The Bad News First – Greece is Crashing Again

We only recently reported on the ludicrous idea of Greek prime minister Antonis Samaras to pretend that the Greek government is suddenly not bankrupt anymore (see: “Greece Tries to Escape Bail-Out” for details). Note that non-performing bank loans in Greece stand at an estimated €90 billion, so it should also be kept in mind that the banking system remains de facto insolvent as well – in spite of having been bailed out once already.

It is probably getting more so in recent days – Greek stocks and bonds have essentially crashed, with government bond yields back at levels that normally indicate severe crisis conditions (in other words, they are way above the level that would allow for what is generally considered “sustainable” refinancing of the government’s debt). The Greek stock market meanwhile is very close to getting cut in half once again:

The Athens General Index has been in free-fall lately 

The real drama is however playing out in government bonds. Below is a chart of Greece’s 10 year yields. It sure looks like a full-blown crisis is back:

Insert the Greek equivalent for “Mamma mia!” or “sacre bleu!” here. Greek 10 year government bond yields take off like a scalded cat – click to enlarge.

This can’t be good. And it happens just as Mr. Draghi seems to have problems convincing the frugal inflation-haters in Germany of the need for full-blown “QE”.

However, good things are happening in Europe as well …

The Good News: Italy is Saved – by its Drug Dealers and Hookers

We also just learned that Italy has followed the lead of other EU countries and is now “estimating” the economic value of drug dealing, prostitution and other black market activities so as to add them to its official GDP data. Thus, Mr. Renzi no longer has to worry as much about the deficit-to-GDP ratio, which the fiscal compact enforcement bureaucrats in Brussels insist must be kept within agreed upon limits. In fact, due to the diligent work of its criminal class and its prostitutes, Italy is no longer in recession!

“Italy learnt it was no longer in a recession on Wednesday thanks to a change in data calculations across the European Union which includes illegal economic activities such as prostitution and drugs in the GDP measure. Adding illegal revenue from hookers, narcotics and black market cigarettes and alcohol to the eurozone’s third-biggest economy boosted gross domestic product figures.

GDP rose slightly from a 0.1 percent decline for the first quarter to a flat reading, the national institute of statistics said.

Although ISTAT confirmed a 0.2 percent decline for the second quarter, the revision of the first quarter data meant Italy had escaped its third recession in the last six years. The economy must contract for two consecutive quarters, from output in the previous quarter, for a country to be technically in recession.

The new system, known as SEC 2010, aims to facilitate comparison of data between countries, regardless of whether or not they have legalized prostitution and decriminalized drugs – activities already included by some in their GDP calculations.

The revision brings a bit of extra breathing room for Prime Minister Matteo Renzi’s government, which is struggling to boost the economy and implement reforms whilst keeping the deficit below the EU’s 3.0 percent ceiling.

Black, or undeclared, market revenues are also expected to help reduce Italy’s debt to GDP ratio, which stands at a 132 percent, more than twice the EU ceiling of 60 percent.

(emphasis added)

“Hallelujah!” is probably not the most suitable expression to use in this case. “Oh joy!” likely hits the mark better. Just saying.

Of course, all that is left now is indeed for the Vatican State to also adopt this innovation to prettify its GDP.

Conclusion:

Greece has always been a hopeless case (our guess would be that not even adding illegal activities to its GDP is going to help much), a fact that has merely been temporarily suppressed by irrational faith in the omnipotence of the ECB.

Italy on the other hand, while also a hopeless case in many ways, is at least still able to demonstrate that there are many ways to skin a cat, as the saying goes. If 25% of your manufacturing industry disappears into a black hole, don’t worry! Just replace it with a few interesting and hitherto ignored service sectors, et voila! – you’re back in compliance with the EU’s fiscal rules and your economy grows once more.