Monday, July 27, 2015
Forget about Greece. This is at least how German businesses seem to look at Greek turbulences of the last weeks, judging from the latest Ifo numbers. Germany’s most prominent leading indicator just increased to 108.0, from 107.4 in June. Both the current assessment and the expectations component increased, with the current assessment component almost returning to its May level. In the eyes of German businesses, the external tailwinds, stemming from low energy prices and a weak euro, clearly outweigh any downside risk from the Greek crisis on the German economy. Even if the doses has been reduced somewhat, the German economy is still on steroids. Despite some recent rebounds, the weak euro exchange rate and low energy prices are still artificially extending the last phase of a very positive reform-growth cycle. Even after today’s drop, the level of the Ifo remains comfortably high. In fact, comparing the levels of the second quarter with the levels of the first quarter suggests a growth acceleration of the German economy in Q2, confirming our positive growth outlook. Looking beyond the second quarter, the German economy currently faces three major risks: : i) the never-ending Greek crisis, which despite latest positive developments is still far from being solved and could re-escalate quickly almost any time; ii) a longer-than-expected periods of weakness of the US and the Chinese economy (both accounting for 15% of total German trade); and iii) the lack of new reforms to further reduce unemployment and tackle the current investment gap combined with the deficit in digitalization could eventually backfire on the German economy once the current favourable tailwinds disappear. While there is little German policymakers can do to tackle the first two risks, developments in domestic sectors can be influenced. A closer look at the German industry shows that the industrial safety net has become somewhat thinner over the last months. Orders at hand have slightly come down and inventories have remained relatively stable at moderate levels for more than half a year now. This suggests that not too much production acceleration is currently in the German industry’s pipelines. Interestingly, capacity utilisation in the German manufacturing sector is still lower than in 2011 and 2012. Even though financing conditions in Germany remain extremely favourable, average capacity utilisation rates, modestly filled order books and continued uncertainty in main export destinations all argue against an imminent investment boom. In fact, financing conditions are currently so favourable that they might even trigger “economically useless” investments. In our view, the only way out of this dilemma would be government-induced or supported investments in typical public goods, eg infrastructure, energy and education. Last month, Grexit fears were discussion topic number one on German streets, pubs and even boardrooms. With latest developments in the Greek crisis and the agreement to reach a deal, discussions in local pubs can focus again on the upcoming soccer season and, as today’s Ifo index suggests, companies want to return to business as usual.
Friday, July 24, 2015
In de top 100 van de beste economiefaculteiten ter wereld staan maar twee Duitse. Zijn de Duitsers niet goed in de economische leer? De Griekse saga toont dat dit soort rangschikkingen leuk artikelmateriaal vormt, maar dat de werkelijkheid anders is. Het Duitse economische beleid heeft uiteindelijk gezegevierd, ook zonder internationale academische waardering. Griekenland zal daar weinig vruchten van plukken. Als Tsipras echt iets in Europa wil veranderen, kan hij Angela Merkel en Wolfgang Schäuble beter op een zomercursus economie naar Londen of Milaan sturen. Dat is beter dan ministers van Financiën middelvingers op te laten steken of vuil spuiend in de media te verschijnen. Een blik op het akkoord met Griekenland laat de hand zien van de Duitse economische leer: het ordoliberalisme (of in het Duits: Ordnungspolitik). Deze leer staat voor structurele hervormingen als de enige weg naar geluk en economische groei. Helaas betekent het ordoliberalisme na jaren van recessie, massawerkloosheid en politieke instabiliteit in Griekenland ook nieuwe en langdurige problemen. De Duitse school ziet dat anders. De argumentatie is dat Tsipras door zijn stoere politiek het prille herstel van vorig jaar kapot heeft gemaakt. Dat is een denkfout. De groei van vorig jaar was niet het gevolg van succesvolle hervormingen, maar van kunstmatige groei. Het was het gevolg van Europees geld, dat altijd aan het einde van de Europese financieringsperiode (de laatste was van 2007 tot 2013) wordt uitbetaald. Dat gaf Griekenland een groei-effect van zo’n 2 procent van het bruto binnenlands product (bbp). De kunstmatige groei van afgelopen jaar maskeert een veel dramatischer beeld in Griekenland: de uitverkoop van het land, of voor economen, het sterke verval van de zogenaamde kapitaalstock. Kapitaalstock is de actuele waarde van alle productiecapaciteit van de Griekse economie. Die waarde is sinds 2010 met zo’n 8 procent gedaald. Zo’n afbraak van de productiecapaciteit zie je doorgaans alleen tijdens oorlogen of lange economische depressies. Interessant is dat van alle andere Europese probleemlanden alleen Portugal te maken heeft met een afbouw van productiecapaciteit (in mindere mate dan Griekenland). In Ierland en Spanje neemt de kapitaalstock weer toe. Het huidige akkoord met Griekenland is voor deze investeringsproblematiek erg dun. Europa en de Duitse school hopen nog steeds op de louterende kracht van hervormingen. Het geld uit het zogenaamde Juncker-plan bestaat uit al ingeplande EU-middelen, die met veel vertraging het land zullen bereiken. De 12,5 miljard euro die ooit uit een privatiseringsfonds van 50 miljard zal rollen is wishful thinking. Structurele hervormingen zijn absoluut nodig in Griekenland, maar de opbouw van de productiecapaciteit - lees inkomen en daarmee de belastingen - nog meer. Om politieke stabiliteit te krijgen en het Griekse volk én de niet-Grieken aan de kant van Europa te houden, zal de Duitse economische school zich verder moeten verdiepen. Wellicht stijgen de Duitse universiteiten dan ook in de rankings? Deze column verscheen vandaag in het Belgische dagblad "De Tijd"
Tuesday, July 21, 2015
The payment of ECB and IMF obligations seems to be topping the institutions’ scale of priorities. The disbursement of the €7.16bn EFSM bridge loan, approved last Friday, has allowed Greece to meet its compelling short-term obligations. Yesterday, the Greek government disposed both the reimbursement of the €3.7bn bond held by the ECB and the payment of around €2bn to the IMF. As confirmed by IMF spokesman Gerry Rice, Greece is no longer in arrears to the IMF. In another step in the search of normality, Greek banks were allowed (upon the positive advice of the Bank of Greece and the ECB) to re-open yesterday. While many of the capital controls will remain in place, partial functionality should nonetheless help customers. They can now cumulate the €60 daily withdrawals into a single weekly withdrawal and have re-gained access to their bank deposit boxes. With cash holdings in boxes reportedly amounting at around €10bn, this could be another handy source of short-term personal liquidity. The government reshuffle put in place by Tsipras over the weekend was not a game changer. Sure, it proved that in principle the party leadership is keen to re-build reciprocal confidence with lenders and that is unwilling to accept ambiguity when working for a third package. However, for the time being, the destiny of the 39 rebels (who voted against the bill or abstained) has not been decided yet. Tomorrow, the Greek Parliament will vote on the second set of prior actions agreed with lenders: these will include a new code of civil procedure and the adoption of the EU’s Bank Recovery and Resolution Directive (BRRD). In view of the vote, it seems reasonable to expect a replication of the voting pattern shown last week. While the passage of the bill does not seem at risk, the outcome of the vote deserves attention, as any further haemorrhage of support from Syriza’s MPs could in principle weaken Tsipras’ position, pushing him to seek snap elections in the autumn. A positive passage of the second bill should in principle pave the way to the quick start of actual negotiations. With representatives of Greece’s creditors (the former Troika) and of the ESM reportedly already in Athens, pressure for a rapid agreement on the memorandum of understanding of a third programme is already mounting. Yesterday, the president of the EU Commission, Juncker, and of the Eurogroup, Dijsselbloem, said that the Greek parliament must complete the bailout agreement with the ESM within two weeks, as this would allow the disbursement of funds in time for Greece to meet its August financial obligations (another ECB held bond matures on 20 August). At the same time, German politicians are still licking their wounds after last week’s agreement to reach a deal. It still does not feel good. According to media reports, there had been different views on Greece and a possible Grexit between Chancellor Merkel and Finance Minister Schäuble. While Schäuble is still flirting with the idea of a Grexit and even hinted at the possibility of his own resignation, Merkel remarked during a television interview that the Grexit discussions should be stopped. The negotiations had started. Some calm has returned to Greece. After last week’s turbulences, yesterday marked the first day of Greece in a new environment. An environment, in which banks are a bit more open but not really open, taxes are higher and Greece has fulfilled short-term payment obligations but is still struggling to find a third bailout. Clearly not a return to normality.
Thursday, July 16, 2015
As expected, today’s ECB meeting was all about Greece. ECB president Draghi did not only answer many questions, he also delivered tangibles for Greece: a minor increase of ELA for one week. Together with the Eurogroup’s parallel decisions to grant bridge financing of 7bn and a principle agreement to grant a third bailout package, the Eurozone’s key players took an enormous leap of faith with Greece. As regards the macro-economic situation, the ECB’s analysis and outlook did not change from last month’s. The ECB still expects a broadening of the Eurozone’s economic recovery and gradually increasing inflations rates. Interestingly, the ECB added the slowdown in emerging markets to its downside risks to growth. Remarkably, despite the broadly unchanged macro-economic assessment, Draghi gave an important hint that market participants should forget about tapering any time soon. The ECB reincluded an important paragraph to its introductory statement, saying that the ECB would “continue to closely monitor the situation in financial markets, as well as the potential implications for the monetary policy stance and for the outlook for price stability. If any factors were to lead to an unwarranted tightening of monetary policy, or if the outlook for price stability were to materially change, the Governing Council would respond to such a situation by using all the instruments available within its mandate.” In our view, a clear sign that – contrary to what the ECB said in early June – the ECB is concerned about the sell-off in bond markets and would react by stepping up, rather than reducing its QE activities; at least as long as the recovery is as fragile as it currently looks like. Most of the press conference was dedicated to Greece. Here, Draghi gave many long explanations and statements on the current state of play. The most remarkable two comments and announcements were: i) the ECB decided to increase ELA for Greek banks by 900 mln euro for one week. With this decision, the ECB fulfilled the request of the Bank of Greece and at least symbolically rewarded latest progress in the Greek crisis. ii) Draghi joined the current choir on debt relief for Greece, saying that “it is uncontroversial that debt relief is necessary”; and iii) Greek bonds would become eligible for the ECB’s QE programme once there is a bailout deal and the ESM has disbursed the first tranche of the money. And there was more news from the Eurozone today. After the principle decision that the Eurozone would offer Greece a 7bn euro bridge financing through the Commission’s rescue fund, the EFSM, the Eurogroup today also reached out to Greece. At the same time that the ECB press conference started, the Eurogroup issued a written statement, welcoming last night’s parliamentary green light for the Greek reforms. Moreover, the Eurogroup said that it would in principle grant a three-year bailout package to Greece, obviously only when all conditions as laid out in Monday’s agreement are met. All in all, let’s not get carried away by too much pathos. The Eurozone finance ministers just confirmed what their chiefs had already decided on Monday. Let’s stick to facts: Greece last night took an important first step towards receiving a third bailout package. More important and complex steps and negotiations will still follow. The decision to grant bridge financing as well as today’s ECB decision to increase ELA are no game changer, yet, but at least a symbolic leap of faith.
Monday, July 13, 2015
Grexit avoided, but for how long? After another marathon in Brussels, Eurozone leaders just decided on a path towards a third bailout package for Greece. We are still waiting for the official and written summit declaration to be released but here is our first take on the deal, based on having listened to the press conferences of Tusk, Juncker and Dijsselbloem as well as the ones of Merkel, Hollande and Tsipras. In short, the Greek government will now have to do almost everything the Greek people refused in last week’s referendum. As already reported earlier this morning, Eurozone creditors have come up with several demands before agreeing to a third bailout package. This compromise can be divided into three categories: i) rebuilding trust; ii) negotiations on a third bailout package; and iii) how to deal with Greek debt. As regards rebuilding trust, the Eurozone wanted Greece to pass several reforms through parliament by Wednesday, among these reforms were apparently the VAT and pension reforms but also improvements of the Greek statistical agency. Once the Greek government has agreed to the reforms, several Eurozone parliaments would decide on whether or not the official negotiations could be started. Only then, the negotiations between the three institutions (IMF, ECB, European Commission) on behalf of the ESM would start. Judging from earlier reports last night, these negotiations will not be easy as the Eurozone creditors have asked the Greek government to come up with new and more concrete proposals on how to compensate for the earlier withdrawn reforms to the economy and the public sector. If and when these negotiations would come to a successful end, Greece would get a bailout of around 85bn euro. Already in the coming two months, Greece would need 7bn euro until next week Monday (remember the bond held by the ECB), another 5bn euro until mid-August and up to 25bn (of which 10bn should be immediately) for the Greek banks. A prominent part of the potential deal, at least judging from the press conferences, is a privatization trust fund. This fund, based in Greece, should guarantee fresh money of 50bn euro, of which 12.5bn euro should be used for domestic investment. The rest of the money would be for debt repayments. Furthermore, the Troika is back. As stressed by Ms Merkel, the three institutions, formerly known as the Troika, will do the negotiations and would also be responsible for future surveillance and monitoring of progress. As Ms. Merkel said a third bailout package for Greece would not differ from earlier programmes or programmes for other Eurozone countries. Finally, the Eurozone returned the idea of some debt restructuring - not forgiveness – as part of a third bailout. The 2012 agreement of the Eurogroup was taken as a point of reference for some kind of debt relief. However, Ms. Merkel stressed that a haircut on debt was not an option but that debt relief could come in the form of longer maturities and/or grace period. Interestingly, she said that this form of debt relief could come earlier than anticipated in the 2012 statement. As regards the next steps, the Greek parliament now will have to pass the required reforms, then national Eurozone parliaments will have to give the green light to start the negotiations. Next week, the negotiations on a third package could start. In the meantime, the Eurogroup will look into options for bridge financing. While all leaders tried to give the deal a positive spin, doubts and concerns in our view outweigh optimism and euphoria. It starts with the fact that there actually is no deal, yet. This morning’s “deal” is an agreement to start negotiations once certain conditions are met. It’s a declaration of intent. Moreover, there is little in the deal that could give the Greek economy a short-term boost. Neither the 12.5bn from a still to be built trust fund nor the promised 35bn investment from the Juncker plan are tangible enough to provide results. Furthermore, even if Greek parliament would pass the required reforms, it is unclear whether Tsipras could politically survive the negotiations. In fact, this looks like a deal, he had been fighting against for a long while. All of this means that the champagne bottles should still remain in the fridge for a while. Eurozone politicians should rather be prepared for additional long meetings and negotiations. This morning’s agreement is a typical European fudge, made possible by the fact that the Greek people are currently still overwhelmingly in favour of Eurozone membership and the Eurozone’s willingness to avoid Grexit. This is not the most stable fundament for sustainable calm. To the contrary, the Grexit might have been avoided for a couple of weeks or – in a best-case scenario – for a couple of months, but as in any good horror movie, the ghosts will always return.
Sunday, July 5, 2015
The ‘no’ vote in yesterday’s referendum seems to have strengthened Tsipras’ position. However, what looks like a stunning victory could quickly become a Pyrrhic ‘no’. The Greek people yesterday sent a strong message to the rest of Europe: a ‘no’ against austerity. According to the latest results, more than 60% of the Greek people said ‘no’ in the referendum. Officially, this ‘no’ was against a proposal from Greece’s creditors on 25 June to extend the bailout agreement against certain conditions. Whether the ‘no’ was also a vote against Greece’s membership within the Eurozone will never be clear. Ahead of the referendum, there was lots of speculation on what would happen if…now that there is clarity on the outcome of the referendum, the only thing that is clear is that nothing is clear. Only the coming days and hours will show what all involved players are really up to. In our view, the most likely next step is that the Greek government will want to return to Brussels to negotiate a new package with its Eurozone creditors, now backed with a strong mandate of the Greek people. It is hard to tell what the new demands or proposals of the Greek government will really be. The range of demands varies highly between different members of governments, ranging from a democratic change for Europe to no new austerity. The only element that will clearly be in any new Greek proposals is debt relief. In our view, the Eurozone will wait for Greece to make the first move. Initially, the Eurozone will insist on the technical issue that there no longer is a Greek bailout programme and that the Greek government would have to apply for a new programme. Interestingly, the German parliament and other parliaments would have to agree to a start of new formal negotiations. In this regards, it is noteworthy that new negotiations with Greece could also put the Eurozone’s inner stability to a test. It will not be easy to find a common strategy for any new negotiations that will be embraced by all Eurozone countries. Still, even if it is hard to see that the other Eurozone countries will give their Greek colleagues a warm welcome and that new negotiations are more fruitful than over the last five months, the outcome of the referendum will push the rest of the Eurozone to at least start talking. In theory, a compromise could be possible. A deal with less austerity but serious reforms, including tackling corruption and tax evasion, in Greece, obviously, would be the best outcome. Such a deal could even include some debt relief, but at the end of the ride and not upfront. This, however, would require that all parties involved could jump over their own shadows. In particular, the bad blood created by sometimes excessively inadequate language will be a large liability for any new negotiations. While politicians in the Eurozone are preparing for possible new talks, it is once again up to the ECB to do the dirty work. Today, the ECB will have to decide on what to do with ELA. Apparently, the Greek central bank applied for an increase of ELA. The ‘no’ has not made the ECB’s life any easier. With every step that Greece is moving closer to total default or even a Grexit and Greek banks are losing deposits, it will be harder for the ECB to label Greek banks as solvent, and thereby eligible for ELA. In our view, the ECB will not be the one pulling the trigger on Greece. As long as Eurozone politicians will signal their willingness to negotiate with Athens, the ECB will keep ELA at its current levels – even if it will create a bigger headache in Frankfurt every day. Still, this strategy will come to an end on 20 July. If Greece is not able to reimburse the ECB and would default on the bond, it is very hard to see the ECB continuing ELA. All in all, the ‘no’ vote in the referendum will lead to the expected uncertainty. At the current junction, the ‘no’ vote is not (yet) a first step towards a Grexit. Even if Eurozone politicians won’t have a huge appetite to talk to possibly triumphant Greek counterparts, they will never refuse initial talks. How such negotiations will end is hard to tell. A lot will depend on how ready to compromise both the Greek government and the other Eurozone governments are. We still think that eventually a sustainable compromise can be reached. However, the risk for a Grexit has never been higher than today. To a large extent, the current situation brings the Eurozone and Greece back to square one. Square one as it looked like in January: the Greek people have voted against austerity, the Greek government wants debt relief from its Eurozone peers and the Eurozone has troubles finding a united reaction. The big difference with January, however, is that lots of bad blood is on the floors, Greek banks are closed and Greece does not have a bailout programme. These three factors clearly do not argue in favour of a strong Greek position vis-à-vis the rest of the Eurozone. Did Tsipras celebrate a Pyrrhic ‘no’?
Thursday, July 2, 2015
Yesterday was another day with tactical moves from all sides in the Greek crisis and a Socrates-like conclusion: all we know is that we know nothing… Day one after Greece’s default on the IMF, which officially is not called default, and the end of its bailout programme offered again plenty of turbulences. A new letter from Tsipras, speculation about a cancellation of the referendum, Angela Merkel in the German parliament, Tsipras on television, a Eurogroup conference call and Varoufakis on the internet. This is the summary yet another ‘normal’ crazy day in the Greek crisis. Early in the morning, the media reported that Alexis Tsipras had sent a letter to the Eurozone creditors, claiming that he would accept almost all demands from the creditors with only minor changes. Creditors took their time to examine it thoroughly, postponing the planned Eurogroup teleconference to late afternoon. In the meantime, speculation emerged that Tsipras might still cancel the referendum and Eurozone politicians sent mixed signals. While French Finance Minister Sapin said he was still hoping to find an agreement ahead of the referendum, German politicians closed the door for negotiations before Sunday. Both Schaeuble and Merkel voiced their irritations with the Greek government and reiterated their position that no new negotiations with Greece were possible before the Sunday referendum. Interestingly, Merkel’s official stance has changed compared with several weeks ago. She now remarked that the door for Greece was not locked and that Greece should stay in the Eurozone, though not (any longer) at any price. After Merkel’s speech in German parliament, Tsipras made a televised address to the nation, turning again defiant. He confirmed that the referendum would be held on Sunday and urged his fellow citizens to vote no, reassuring Greeks that a no would not mean a rupture with Europe, but instead a necessary step for a better agreement with lenders. Later in the evening, the Eurogroup officially refused Tsipras’ request, postponing any further discussion to after the referendum. The Eurogroup also repeated that an extension of the bailout was no longer possible and that any new negotiations would start from scratch. Finally, Greek Finance Minister Varoufakis presented his six arguments for a “no” vote at the referendum in his blog on the internet. No matter how this crisis will end, at least Varoufakis has definitely brought new transparency to the Eurogroup. His article, however, is not very substantial, five out of six argument can be summarised as “vote ‘no’ because the creditors won’t give us debt relief”. Trying to understand why Tsipras does what he is doing, the only explanation is that his letter to the Eurogroup was just another tactical move to stay ahead of the Eurozone in the ongoing blame game, rather than a serious change of mind. The answer by Merkel and the Eurogroup was a strong signal that the Eurozone will not move anymore ahead of the referendum. Even if an agreement would be possible, too much trust has been destroyed that it is hard to see that the Eurozone would believe Tsipras this time around. What if he signs an agreement? The Eurozone would not have any evidence that this time is different and that the reforms would really be implemented. All of this means that the blame game will unfortunately continue in the days leading to the referendum. The only clarity that yesterday’s events have given, is that any spectacular and unexpected new turns before Sunday should be excluded. At least some clarity. However, for those hoping for clarity after the Sunday referendum, here is our disappointing view: the mess will go on. No matter what the outcome of the referendum will be. Let’s have a quick look at what could happen. In case of a ‘yes’ vote, the Eurozone would be willing to start new negotiations quickly but probably not with the current Greek government, rather with a government of national interest or a new government after new elections. The Eurozone would probably offer a third programme, coupling reasonable fiscal discipline (without excessively ambitious primary surplus targets) with a population/growth friendly investment programme. This could have a strong power against the surging populist movements in Spain and Italy. However, what would happen if Greece would get new elections and Tsipras would win them? In case of a ‘no’ vote, of course, things would be much more complicated. Tsipras would take it as a popular mandate for new negotiations in Brussels. It is hard to see that after the last events, the Eurozone has a huge appetite for these negotiations. On the other side, however, ignoring the Greek peoples’ will would also be hard. In our view, the Eurozone would not immediately let Greece fall after a ‘no’ vote but it would be very difficult for the ECB to continue ELA, even not at its current level. Even if negotiations between the Eurozone and Greece would continue after a ‘no’ vote, these negotiations would be very likely too difficult, defiant and slow for the ECB not to stop ELA. A new chaos and eventually a Grexit in the making. The inconvenient truth on the Greek referendum is that neither a ‘yes’ nor a ‘no’ vote will quickly lead to a solution and a return to normality.