A Casual Observers Guide to

the Greek Economy

May 2015

Ilias Lekkos
Irini Staggel
Anastasia Aggelopoulou
Dimitris Gavalas

Lekkosi@piraeusbank.gr
Staggelir@piraeusbank.gr
Aggelopouloua@piraeusbank.gr
Gavalasd@piraeusbank.gr

Piraeus Bank
4 Amerikis Street, 105 64, Athens, Greece Tel: (+30) 210 328 8187, Fax: (+30) 210 328 8605

researchdivision@piraeusbank.gr
Bloomberg Page: <PBGR>

A casual observer of the Greek political discourse should be excused for feeling completely confused by
the cacophony created by a litany of the comments regarding the issue of Greek sovereign debt
sustainability, re-negotiation, alleviation or even repudiation. While these comments reflect the
importance of these issues for the future of the Greek economy, the way this dialogue is conducted
obscures rather than clarifies the true nature of the problems that need to be addressed.

In what follows, we focus on some of the hot topics relevant to the Greek economy:
What has been the course of events since 2010.
Where we stand now regarding the business cycle.
What is the cyclical position of the Greek economy.
What is the state of affairs regarding the Greek debt.

GDP

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2000

2014

2013

10,000

2012

150,000

2011

20,000

2010

170,000

2009

30,000

2008

190,000

2007

40,000

2006

210,000

2005

50,000

2004

230,000

2003

60,000

2002

250,000

2001

70,000

2000

270,000

2002

Gross Fixed Capital Formation ( mn, constant prices)

2001

GDP ( mn, constant prices)

Gross Fixed Capital Formation

Private Consumption ( mn, constant prices)

Public Consumption ( mn, constant prices)

180,000

55,000

170,000
50,000

160,000
150,000

45,000

140,000

40,000

130,000
35,000

120,000
2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2014

2013

2012

2011

2010

2009

2008

2007

2006

2004

2003

2002

2001

2000

2005

Private Consumption

2000

30,000

110,000

Public Consumption

Source: ELSTAT, Piraeus Bank Research

Imports of goods & services

Exports of goods & services

( mn, constant prices)

( mn, constant prices)

100,000

65,000

90,000

60,000
55,000

80,000

50,000
70,000
45,000
60,000

40,000

50,000

35,000

Imports of Goods & Services

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

30,000
2000

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

40,000

Exports of Goods & Services

Source: ELSTAT, Piraeus Bank Research

Based on our two complementary methodologies of accessing the phase of the business cycle the
following picture emerges:
Since the middle of 2012 the Greek economy entered in an improving trajectory that culminated in a brief
period of GDP growth.
The recent rise of political uncertainty and instability is threatening to push back the Greek economy to a
recessionary phase.

Pro-cyclical and Non-cyclical components

of GDP (% change)

Economic Climate Tracer

1.0

expansion

downswing

Jan.'06

40.0

10.0

30.0

8.0
6.0

20.0
0.0

level

Feb.'15

4.0

10.0

2.0

0.0

0.0
-2.0

-10.0

-1.0

-4.0

-20.0

-8.0

-40.0

-10.0

Pro - Cyclical (YoY% change), LHS

2014Q2

2013Q3

2012Q4

2012Q1

2011Q2

2010Q3

2009Q4

2009Q1

2008Q2

2007Q3

2006Q4

2006Q1

2005Q2

2004Q3

2003Q4

2003Q1

0.15

2002Q2

mom change

0.05

2001Q3

-0.05

2000Q4

-0.15

2000Q1

upswing

contraction

-2.0
-0.25

-6.0

-30.0

Non - Cyclical (YoY % change), RHS

Source: European Commission DG ECFIN, Eurostat, Piraeus Bank Research

The downward revision of Q4-2014 real GDP growth rate to -0.4% QoQ minimized the momentum of the
Greek economy, drastically reducing the carry over effect to just 0.1% forcing us to revise our forecast for
real GDP to 0.8% and for nominal GDP to -0.9%.

Real GDP (YoY% change)

Nominal GDP (YoY% change)

15.0

8.0
6.0

10.0

4.0
2.0

5.0

0.0
-2.0

0.0

-4.0
-6.0

-5.0

-8.0

growth dynamics within the year

total % change

carry - over effect

growth dynamics within the year

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

carry - over effect

1996

-10.0

-10.0

total % change

Source: EL.STAT., Piraeus Bank Research

Given the substantial negative output gap in the Greek economy and taking into account the global
lowflationary environment, we expect the Greek economy to remain in a deflationary mode with inflation
at -1.2%.

HICP constant tax yoy% change

Inflation & Output Gap

Headline Inflation (CPI) vs GDP deflator

6.0

10.0

5.0

8.0

4.0

6.0

3.0

4.0

2.0
2.0

1.0

0.0

0.0

-2.0

-1.0

2015

2014

2013

2012

2011

2010

2009

2008

2007

GDP deflator

2006

2005

1.5

2004

1.0

2003

0.5

2002

Output Gap

0.0

2001

-0.5

2000

-1.0

1999

-1.5

1998

-2.0

1997

-2.5

1996

-4.0

-2.0
-3.0

Inflation

Source: European Commission DG ECFIN, EL.STAT., Eurostat, Piraeus Bank Research

Job creation schemes have supported employment in recent times but uncertainty is beginning to spill over
to the labour market.

Hiring Intentions (normalized data, sa, 3m moving

average) vs Employment (YoY% change, sa data)

Economic Growth vs
Unemployment rate
Yearly change % unemployment

6.0

4.0

2.0

0.0

-2.0

-4.0
-15.0

-10.0

-5.0

0.0

Real GDP (YoY % change)

5.0

10.0

6.0

1.5

4.0

1.0

2.0

0.5

0.0

0.0

-2.0

-0.5

-4.0

-1.0

-6.0

-1.5

-8.0

-2.0

-10.0

-2.5

-12.0

-3.0

Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
Jan-09
May-09
Sep-09
Jan-10
May-10
Sep-10
Jan-11
May-11
Sep-11
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15

y = -0.3998x + 1.0887
R = 0.6553

8.0

mployed (YoY % change, sa), LHS

Hiring Intention (3m ma), RHS

Source: European Commission DG ECFIN, EL.STAT., Piraeus Bank Research

The recent outflow of deposits and the dependency of Greek bank to the Eurosystem funding to the
turn of 104bn will have an adverse impact to the total credit formation, leading total loans growth
to -2.5%.

Total Credit

Total Credit (% of GDP)

20.0

4000.0

15.0

3000.0

280,000

125.0

2000.0

5.0

1000.0

0.0

0.0

110.0

-5.0

-1000.0

105.0

-10.0

-2000.0

-15.0

-3000.0

YoY% change - LFS

240,000
220,000

115.0

200,000
180,000
160,000
140,000

100.0

120,000
100,000

Outstanding amount (mn ), RHS

Greece (% of GDP), LHS

Q4/14

Q3/14

Q2/14

Q1/14

Q4/13

Q3/13

Q2/13

Q1/13

Q4/12

Q3/12

Q2/12

Q1/12

Q4/11

Q3/11

Q2/11

Q1/11

Q4/10

Q3/10

Q2/10

Q1/10

Q4/09

Q3/09

Q2/09

95.0
Q1/09

Jan-09
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Jan-10
Mar-10
May-10
Jul-10
Sep-10
Nov-10
Jan-11
Mar-11
May-11
Jul-11
Sep-11
Nov-11
Jan-12
Mar-12
May-12
Jul-12
Sep-12
Nov-12
Jan-13
Mar-13
May-13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15

10.0

net flow, mn -RHS

260,000

120.0

Euroarea (% of GDP), LHS

Source: EL.STAT., Eurostat, Bank of Greece, Piraeus Bank Research

One of the biggest side effects of the lack of liquidity and the political uncertainty is the high cost of
funding for Greek Corporates.

Average Real Interest Rate on New bank loans

(<1mn) to Non Financial Corporations

Piraeus Bank Greek Corporate Bond

Index Weighted Average Yield

(nominal rate minus change in HICP, %)

9.0

10.0

8.0

9.0

7.0

8.0
7.0

6.0

6.0

5.0

5.0

4.0

4.0
3.0

3.0

2.0

2.0

1.0

Source: ELSTAT, Eurostat, Bank of Greece, ECB, Bloomberg, Piraeus Bank Research

13/3/2015

1/2/2015

23/12/20

13/11/20

4/10/2014

25/8/2014

16/7/2014

6/6/2014

27/4/2014

18/3/2014

6/2/2014

28/12/20

9/10/2013

30/8/2013

21/7/2013

11/6/2013

2/5/2013

23/3/2013

11/2/2013

Q4/14

Q3/14

Q2/14

Q1/14

Q4/13

Q3/13

2/1/2013

Greece

Q2/13

Q1/13

Q4/12

Q3/12

Q2/12

Q1/12

Q4/11

Q3/11

Q2/11

Q1/11

Q3/10

Q2/10

Q1/10

Q4/09

Q3/09

Q2/09

Q1/09

Q4/10

Euroarea

0.0

18/11/20

1.0

0.0

10

One of the negative consequences of the increased uncertainty regarding the course of the Greek
economy is the trend (which occurs since early 2010) to hoard cash (ie banknotes) on the part of
Greek households.

Banknotes in circulation

GDP and banknotes in circulation

growth ( bn)

(% of nominal GDP)
70

25%

60

20%

50

15%

40
30

10%

20

5%

10

Greece - bank notes in circulation

Greece - net liabilities related to the allocation of euro banknotes within the Eurosystem
Eurozone

Q1/15

Q3/14

Q1/14

Q3/13

Q1/13

Q3/12

Q1/12

Q3/11

Q1/11

Q3/10

Q1/10

Q3/09

Q1/09

Q3/08

Q1/08

Q3/07

Q1/07

Q3/06

Q1/06

Q3/05

Q1/05

Q3/04

Q1/04

Q3/03

Q1/03

Q3/02

0
Q1/02

Q3/14

Q1/14

Q3/13

Q1/13

Q3/12

Q1/12

Q3/11

Q1/11

Q3/10

Q1/10

Q3/09

Q1/09

Q3/08

Q1/08

Q3/07

Q1/07

Q3/06

Q1/06

Q3/05

Q1/05

Q3/04

Q1/04

Q3/03

Q1/03

Q3/02

Q1/02

0%

bank notes in circulation ( bn)

Net liabilities related to the allocation of euro banknotes within the Eurosystem ( bn)
quarterly GDP_current prices_sa ( bn)

Source: BoG, ELSTAT, ECB, Eurostat, Piraeus Bank Research

11

Last time that the issue of the sustainability of Greek debt was seriously addressed by the institutions
was during the November 2012 Eurogroup meeting. The outcome of that meeting was very favourable
for the Greek economy. Yet Eurogroup had to satisfy two important, politically imposed, constraints:

Debt had to appear to be sustainable (based on IMFs sustainability analysis)

Estimated funding needs could not exceed the amount of 245 bn originally allocated to Greece,
i.e. no new money.

These constraints are satisfied under a unique set of conditions that maybe achievable in a physics lab
(or more appropriately in an Excel spreadsheet) but not in the real world. More specifically, debt
sustainability requires a specific trajectory for growth, inflation, Euribor rates, fiscal surpluses and
privatization revenues. At the same time the lack of new financing means that all fiscal surpluses, ANFA
& SMP profits and privatizations revenues have to be directed towards repaying Greeces external
debt.

12

The key feature of the IMF estimates are the overoptimistic projections of the initial reports (May 2010-July
2011) regarding deficits in 2010 and 2011, as well as the very high primary surpluses particularly between
2014 and 2020. A significant rationalization is recorded over time. The main feature is that the last three
reports (January 2013, June 2013 and July 2013) contain a much more realistic profile for 2013, 2014 and
2015, which progressively becomes less realistic from 2016 onwards.

Primary Balance (% GDP)

10

-5

-10

May 2010 (a)

July. 2011 (a/4)
June. 2013 (b/2,3)

Sep. 2010 (a/1)

Dec. 2011 (a/5)
July. 2013 (b/4)

Dec. 2010 (a/2)

Mar. 2012 (b)

Mar. 2011 (a/3)

Jan. 2013 (b/1)

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

-15

Source: IMF, Piraeus Bank Research

13

The profile of the price level evolution - as expressed by the GDP deflator - was also very aggressive for
2010 and 2011, while there was no provision for negative inflation rates in 2012, 2013 and probably 2014.
The actual inflation rate is well below what was expected in the initial reports and it certainly has an
aggravating effect on the intertemporal de-escalation of the debt as a % of GDP. As regards the period 20152020, the latest reports predict a gradual convergence of inflation with the targets of the ECB, namely just
below 2%.

GDP Deflator
4

-1

May 2010 (a)

July. 2011 (a/4)
June. 2013 (b/2,3)

Sep. 2010 (a/1)

Dec. 2011 (a/5)
July. 2013 (b/4)

Dec. 2010 (a/2)

Mar. 2012 (b)

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

-2

Mar. 2011 (a/3)

Jan. 2013 (b/1)

Source: IMF, Piraeus Bank Research

14

The interest rate profile in the 5 first reports (May 2010 to July 2011) ranged from 5% to 7%, which was
clearly unrealistic and unsustainable. On the contrary the 3 last reports (January 2013 to July 2013) reflect
both the decisions to reduce rates which were taken in February and November 2012 and the pragmatic
admittance that public debt can enter a de-escalation path only if financed at low cost. However, it is
interesting that, even in the latest reports, the borrowing cost of the Greek state stands at about 3% which
leaves room for further reductions.

Interest Rates
8

(a/1)
(a/3)

(a/2)

(a/4)

(a)
(a/5)

(b)
3

(b/1)
(b/2,3)
(b/4)

May 2010 (a)

July. 2011 (a/4)
June. 2013 (b/2,3)

Sep. 2010 (a/1)

Dec. 2011 (a/5)
July. 2013 (b/4)

Dec. 2010 (a/2)

Mar. 2012 (b)

Mar. 2011 (a/3)

Jan. 2013 (b/1)

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

Source: IMF, Piraeus Bank Research

15

The IMF predictions regarding the evolution of the privatization program may be the most striking example of
how the assumptions of the IMF methodology can be adjusted so that the conclusions converge on a more
desirable debt evolution.
The initial reports (May, September 2010) comprise a highly conservative estimate on the course of
privatization. Conversely, the subsequent reports have revised upwards the ability to raise revenue from the
sale of assets.
The extreme example is the report of July 2011 which predicted revenues of 50 billion for the period 20112015. In subsequent reports, the amount of privatization revenue has been limited; however it is possible
that these estimates may also prove to be overoptimistic.
Finally, for the correct valuation of the estimates - particularly in the initial reports - one must take into
account the fact that they did not include revenue from the sale of the HFSF bank shares and warrants given
the fact they had been drafted before the PSI and the recapitalization of the 4 systemic banks.

16

Privatization Revenue (in billions of )

16

14

12

10

May 2010 (a)

July. 2011 (a/4)
June. 2013 (b/2,3)

Sep. 2010 (a/1)

Dec. 2011 (a/5)
July. 2013 (b/4)

Dec. 2010 (a/2)

Mar. 2012 (b)

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

Mar. 2011 (a/3)

Jan. 2013 (b/1)

Source: IMF, Piraeus Bank Research

17

The following Chart depicts the successive revisions of the real GDP predictions by the troika and vividly
illustrates the inability of the IMF to predict with any degree of accuracy the recessionary effects of the two
economic adjustment programs on the Greek economy.
For example, it must be mentioned that according to initial estimates, the recession in 2011 would be limited
to -2.6% (against what was ultimately a recession of -7.1%), in 2012 it predicted growth of 1.1% (against an
actual recession of -7.0%) and in 2013 growth of 2.1% (against an actual recession of -3.9%).
It is particularly interesting that in September 2010 the IMF economists predicted an explosion of growth of
4.7% for only one year in 2016 and then a retreat to previous levels of 2.7%.
This prediction does not include any significant insight from the IMF staff on the causes of this important
growth of the Greek economy in this particular year. On the contrary, this prediction was necessary in order
to change the dynamics of debt in this September 2010 report.

18

GDP (constant 2005 prices, % of change)

6

-2

-4

-6

May 2010 (a)

July. 2011 (a/4)
June. 2013 (b/2,3)

Sep. 2010 (a/1)

Dec. 2011 (a/5)
July. 2013 (b/4)

Dec. 2010 (a/2)

Mar. 2012 (b)

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

-8

Mar. 2011 (a/3)

Jan. 2013 (b/1)

Source: IMF, Piraeus Bank Research

19

Based on the initial amount of Greek debt and the intertemporal evolution of all variables we have discussed
so far, the evolution of the debt as a % of GDP becomes clear. According to the first report of May 2010 and
particularly of September 2010, the sustainability of the General Government debt was a matter of minor
importance. Starting from the level of 115%, it would peak in 2013 at 144% and then the combination of high
growth, inflation and primary surpluses would lead to a decrease to 111% in 2020.
The defining moment, which raises the issue of sustainability as a key issue in the Greek programme and
which ultimately determines all subsequent developments, is the revision of the 2009 debt by Eurostat at the
end of 2010 from 115% to 127%. From that moment on Greek debt becomes problematic and despite the
significant reduction of the private sector debt (through the PSI process) in the latest reports it is predicted
that it will peak in 2013 at 176% and then rapidly fall to 124% in 2020.
In the last available assessment review of the European Commission (Fourth Review, April 2014, Occasional
Paper 192) the public debt is expected to reach its highest value in 2014 at 177.2% of GDP and it shall be
declining from 2015 onwards.

20

Public Debt (% GDP)

180

(b/1)
(a/4)

170

(b/2,3)
(b/4)

(b)
160

(a/3)
(a/2)
(a/5)

150

(a)
(a/1)
140

130

120

May 2010 (a)

July. 2011 (a/4)
June. 2013 (b/2,3)

Sep. 2010 (a/1)

Dec. 2011 (a/5)
July. 2013 (b/4)

Dec. 2010 (a/2)

Mar. 2012 (b)

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

110

Mar. 2011 (a/3)

Jan. 2013 (b/1)

Source: IMF, Piraeus Bank Research

21

From the mere presentation of the revision of the IMF forecasts regarding the development of the
public debt we can draw a number of conclusions:
i.

The valuation of debt sustainability is not a pure statistical modelling exercise.

ii.

On the contrary, it is the product of projections and subjective assumptions on a number of

variables over a long period of time.

iii.

Consequently, these projections involve a significant margin of error.

iv.

It is natural that the margin of error as well as non-realistic (namely overoptimistic) estimations,
are larger for projections regarding the distant future. As the time horizon of the predictions
shrinks, the predictions are (unavoidably) revised towards more realistic levels.

v.

In the first two reports of the IMF (May 2010 and September 2010) the debt dynamics were
problematic, but in no way could the General Government debt be treated as non-sustainable.

vi.

The revision by Eurostat of the total amount of the 2009 public debt by 12% of GDP (from 115%
to 127%) at the end of 2010 was critical. From this point onwards, the trajectory of Greek debt
enters non-viable levels and decisions to reduce interest rates in the formal sector and for the
debt haircut through PSI became inevitable.

22

The point that we are trying to make is that debt is one of the variables in that system of equations but
it is the end- rather the starting-point. Rather than starting a negotiation on the level of debt we
should start from a reasonable set of macro assumptions, allowing for achievable primary surpluses
that can be recycled into the Greek economy in the form of infrastructure spending and keeping
debt/GDP as a free variable which will be determined at the end.

If that exercise leads to unrealistic levels of sovereign indebtness at the end-horizon of the simulation
then corrective action should be taken to reduce the debt accordingly.

23

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