Greece’s leaders fulfill Albert Einstein’s definition of insanity

 

Posted on July 26, 2012 by Shaun Richards

The last few days have seen a change of mood in the analysis of Greece’s position in the Euro. Over the weekend the German newspaper Der Spiegel published an article suggesting that the International Monetary Fund is considering cutting Greece adrift. Of course newspapers speculate all the time and most, sometimes all of it, is spurious, but this one appears to have hit something of a raw nerve. Whether by luck or judgement it has exposed doubts in people who previously were willing to describe utter failure as being “on track”.
The timing
This week the troika (IMF,European Central Bank and European Commission) has its representatives in Greece examining the books and her economy and it is not a pretty sight. I will discuss Greece’s public finances in a moment but her economy was summed up by President Samaras who stated that he now felt her economy could shrink by 7% this year and that she was in a “Great Depression”. This will not have come as a surprise to readers of this blog as the latest data showed it shrinking at an annual rate of 6.5%. However the official view up to now has mostly been of the “an improvement is just around the corner” variety. If you wish to compare reality with past official views you merely need to contrast the reality of Greece’s likely 7% economic contraction with the 2% economic growth that the original IMF bailout forecast in May 2010. Only 9% out…..
Greece’s Public Finances
There has been something of a change in these numbers which can confuse the unwary. Let me show you the latest data which covers the first six months of 2012.

the State Budget deficit amounted to 12,477 million Euros, a significant improvement relative to the target deficit of 14,878 million Euros set in the 2012 Supplementary Budget.

So far so good although the more eagle-eyed may be wondering already why a Supplementary Budget was necessary if things were going so well! If we look at the same time period in 2010 and 2011 on a like for like basis we see that suddenly the situation looks very different.

the execution of the State Budget for the six months January – June 2011, on a fiscal basis, the deficit amounts to 12,781 million Euros compared to the target of 10,374 million Euros set in the 2011 Budget. During the same period in 2010, the State Budget deficit amounted to 9,997 million Euros

So as you can see adding some perspective gives us a completely different picture. The deficit expanded by some 2784 million Euros in 2011 and the Herculean efforts in 2012 have trimmed that expansion by the grand sum of 304 million Euros. So in the “bailout era” it has risen by 2480 million Euros. No wonder the IMF is having doubts.
Oh and the change I mentioned was that past reports as you can see above gave you figures for the previous year whereas the present ones do not. Just forgetful I guess.
Revenue is a particular problem
Here again matters look poor from the beginning as even the spinning does not work.

State Budget net revenues amounted to 23,191 million Euros, performing below the target set in the 2012 Supplementary Budget (24,754 million Euros) by 1,563 million Euros

This is better than 2011′s 21,814 million Euros but if we look back to the same period in 2010 we see in that report that revenues were  23,796 million Euros. Yes in the same period of 2010 revenues were higher than they are this year. This is in spite of all the tax increases inflicted on the Greek people as a weakened economy has led to lower receipts despite higher percentage rates of tax.
Although it would be less of a problem if they collected it
We are told that Greece is collecting its taxes with enthusiasm these days and yet we are told this.

This shortfall is attributed to lower Income Tax revenues (by 909 million euros) due to the extension given to individuals (until the 31 th of July) and to corporations (until the 8 th of June) in order to submit their income tax declarations.

Not entirely reassuring is it?
The Consequences of this
Greece’s new coalition government has been meeting this week to discuss a further 11.5 billion Euros of austerity. Let me offer them a free piece of advice and that is that further tax rises are pointless as so far tax rises have led to lower revenue as economic activity has fallen faster than the (tax) rises. This only leaves spending cuts which also lead to downwards pressure on a shrinking economy. If we were playing chess I think this would be called a strategy which is end-gamed.
Greece’s banking system is still weakening
This morning the European Central Bank has released data telling us that Greek bank deposits fell by 4% in June which takes them back to October 2005 levels. They fell from 163.1 billion Euros to 156.2 billion Euros. So we see an already weak banking system afflicted by further outflows as there was a 5.2% outflow in May.
The Governor of the Bank of Greece has taken a different view of the situation as a fortnight ago he informed us.

but after the elections bank deposits returned at a satisfactory pace

It looks like satisfactory may find its way into my financial lexicon!
Mind you in some ways it is a surprise that there are any deposits left to leave! As I have pointed out before one of the problems of such a situation is that it is the unwary and the trusting who are likely to be most affected by the initial impact of a devaluation.
August 20th is a date for the diary
On that day Greece has 3.2 billion Euros of government bond redemptions which need financing and as ever the question is with what? Ironically these bonds are owned virtually entirely by the European Central Bank as part of its Securities Markets Programme purchases which lest we forget were supposed to support/rescue Greece’s government bond market. Instead it collapsed and the Euro area taxpayer needs to be alert as these bonds will no doubt be shifted to a more obscure part of the Euro mechanism probably off balance sheet that they are responsible for.
These moves are not well understood as I note the Wall Street Journal writing about ECB profits on Greek bonds. I await their next instalment which will no doubt tell us how you make a profit by buying something at 90 which is then worth 20.
Greece’s latest trade figures are worrying
Whilst I am very cautious about the reliability of monthly trade figures those from Greece this morning show a weakening in what was previously an improving trend if we compare this months with 2012 so far.

The total value of exports-dispatches, excluding oil products, in May 2012 amounted to 1379,2 million euros (1769,1 million dollars) in comparison with 1397,7 million euros (2011,5 million dollars) in May 2011, recording a drop, in euros, of 1,3%
The total value of exports-dispatches, excluding oil products, for the 5-month period from January to May 2012……, recording an increase, in euros, of 4,3%

As you can see an increase has become a decrease and since May we know that economic prospects have deteriorated in many of Greece’s export markets.
Comment
Let me now bring together the two strands of today’s article. As Greece’s public finances have got worse since her bailout so has her economy at a rate of around 5 or 6% per year. So the deficit has got even less supportable by her economy. Even worse attempts to reduce the deficit have directly weakened the economy. So two years into the bailout the situation is in fact worse and indeed much worse rather than better.
I see that one of my tutors at the LSE (Willem Buiter) is now predicting this for Greece.

We now believe the probability that Greece will leave EMU in the next 12-18 months is about 90%, up from our previous 50-75% estimate, and believe the most likely date is in the next 2-3 quarters.

Strange he always used to be able to count to 100.
Meanwhile the same drumbeat carries on as I see on the news wires that the Greek government and the troika have agreed on the 11.5 billion Euros of cuts. Although they have not explained how this will not collapse the Greek economy like its predecessors have. Wasn’t it Albert Einstein who described insanity as doing the same thing and expecting a different result?

http://www.mindfulmoney.co.uk/wp/shaun-richards/greeces-leaders-fulfill-albert-einsteins-definition-of-insanity/

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thank my teachers I can still read the numbers and Shaun reads them the very same way - the safest to check back 3 to 5 years
it really doesn't work


I give 35% it could still work only by using a different approach, in a surprisingly (some) way Samaras and others were telling during the pre-election period
we probably wouldn't see it next hours


I give also Samaras coalition only one chance to pass new austerity laws, second time they 'll face NO votings