Wednesday, November 8, 2017

Greek Debt Basics: Part IV - Present And Prospects

Greece is going through its eighth year in a row of economic funk.  GDP is down 24% from its peak, unprecedented for a country not at war. It is the result of the implosion of the Greek debt bubble which formed after the country entered the eurozone, even though it was not fundamentally prepared to do so.  The country's economy was very unproductive and focused on low value added products and services. It is indicative that, even today, the main export by value is gasoline and other refined products (Greece, of course, is not an oil produced itself).

Let's take a look at the components of Greek GDP, then and now (in billion EUR):

Year                    Consumption         Investment       Trade Balance
2008                         203                        57                     -28
2016                           158                         18                        -1
 Difference               -45                        -39                    +27
% Change               -22%                     -68%

A quick analysis reveals that 60% of the drop in consumption has come from sharply reduced imports, not necessarily a bad thing.  But the real GDP killer between 2008-16 has been the plunge in investment, down a massive 68%. In fact, capital investment is now running below annual depreciation, meaning that the country's productive capacity is eroding. Bad news for an economy that is trying to rise from the bottom of the barrel.

Where is growth going to come from? 

  • With unemployment around 20%, sharp drops in personal income, and negative credit growth it won't come from consumption. In any case, final consumption is already a huge 90% of total GDP, another indication that Greece is scraping by on just the basics.
  • Greece is not an export-oriented economy, neither can it become one in short order.  Although there has been some improvement, the economy still exports little.
  • This leaves investment as the only viable growth engine, particularly Foreign Direct Investment (FDI).  Coming from such depressed levels, even a modest increase will produce a significant positive impact on GDP growth.  For example, a mere 5 billion euro extra translates to +3% GDP growth.
 Is Greece today ready, willing and able to become FDI friendly?  After two years of a loony economic policy that fought against private business investment, there are signs that the government is finally changing its tune.  The rhetoric has certainly changed, and it remains to be seen how quickly it will be translated into action.  There have been major deals with airport, port and rail privatizations, with more in the pipeline in real estate development (Astir Hotels, Hellenikon old airport re-development), energy production and distribution.

Prices in assets such as commercial and residential real estate are down 40-50% from the peak, while labor cost are also lower. The tourism sector, where growth is particularly apparent, is attracting major hotel chains and operators.

Still, much more is needed to sustain growth at the levels needed to pull Greece out of its funk.  One recent study claimed that Greece requires a total of 100 billion euro in capital investment to bring its  economy back to pre-crisis levels.  Is there such a prospect? Intriguingly, the money largely exists, and it exists in Greek hands. I'll explain..

Beginning in 2009 Greek banks have lost a massive 143 billion in deposits, a drop of 44%.  Because, unlike Cyprus, there hasn't been a deposit "haircut" (also known as "bail-in") in Greece, this money is still largely intact, albeit sent abroad in foreign accounts and squirreled away in safe deposit boxes and under the proverbial mattresses. This 143 billion euro amounts to over 80% of current GDP, a huge pool of capital that could, potentially, be put to better use boosting growth.

What is the catalyst to make it happen? In a word, confidence.  Greeks have been so badly beaten down by eight years of constant misery that they are understandably reluctant to invest.  Yet, one can see that there is plenty of fuel available to power the economic engine, if there was to be a "spark" of confidence.

 For such a "confidence indicator", I turn to Credit Default Swaps, a good gauge of sovereign credit risk (see Chart 1).  Greek risk has in fact been improving rapidly in recent months, with the benchmark 5-year CDS now at 427 bp, down from a high of 990 bp earlier this year -  and much higher at the height of Grexit anxiety. (For comparison, Portugal is currently at 117 bp and Italy 113 bp.  Not bad at all, given the hoo-hah in the media about Greece).

Chart 1

I'll leave it here today.  In the next post, I will look at Greek banks - a very much maligned bunch...


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