Greece: A Snapshot

By the end of 2012, Grexit was a term firmly entrenched in the industry jargon. It meant Greece's exit from the Eurozone. All thanks to the billion dollar bailout packages extended to Greece by its Eurozone partners, this was averted. The worst case scenario being imagined in the above case was that of the collapse of Eurozone. Here's an analysis of the Greek economy.

GDP

As per 2012 data, Greece is a 250 billion dollar economy.  The highest ever GDP for Greece was recorded in 2008 at 343 billion dollars. In nominal terms, the exports in 2012 were about 35 billion dollars in value. Even though the exports have only seen an increasing trend over the years, the gap between exports and imports has widened substantially with imports being the highest in 2009 at $92 billion. In this year, the exports accounted for only about 20 billion dollars. The corresponding number for total imports in 2012 was 67 billion dollars.

Trade-dependence

It is the value of a country's total imports and exports as a percentage of the Gross Domestic Product. It is seen as a measure of an economy's openness in terms of free trade. Trade-dependence from 1980 to 2012 has hovered in the 25 to 35 percentage range. Trade dependence increased to 35 percent in 2009 as imports increased considerably to 92 billion dollars. Sum of imports and exports was about 112 billion dollars, for a GDP of $321 billion. In 2012, the trade dependence was 41 percent as GDP decreased substantially to 249 billion dollars and the sum total of exports and imports did not decrease much, remaining at $102 billion. As the base contracted, the trade dependence number jumped to 41 percent.

What went wrong with the Greek economy?

Greece had been running huge fiscal deficits for long. After the sub-prime crisis in US and the resulting repercussions that were felt around the world, Greece found it difficult to raise money to finance its spending. In fact, investors feared that Greece would default on its debt payments. Before this crisis set in, Greece's economy was growing at more than 4 percent. The Government's expenses had increased by more than 80 percent but the tax revenues had not kept pace, registering an increase of a little over 40 percent. A major chunk of this spending was being done on arms, salaries and pension. Therefore, nothing productive was expected to come out of the money that was being spent. To make matters worse, it emerged later that Greece was under-reporting the information on its fiscal deficit year after year and the number had even gone beyond 10 percent when it was reported to be near 6 percent. Greece was second only to US in its defence spending among all the NATO members. With the ever ballooning Government expenses and little to look forward to in terms of returns from the expenditure, lenders were finding it difficult to keep faith in the Greek economy. As recession hit the world in late 2008, there was little to be expected in terms of better GDP growth. GDP in nominal terms has only seen a downward trend since 2008.

Coming back to Greece's high debt/GDP ratio, it was hovering near 100 percent from 1991 to the early 2000s. Once the financial crisis set in, it was difficult for Greece to finance its spending. The situation deteriorated quickly in the last quarter of 2009. As investors feared a default, Greek debt was relegated to junk status. Other members of Eurozone extended to Greece a bailout package of 110 billion Euros in April 2010. This was followed by another bailout package in 2012 of about 130 billion Euros. These came with some conditions which included austerity measures on the part of the Government and privatization of certain assets in order to finance Govt. spending. It would only be after 2015 or perhaps even 2017 that Greece will be able to get private lenders to lend to it, given that at the time of the second bailout package private lenders had to agree to lower interest rates and a reduction in face value of assets by more than 50 percent.

Industrial analysis

Fuel and mining exports increased, from 4.4 billion dollars in 2010 to 16 billion dollar in 2012. Decrease in wage rates post 2009 may have had a role in this but this industry being capital intensive, investments over the years before the recession set in, have perhaps played a bigger role. Mineral fuels and lubricants are the chief exports in the fuels segment. Greece has huge deposits of Limestone, Gypsum, slate and Alumina. The subject of Gold mining has remained a bit controversial in the region.

Agricultural products continue to be a significant part of the country’s exports. Its share in exports has come down from almost a third in 1980 to 20 percent in 2012. A large decline in the share of agricultural products in exports was seen in the 2010-2012 period, coming down from 27.4 percent in 2010 to 19.4 percent in 2012. This was a reversal of the trend seen in fuel and mining products' exports.

Greece is a part of the European Union. Its major trade partners are European nations. Since 1995, Germany and Italy have been the leading importers of its products. In 1995, 21% of its exports went to Germany and 14 percent to Italy. By 2000, the share of Italy and Germany was 12 percent each. In 2010, it was Italy at 11% and Germany at 10%. Other trade partners of Greece are Cyprus, Turkey, Albania, Romania and United States. Cyprus gets 20 percent of its imports from Greece. The value of imports was 280 million in 2000; 1 billion dollars in 2005, the corresponding values for 2007, 2008, 2009 and 2010 were 1.4, 1.7, 1.5 and 1.4 billion dollars respectively. There was a reduction in exports to Germany, from 2.6 to 2.3 billion dollars in the years 2008 and 2010 respectively.

The pharmaceutical industry in Greece presents an extremely interesting case. In order to push for austerity while ensuring that its citizens get access to medicines, Greece implemented a 25 percent reduction in prices of many medicines. Although, this led to shortage of medicines as some pharma companies preferred not to supply to the country, there were other effects as well. More than 25 percent of the medicinal supplies to the country were being exported to Germany. Greece, then had to resort to an export ban on medicines. If this fact is not taken into account, it may seem that Greece was a major exporter of medicines.

Who decides China's fate?

Over the years, China has emerged not only as a major trade partner for countries across the world but also a major market for organizations, given the amount of money people have at their disposal and the demographic factors that come into play for the most populous nation in the world. The confusion over the path that the Chinese Government will be taking in managing its growth in the future, or even the kind of growth numbers it wants to achieve and the way it will go about doing that has led to speculation on China’s fate. The fall in the Purchasing Manager’s Index (PMI) value to 50.5, an indicator of slowing exports and lack of orders that can keep the engines of China’s growth well-oiled, has only added to the woes of emerging economies that are yet again seeing an outflow of money given the investor fears over their fate, as the ghost of QE tapering  is out to haunt them yet again. (I have written about Quantitative Easing in one of my earlier posts.)

The apparent confusion can be gauged from the fact that policy announcements have not been clear on whether China is going to curb its credit system to reduce the growth of credit which has become a major cause of concern. If efforts are indeed made in this direction, then the growth is going to stand at sub-7 percent levels for at least a few years in the future. While this has been indicated in one of the policy announcements, the information coming out from other quarters in the Chinese establishment has been that of insistence on keeping the growth engines running even at the cost of a spiraling credit demand. Banks have been on a lending spree as availability of cheap credit has been a non-issue with investors making a beeline for making a fortune out of China’s growth. Are the times changing? Well, investors are a worried lot these days. The shocks that China’s inter-bank lending rates experience from time to time, seen in June and even at the end of last year, have given credence to the theory that China’s credit bubble may burst soon and a sub-prime crisis like situation may emerge. The fact remains that sentiment drives investment more than anything else. For now, the sentiment is not in favour of China.

China is implementing long overdue social reforms. Its one-child policy has been tweaked a bit to allow more couples to have a second child. The Hukou system, which is akin to a regional passport or a registration of residence or birth and denies education and medical facilities to those not registered in a region, is being debated upon to bring about a change in the form of some relaxations. Social change is thus on the way. We all know that this was the more difficult of a change to bring about in China than something that concerns trade, banking or investments. If China can look ahead in terms of its society, rebalancing for better growth-management is certainly on the cards. If China has been able to manage its growth for decades, why should there be a question mark on its ability to give a new direction to it now? China’s fate lies in its own hands. No investor can afford to ignore an economy like China. All that is required is a clear indication on policy direction for the future.