13 September 2010

Greece - January-August budget analysis

This week the Greek Government is undertaking a roashow through Europe's financial centers to explain how great the implementation of austerity measures is going in order to convince investors that they shouldn't have to pay ruinous interest rates on their sovereign debt (11.6% on Friday on the 10 years bonds, over 5 times what Germany pays).
Markets & Beyond spent hours going through the details of the Greek budget since January 2010 and looking at 2009 data as well. The conclusion is simple: whilst the budget deficit is being reduced the crisis is not over and far from it.
A simple view of the progress between revenue sand expenses shows that during the January-August 2010 period (representing 67% of the whole year):
  • Revenues received by the State represent 59% of what was budgeted in the revised numbers presented by the Greek Government in June, i.e. behind schedule (they should be at 67%). The Greeks are saying that the new measures are being implemented and additional revenues will come in to match the Economic Policy Program. I doubt it due to a continued contraction of GDP(-4% expected in 2010) and rising unemployment (11.6% at the end of June).
  • In the meantime, expenditures reached 64% of budget forecast more or less where it should be at this time of the year; interest payments are however well ahead at 84% which is due to increasing short term financing (the only way Greece can raise fund in the markets) and increasing risk premium asked by investors combined to the 5% interest payment on the rescue package extended to the country for longer term refinancing.
  • The Public Investment Program (P.I.B.) deficit is also behind schedule at 56%. I guess this is used as an adjustment variable to plug (at least partially) any large divergence from the budget by postponing investments to next year.
  • My view is that the budgetary situation for Greece will be deteriorating until the end of the year mainly due to a shortfall in revenues direct corollary to the negative economic situation. Even if one believes Greek’s budgetary projections, the debt will increase in the turn of minimum EUR 21 billion and the Debt/GDP will reach 130% (115% in 2009).
I do not know when the day of reckoning will occur: in 2011, Greece could probably continue financing its requirements via short term TBills and the rescue package for longer term funding; in 2012, Greece has to repay EUR 42.8 billion (including 11.1 billion in interests) on its bonds and EUR 36.7 billion in 2013. In 2014 and 2015, Greece will need to repay the IMF and the EU approximately EUR 70 billion per year. How long markets will wait? When German patience will run out?
The EU shares the Greek concerns because a big chunk of the country's debt is held by the region's banks (mainly French and German in the turn of EUR 111 billion according to March BIS numbers).
Greece needs time to reform its economy and witness this bearing fruits: we are not talking about 3 years (the initial length of the EUR 110 billion rescue plan) but at least 10 years. A debt restructuring is the only way to avoid a bankruptcy, whatever euro-dogmatics are saying, and the sooner the better.
Oh! And I forgot the +/- EUR 600 billion of pension liabilities the Greek state is the happy owner which represents 875% of GDP…
Last final word: a MUST-READ article written by Michael Lewis in Vanity Fair about breathtaking corruption, startling failure of societal norms, an absolute collapse of ethics on a national scale.

BIS: The international banking market - statistical annex
Vanity Fair: Beware of Greeks Bearing Bonds -Michael Lewis
Hellenic Republic - Ministry of Finance: Stability and Growth Program