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Economist first, attorney second. I enjoy critiquing the current groupthink spewing from the academics, central bankers, journalists and banksters regarding the world’s fiscal, financial and economic condition. The groupthinkers seem to think that we are muddling through a post-Great Financial... More
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  • Greek Recovery Meme 0 comments
    Apr 22, 2013 2:20 PM

    Greece will probably pull through | Hugo Dixon.

    This is how these pieces work. If Dixon is correct, then he can claim to be the first to call the Greek recovery. If Greece continues its descent into depression, then everybody will have forgotten about this article in a few months anyway. Mainstream media types are rarely called to account for poor predictions with the consequence being that they make a lot of them.

    In this article, Dixon combines his free trip to Greece with a few anecdotes meant to show how Greece is improving. Unfortunately for the Greeks, the economic data shows the exact opposite of those nice little stories about the brave Prime Minister holding the country together and tales meant to foreshadow Greece's coming economic rebound.

    Let's cut away the hype and see what remains.

    Samaras hasn't suffered the plunging support of Spain's Mariano Rajoy or France's Francois Hollande. This statement is not true. Samaras was elected with over one-third support of Greek electorate. His current support is less than 19%, which places New Democracy in a statistical tie with opposition Syriza.

    But Athens now seems on course to achieve "primary balance" this year…That means it probably won't have to implement another round of austerity next year, so the economy won't be struggling against that headwind. Maybe Dixon is right, but maybe this will just be the third straight year that Greek promises of attaining a primary balance are pushed back . Moreover, budget cuts and tax increases don't go away after they are implemented. The economy will still be held down by a confiscatory tax scheme for the near future.

    Meanwhile, up to 50 billion euros of bailout cash is being used to recapitalise viable banks and shut down non-viable ones. You can give the banks all the money you want. The economy is weak, so the demand for loans remains low. Banks are not lending in the periphery and will not as long as they can invest their capital in the ECB supported sovereign bond market.

    The banks' dependence on expensive emergency liquidity assistance (NYSE:ELA) from the Greek central bank has also been slashed. It is now 22 billion euros, down from a peak of around 120 billion euros. The implication here is that Greek banks are healthier because they require less ELA, but this reasoning is incorrect. When Greece was dithering on its bailout and the troika was withholding funds, the country was in danger of running out of money. In order to prop Greece up until the troika paid the bailout, the ECB was lending the Greek central bank money who loaned it to the Greek banks to buy Greek T-bills to finance the government. Since the bailout tranche was released to the Greece, the banks no longer require as much ELA.

    The drive to improve competitiveness, mainly through much lower wage costs, is finally bearing fruit too. It's nice that Greek tourism may have a good year, but where in this chart do you see lower wage costs bearing fruit?

    Greek GDP Performance

    The Greek economy continues to contract, and there is no end in sight to the depression. Lower wage costs are still not low enough to make the unproductive Greek worker a bargain.

    If Athens can hold the course, there's also a good chance that the euro zone will agree to further lighten its debt load, which amounts to about 160 percent of GDP, by cutting the interest rate and lengthening the maturities of official loans. If you read the sentence, you will notice that the Greek debt load is not being lightened but merely restructured. Instead of the next two generations of Greeks struggling under this debt, the load will be shared with more of the unborn. Lightening the debt means forgiving principal, and this will never happen as anti-bailout sentiment rises across the northern tier.

    The outlook for Greece looks far better than it has for years. The country will probably make it. What does "probably make it" mean? This is a vague prediction. As long as the country avoids a fascist coup, you could probably argue that Greece has made it.

    However, if we mean that Greece will not default on its debt mountain and return to sufficient growth to cut its unemployment rate below ten percent, then poor Greece will probably not make it.

    Once you cut away the hype, little remains.

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