Tags: Greece | Worse | Better | europe

In Greece, Things Will Get Much Worse Before They Get Any Better

Monday, 13 Feb 2012 01:05 PM

By Hans Parisis

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Greek Prime Minister Lucas Papademos, at the head of his Greek coalition government, has won the battle for “accepting” the austerity measures imposed by the so-called Troika, which are the IMF, EU and ECB.

The Troika not only required the Greek Parliament to vote “yes” to the additional reforms but also to explain how 325 million euros ($429 million) of budget cuts this year will be achieved before it agrees to the bailout.

They have also demanded that Greek political leaders “endorse and commit to these measures in writing.”

Finance Minister Evangelos Venizelos said Parliament needed to approve the deal otherwise Athens wouldn’t make the Feb. 17 deadline to submit the debt swap offer to its private-sector bondholders.

Interestingly, he added that Greece was being dictated measures “at gunpoint” and noted: “Make no mistake, the choice is for an orderly default within the euro.”

Today, the markets seem, for the moment at least, to consider this Pyrrhic victory in the Greek Parliament as a positive sign for putting “risk on” again.

Market participants’ short-term view/perception of “delusionary” positivism seems to be back. Well, let’s hope they are right.

Of course, that view doesn’t take into account the huge distance there is between an “insincere acceptance” and “implementing” the “impossible” conditions that was agreed on. Looking back at recent history we have learned Greece hasn’t been able to “implement” the majority of all the austerity measures that were agreed on over the past three years.

We should also not forget that Greece had never a current account surplus during the past 40 years. The country, and that’s before the new austerity measures will come into force, faces today a situation where 27 percent live below the poverty line, overall unemployment stands at 20 percent with youth unemployment practically at 50 percent.

How will they be able to start growing again is still a question that doesn’t have an answer for the time being.

Investors should keep in mind that conditions will, unfortunately, first get worse before getting better.

To me, I have no doubt that the accepted austerity plan won’t work and will be nothing more than winning some more time for getting another, but not the last, bailout tranche.

How long that will go on, no one can tell.

Meanwhile, the Organisation for Economic Co-operation and Development, or OECD, released its leading indicators (CLIs), which are designed to anticipate turning points in economic activity relative to trend, show signs of a positive change in momentum, especially in the U.S. and Japan.

The CLIs for India and Russia show signs of an upward change in growth momentum. On the contrary, the CLIs for all other major OECD economies, the euro area and Brazil continue to point to below trend growth.

However, the CLI for China points more strongly to a slowdown this month than in last month’s assessment.

Finally, tentative signs are emerging that the recent deterioration in CLIs is moderating, and the CLIs for seven of the 15 countries in the eurozone are now pointing towards a positive change in momentum.

There is no doubt that the economic picture in the U.S. is slowly (but probably too slowly) improving.

What still worries me is what Federal Reserve Chairman Ben Bernanke told the Senate Budget Committee in Washington: “It is very important to look
not just at the unemployment rate, which reflects only people who are actively seeking work … There are also a lot of people who are either out of the labor force because they don’t think they can find work or who have taken part-time jobs … The 8.3 percent no doubt understates the weakness of the labor market in some broad sense.”

To me, it’s still too early to start considering of taking on even what’s called “limited” risk in long-term investments.

I still consider we aren’t out of the woods yet. There are way too many uncertainties out there.

Not at least, now that China from its part, has also instructed its banks to embark on a mammoth roll-over of loans to local governments who own 10.7 trillion yuan ($1.7 trillion) in debts with more than half those loans scheduled to come due over the next three years and the principal on many of these loans can simply not be repaid, it’s clear that authorities want to avoid a wave of defaults and they feel obliged to kick the can down the road over there.

No, that’s not sustainable but these malpractices in China, in the EU, in the U.S. can go on for a long time before the system will hit the wall. But finally they will do.

So, before I will take positions, I would like to have more clarity.

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