One Man’s Opinion: Has The ECB’s Stimulus Program Failed To Drive The Eurozone’s Real Economy?

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92835431The looming elections in Greece have triggered higher volatility across asset classes as they remind of the so-called “Grexit” (Greece exit from the EU) episode that played out in 2010-11.

The first round of Presidential election will be held next week in Greece and if the government/ruling party fails to secure 2/3rd majority, the crucial third round will be held 29th December 2014 where the govt. must secure at least 60 percent or 180 votes out of 300 parliamentarians, said Christian Schulz, senior economist at Berenberg Bank.

The govt. has only 155 MPs (Member of Parliament) and it will be very, very difficult for the government to get the support of an additional 25 MPs. It will depend who they present as the Presidential Candidate; the ruling party is now presenting a former EU Commissioner Stravos Dimas, who is also a member of the current establishment, as the presidential candidate.

However, they may have to find a compromise-candidate for the crucial third-round if there’s a lack of consensus and some of the opposition parties then may decide to vote with the government. The process starts next Wednesday while the last round will be over by the end of the year, he noted.

Asked if some of the independent parliamentarians are likely to vote in favor of the government in order to save their own jobs as they may not get re-elected if an inconclusive presidential election results in general elections, Chris answered in affirmative.

The fact that the government has called for these elections shows that there is some hope, or even confidence, that they can convince enough opposition lawmakers. Many of the small Greek political parties are squeezed between the ruling conservatives and the anti-austerity main-opposition party Syriza. They are looking for excuses to vote for the government in order to secure their own jobs till 2026.

Asked if the opposition Syriza party-led government will be very bad for Greece, Chris said the party has already softened their stand on various issues. They have clearly stated they want to stay in the eurozone, which is quite a turnaround. However, their policies are inconsistent because Greece can’t remain inside the common-currency area by defaulting on its debt while increasing government spending simultaneously.

The markets are in no mood to lend them money; their European partners will not help them either if they approach them just after defaulting on public debt. So they have to amend their policies even further if they want to retain power.

That said, the whole process is still a very big risk and the West is very fearful the worst might still happen, he explained.

Current Greek Prime Minister Antonis Samaras undertook extensive economic reforms during his tenure. Asked how long it may take for the measure to bear fruit, Chris said it actually took a long time to implement the reforms. But Greece has probably made the biggest economic adjustments that any western country since the World War.

The government made massive fiscal adjustments – to the order of 15-16 percent of GDP in five years, which is a tremendous achievement. There were labor market reforms and minimum-wage was cut 25 percent.

The public-sector was trimmed while taxi and truck drivers lost their licenses; such difficult decisions would have hurt political sentiment anywhere in the world. But the reforms are beginning to pay-off – Greece is the second fastest growing economy in the eurozone this year. However, the growth has come at a price; the economy is still 26 percent smaller than it was in 2008 and 1.2 million Greeks are unemployed. Elections in 2016 would have been a better bet for the government than December 2014, he observed.

The results of the European Central Bank’s TLTRO (Targeted Long Term Refinancing Operations) to the euro-area banks were made public on Thursday, which showed banks only lapped up 130 billion euros. Taken together with the first round of funding that took place in 2011-12, the total amount adds to 212 billion euros.

Asked to comment, Chris said the latest round of funding is unlikely to help the ECB expand its balance-sheet by another 1 trillion euros. The net-effect is likely to be negative because by March 2015, about 270 billion euros in repayments by the banks will be realized. The balance-sheet expansion needs to come from other measures like purchase of asset-backed securities and covered-bond purchases. However, till now the covered-bond purchase was worth around 250-300 billion euros while the ABS purchase program was about 30-40 billion euros, which left behind a huge gap, he noted.

The point of the TLTRO is to try and extend credit to households and companies across the currency area. Asked if TLTRO is showing signs of success and if that would change if a full-fledged QE  happens, Chris said the ECB has released data till October.

October was also the month when the Asset Quality Review (AQR) took place and that probably spread some uncertainty among banks. The regions lenders will no longer be constrained from November and after the conclusion of the recent round of TLTRO, additional 83 billion euros have been made available to the region’s banks. But so far there has been no sign of success, he concluded.

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