Greek Recession Deeper Than Forecast, or Another Vindication of Independent Proprietary Analysis Over Government Propaganda?

The Guardian, UK proclaims:

Greece’s economy deeper in recession than forecast

• Second-quarter GDP in Greece estimated to have fallen by 3.5% year-on-year [Reggie's
note: I'd like to bring to your attention that this is a pace that is
over 11.5x WORSE than the projections that Greece used to get the
austerity package-based bailout!!! It is also much more in line with what we anticipated]
• Record jump in Greek unemployment prompts that crisis could intensify social unrest

Greece’s recession deepened more than expected in the second quarter of 2010 after the country was rocked by its financial crisis and a series of government measures to slash public debt.

Investment dropped and public
spending slumped in the three months to June as Greek politicians
battled to regain the confidence of financial markets and meet the
conditions of a multibillion-euro bailout from the European Union and
International Monetary Fund.

On the weekend of March
14th, 2010, ex EU Commissioner Prodi proclaimed the worst of the Greek
crisis was over. Many EU, ECB and Greek officials claimed Greeks issues
were overblown. I said, “Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!“.

There was also a fresh warning sign that the economic crisis could further intensify social unrest, after a record jump in unemployment. The crisis has already led to widespread industrial action and public protests.

With the fiscal squeeze only just starting, Greece is expected to remain mired in recession for the rest of this year.

The country’s ELSTAT statistics
office estimated that second-quarter GDP fell by 1.5% during the three
months, and was 3.5% less than a year ago. Those were steeper falls
than the quarterly 1% and annual 3.3% contractions forecast in a
Reuters poll of economists.

The falls were also sharper than in
the first quarter. So while many fellow European economies, including
the UK, were enjoying a quickening recovery out of recession in the
second quarter, Greece’s first-quarter contraction of 0.8% almost
doubled. The statistics office said that the deterioration reflected a
drop in investment and public spending cuts.

As excerpted from Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!“.

The Greek government’s macroeconomic assumptions also seem overstated when compared with EU estimates.

Now, its bad enough that Greece’s projections were more optimistic
than the EC’s projections, but if you look at how overly optimistic the
EC’s projections have been (actually you can just compare it to last
quarter’s results) you begin to see why I have been so bearish on
Greece. Let’s excerpt the bombastic piece, “Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!“.

The EU/EC has proven to be no better than the Greek government’s
unbridled and highly misleading optimism, and if anything is arguably
worse over time!

Revisions-R-US!

and the EU on goverment balance??? Way, way, way off.

Now for those who haven’t picked up on it yet, the entire Greek
government austerity program’s success is based upon the highly
optimistic (and already proven wrong) numbers forecast earlier this
year. This means that even with the IMF/EU/ECB bailout, Greece ain’t
gonna make it without more money. They have been over-optimistic on
revenue generation and underestimated the drag on the economy from
austerity measures, and have been counting by 1/2’s when it came to
expenses.

Of course, as the article cites, social unrest is again cropping up…

The economic crisis in Greece has
led to widespread protests, including clashes between demonstrators and
riot police. Photograph: Louisa Gouliamaki/AFP/Getty Images

This was addressed in our Sovereign Contagion model (Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!, subscribers see Sovereign Contagion Model – Retail (961.43 kB 2010-05-04 12:32:46) and Sovereign Contagion Model – Pro & Institutional)
and is woefully under-appreciated in its challenge to the will of
governments to follow through on politically unpopular austerity
measures. So, what happens if the projections are way off, or social
unrest tilts the scales? First restructuring, and defacto default,
then…. Economic and financial Contagion, that is what. Restructuring is
inevitable, and we have modeled it out for the most likely suspects. See
A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

Subscribers can download Greece Public Finances Projections
for a considerably more accurate and unbiased (yet still probably too
optimistic) view of what is going on in Greek finances. Please be aware
that we have run REALISTIC public finance analysis and haircut
estimations for all of the usual suspects: Greece, Portugal, Spain and
Italy – and have summed up the contagion threat for not only Europe but
the developed world as well as key emerging markets. Reference…

The BoomBustBlog Sovereign Contagion Model

Nearly every MSM analysts roundup attempts to speculate on who may be
next in the contagion. We believe we can provide the road map, and to
date we have been quite accurate. Most analysis looks at gross claims
between countries, which of course can be very illuminating, but also
tends to leave out many salient points and important risks/exposures.

In order to derive more meaningful conclusions about the risk
emanating from the cross border exposures, it is essential to closely
scrutinize the geographical break down of the total exposure as well as
the level of risk surrounding each component. We have therefore
developed a Sovereign Contagion model which aims to quantify the amount
of risk weighted foreign claims and contingent exposure for major
developed countries including major European countries, the US, Japan
and Asia major.

I.          Summary of the methodology

• We have followed a bottom-up approach wherein we have first
  identified the countries/regions with high financial risk either owing
  to rising sovereign risk (ballooning government debt and fiscal deficit)
  or structural issues including remnants from the asset bubble
  collapse, declining GDP, rising unemployment, current account deficits,
  etc. For the purpose of our analysis, we have selected PIIGS, CEE,
  Middle East (UAE and Kuwait), China and closely related countries
  (Korea and Malaysia), the US and UK as the trigger points of the
  financial risk dissemination across the analysed developed countries.
• In order to quantify the financial risk emanating in the selected
  regions (trigger points), we looked into the probability of the risk
  event happening due to three factors – a) government default b) private
  sector default c) social unrest. The probabilities for each factor were
  arrived on the basis of a number of variables determining the relative
  weakness of the country. The aggregate risk event probability for each
  country (trigger point) is the average of the risk event probability
  due to the three factors.
• Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure.
  The exposures of each developed country were expressed as % of its
  respective GDP in order to build a relative scale for inter-country
  comparison.
• The risk event probability of the trigger point countries was
  multiplied by the respective exposure of the developed countries to
  arrive at the total risk weighted exposure of each developed country.

It is strongly recommended that any and all with an economic interest
in Greek and Pan-European affairs review all 50+ articles in The Pan-European Sovereign Debt Crisis series. Those interested in subscribing to our research services should click here.

Comments

[jbc77]

When are EU estimates not way off? Are they that ignorant in financial analysis / forecasting? Or was the Greek bailout just another run of the mill money grab? Was it the best attempt to stave off giving those bonds a nice little haircut? The only questions left is when does the barber go to work and what in the hell is France goiong to do? This is going to be some wild shit when it breaks.....

[Hunch Trader]

Those are horrendous figures, especially the last table. Thanks for bringing this out, Reggie.

With figures like that, not surprised if euro falls to half vs everything in mid term future, and stays there for a long term.

[Leo Kolivakis]

Reggie,

There is lots of pain in Greece, no doubt about it, but if you actually bother to visit the country, you'll see that not much has changed. They overspent for years, corrupt politicians took in those Euro loans and built villas with them. But the biggest problem Greece has is tax evasion. The rich pay nothing. There is no real estate tax, so the cost of owning properties is zilch. And even though the cost of carrying property is nothing, real estate pries are starting to fall -- unheard of in Greece where for years everyone kept repeating to me "real estate never falls in Greece". Yeah right. Papandreou has achieved a lot, but his government needs to shore up the tax base, and they need an industrial policy. Unfortunately, he will be lynched in the next elections.

[Reggie Middleton]

I can't vouch for what's happening on the ground, but what the company reports and forecasts is materially different (to the negative side) than what actually happens.

I believe you're right about the tax base, but that will be near impossible to enforce for it will involve a sea change in culture + enforcment measures.

As for the PM, he may be lynched in the next elections, but it is doubtful that the next guy will be able to do any better. You have play the cards that you are dealt.

[traderjoe]

I'm with Reggie. The bailout was doomed to failure. Even going in the EU admitted that debt/GDP would be higher coming out in 3 years than going in. 

Leo, while your tax evasion point is well taken, austerity is a conundrum - as you tax more or spend less as a government, in the short term economic activity falls. This puts you even further from the ultimate solution. 

In reality, once you go down an economic path, structural changes are extremely difficult. Which turns Leo's "nothings really changed" argument from bullish to bearish. And the constant churning of politicians does nothing to solve long-term problems. It merely traps governments into continuously providing short-term sugar to the economy to get votes. 

Greece will default, and likely before the 3 year bailout is done. The EU will give up the ghost soon, as they realize they are throwing good money after bad.