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.