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Europe - The Week Ahead: Greece And The Volcano
The latest from Goldman's Erik Nielsen:
Happy Sunday,
This is not your usual weekly from Chiswick (where I understand the weather is awesome with not a cloud in the sky!) - instead you'll find below a very short note from the road as I am making my way north (I just came through Mont Blanc) after having been stuck in beautiful Florence where I was on one of my hardship assignments when the wind changed and sent the volcano dust down over Europe bringing all air traffice to a hold.
From all the very funny emails I have received in recent days, my prize for the best one goes to Kevin Daly who suggested that when the British and Dutch called for "cash" for the IceSafe fiasco, Iceland simply misheard them, thinking they were asking for "ash"
More seriously, the two big stories in Europe are of course the planned start tomorrow, Monday, of negotiations in Athens on an IMF/EU program for Greece and the vulcano and its possible impact.
On Greece, I am not sure whether the negotiating teams from Washington and Brussels have made it to Athens, but if not things would presumably start via phone conferencing. As I have discussed in recent weeks, the IMF is likely to ask for three components of conditionality: (1) contingency plans for the fiscal performance for this year; (2) concrete further fiscal measures for next year (and for 2012 if multi-year program); and (3) structural measures aimed at regaining competitiveness. I continue to suspect that the Greek government will be reluctant particularly wrt (3). But if PM Papandreou's infamous gun is to get loaded then they'll need agreement on all aspects, and the Europeans will have to get their political promises of EUR30bn converted into legal commitments. The finance ministers updated each other on Friday in Madrid on their national strategies and progress. After some early flirtation with various ideas of how to circumvent the national parliaments, I believe that most - if not all - now have concluded that they had better go through their parliaments (makes a lot of sense to me given the risks involved.) I am not aware that anyone has received parliamentary approval yet. Next weekend there'll be more opportunities to talk coordination and policy stuff when they all meet in Washington DC for the IMF's spring meetings.
And then the Volcano. Needless to say, at this early stage it is very difficult to say anything meaningful about the effect on the European economy, but here are my very preliminary thoughts (surely subject to possibly significant revisions):
First, if the disruption to air traffic is contained to a week or less, then I think the total effect will be minimal. My guess would be that the effect on Q2 GDP would be within a rounding error (of 0.1pc) around our +0.8pc qoq forecast.
Off the top of my head, air transportation is no more than some 0.1 pc of European GDP, and one would assume that a lot of what's been lost in the air will be made up in coming weeks. Also, ground transportation is having a field day, as illustrated by the fact that all trains out of Florence was fully booked for the next 3 days and none of the car rental companies had cars available for the next 9 days.
In hospitality, I suspect that its also marginal so long as its contained to a week. My hotel in Florence told me that so far their cancellations were being broadly compensated by people extending their stays (as I had to do), and restaurants and bars were busy as ever; I suspect we had seen what we wanted to see of the city so a wonderful atmosphere developed in several places with people buying drinks for each other while swapping stories of the hardship we all had to endure away from our families, friends and work! - making the bar tender very happy!
BUT, if this things were to continue for a longer time, then it would surely start to have a significant effect. (And, worrisome, last time it erupted it kept going for some two years!)
In other words, if disruptions run beyond a week or so, then I suspect that most people will have made their way to where they want to be by ground transportation, and a very large share of otherwise planned travels will be simply be cancelled. As my driver just told me: "this is great for us, but if they don't start flying again by mid-week then there will be no more tourists left in Florence and there'll be no more work." I suspect that hotels around Europe will feel the same pain. The loss here will surely not be compensated by business people and tourists changing to ground transportation and video conferencing etc.
Also, production and distribution of goods usually transported by air - including "light weight, high value" stuff like many pharma products as well as fresh fruit etc - will suffer because it'll either take substantial time to sort out their ground transportation, or it'll be impossible all together. (The latter probably applies more to fresh produce usually being flown into Europe from overseas.).
In the extreme scenario (at least I hope it's extreme) in which we are still not flying by the end of the quarter I suspect that we would see a very serious knock to our Q2 GDP forecast before business conferences and vacations get rescheduled closer to home (with video links when necessary). If so, we would see the biggest damage to GDP in Q2, followed by less severe - but still measurable - damage in following quarters until we return to normal.
Stay tuned. I expect to be back on line from Paris tomorrow.
Erik
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Erik, I think you forgot to mention something...but we all hope you and your driver are enjoying your unplanned Tourre of Italy
Sounds like Eric is having a truly Fab time of it. However the news over here is Tourreable
Wit: 10
Language Games: 10
Originality: 9.6
OT
IMHO; Austria is the next piece to fall. Regardless of rating agencies optimism Austrias exposure to Eastern European Economies will come to haunt Austria in the foreseeable future. 291.2 billion $ is lent to Eastern European Economies, not an insignificant amount considering that it represents 70% of Austrias 2009 GDP. Given the soddy accounting practices world banks started to conduct shortly after the crisis escalated the only thing that is keeping Austria out of the spotlight is that its banks still value the loans at 100 cents on the dollar, which is hilarious given the carnage Eastern Eruopean Economies suffered in the past 2 years. The amount of news coming out of Austria in regards to this particular topic is smaller than the amount of news coming out of USSR about Stalins ass bleaching. Once the EU institutions [dont know when] start asking for full disclosure of the value of the loans Austria will take Greece's place in the bailout row. Just to further illustrate the situation which is facing Austrian banks i give you these charts, which are either hilarious or gut wrenching.
Thanks for the graphs!
They were drunk/coked/threaten to/beaten up/stalked and yelled at/kidnapped enough to name me a contributor so till i write something contributor-esque i can at least post purty pictures ....
At the same moment GS gets shown the door, the speculators gun for France et al. Ironic? I think not.
The Austrians have a tendency to ignore any glaringly obvious problems (Jorg Haider having a gay lover, Kurt Weldheim being an ex Nazi etc etc.) I was recently told by serveral Austrians how the country was in good shape as it had hardly been affected by the crisis and I just laughed. It defies belief that they have a AAA rating. No offense to Austrians, but they have not the hard working, industrious nation that Germany is, but were enjoying their role as banker to the East and have piled into all sorts of commercial real estate lending.
As you so eloquently put it, the lack of any comment about bad loans suggests not that it is ok, but rather than it is really, really bad.
Austrian media dont write about austrian banks, because there´s nothing really too much to write about. All major austrian banks with high CEE exposure are making profits, so what should they write about? Anyone with a bit of interest can google it out easily. Here´s few numbers. Last year(2009) net profit: Bank Austria Creditanstalt:1.1 bn EUR, Erste Bank: 0.9 bn EUR, Raiffeisen Bank: 0.4 bn EUR.
Note: Raiffeisen Bank has 100% exposure to CEE, as they conduct all their business in CEE(+ Austria). About last year they wrote this:
Against the backdrop of persistently difficult market conditions, the group of Raiffeisen Zentralbank Österreich AG (RZB) achieved a remarkable result. It generated a profit before tax of EUR 824 million, surpassing the 2008 result by 38 per cent. Fully consolidated subsidiary Raiffeisen International Bank-Holding AG showed a profit before tax of EUR 368 million.
"The RZB Group showed a solid development even in the most difficult year of the economic crisis. Our conservative policy regarding provisioning for impairment losses notwithstanding, our profit rose significantly", said RZB-CEO Walter Rothensteiner. "This result shows not only the strength of our business model, but also the quality of our steering measures as well as the strong cohesion within the Austrian Raiffeisen Banking Group."
http://www.rzb.at/eBusiness/rzb_template1/1026359884948-1026359885014_47...
In the meantime, its time to bring out Radio Zero and create a new alcoholic beverage based on Ice and Magma!
Cheeky--its a Christmas Miracle! No hate-stalkers junked you yet.
Another Festivus miracle!
Because he is armed with graphs. Very intimidating those graphs.
What happens to global warming if this spews out great clouds across the Northern Hemisphere for weeks on end? The last times this thing blew the Mississippi River in New Orleans froze. Is this the ultimate black swan?
Just because the volcanic activity causes a short & relatively minor reduction in economic measures doesn't mean it can't be used to provide cover for the "less than expected" performance of the eurozone.
Sadly TPTB can convince the masses to believe anything.
yup, just like they used snow in the east for any unemployment/retail/home starts bad news this winter.
Just finished watching the Greek news via satellite. Athens airport is total chaos. Stranded passengers looking to go home and the airlines, now losing an estimated 200 million euros a day, are not paying for accommodations any longer. Experts say the volcanic ash is heading for Greece this week and this disruption could last weeks, maybe months. Looks like the short euro trade is alive and kicking!
it's only a matter of time before the 1st class lounges across Europe and the UK come under siege
Leo, my brilliant brother just booked his honeymoon to the greek isles by way of athens, end of August. I would love to get your odds on the airport being open (not due to ash, more default/rioting/strike) so I can decide how intense the mockery should be. many thanks!
By August, they should be fine (hopefully). Here are some suggestions for your brother:
http://www.danavillas.net/
http://www.royalmyconian.gr/default-en.html?CFID=24963177&CFTOKEN=50823355&jsessionid=e830d9acc898$E3$29$0
and where I went on my honeymoon in Elounda, Crete:
http://www.bluepalace.gr/bluepalace/frontend/index.jsp
Amazing place to relax and enjoy the beauty of Crete. Mind you, it's gotten a lot more expensive now (I wouldn't pay those rates) and my marriage didn't work out (nothing to do with the honeymoon, LOL!)
lol. damn it, there goes my mockery. thx for the links
I guess I will have to fly home from Oman through Mumbai rather than London. Just what I need, a 12 hour layover in Mumbai.
The real question here is: how can the Brits recup the cost of this latest act of Icelandic terrorism? Gordon's Browne Bottom must be relieved the first version of IceSave didn't pass; now it can be revised to include the price of these evil Icelanders shutting down UK airspace. What? You say its not their fault? Hey, Pal, those Brennivin swilling seal hunters knew damn well they had active volcanoes in their country, and what have they ever done about it? Yeah, exactly, that's what I thought...now sit down.