Sunday, 26 June 2011

A look at recent wage dynamics in Greece

If there is one datapoint that is extremely difficult to come by for Greece this is data for wages. I found some of that concerning industry and construction from Eurostat. Of course these two sectors account for a very small part of total economic activity in Greece presently but nonetheless the comparison with Ireland allows for some conclusions to be drawn.

Here is the chart for industry.

source: Eurostat

During 2008 when Greece was not in recession, Ireland was already there and during 2009 when Ireland was deep into it Greece was just testing the waters. Last year when economic activity in Greece plummeted, recession in Ireland was more contained. The reason for that? Well, one reason could be that its tradables sector is larger and export-oriented at that.

The result of this fact is the chart above; despite things being tight in the domestic market, wages of Irish industrial workers performed much better that the ones for Greece.

source: Eurostat

Even wages in the construction sector behaved better in Ireland and Ireland had a monumental-size bubble there. 

The fact that any fiscal adjustment that took place in Ireland was enacted not through the raising of indirect taxes (VAT) surely plays a significant role in the picture painted by the charts above. I think that VAT was even slightly reduced in Ireland in an effort to make things more manageable for people and businesses.

You can reach your own conclusions over what's happening in Greece right now and if it is done properly. The truth is that the present situation faced by Greece is not a result of the current policies, decades of non-existent policies and extremely bad choices brought us here. All illusions end at some point though and Greece is definitely beyond that point...

Thursday, 23 June 2011

A snapshot of the "good old days" in Greece

Here’s a snapshot of the good old days in Greece and how conditions in business and banking were back then.

source: Bank of Greece, own calculations

In numerous posts I’ve been blubbing about the severe shortfall of fixed capital investment in Greece. Besides regulatory, political, monetary policy and all other kinds of reasons you can think of add this one right here to that list. The crowding out of the private sector from the Greek public sector. 

As you can see in the chart above, from March 1998 up until Greece’s ascension in the EMU, loans to the private sector roughly matched Greek government bonds holdings as a % of total banking assets. This is as textbook a case of crowding out as it gets…

This chart has major implications for the future as well. If Greece finds itself locked out of international capital markets (something that already has materialized save for bail-out funds) could this be how banks’ balance sheets would look? Well, not necessarily, it depends on a multitude of factors, say for example ownership of the banks among others…

P.S. To be fair here I don’t know what the picture was the previous years but I can’t see many reasons to make me believe things were different…

Sunday, 19 June 2011

A focused look on some cases of sovereign default

For a while now I wanted to take a look at recent sovereign default/restructuring episodes. Here's a first take on this based on the so-called misery index which is computed by adding up  the unemployment rate and the inflation rate. 

Here are the misery index readings for the most prominent cases of sovereign default/restructuring (or the ones I could find if you prefer).

source: IMF

Argentina is maybe the better known case of default for most people. Argentina defaulted in December 2001. As you can see following the default misery index readings exploded upwards due to the surge in both unemployment and inflation.

source: IMF

Ecuador defaulted in September 1999. Here too after the event the misery index surged.

source: IMF

Moldova started restructuring proceedings in June 2002. After the event the misery index rose but not significantly.

source: IMF

Pakistan implemented an exchange offer in November 1999. After the event the misery index actually dipped.

source: IMF

Russia defaulted on its debt in December 1998. The index more than doubled during the year after the event but fell significantly the following years.

source: IMF

Ukraine after earlier efforts to restructure launched an exchange offer in February 2000. During 1999-2000 the misery index readings doubled cumulatively but quickly fell significantly afterwards.

source: IMF

Uruguay launched an exchange offer on its sovereign debt in April 2003. The year that the exchange offer was implemented as well as the previous year the index rose significantly to fall rather fast the next few years.
Some of the default/restructuring events were accompanied by large spikes in the readings of the misery index while others did not, what is the differentiating factor?

In my humble opinion the gamechanger is whether we are talking about a liquidity crisis of a solvency crisis. Liquidity crises' negative effects should be rather more contained while solvency crises in most cases should prove to be more painful.

To differentiate between the two I look at debt reduction following the event and the real GDP growth rate during the year of the event as well as the ones right before and after.

By these simple (and maybe not foolproof) criteria, the case of Moldova seems to be the less painful. I think that this was definitely a liquidity crisis. I think that the exact same goes for  the case of Pakistan.

Argentina's case seems to be rather painful, it definitely falls under the umbrella of a solveny crisis and it appears to be the most painful of the cases I mention in this post.

Uruguay's case was quite harsh too and I think that it was a solvency crisis too. It also appears that there was some kind of contagion from Argentina's earlier default.

Ukraine's case is a weird one. There is some significant debt reduction in the years prior to the event mentioned here at the same time that the misery index spiked. The event mentioned here is maybe the exhaust fumes of the whole situation. All in all I think that there was a solveny crisis in Ukraine prior to this particular event. Of course it is more than likely that I've got this wrong so please if that's the case and you know what actually went on please say so in the comments section.

Finally Russia's case is well known so I don't have to say much here. It was a victim of contagion from the SE Asia crisis of 1997-1998, the fall in crude prices as well as the fiscal knock-on effects of the Chechen war and other chronic weaknesses of the Russian economy. I think that we are talking about a solvency crisis here that escalated rather abruptly and is a case-study in what contagion actually means.

Sovereign defaults/restructuring events seem to be associated with a lot of pain and are not to be taken lightly, since this amount of pain being inflicted on people abruptly can have some rather adverse effects. Readings of the misery index do deescalate fast but some social scars may linger.

To wrap this up, the Greek crisis is a rather severe solvency crisis that could make all the ones mentioned above seem like small beer...

Thursday, 16 June 2011

Has US private consumption actually recovered ?

A commonly discussed theme is that private consumption in the US has recovered after the lows posted during the height of the crisis. (a good question would be if the crisis has really ended or whether it just has retreated for the moment waiting for the right moment to cast its venom again)

But is that so? Here’s the chart for Real Personal Consumption Expenditures.

source: Federal Reserve Bank of St. Louis

It is true that the figure for real PCE has recovered. But given that unemployment is still really high and more and more people are dropping out of the labour force it becomes obvious that there is an ever increasing duality forming in the US society.

What I think would be fit to help us dissolve the perils of aggregate measures like real PCE is trying to take population into consideration.

source: Federal Reserve Bank of St. Louis, own calculations

It appears that population-adjusted real PCE has not reached or surpassed pre-crisis highs after all.

All these basically mean that population grew with a faster pace than real PCE.

With unemployment that high and participation rate constantly falling people working have to support an ever increasing number of members of their households that are jobless or retired.

source: Federal Reserve Bank of St. Louis

Could this be the very fact that is keeping the US savings rate from increasing as much as some people expected?

One could think that this is out of place or grossly mistimed given the latest developments in my native Greece, but this is not quite so. It reminds me that things are not that rosy elsewhere and the so called economic recovery is not that robust. Maybe I’m totally exaggerating here but again maybe a little shove is all it takes to destabilize the economic recovery again…