05 May 2010

Greece: the final chapter … at last?

During the Weekend, with the help of the IMF, eurozone Finance Ministers agreed to a EUR 110 billion rescue package spread over 3 years and Greece came with additional austerity measures amounting to EUR 30 billion also spread over 3 years. Greece also obtained 2 years grace period to come back to a budget deficit/GDP of 3% in 2014.
Will it be enough? The short and straight answer is no.
In my view this package has more to do saving the euro from a spiraling downfall than saving Greece from an immediate banqueroute. Jean-Claude Juncker and Christine Lagarde declared that Greece was a special case and there no risk of the crisis spreading to Portugal and Spain that are in a totally different position.
True Portugal and Spain did provide statistics that were not manipulated (as far as we know). However, the size of their budget deficit, lack of competitivity and high unemployment do not bold well for the future. According to the economist of JP Morgan Chase and Royal Bank of Scotland, it is not EUR 45 billion, EUR 110 billion but EUR 600 billion needed to bailout PIIGS countries. And France is in a very bad shape: its bank are over-exposed to the Greek debt (not talking about the Spanish debt...), budget deficit patterns are similar to Greece and Portugal with successive deficits whilst the GDP grew and its productivity is worse than Greece. If between 2002 and 2008, Greece is the eurozone country that displayed the highest budget deficit / GDP with 5.5% a year, Portugal was second (4.5%) and France third (3.9%). Investors will soon have a closer look at France.
Europe has been facing for years a euro-centric dogmatism, where it own dynamic became the sole objective with no regards to pragmatism. The euro construction was flawed since its inception because the one-fits-all does not work when grouping economies as different as Germany and Holland on one hand and Greece and Portugal on the other hand without automatically enforceable convergence criteria with tough penalties (including vote suspension in all Europeans institutions and stopping transfers). It is even worse since Brussels did not see (or did not want to see), the Greek fraud whilst this country received tens of billions from Europe.
I simulated a new budget between 2010 and 2013 according to the new package (even if I do not believe one minute that Greece can implement its new revenues and spending cuts).
I used the data contained in the Greek Stability and Growth Programme as published in January and March 2010 that I adjusted with the new information provided this week-end, even if I do no believe that the additional 2% VAT will bring any new tax revenues with a 4% fall in GDP (1.7% GDP growth in the SGP!).
I used a 5% interest rate on any new debt as agreed by eurozone countries for the bilateral loans (I assume the IMF rate will be the same).
EUR 6 billion economy in 2010 (6 months) and EUR 12 billion for each subsequent year.
0.7% of Vat revenues on the GDP (same as the 2% VAT increase for a full year)
3.5% GDP growth in 2013 (a bold assumption)
For 2013 the computation results are:
  • EUR 73 billion additional cumulated debt vs the SGP
  • EUR 121 billion additional cumulated debt vs 2009
  • Debt/GDP of 170%
  • Budget deficit/GDP of 14%
  • Interest payment / GDP of 5%

Well, there is only one solution: rescheduling the debt whatever it costs to the European ego.