29 October 2010

Greece’s Budget Execution Program: Jan-Sep 2010

As readers of Markets & Beyond know, I am closely following the implementation of the Greek budget. Its most recent release (20 October) leads me to conclude that the Economic Policy Program (“EPP”), which takes into account stability measures decided in March and May and implemented since, will not be met.
At the end of September, cumulated revenues were running behind schedule at EUR 36.5 billion whilst they should be standing at EUR 41.4 billion (EUR 55.1 billion projected for 2010); the gap between projection and realization is widening: the latest data from the Greek Ministry of Finance indicate that EUR 2.4 billion revenues will not materialize with direct tax and indirect tax 10% behind schedule so far. The growing gap between tax revenues and EPP leads me to also doubt about the GDP growth forecast.
Expenditures have been reduced more than what was planned in the EPP. However, the Public Investment Budget (P.I.B.) is nearly 20% behind schedule, minimizing expenditures by roughly EUR 1 billion (I am pretty sure that this one of the adjustment variables to make the final implementation closer to projections- another one is EU grants with EUR 2 billion left in the backburner in case over a total of EUR 3.1 billion planned for 2010…) and interest payments are well ahead by nearly EUR 2 billion and this is not going to improve as the year goes.

Overall the improvement compared to the disastrous 2009 is obvious but trailing projections despite the harsh measure taken by the Greek Government and money poured y the ECB (for banks), the EU and the IMF (to match the borrowing requirements). This leaves us with a budget deficit which should be close to EUR 21-22 billion (pending numbers massaging by the EU and the Greeks). As stated in previous articles, Greece has the problem with revenues more than costs; yes, they must slim down but due to the sheer size of its debt, it is a substantial increase in revenues that will save Greece from default/restructuring, and frankly I do not see how they can avoid it.

Finally, on 20th October Eurostat released an update for EU 2009 budgets deficits for all member states but Greece:
“Eurostat has completed its enquiries on statistical compilation of the Greek fiscal data and is now undertaking a process of quality assessment of statistical source data from public accounts, in cooperation with the Greek Statistical Office and the Greek Court of Auditors. Following this process, and the release of the annual report of the Greek Court of Auditors at the beginning of November 2010, Greek fiscal data will be published by Eurostat by mid November 2010.”
On October 27, the Finance Minister, George Papaconstantinou, said a review of the 2009 budget showed the deficit was greater than 15 percent of gross domestic product, more than the 13.6% previously estimated, and more than what he said on October 7…
The final number will be published by Eurostat by mid November.
As for banks, it is time to stop bailing out cheaters and incompetents: imagine to what productive use and wealth creation the trillions of wasted money could have bee channeled to.
Greek Ministry of Finance: Budget Execution 2010 – September
Greek Ministry of Finance: Presentation on Budget Execution / January-September 2010
Eurostat: Euroindicators - Second notification of government deficit and debt figures for 2009
Bloomberg: Greek Bonds Tumble as Government Says Tax Revenue Falling Short

21 October 2010

The US economy: no double dip! Long equities

Whilst the double-dip theory is waning these days, I thought it would be good to review a few economic indicators that cry that no double-dip is to be expected (but for economic/monetary mistake or exogenous shock).
First, the output gap turned around and whilst still negative is not pointing to a downward tipping point. The graph below clearly shows that employment is lagging the output gap indicator. In addition unemployment peaked four months after the recession ended, which is rather short compared to 1991 and 2001 recessions where the numbers were 15 and 19 months respectively vs. 1 month for 1981 recession: it seems that the deeper the recession the shorter the recovery time (that does not say anything about the magnitude of the improvement and unemployment is still very high by US standards).
Second, retail sales have also strongly rebounded and continue to forge ahead. We are back to April 2007 and September 2008 levels.

Third, despite a high unemployment rate, individuals have largely repaired their balance sheet to levels not seen since 2000 and the 1985-1990 period. I am convinced that the debt service payment/disposable personal income ratio will shrink further however that will weigh on GDP growth but make the economy much sounder longer term. In the meantime, the savings rate has stabilized in the 6% area.

Finally, we also analyzed US federal tax receipts from the 2006 tax year (ending in September) which present an online view of the real state of the US economy, since data are provided each week. The graph below plots monthly taxes received from individuals, corporations, excise and all contributors compared to the previous year.

Data clearly point towards an improving economy since February-April 2009; this corresponds to the trough of equity markets in the Western world in March 2009. The dramatic improvement in corporation taxes paid (+20% for the 2010 tax year) show that the economy definitely turned around whilst taxes paid by individual are still sluggish but have gained traction for a year now.
Excise taxes are as close as we can get for the exact picture of the economy: they improved a lot late last year and are now in a consolidation phase but nowhere near a double dip. It is worth noting the correlation between tipping point of the excise tax collection amelioration with the stock market trough in March 2009 and the sluggishness of 2010.
All the above lead me to think me that equity markets should at worse do alright at least to the end of the year.
US Treasury: Financial Management Service
Federal Reserve Bank of St. Louis: Economic Research