Monday, 20 May 2013

Fixed Investment in Greece: a faint glimmer of hope...?

These past few years, after the sudden stop in market-derived external financing, Greece has been going through an extremely painful current account adjustment.

Since the current account can be expressed as the difference between national gross savings and gross capital formation, one way to view current account adjustments is through the interaction of these two figures.

As far as Greece is concerned, up until 2012, adjustment was borne solely through gross capital formation, which has plummeted. On the other hand, 2012, was the first year that savings made the largest contribution to the adjustment.

source: Eurostat, own calculations

A (-) sign in the chart above implies that changes in the two figures go towards narrowing the current account deficit, while a (+) sign towards widening it.

To put a bit more perspective of the damage done by the plummeting of fixed investment I would like to post one more chart where the consumption of fixed capital (i.e. depreciation) is added.

source: Eurostat

The past two years, consumption of fixed capital exceeded gross fixed capital formation, meaning that Greece’s net capital stock decreased. Something which in turn means that Greece’s potential GDP shrunk as well. 

One of the few things that more or less all commentators agree, is that Greece’s tradable sector is miniscule and needs to grow in size. One of the greatest pathogenies present in Greek modern economic reality is the unbelievably distorted allocation of resources. Greece is the only EU country where, for the length of the time for which data are available, fixed investment in equipment not once exceeded investment in dwellings. In all other cases that this was the case, the countries concerned were said to be in a housing bubble (i.e. Spain, Ireland in the 00s). For Greece though this was everyday life. 

In Q4 2012, for the first time since data run, investment in machinery and equipment exceeded that in dwellings as a % of total.

source: Eurostat

Viewed in the context of the prevailing situation, this occurrence though is hardly something to celebrate since it is more akin to a race to the bottom. Both categories of fixed investment are shrinking fast and the said fact is a matter of which one is decreasing at a slower pace.

For the first time since the depression kicked in though, investment in machinery and equipment increased in Q4 2012.

source: Eurostat
It now remains to be seen whether this is a one-off apparition or the start of the very much sought-after rebalancing. Fingers crossed that this is a case of the latter…


Wednesday, 1 May 2013

The Greek government bonds' haircut and the fall in the Greek current account deficit...

Greece’s current account deficit decreased significantly in 2012. That is valid both when expressed as a % of GDP as well as in absolute numbers. 

source: Eurostat

In this post I’m going to ignore all other factors leading to that and zoom in on the least lauded of them all, the fact that the income deficit plummeted.

source: Eurostat

Since I haven’t heard (or read at that) anywhere why that is the case, I’m going to take the long way round.

One of the components of the income account is, income on debt. I will focus on the debit side of the ledger here, so we are talking about interest paid on debt. 

source: Eurostat

As you can see from the chart above, the fall that the debit side of the income component recorded in 2012 corresponds to a fall in interest paid on debt.

This fall is an absolute match for another figure that is especially talked about in Greece the past few years, namely, interest paid on government debt.

source: Eurostat

It seems that the haircut/restructuring of Greek government bonds is one of the main reasons that account for the fall in the current account deficit.