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.
Weak growth is hampering efforts to consolidate the fiscal position. Goldman Sachs, in fact, expects the deep recession has fully offset budget consolidation efforts. Analysts at the bank write:
“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.
They add:
Euro periphery: Lehman-type shock still on cards
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The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.
However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece — rising debt and weak economic growth pushing the country to seek a bailout — as a result of tighter financial conditions.
Take this warning from JP Morgan:
Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.
JP Morgan uses analysis based on quantifying the impact of financial market developments and monetary policy actions on economic activity. The main variables the analysis uses is: the three-month LIBOR rate, the yield on investment grade corporate bonds, the spread of high yield corporates over that of high grade, real equity returns, the change in the real exchange rate and bank lending standards for businesses as reported in loan officer surveys.
According to JP Morgan’s calculations, the 838 basis-point rise in the peripheral HY spreads implies a drag of -2.2 percent of GDP relative to what it would otherwise have been, had the HY spread unchanged.
EBRD to puzzle over E.Europe crisis
Ministers and bankers meeting at the European Bank for Reconstruction and Development‘s annual gathering in London tomorrow and Saturday have a sorry mess to scrutinise.
By the bank’s own (revised) forecasts, its region of central and eastern Europe will contract by over 5 percent this year. Many countries in eastern Europe took too much advantage of western banks’ lending spree, and businesses and households are struggling to pay back foreign currency loans.
Falling commodity prices have hit countries like Russia and Kazakhstan, and a burst consumer credit bubble is risking double-digit contraction in the Baltic states and Ukraine.
The bank’s 61 country members together with the European Union and its development bank the European Investment Bank will be discussing how to cope with the crisis and manage any recovery.
They will be looking at whether to continue giving help to several EU member countries which were due to stop receiving EBRD funds next year. Some countries may also be asking for an increase in the EBRD’s capital from its current 20 billion euros, to cope with the crisis.
The EBRD operates in 30 countries, mainly in the former communist bloc, and most recently Turkey. Those countries may be wondering if the bank could have done more to help them through the crisis, and seek more help now.
The EBRD is probably doing all that it can, but with almost 30 countries in distress it sees the bottom of its financial resources.
