BarroMetrics Views: An Inflection Point II
Since Draghi’s famous promise, ‘do whatever it takes’, we have seen in Europe none of the structural reform changes that were mooted to be necessary; and we have seen little growth in the economies of Portugual, Italy, Greece, Ireland and Spain.
Let’s have a look at Greece.
On April 28, Greece raised E6.3B from its bond issues to pay the ECB. Despite the repayment, it’s suggested that Greece will need to have a third bailout to meet its ongoing commitments.
For a start, there is a shortfall of E5.5b in 2014 increasing to a total E12.6B by 2015. The EC expects Greece to make-up the shortfall by more bond issues or by drawing on ‘surplus’ funds in some Government accounts – at least to May 2015. After that date, we have a black hole of how Greece will meet its liablities.
Will the bond issues be successful? The EC seems to think so, seeing Greece’s public debt fall from 177% of GDP to 125% of GDP by 2020, and to 112% of GDP by 2022. But, the EC is assuming that the Greek economy, which to date has shown no growth, will grow by 3.75% by 2016. I for one, would need to some evidence before accepting such assumptions – especially since there have been no signifcant structural reforms.
What about the 2013 Greece budget surplus? Well, that was a bit like the official unemployment numbers in the US (where long-term unemployed are not seen as unemployed). In my world, when I have an annual cash flow surplus, it includes any debt that I have to pay off in that year. But with Greece, the GDP ‘surplus’ is attained by excluding interest payments and one-off repayments. That instills little confidence that Greece will solve its growth problems.
So, then if the facts show Greece is still in the throes of woes, why are international investors willing to invest in Greek bonds? Apparently in their search for yield, they are relying on Draghi’s promise. In turn, his promise relies on Germany continuing to support the efforts. Whether not this will play out is anyone’s guess.