Latvia Is Back In The News, And Expect More To Come

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The Latvian government is getting nervous about the level of lending coming from Swedish banks. According to the Financial Times, “Latvia’s prime minister has warned Swedish banks they risk choking off recovery in the Baltic state’s crisis-hit economy unless they resume lending”. The Latvian authorities are complaining, it seems, that banks such as Swedbank and SEB, which dominate the Latvian market, have reined in credit as they struggle to contain rising bad loans amid the deepest recession in the European Union.

“The . . . abrupt stopping of credit is a very problematic issue,” said Valdis Dombrovskis, the prime minister. “We expect Swedish banks to start [lending] again. “Of course you can say that Latvians were borrowing irresponsibly but to borrow irresponsibly you need someone to lend irresponsibly,” he said. “We had very easy credit in a very overheated economy. Now we have almost no credit in a very deep recession.”

Continue reading →

Why The Ratings Agencies Are Right And George Papaconstantinou Is Wrong

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The Greek government is having a hard time of it at the moment. Only today the Finance Ministry issued a statement that it was ready to “intensify its efforts to restore the viability of fiscal and economic trends in Greece” in response to the Moody’s decision to downgrade the country’s credit rating, while just one week ago the Finance Minister was accusing Standard & Poor’s of failing to “assess correctly” new moves by Athens to tackle its swollen budget deficit – echoing a similar response from Spanish Prime Minister José Luis Rodriguez Zapatero. George Papaconstantinou’s critical outburst followed the earlier downgrade decision by the rating agency of the nation’s long-term sovereign debt. Today, the Greek Government got the answer they should have expected, since Moody’s effectively followed the path of the other two main agencies (Fitch already have the Hellenic Republic on BBB+) and downgraded Greece to A2 from A1. The move means Greek debt is one step closer to being cut off from eligibility as ECB collateral, since Moody’s have put the rating on negative outlook, which means they consider a further downgrade more likely than an upgrade over the next twelve to eighteen months, while the ECB are scheduled to revert to the pre-crisis criteria of only accepting Sovereign Bonds which retain at least one A- from one of the main ratings agencies as collateral for lending. Certainly Lucas Papademos, ECB vice president, said last week that the ECB would not change plans to tighten its collateral rules in December 2010 simply to accommodate Greece. Continue reading →

Podcast On The Present State Of The Spanish Economy

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Caveat emptor, Spanish based blogger Mathew Bennett and I have started doing podcasts, and you can find the first one here. At this point in time we are concentrating on Spain. Among the points we cover are:

– How does what’s happened in Dubai affect the economic situation in Greece, Spain and the EU?

– Are left- or right-wing political parties causing or solving more problems during the recess…ion?

– Will the Germans, the French or the EU be able to bailout several European countries at the same time if there are several sovereign defaults?

– Are the ECB and the EU trying to pre-empt the IMF in Greece and Spain?

– What are the underlying structural problems with the eurozone funding plan?

– Why is the ECB channelling funds through monetary and financial institutions to buy up government debt in the eurozone?

– How the ECB is trying to use a carrot and stick approach with eurozone governments to control national government deficits and public policy?

– Is IMF intervention now inevitable in Greece?

– Will the ECB will try to play politics and pressure Zapatero in the run up to the 2012 general elections in Spain?

– Is the situation in Spain similar to the situation in Greece?

– Why don’t Zapatero and the Spanish government seem to be reacting?

– Why is there no coherent plan to get Spain back on its feet?

– What is going on with Spanish banks?

– Will unemployment in Spain reach 25% by the end of 2010?

– Which is more important in Spanish economics: image or hard data?

– Will it be possible for the Spanish government to reduce the deficit from over 10% of GDP to less than 3% by 2012 or 2013?

– What state will the Spanish economy be in by the end of 2010?

– What will happen to Spain when the ECB raises eurozone interest rates?

– Might Spain soon be in a worse economic position than Greece?

– What are the ratings agencies trying to achieve with their warnings on Spain?

– Why won’t the Spanish government tell the Spanish people the truth about what’s going on with the Spanish economy?

РIs Jos̩ Luis Zapatero really the biggest problem for the Spanish economy right now?

Obviously many of these points run parallel to those raised in my recent post “Why Standard and Poor’s Are Right To Worry About Spanish Finances“, but maybe, if you have 40 minutes or so to spare, you might enjoy listening to them being made in Podcast format.

Why Standard and Poor’s Are Right To Worry About Spanish Finances

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“Spain’s weaknesses over the developing crisis reflect mainly the reversal of the continuous domestic demand expansion of over a decade, which was associated with high indebtedness of the private sector, large external deficits and debt, an oversized housing sector compared with the euro area average and fast rising asset prices, notably of real estate assets.”
European Commission assessment of Spain’s Response to the Excess Deficit Procedure, Brussels 11 November 2009.

“The latest services PMI data suggests that the Spanish economy remains on a downward trajectory. The fact that variables such as activity, new orders and employment all fell at sharper rates during November is real cause for concern, with the prospects for 2010 becoming increasingly gloomy. Businesses report that consumers remain cautious of making any major purchases, particularly those requiring credit. It appears that any economic recovery over the next twelve months will be gradual and drawn-out.”
Andrew Harker, economist at Markit commenting on the November Spanish Services PMI survey.

According to Spanish Prime Minister José Luis Rodriguez Zapatero Spain’s government is firmly committed to reducing its fiscal deficit, and is intent on lowering it as requested by the EU Commission by 1.5% of GDP annually, until it finally brings it within the EU 3 per cent of gross domestic product limit by 2013 at the latest. What’s more he is quite explicit about how this is going to be possible: Spain is right now, and even as I write, on the verge of emerging from the long night of recession in whose grip it has been for the last several quarters. As such it will soon resume its old and normal path onwards down the highway of high speed growth. There is only one snag here: few external observers are prepared to share Mr Zapatero’s optimism. Continue reading →

Is Austria Set To Join The Honourable Company of PIIGs?

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Hypo Alpe Adria bank, the Austrian arm of the Bavarian bank Bayern LB, was nationalized on Monday for the symbolic price of three euros. This unexpected action brought to the world’s attention something which has been obvious to some of us for a very long time: namely that all is not well with Austria’s banking system, and it is not well for one very simple reason – over-exposure to Central and East European Markets. Of course, when some of us first started pointing the problem out, we were roundly rebuked from all quarters, what a ridiculous idea! Izabella Kaminska had a reasonable review of how the arguments were being marshalled back in January here, while Paul Krugman attracted the wrath of all Austria back in April by, as this blogger puts it, stating the obvious. Continue reading →

Europe Needs Action Not Words From The Greek Finance Minister

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“Today our biggest deficit is that of credibility.In the last years Greece lost all traces of credibility, which is why international institutions, partners want to see actions.” Greek Prime Minister George Papandreou

As the Economist points out, and as I personally can confirm (since I am constantly having to alter and update my excel sheets), Greek government statistics are notoriously unreliable – indeed, I would say that along with the Bulgarians the Greek statistical agencies are the joint worst in the entire EU. But rarely can the numbers have seemed more erratic and subject to such sharp revisions as they have been in recent months. Following the election of the new government in October (who obviously decided to get as much of the bad news out of the way as quickly as possible) we suddenly learnt that far from having been being “spared” the worst of the global economic contraction, the Greek economy in fact entered a period of negative growth in the first quarter of 2009 (shrinking by 0.5% on the quarter instead of growing by 0.3% as the stats office had previously “estimated”) wherein it is has subsequently remained. And of course given the size of the correction the Greek economy is now entering it is likely the economy will stay in this mode for some considerable time to come. And as if that wasn’t shocking enough, the forecast for this year’s budget deficit more than doubled overnight, from 6% to 12.7% of GDP. Continue reading →

A Short Political History Of Modern Greece

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Greek Governments Since 1963

63-65 George Papandreou

65-67 Chaos

67-74 Military Dictatorship

74-80 Konstantinos Karamanlis

80-81 George Rallis

81-89 Andreas Papandreou (son)

89-90 Chaos, 3 failed elections

90-93 Konstantinos Mitsotakis

93-96 Andreas Papandreou (son)…died

96-04 Konstantinos Simitis

04-09 Konstantinos Karamanlis (nephew)

From Oct 09 George Papandreou (grandson)

So What’s It All About, Costas?

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All the recent critical attention which has been directed towards Greece of late might seem surprising to some (or part of a global anti-PIGS conspiracy, to others) since, on the face of it, the Greek economy had managed over the last decade to appear to be something of a success story. Indeed the economy did clock-up a more than respectable growth rate, and the country even seemed to be well on the road to economic convergence with its richer neighbours, with GDP growing at an average annual rate of around 4.25% between 2000 and 2007, as compared with a 2% average for the euro area as a whole.

In particular there was a sharp acceleration in the growth rate in the early years of this century, stimulated in part by preparations for the Olympic games. As a result, living standards, measured in terms of GDP per capita in purchasing power standards (PPS), rose from 84.25% of the EU-27 average in 1997 to almost 95% in 2007. But as we all now know, and as many a Greek philosopher has often told us, “seeming” is not the same thing at all as being, and the current Greek case is no exception. Behind this wonderful facade, all was far from being as it should have been.

This was the case, not only in terms of the rather questionable data which was being sent out for external consumption – although, it should be noted, not everything was completely phoney, since Greeks today are surely much better off than they were in 2000 – but also in terms of a failure to explain how this rather spectacular change in fortune was achieved, or how the sustainability of the model on which it was based was to be ensured. As Titus Maccius Plautus reputedly put it, I am a rich man for just as long as I don’t have to pay back my debts, and of debts in Greece there were plenty, especially in the public sector.

So the growth we saw in the first eight years of this century was hardly normal, since it was based on a model of growing indebtedness which was always going to fail one day or another. One consequence of this is that no one really knows what “trend” growth in Greece would look like at this point (the same goes for those other two Eurozone “star performers” Spain and Ireland) since we don’t really know how much of recent growth was valid, and how much was due to overheating, and we won’t really start to get a clear picture till we see what the downside is, and how far it runs.

In an earlier post I suggested that while Greek Sovereign Debt was far from dead at this point, in the long run it was almost surely dead. Here, and in the posts which follow I will try and explain why I think that is the case. Continue reading →

A New Version of the Weak Euro Meme

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Well, having been so lavishing in my praise of Ralph Atkins in recent posts, perhaps it is time for the administration of a gentle “rapapolvo” (otherwise, you know Ralph, people might start to talk), and just to hand he offers me the ideal opportunity to “discrepar“. A little instability is, it appears, a dangerous thing, but not, it seems entirely and unequivocally dangerous:

True, Greece’s plight has weakened the euro, which has ended this week back down at levels last seen in early November. A weaker euro, however, will help boost eurozone growth – and thus come as a relief to eurozone policymakers. A little instability is not necessarily all bad.

Now, with all the other pressing topics I currently have on my plate I would normally have quietly passed this one by, had it not been for the fact that earlier in the week, over at the Economist, they came up with a similar “saving grace” for a partial Greek default.

How badly the euro’s standing would be hurt by a default would depend on the state of public finances elsewhere: if America were struggling too, the dollar might not seem an attractive bolthole. If the current struggles with a strong euro are any guide, euro members might even half welcome a tarnished currency.

I can think of a thousand and one different ways in which the euro might lose some of its current strong value, I can even imagine a goodly number of those which might be decidedly positive, but what I can’t for the life of me accept is that one of them would be the sort of economic, financial and political chaos which we may now be about to see in Greece.

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The Velocity Of Modern Financial Crises

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Jean-Claude Trichet, European Central Bank president, noted when speaking in Cambridge last Thurdsay that the speed at which financial disruption can spread had “accelerated tremendously over the past few decades”. While debt crises in the 1980s occurred over years, the effects of the Lehman collapse “spread around the world in the course of half-days”.

As Ralph Atkins pointed out, the Greek government is but the latest to learn that in the modern world you can be catapulted from relative obscurity to global prominence in a matter of hours. Everyone can be famous for five minutes, as Andy Warhol said, but this kind of fame most of us could well live without.

Faced with the assessment by Ratings Agency Standard and Poor’s that Spain’s economic and financial situation was deteriorating, the Spanish Prime Minister Jose Luis Rodriguez Zapatero simply limited himself to an outright rejection of such negative economic forecasts, declaring the naysayers to be wrong in the light of the -to him – self-evident fact that Spain was just about, at this very moment, to emerge from the recession which has now bedevilled it for so many months. Indeed he even went as far as to say they were wrong, since he he could find no reason why Standard & Poor’s should downgrade Spain’s long-term sovereign debt rating, “From our perspective there are no reasons for it, firstly because of the strength of the country (and) because the public accounts are solvent,” he told the Onda Cero radio station. Standard and Poor’s in fact argued that “The downgrade … reflects our expectations that public finances will suffer in tandem with the expected decline in Spain’s growth prospects”, a viewpoint with which few external observers would disagree.

Indeed, Spain’s representative on the ECB governing council Jose Manuel Gonzalez-Paramo told the Spanish press agency EFE, in an interview widely quoted in Spanish media, that he, himself, found the S&P opinion hard to disagree with: “The ECB is not taking issue with whether Standard & Poor’s should cut Spain’s rating, but the report that accompanies this warning is hard to deny….I’m convinced that Spanish authorities share this analysis and will do whatever is needed to avoid S&P’s negative outlook resulting in a change in rating,” he said.

Had Mr Zapatero found it within his repertoire to be able to express similar sentiments I am sure he would have done more to convince the world at large that he is aware of the problem, and is willing to take the necessary action. As it is, he simply leaves the impression that what just happened in Greece will eventually and inevitably happen in Spain, with all the suddenness and lightning-strike velocity M Trichet was warning about. What we seem to be facing is what Gabriel Garcia Marquez once called the Chronicle of a Death Foretold.

So what do the rest of us do, simply sit back and watch that “accident waiting to happen” actually happen? Angela Merkel may have other thoughts, since speaking in Bonn last Thursday she indicated that she, at least, was of the opinion pressure could be brought to bear on the national parliaments of countries with looming budgetary difficulties.

“If, for example, there are problems with the Stability and Growth Pact in one country and it can only be solved by having social reforms carried out in this country, then of course the question arises, what influence does Europe have on national parliaments to see to it that Europe is not stopped…..This is going to be a very difficult task because of course national parliaments certainly don’t wish to be told what to do. We must be aware of such problems in the next few years.”

Well, if such pressure can be brought it most certainly now should be. And not over the next few years, but rather, if M Trichet is to be believed, during the coming weeks and months. Lightning may well not strike twice in the same place, but it most certainly can strike twice.