Week in review: fears rise over Greece
The talks between the new Greek Government and its official lenders have felt like a rollercoaster to the financial markets over the last couple of weeks. The main issue of discontent currently is about a bridging programme that would alow the Greek Government to continue to pay for debt and civil servant’s wages while negotiating a debt restrucutring programme, between the 28th February, when the current programme ends, and June. The EU, the ECB and the IMF all want Greece to enter a new programme with the troika but the Greek government has indicated it wants to issue up to €10bn in more short-term debt rather than accept the next bailout tranche worth €7.2bn, that is due pending a review. It also wants €1.9bn in profits from Greek bonds held by the ECB and other eurozone authorities. These funds would allow the Greek Government to continue negotiations.
Even if the Government sucessfully finances its requirements for the next five months, the actual debt renegotiation issue also appears to be doomed to fail. Most European Governments as well as the ECB fiercely oppose it. The draft proposal by Finance Minister Varoufakis includes swapping debt held by EU countries for growth linked bonds and swapping the debt held by the ECB for perpetual bonds. The first, would increase the sustainability of Government debt but would probably lower interest payments significantly. The second one would be tantamount to debt forgiveness, which would violate the Treaty’s principle that the Central Bank cannot finance Governement spending.
The scheme below shows the major options facing both parties. At this stage, both parties want to avoid the Greee exit (Grexit) scenario, possibly the worst outcome, whereby Greece leaves the euro, but probably not the EU. In that scenario, Greece would go through a very sharp recession, the drachma would depeciate sharply, the Government would find it impossible to fund itself on the financial markets and probably default on its current debt (that would remain denominated in euros). The economy would go through an exceedingly hard adjustment process, unless the Central Bank started printing money, which could lead to hyperinflation. For the EU, the main source of concern under that scenario would be the potential impact on the more fragile countries, such as Portugal and Spain, that would become targets for the markets as potential euro area leavers.
The best scenario, which would involve some sort of renegotiation of debt, would still lead to a moderate recession and a painstakingly slow recovery, accompanied by some economic reform, probably mostly directed at high net worth individuals and fighting corruption.
Both sides hope that the fear of the wort scenario will yield the other party, but so far it appears that everyone is digging their heels in and there are no signs that the negotiations are even likely to start any time soon.
Turning to data releases, in the EU, in 2013, gross inland energy consumption1 , which reflects the energy necessary to satisfy inland consumption, amounted to 1 666 million tonnes of oil equivalent2 (Mtoe), back to its early 1990s level and down by 9.1% compared to its peak of 1 832 Mtoe in 2006. This decline in energy consumption is mostly a reflection of the economic downturn, and, to a lesser extent, to energy saving measures. Inflation in the euro area fell from -0.2%yoy to -0.6%yoy, due to a further decline in energy prices. Excluding energy and unprocessed food, core inflation fell from 0.7% to 0.5% in January. The decline inflation and its potential effects on inflation expectations has been the major driver for the new ECB QE announced in January. The unemployment rate edged further down to 11.4% in the euro area, after several months of stabilisation at 11.5%.
In Portugal, industrial production was down 0.8%mom in December after -8.7%mom in November. The yoy rate rose from -5.6% t +0.7%. In Q4, IP was up 3.3%q0q, thanks to a strong rise in October. This adds upside risks to our Portuguese Q4 GDP forecast of -0.1%qoq. The unemployment rate was 13.5% in Q4. This value is up 0.4 percentage points (p.p.) from the previous quarter and down 1.8 p.p. from the same quarter of 2013. the number of unemployed rose 1.4%qoq and fell 13.6%yoy. Employment fell by 1.6% qoq (less 73.5 thousand people) and rose 0.5% yoy. The unemployment rate stood at 13.9% in 2014. The labour market numbers continue to deteriorate after a sharp improvement in the first nine months of the year, possibly due to changes in the terms of the Government labour market active policies.
Week ahead: All eyes will remain on the Greek situation, with an important EU ministers meeting taking place on tuesday.
Friday 13 February: Euro area GDP, including Portugal, will be released. Analysts expect it to remain unchanged at a meagre 0.2%qoq.