The 'Depressing' Truth Of Greece's Insolvency

Tyler Durden's picture

Despite hope (and talk) that Greece is on the path back to recovery, our recent discussion of the record deflation the nation is undergoing (and record unemployment) suggests Stournaras propaganda is just that. As Bloomberg's David Powell writes, the embattled nation continues to push further into depression and a state of insolvency and appears highly unlikely to be able to reduce the domestic price level in order to restore competiveness and simultaneously avoid a second restructuring of its sovereign debt. Perhaps that is why Troika delayed its appearance in Athens as it is easier to ignore the truth that way? Especially as beggars, once again, will become choosers in the "grexit" debate.


Via Bloomberg's David Powell,

Deflation in Greece continues to push the embattled country further into a state of insolvency.

The EU-harmonized measure of the headline consumer price index declined 2.9 percent year over year in November, according to data released by the National Statistical Service of Greece on Monday.


The gross domestic product deflator dropped 3 percent year over year during the third quarter of 2013, according to Bloomberg Brief calculations based on the levels of nominal and real GDP. The decline in prices is likely to have been greater than the economists of the International Monetary Fund had forecast. In the public sector debt sustainability analysis published in the latest review of Greece’s bailout package, they assumed the GDP deflator would measure minus 1.1 percent in 2013. It was released in July.

The official inflation forecasts for the following years also appear high. The economists assumed the GDP deflator would measure minus 0.4 percent in 2014, 0.4 percent in 2015 and 1.1 percent in 2016. Those figures may fail to materialize as a result of spare capacity in the economy. The unemployment rate measured 27.3 percent in August, the latest reporting period.

That compares with a recent peak in May of 27.5 percent, which was the highest level since the birth of the monetary union. The Organization for Economic Cooperation & Development estimates the non-accelerating-inflation rate of unemployment to be 15.6 percent. That’s a gap of 11.8 percentage points. A period of sustained deflation appears likely.

The experience of Japan demonstrates the difficulty of overcoming deflation. Nationwide Japanese CPI, excluding food and energy prices, slipped into negative territory in September 1998, measuring minus 0.1 percent year over year. It failed to move into positive territory for almost 10 years, hitting 0.1 percent year over year in June 2008.

In addition, spare capacity was much less in Japan than it is in Greece. The unemployment rate in the former never rose above 5.5 percent during the period. That compares with the latest estimate of NAIRU for Japan from the OECD of 4.3 percent.

Deflation raises the real interest rate on Greek debt. For example, the average real interest rate would rise to 5.7 percent from 3.6 percent in 2013, to 4.8 percent from 3.1 percent in 2014, to 4 percent from 2.6 percent in 2015 and to 3.2 percent from 2.1 percent in 2016, according to Bloomberg Brief calculations. Those figures assume the GDP deflator troughs at its present level of minus 3 percent in 2013 and rises to minus 2 percent in 2014, minus 1 percent in 2015 and 0 percent in 2016.

Deflation also weighs heavily on the pace of nominal GDP growth. It would fall to minus 7.1 percent from minus 5.3 percent in 2013, to minus 1.4 percent from 0.2 percent in 2014, to 1.9 percent from 3.3 percent in 2015 and to 3.7 percent from 4.8 percent in 2016, assuming the real GDP growth forecasts from the latest IMF review of the Greek economy and the aforementioned alternate inflation profile.

The nominal size of the Greek economy would be much smaller in 2016 under the alternate inflation scenario. It would measure 199.2 billion euros using the baseline scenario of real GDP growth and inflation from the latest report of the IMF. It would measure 187.5 billion euros using the baseline scenario of real GDP growth from the latest report of the IMF and the alternate inflation profile.

A shrinking economy increases the relative size of a country’s sovereign debt. Greece’s debt-to-GDP ratio would measure 158.3 percent in 2016 under the baseline scenario of the IMF and 168.9 percent for the same year under the alternate inflation scenario.

Greece appears highly unlikely to be able to reduce the domestic price level in order to restore competiveness and simultaneously avoid a second restructuring of its sovereign debt.

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Joebloinvestor's picture

Hey Ukraine, see what you are in for?

Russia isn't any better ala Putin.

Groundhog Day's picture

It's a good thing that can't happen here in good ol USA

NoDebt's picture

Two years ago I said stick a fork in them- they're done.  Now the bird is just a charred lump in the oven.  Way past done.

You can stop cooking them now.  It's not helping any more.

MagicMoney's picture

Ha I said the same thing years ago too based on the tendencies of the Greek politicians themselves & their social democractic society that makes up Greece. Greece should of went bankrupt years ago, & left the Euro. The sooner the better I said. Just let them go.

WTFUD's picture

Fuck yeah right. just let the people who run greece, goldman go.

NEOSERF's picture

Japan's experience would say they can take more pain, maybe 5 years more...grind em into dust Troika...

layman_please's picture

who said troika? 

Troika lenders to Greece: what if you don't pay not a single pension in 2014? (!!!)

madcows's picture

the depressing reality is that the rest of the world is no different than Greece.  They just realized it first.

TruthInSunshine's picture

The average (now) impoverished Greek raises his eyes & fists to the skies and cries out, and begs the Heavens above for MOAR INFLATION (so they can have even LESS purchasing power).

ejmoosa's picture

Why is facing reality depressing?  Is it because sooner or later, you can make the hard choices, or the hard choices will be made for you?

CrashisOptimistic's picture

A walk down memory lane:

1) Greece, with the help of GS, lies about its financial affairs and qualifies for EU membership.

2) The tide goes out and the shortfall becomes apparent, with most of the risk held by private banks -- which were subject to unknown totals of credit default swaps that would trigger on bank default, derived from sovereign bond default.

3) The ECB, EU and IMF troika forms to find ways to ensure Greece cannot default and trigger swaps worldwide.  "Ways" turn into loans.

4) Loan conditions are imposed (austerity) to force the government of Greece to gut its people's benefits and raise taxes.  Golden Dawn rises in popularity as the people don't accept that "we must borrow more of this money to keep the wheels turning or it will be far worse".

5) The Greek coalition persuade a majority that indeed it would be far worse if they default, can't borrow money to buy oil or anything else.  People would die outright.

6) So the mega deal is done and the Troika insists on severe austerity and also private banks agreeing to extend the maturity of their Greek sovereign debt holdings many decades forward, which is not declared to be a swap triggering default event regardless of them all having a lot less hair afterwards than they did before.

7) Among the banks forced to agree to this are the major banks of Cyprus, who had extensive Greek sovereign holdings.

8) This process repeated 3 times for various tranches of loans.  Each time generated riots, but no significant bloodshed.

9) The Greeks now approach primary surplus.  It has been pointed out that this negates item 5.  They now COULD default without immediate negative consequences.

edotabin's picture

Simply because reality is usually far more depressing than beautiful stories.

What if all these years you were led to believe in an alternate reality? What if you don't know what reality really is?

I think this is why ZH is popular isn't it?  We know choices are being made for us and we are here in an attempt to remain one step ahead.

Joebloinvestor's picture

Nothing will be fixed in Greece until they get property ownership fixed and the crooked politicians purged.


PontifexMaximus's picture

Greece is still on the map, it still exists, people are waking up, driving to work, business as usual. Who the hell once for ever cares? Unless there are 10k of death every day in a row, a big, big yawn and:.......bullish!

Peter Pan's picture

Did you say driving? Work? You obviously missed the bit about 27% unemployment and you may not be aware of the hundreds of thousands of cars that have been withdrawn from circulation to avoid taxes,

Why should you care? Because when Greek shit hits the fan it will spread far and wide unless they agree to write off her debt and to revalue gold.

Peter Pan's picture

The deflation in Greece is a myth. When prices fall 3% even for three years in a row but wages and pensions have fallen by multiples of that, you can see why the average Greek is suffering from massive inflation.

This is just another reason why banks will come under more pressure as people with falling incomes will not be able to service debts. So what will happen first? grexit or haircut to savings?

Peter Pan's picture

Who is the idiot who down voted me? LOL. How do you explain property vlues in Greece being down by 50% but few sales taking place?

How about a reaoned response rather than a gutless down vote.

Or are you just a tourist who has benefited from lower prices?

edotabin's picture

I didn't down vote you but to anwer your quesion as to why no property is being bought despite the 50% drop in price:

1. The price drop is even greater than 50% in many cases

2. The government is not stable and the remaining choices are truly scary. Would you invest in such a climate?

3. Property used to be tax free.  Taxation on property is a new and unknown entity. Combine that with the fact that they are constantly changing, adding and rasing those property taxes.

4. Virtually everyone with money has tax problems.

5. It is hard for people to imagine just how badly things have deteriorated in comparison to the way they were. Reading the odd article on ZH doesn't begin to remotely cut it.

6. Greece is no stranger to hardship but they could always count on each other to get by. They could rally around a cause. This time the rug was pulled out from under everfyone's feet, especially the government's which so many people had come to rely on. Their spirit has been broken, there is no real cause to rally around and many simply do not know what's really happening.  Sure, they will scream at the banks and the imperialist pigs and this and that.  It is one thing to display the usual knee-jerk reaction and another to truly understand, realize and accept what's happening.  Think of it as all the smart-ass comments and snyde remarks many people write here. It's one thing to write remarks and an another to wake up and realize you have nothing. There is just a difference in the level of gravity between the two. Lastly, Greeks are world class theorists. When it comes to practice, it takes a while.

7. You can get a 1200 sq ft. apartment  for about 25-30k Euros.  Not that steep by any means. Why not buy a few? What will you do when others don't pay the maintenance fees? Who will pay for the CAM fees such as electricity for the elevator etc? Who will perform the necessary repairs?

8. Nobody will rent your property other than perhaps 10-15 refugees from Pakistan. It takes "slum lord" to a new level.

9. Everyone who could, left ( approximately 200k) Brain drain, resource drain, youth drain.

The place has been gutted out completely. The only thing standing of old is the Parthenon.  I am exaggerating to make a point but you get my drift. It is not an economic climate that you go into. You run as far and as fast as you can.

Hopefully this satisfies the "reasoned response" parameter set in your above message.

Peter Pan's picture

Your answer in other words agrees with what I have said. My point about property sales is that despite the price drop wages and jobs are not at a level that inspires property purchases.

The truth however is that Greek construction is miles ahead of the cladded crap you see in the USA.

Greek politicians are either on the take or the Euro masters have dirt files on them which makes them do as they are told. Why else put up with a losing austerity strategy for so long?

edotabin's picture

Not only are wages dropping with more to come. The place is simply not stable.

When they are not skimping on the quality and quantity of the materials, they can build well. No maintenace though. They will buld a spectacular bridge or stadium and then 7 years later........ The reasons are not only monetary. It is a cultural thing too.  Hard to explain but it is.....

The last point is easy to make but lengthy to properly answer.  Just let's say they had lost their way. They were and are disillusioned. That has deteriorated into hopelessness and confusion. Kinda like when the latest app won't cure the ills of the youth here in America. They'll keep tapping the 5.5 in AMOLED screen but the problems won't magically vanish type thing.  Not poking fun here..... Mentally and emotionally they simply brought a knife to a gun fight. They were not perpared.

MS7's picture

"Greek politicians are either on the take or the Euro masters have dirt files on them"... Exactly!. A lot of people outside Greece don't realize this and think the Greek politicians are engaged in hard negotiations.  The Greek people have to set up a new government and put the old politicians on trial before it is too late (if it's not already).

ejmoosa's picture

What if inflation or deflation was measured not in costs relative to currency, but in costs relative to a unit of work?

I bet that paints a very different picture.  I bet Greece has salaries dropping faster than the cost of goods....

OldE_Ant's picture

I guess nothing left to 'bail in', and greeks (rightfully so) are bailing out.

What is interesting isn't how bad it is, but how no-one seems to be correcting the financial trajectories for negaitve growth.

Following the trend Greece will be at -10% inflation sometime in 2017/2018.

I think it's funny this shit is so bad that ECB and europe just wants to ignore it.    Won't take long till the entire country of Greece looks like Detroit.   That of course will start spreading to the periphery, just like in the US because the signals meant to induce change arn't being allowed to feed back into the system anymore.

This is a worldwide phenomena btw, and why when the recent bubble collapses it's going to be the mother of all bubbles that will hit all countries very hard.  No-one will be immune.

At that point is when war breaks out.

Jack Burton's picture

Greece's situation brings the subject of the current Ukranian drive for EU membership. Ukraine is 10 billions dollar short of paying it's budget obligations. This is fact, by next year Ukraine will default on things like pensions, health care, military spending and administration, IF that 10 billion does not come from somewhere. Since Ukraine's economy looks to fail even more badly, economic growth will not make up the 10 billion.

The EU has demanded that Ukraine lower it's fuel subsidy to people, this wil cause a 40% gas price increase in one step. Add to that the missing 10 billion and the failing economy and Ukraine is not in a simple yes or no postion to sign an EU deal. Nobody knows for sure. but to meet EU standards of administration and product quality to allow exports to begin is going to be costly to the tune of at least another 10 billion dollars. This money does not exist. Protestors probably do not know what the EU is demanding of Ukraine.

Here is the long and short of it. Only loans, big loans can keep Ukraine solvent for now. Only bigger loans will be able to fund the transormation of Ukraine's government and industry to meet minimum EU standards. And fuel is now very cheap due to Russian and Ukrainian subsidies. That is being ordered to go away by the EU.

Here it is. "Where does all the billions come from?" Only loans can provide it. The EU directly or IMF will have to laon this money, Ukrainian taxpayers will owe the priciple and interest going forward. JUST LIKE GREECE. Only austerity can provide the money to service these new debts.

Okay, I accept western Ukraine wants in the EU, but they have NO idea what this is going to do. Greece is the perfect example of where Ukraine is headed. I would like some of those who favor the current protests and the EU agreement to just admit that these problems exist and that these problems are why Ukraine failed to sign. Going forward Ukraine must borrow, and if they go to the EU, they must borrow orders of magnitude more next year and on and on. Greece is their future.

I know for a fac tthat Eastern Ukraine is well aware of this and that they will not remain passive if the western Ukraine signs on for EU dent slavery. The industrial east and the Crimea will both seek Russian support and both will ask for independence from Western Ukraine. For all it's troubles, Ukraine is also headed for a civil war that it can not win. Sadly, the only solution I see is partition under the UN. East and Crimea go their own way, and Western Ukraine can sign any deal with the EU it likes. They will be debt slaves like Greece. This is sad, but it is reality. Ukraine is functionally bankrupt, and protestors ignore this at their peril. With it's people and resources Ukraine should be rich, but like Argentina is is so corrupt from top tp bottom it can not make use of god's gifts, it all goes to corruption, greed and theft.

Greece is the model for nations like Ukraine who are simply very sick economically and socially.

Fuh Querada's picture

excellent post and you hit the nail on the head. EuSSR or USSR, take your pick Ukraine.

starman's picture

all those EU  nations except Deutchland will have to 

"reset" or do as Hungary! monetize your currency to freeyourself from IMF! 

NoWayJose's picture

In 'ye olde days' a country suffering from a depression would be allowed to have deflation and corresponding drops in income, housing, food prices, etc - until the economic re-set happened.  There would be a default on debt and likely a 'new' currency.  The country could then begin a recovery.  In the 'new global economy' this is not allowed to happen.  Greek wages and jobs have collapsed, but now global investors and retiring Germans swoop in to grab prime Greek housing - meaning the home prices do not fall to match the drops in income.  Many types of food are no longer grown in Greece, but are now 'imported' from countries that have no interest in lower prices in Greece.  Same with nearly all manufactured items, either from Germany, China or other countries that still 'make' something.  Debt is never allowed to default anymore - because it is no longer held by domestic banks - and the EU doesn't want the debt default passed from the Greek citizens to the big EU banks.  Greece has become a Zombie - a Walking Dead - the body keeps moving but eventually some event will deliver the final blow and allow the inevitable economic re-set to finally happen -- almost certainly outside the EU.

pashley1411's picture

The answer is that the prevailing spirit of the age is a mighty effort against change, of any kind, but, especially, against change in income.   

Every tool of government and government policy is thrown into the breach to keep the rentier, retired, middle and upper classes solvent and in the income bracket they aspire to.

As has been said many times before, this isn't going to end well.

icanhasbailout's picture

I know what this calls for - another bailout!

WTFUD's picture

Iiizzz been to places much worserrer than greece; new jersey for one.

Martel's picture

Hey, looking good. Brussels Peace Project right on track. Countdown to civil war 10...9...8...

SweetDoug's picture




  The unemployment rate in the former never rose above 5.5 percent during the period. That compares with the latest estimate of NAIRU for Japan from the OECD of 4.3 percent.


You finance guys will forgive me, but WTF is the problem with 'deflation' if you have unemployment at 5% or less? Ah… less food and energy! WTF do you want! What's left!?

I LOVE DEFLATION! I SAVED MY MONEY. Now I'm punished for it?!?! GFY!

Each year I LOSE money, with deflation. Maybe I'm just one of those 99% conspiratorial types, but WHY do I have to put up with it!?

F the FED and their antinflationary measures.



Notarocketscientist's picture

And now that winter is upon us and Greeks are further impoverished - how will they keep warm?


Now keep in mind, before the advent of coal there was a crisis of deforestation in many parts of the world - just imagine what is going to happen when Europe, North America and other places with freezing winters go bust...


People will not be able to afford to keep warm - so what will they do?


You got it Pontiac!   The world is going to resemble Haiti in the near future - every tree will be cut down and burned.


So much for prepping for the future - there is NO future. 

Debugas's picture

that has happened in Bulgaria - last year people could not afford to pay electricity bills and went to the streets and scared the government to death