doing so well as per the EU ----- Takeaway - The European Commission may hail the “Greek progress” in its April 2014 review of the second Economic Adjustment Programme for Greece. The EC may hail the primary surplus and the structural reforms. However at the same time it stresses the need for additional austerity measures totaling 7.7 billion euro for the years 2-15-2017....... Greece 2021 ( why not 2031 ?? ) ---- Greece got a plan. A growth and development plan with the futuristic title “Greece 2021″, that is seven years from now. The plan was submitted by Finance Minister Yiannis Stournaras to Euro Working Group on Thursday in Brussels in the context with the Greek debt relief request. Here is to note that the development plan is the first after Greece sought the aid of the International Monetary Fund in 2010.
Primary budget surplus is no panacea
It cannot compensate for the need to revive the economy, and priority must be reviving investments
By Dimitris Kontogiannis
The primary surplus of the general government a year before schedule is important in many respects but it is not a panacea for the country’s economic problems. If the economy does not recover and grow at satisfactory rates in the years ahead as official creditors forecast and market participants bet with their money, the primary surplus may turn out to be a short-lived memory. Even if it is maintained, the surplus will not be enough to ensure the huge public debt will be manageable and contain social discontent.
In a paper presented to the American Economic Association in Philadelphia a few months ago, economics professors Carmen Reinhart and Kenneth Rogoff reportedly argued Greece is likely to need 12 years to recover output losses sustained during the crisis based on data from the late 19th century and early 20th century crises. Greek gross domestic product losses are estimated around 24 percent from 2008 through 2013 so far.
They predicted Portugal was unlikely to do the same before 2018.
In their opinion, advanced economies must adopt some of the approaches adopted by emerging market countries over the last few decades, including restructuring of debt, allowing faster inflation and introducing capital controls.
However, it is clear that it is unlikely Greece’s official lenders will consent to some of these measures and the European Central Bank will change its monetary policy significantly to allow for an average annual inflation well above 2 percent, the implicit target, in the eurozone.
The professors’ pessimistic forecast about the time needed for the return of Greece’s GDP to pre-crisis levels – that is around 232 billion euros from an estimated 181 billion last year – implies much lower average annual growth rates than projected by the official lenders in the next several years.
The economy is to grow by 3 percent on average for a number of years.
Readers are reminded the Greek GDP contracted by 0.2 percent in 2008, 3.1 percent in 2009, 4.9 percent in 2010, 7.1 percent in 2011 and 7 percent in 2012.
The recession eased last year according to a preliminary estimate by the Hellenic Statistical Authority (ELSTAT) to 3.9 percent from 4.5 percent predicted initially by the government and others. However, a closer look at the breakdown of the GDP components reveals the easing of the recession is largely due to an unexpected development: the sharp rise in the stock of inventories by more than 2 billion euros compared to initial forecasts for no change. If there were no change in stock, economic activity would have fallen by more than 5 percent. So it will be interesting to see whether ELSTAT will revise the GDP figure significantly, as it has done in previous years, or will not change it at all next September.
Whether the economy gets out of the doldrums is important because failure to do so will fan the flames of social discontent and have political repercussions.
In the meantime, foreign investors’ appetite for Greek risk appears to be growing stronger and stronger as evidenced by the heavily oversubscribed senior five-year bond issued by the National Bank of Greece last week, yielding less than the recently issued Greek government bond, and the Eurobank’s share capital increase. Undoubtedly, the risk on mood internationally has played a significant role in attracting foreign funds to local financial assets.
The Greek growth story and high yields are also central to the trade but much less so the primary surplus of 1.5 billion euros or 0.8 percent of GDP according to the troika or 3.4 billion euros according to Eurostat when the return of income from Greek bonds held by the ECB and national central banks is added.
Like Ireland, the markets don’t pay attention to one-off spending items linked to the recapitalization of banks.
History teaches that fiscal orthodoxy in the form of high primary surpluses does not suffice to make the huge public debt manageable. This is more so when these surpluses are destined to service the debt and will be squeezed out of the economy. It is noted that revenues are projected to exceed government spending excluding interest payments by about 4.5 percent of GDP in 2016 from about 0.8 percent in 2013 on the troika’s definition and stay around 4 percent from 2017 on. On the positive side, the country can count on a low cost of funding.
Therefore, Greece will have to achieve satisfactory GDP growth rates to help attain the targeted primary surpluses easier and ease social strains created by depressed disposable incomes in the large urban centers and the high unemployment almost exclusively hitting the private sector. However positive the primary surplus may be, it cannot compensate for the need to revive the economy. This should be the focus but policymakers should have no illusions they can achieve it by instituting a few structural reforms. The latter will supplement any effort to boost the economy in the medium to long run but they will not spearhead the much-needed drive toward growth.
Therefore, primacy should be given to reviving investments, especially in export-oriented sectors, and exports of goods and services, but it takes much more than a paper exercise to do so. It needs a national commitment at all levels, starting from the top, like in South Korea in the 1960s.
Reshuffle on cards after elections with Stournaras going to BoG
With less than a month to go until crucial European Parliament and local authority elections, the government is planning to focus its campaign on signs that the economy is gradually improving but Prime Minister Antonis Samaras is also said to be drafting a reshuffle that will see see Finance Minister Yannis Stournaras taking the top spot at the central bank after the polls.
The prospect for a launch of talks on a lightening of Greece’s debt burden is expected to be discussed at a scheduled summit of eurozone finance ministers on May 5. With the European Commission’s confirmation last week of Greece’s projected primary surplus, the debate on much-desired debt relief can begin, in accordance with a decision taken by eurozone officials in November 2012 – a fact expected to feature prominently in the government’s pre-election campaign.
Stournaras, who has spearheaded Greece’s economic reforms and coordinated tough talks with the troika for two years, is expected to represent Greece for the last time in his current term as finance minister at the Eurogroup summit next Monday. But the state official pegged to replace him – Stavros Papastavrou, a close adviser to Samaras – is not expected to take over until after the elections on May 25.
The planned reshuffle, which could come as late as mid-June, when the term of the current Bank of Greece Governor Giorgos Provopoulos expires, is expected to include several other key moves aimed at revamping the government.
According to sources, Administrative Reform Minister Kyriakos Mitsotakis, who is overseeing a troika-imposed overhaul of the civil service, and Development Minister Costis Hatzidakis, who has been supervising the lifting of restrictions in dozens of professions, are expected to keep their posts. Public Order Minister Nikos Dendias and Health Minister Adonis Georgiadis are virtually certain to remain in the government with a possible promotion, while Education Minister Constantinos Arvanitopoulos is among those rumored to be facing dismissal. Former PASOK ministers Andreas Loverdos and Filippos Sachinidis are likely to feature in the new cabinet, sources said.
The finances of PASOK, the junior coalition partner, are to be the focus of an investigation that has been ordered by a prosecutor, according to a report by the Efimerida ton Syntakton newspaper over the weekend.
According to the daily, the probe is to focus on the 2007-10 period when the most serious cases of mismanagement are alleged to have occurred. The report claimed that an audit carried out by PASOK last year has not been given to the judiciary. The report allegedly revealed that more than 100 million euros of the Socialists’ cash was unaccounted for.
Responding, PASOK said it had given the judiciary all information requested, adding that “certain circles” were trying to undermine the party.
Eurostat’s confirmation of the Greek primary surplus was the result of a very important fact that has been somewhat neglected, because the European Union’s statistical service accepted all of the data submitted by the Hellenic Statistical Authority (ELSTAT) and seconded its findings.
Eurostat’s trust in ELSTAT’s figures shows that the country has come a long way from the time of the “Greek statistics” fiasco and the state has entered a phase of credibility. However underplayed this extremely significant development may be, it represents a huge step toward the country’s modernization and its convergence with the standards of its eurozone peers.
It was not so long ago that Greece was the subject of international ridicule after it cooked its fiscal books in an effort to convince the eurozone and the international markets that its public finances were in a better state than they actually were.
It was this practice that compelled Brussels to take a somewhat skeptical approach to any figures presented by Greece, whether regarding the country’s livestock or its healthcare spending.
That was until the meltdown, because the Greek state and generally all state-owned, partially state-owned and private entities had made a habit of fiddling with the numbers in order to hoodwink others, but they ended up harming themselves as they started to believe their own cooked statistics.
Just as a household or business budget cannot be managed properly unless the figures on which it is based are correct, so a state cannot function when it pretends to be organized and efficient while actually being anything but.
We should be grateful for the fact that one of the most pressing demands made on Greece by its international creditors and by European authorities such as Eurostat was that it radically reform ELSTAT.
Thanks to their pressure, the authority was taken out of the government’s control and given the kind of independence it needed to refuse any demands from incumbent powers to fiddle the figures. This change was absolutely necessary in a country that cannot even stand the truth of hard data.
It’s official! Almost…. or something like that…. According to EUROSTAT, “Greek primary budget surplus for the year 2013 is 3.4 billion euro,” Greek media hail on Wednesday. In its annual report the Eurostat does not refer to primary surplus, but Greek government and the media came to this conclusion after adding and subtracting from the sentence:
“The general government deficit was 23.109 billion for 2013 including the impact of banks, which according to the Hellenic Statistical Authority was 19.272 billion in 2013. Excluding this impact, the fiscal deficit – always in terms Eurostat – stands at 3,837 billion euro.” (capital.gr)
Deputy Finance Minister Christos Staikouras said that “primary surplus for 2013 is 3.4 billion euro” but that “according to Troika calculations, it is 1.5 billion euro.”
Whether €3.8 billion or 1.5 billion, even a 100-euro banknote primary surplus would be welcome in my very own and private budget.
Nevertheless, the primary surplus is the good news.
The bad news is that in the same report, the EUROSTAT confirmed that the total Greek debt pile reached 175.1% of Gross Domestic Product in 2013, reaching 318,703 billion euro.
In its annual report Eurostat stated further that Greece has the highest debt-to-GDP ratio in the 18- nation single-currency bloc.
Encouraged by the Eurostat news, the Greek government is expected to put the issue of Greek debt relief on the table with its euro-partners.
Greece has received 240 billion euro in bailout since 2010.
PS I leave it up to you to solve the Greek primary surplus puzzle, as my mathematics knowledge is limited to the four basic arithmetic operations for the daily practice and thus for numbers up to 100.
The European Commission may hail the “Greek progress” in its April 2014 review of the second Economic Adjustment Programme for Greece. The EC may hail the primary surplus and the structural reforms. However at the same time it stresses the need for additional austerity measures totaling 7.7 billion euro for the years 2-15-2017.
Although the EC does not specify the austerity measures, the EC states the additional austerity needs as:
€2 billion for 2015
€3.8 billion for 2016
€1.9 billion for 2017
The European Commission makes also a weird reference to “vested interests” blocking the progress.
I don’t know, who the European Commission has in mind when it refers to “vested interests”, neither do I understand the word “progress”. On the other hand I wouldn’t even worry for the extra 7.7-billion-euro austerity.
I am broke and I have nothing to offer, to give, to contribute or donate.
Greece got a plan. A growth and development plan with the futuristic title “Greece 2021″, that is seven years from now. The plan was submitted by Finance Minister Yiannis Stournaras to Euro Working Group on Thursday in Brussels in the context with the Greek debt relief request. Here is to note that the development plan is the first after Greece sought the aid of the International Monetary Fund in 2010.
According to Greek media, the plan Greece 2021 foresees
tax decreases on corporate profits
decreases in social security contributions
tax cuts in energy
tax cuts in natural persons
a guaranteed minimum income for all jobless
changes in bankruptcy law
“Under the new development model, the role of the state should be radically renewed and will be limited to supervision , regulation and support of growth initiatives, while in terms production its role should be limited to the provision of social services , defense and public order .
The new development model means in practice a shift from the production of non- tradable goods and services to the increase of productivity , competitiveness and the promotion of an export-oriented Greek economy,” notes economic news website Capital.gr .
In a section with title “Horizontal Policies” the development model foresees … radical and breathtaking reforms -we’ve heard many times before – like
creation of a climate favoring investment climate and facilitating business
privatization of public properties
improvement of fiscal policies
increasing of labor market flexibility
emphasis on innovation
reorganizing of public administration and improvement of public services
combating corruption and enhancing the reliability and transparency
strengthening social cohesion
The ambitious model has no “Vertical Policies” section, but it states the sectors where the development model will focus.
These sectors are: tourism, food industry, logistics, research and technology innovation, medicines, building materials and metals, shipping and related services, marketable services.
The plan stresses that ” in conditions of severe economic crisis and the urgent need to save resources, tax reduction is difficult. However, as in the coming years the economy recovers and measures to combat tax evasion will continue to produce results, a gradual reduction in tax rates will be implemented . “
In the first stage a gradual reduction will be implemented in the taxation of corporate profits. After the reduction of social security contributions that is already in implementation [note: will be implemented as of July 2014], the further cut of social security contributions will be taken into consideration.
Also, “reduction should be made in the indirect taxes on factors of production (i.e. energy ) in the context of liberalization and rationalization in the relevant markets.” At the same time , “targeted actions should be promoted to the ” relief ” of charges in specific economic activities , such as research and development and the gradual reduction of tax rates on individuals .” (via ProtoThema)
As I was wondering whether the new development model and the tax reductions will start to be implemented in 2021 or be concluded in 2021, a Greek internet user shed a light into the dark corridors of governmental plans.
“tax reductions on corporate profits may start be implemented after 3-4 years, reductions on energy after 5-6 years and tax reductions on natural persons after 7-8 years.”
PS what makes me worry is that I see no “natural gas and oil resources” among the development sectors…
Despite the government heralding the exit from the economic crisis and the primary surplus celebrations, a series of austerity measures will hit Greeks also in 2014. Until the end of the year, Samaras-Venizelos coalition government has to:
lay-off 11,000 civil servants
decrease the supplementary pensions
eventually decrease the main pensions
The loan agreements are here to stay and be implemented.
PS No salary increase is expected as the Memorandum of Understanding freezes wages until 2018