Greece's fable continues to unravel
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Greece's fable continues to unravel

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Greece's crisis deepens as fast as its debt. 2011 budget execution is terrible with tax receipts well below plans, and there is no way Greece will get out the crisis without defaulting on its debt ...

Greece's crisis deepens as fast as its debt. 2011 budget execution is terrible with tax receipts well below plans, and there is no way Greece will get out the crisis without defaulting on its debt obligations one way or an other (the latest idea is to call it "reprofiling"!) .

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Greece's fable continues to unravel Document Transcript

  • 1. http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/ Greece’s fable continues to unravelIt could have been the scenario of a TV series, but it will not last over as many years as toDallas or The Expert did.The past two weeks have been rather rich with events:3rd May: Portugal agrees to a 3 yr EUR 78 billion funding from the IMF and Europe.6th May: An article published in Der Spiegel magazine says Greece may leave theeurozone.Unscheduled meeting in Luxembourg of several eurozone Finance Ministers (France,Germany, Greece, Italy and Spain in addition to the President of the Eurogroup, Jean-Claude Juncker, the ECB President, Jean-Claude Trichet, and the European commissionerfor economic and monetary affairs Olli Rehn).8th May: rumors emerge of an additional loan to Greece anywhere between EUR 25 to 45billion9th May: S&P downgrades Greece from BB- to B with negative watch joining the highlyspeculative bandwagon; now we are halfway from investment grade and default. Moody’sputs Greece under credit watch with potentially a multi- notch downgrade.10th May: IMF and EU experts arrive to Greece to discuss the budget execution progressand I guess a maturity extension of the EUR110 billion rescue package together with aninterest rate reduction plus any additional “adjustments” i.e. new loans.15th May: meeting in Berlin between Angela Merkel and Dominique Strauss-Khan (pulledby the Police In New York out of an Air France flight because of an accusation of sexualassault!)As a side question, I would really be interested in knowing who in Germany did leak theinformation to Der Spiegel (since the source seems to be German, even if I wonder this isnot playing in the Greek’s hands to extract more palatable terms by threatening to leavethe Euro): budget hawks to pressure the Chancellor Angela Merkel not to give awayanything? Germany to weight on Greece and other EU countries to come to their terms?Any other?I having no way to know where the truth lies, and can only use conjectures, I thereforeprefer to focus on hard facts, as validated by Eurostat: • 2010 Government deficit/GDP: 10.5% (just as a reminder: 8.1% were targeted when the rescue package was agreed last year, 7.6% in 2011 and 6.5% in 2012) 1
  • 2. http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/ • 2010 debt/GDP: 142.8% (worse than my May 2010 forecast of 132%, yet rather deemed to be on the doom side at the time) • 2010/2009 debt: + EUR 29.9 billion • 2010 debt maturing: EUR 40.5 billionIn addition: • Debt issuance in the market: only 13 and 26 weeks T bills were issued since mid April 2010, rapidly shortening debt maturity. • Nearly EUR 10 billion are due in May, including a 6.2 billion 10 years bond maturing on May 18. Greece could try to refinance it with 13 and/or 26 weeks bill, but this would spur the. If they do not receive the EU and IMF EUR 15 billion installment due at the end of May (who knows, maybe the IFM will leave politics aside -I do not expect anything form the dogmatic European side), they can close the door and leave the key to anybody who wants it. • Interest payments represent more than 6% of GDP, and these rates are heavily subsidized by the EU taxpayers via the EUR 110 billion bailout at 4% (market rate are north of 10%). • Greece is running a deficit in the turn of EUR 500 million/month over the budget. • All economic and social indicators are worse this year than the previous.The latest release of the budget execution shows that the gap between the planned (EUR6.9 billion) and the actual deficit (EUR 7.2 billion) is increasing month after month. Andthis does not include the figures for the Public Investment Budget which weregrossly manipulated in February, artificially reducing the deficit by EUR 1.6billion and allowing Greece to show a budget in line with plans until March.As I was forecasting last year, the austerity program is exerting its toll on the economicactivity which in turn is translating into lower tax revenues despites efforts to fight taxfraud. There is no reason why this should change, any additional austerity measure willweight on GDP in the absence of an export boom that will not occur.According to my calculation (at least the optimistic one), in 2011 the deficit and thedebt will respectively reach 11.3% (EUR 25 billion) and 158% of GDP (EUR 354billion), using the actual (optimistic) official growth forecasts. This is no moresustainable than in 2010, to the contrary.Then only trump card Greece holds (and only to some extent) is a successful privatizationplan (that may be completed too late anyway) which could amount up to EUR 50 billion (I 2
  • 3. http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/do not believe one minute that the final number will be near half of it). Nice number, but itdoes not address the root of the Greek problem: its lack of competiveness andstructurally negative trade & services balance. And the lack of competitiveness isnot only a question of labor cost, it is also and mainly having goods and services that otherwant to buy: the DM, like the Swiss franc, always revalued versus the Club Med currenciesand Germany has had positive trade balances for decennials. The strong euro did not deterGermany to remain the world largest exporter. And on this count, I do not see what Greececan do… On a more fundamental basis, this leads to wonder how countries (generallysmall ones because lacking of critical mass) without a specific competitive advantage willbe able to remain independent in a world which is increasingly opened andinterconnected. In this context, a new rescue package would be a waste of money and time(the UK wisely indicated that they would not participate).The numbers are rather striking: according to the OECD, since 1993 Germany hascumulative trade surplus of USD 2,075 billion (70% of the eurozone total!)whilst Greece had a deficit of USD 373 billion.The train is in motion, the wall is getting closer by the day whilst the EU pointsmen areasking the taxpayer to lengthen the rail tack faster instead of stopping the train before thedisaster occurs and the eurozone ends up in a wreck. The EU is in denial as usualwhilst there is absolutely no way Greece can abide, even lousely, by theoriginal bailout terms (for example to private capital markets in 2012): there is no wayGreece can increase its tax receipts by +/- 35% (on official numbers, 50% according to mycalculations) to get a flat budget. In order to get a budget surplus to pay down debtin a reasonable way (say 10% a year), Greece needs to more than double its taxreceipts – so, forget it.A default is certain (whatever you call it: debt restructuring or rescheduling, interestdeferral or reduction, etc.): let’s investors (banks and money market/bond funds) payfor their mistakes and if this leads to some bank not being well-capitalized enough (Iwould not buy shares of Dexia! – nor any European bank for the matter), let shareholdersbe wipped-out and bondholders take their losses, not the taxpayer: this is calledcapitalism.Quid about the ECB balance sheet, which must hold +/- EUR 50 billion of Greek debt(not talking about Portugal, Ireland and Spain)…?And, one last word, watch France. 3
  • 4. http://marketsandbeyond.blogspot.com/ http://www.pcgwm.com/Source:Der Spiegel (international edition): Greece Considers Exit from Euro Zonehttp://www.spiegel.de/international/europe/0,1518,761201,00.htmlMoody’s: Moodys places Greeces ratings on review for possible downgradehttp://www.moodys.com/viewresearchdoc.aspx?lang=en&cy=global&docid=PR_218672Hellenic Republic - Ministry of Finance: Budget Execution Bulletinshttp://www.minfin.gr/content-api/f/binaryChannel/minfin/datastore/f1/75/38/f1753817b1599ffefcabffb9c5e1e68ade5532ec/application/pdf/Prel_Bulletin_4_ENG_10-05-2011_no2-6.pdfEurostat: Statisticshttp://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/themesOECD: Statistics from A to Zhttp://www.oecd.org/document/39/0,3746,en_2649_201185_46462759_1_1_1_1,00.htmlAssociated Press: IMF chief accused of sexual assault at NYC hotelhttp://hosted.ap.org/dynamic/stories/I/IMF_HEAD_ASSAULT?SITE=CAVIC&SECTION=HOME&TEMPLATE=DEFAULT 4