Beneath the Greek bailout hopes…
Who’s tired of the “Markets up on Greece, markets down on Greece” headlines of the past few weeks? (I am.)
Today it’s an up day, with world stocks hitting a six-month peak on hopes that Greece will secure a second bailout package next week (finally, really).
But beneath the optimism lies a dire Greek economic and fiscal situation.
The Greek economy slumped 7 percent in the last quarter of 2011, with the rate of contraction since Q4 2008 reaching a whopping 16 percent in cumulative, real GDP terms.
“The fiscal adjustment, which started off with an impressive deficit reduction of more than 5% of GDP in 2010 stalled in 2011… despite a significant fiscal effort.
“Beyond the well discussed inefficiencies that may have impeded the effort, a large part of the undershoot in revenues and the increase in primary spending can be linked to the very deep real GDP contraction of about 6.8% over the year.”
So why is this the case? Goldman thinks there are three key reasons.
- The speed of the adjustment implied in the original programme may have been unrealistically high.
- The large trade deficit at the onset of the crisis was linked to overstretched domestic demand and a very small and uncompetitive export sector that has deprived Greece of sources of external growth.
- Contraction in monetary conditions. M3 is running at negative rates of about 15% per year, with total private sector deposits declining by 17% yoy. As a result, borrowing costs for firms have increased. For example, by end-2011, interest rates on fixed term loans to non-financial corporations by Greek banks had shot up by 230-260bps relative to 2009.