15 May 2011

Greece’s fable continues to unravel

It could have been the scenario of a TV series, but it will not last over as many years as to Dallas or The Experts 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 the eurozone.
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 commissioner for economic and monetary affairs Olli Rehn).
8th May: rumors emerge of an additional loan to Greece anywhere between EUR 25 to 45 billion
9th May: S&P downgrades Greece from BB- to B with negative watch joining the highly speculative bandwagon; now we are halfway from investment grade and default. Moody’s puts Greece under credit watch with potentially a multi- notch downgrade.
10th May: IMF and EU experts arrive to Greece to discuss the budget execution progress and I guess a maturity extension of the EUR110 billion rescue package together with an interest rate reduction plus any additional “adjustments” i.e. new loans.
15th May: meeting in Berlin between Angela Merkel and Dominique Strauss-Khan (pulled by the Police In New York out of an Air France flight because of an accusation of sexual assault!).
As a side question, I would really be interested in knowing who in Germany did leak the information to Der Spiegel (since the source seems to be German, even if I wonder this is not playing in the Greek’s hands to extract more palatable terms by threatening to leave the Euro): budget hawks to pressure the Chancellor Angela Merkel not to give away anything? 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 therefore prefer 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)
  • 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 billion
In 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 (EUR 6.9 billion) and the actual deficit (EUR 7.2 billion) is increasing month after month. And this does not include the figures for the Public Investment Budget which were grossly manipulated in February, artificially reducing the deficit by EUR 1.6 billion 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 economic activity which in turn is translating into lower tax revenues despites efforts to fight tax fraud. There is no reason why this should change, any additional austerity measure will weight 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 the debt will respectively reach 11.3% (EUR 25 billion) and 158% of GDP (EUR 354 billion), using the actual (optimistic) official growth forecasts. This is no more sustainable than in 2010, to the contrary.
Then only trump card Greece holds (and only to some extent) is a successful privatization plan (that may be completed too late anyway) which could amount up to EUR 50 billion (I do not believe one minute that the final number will be near half of it). Nice number, but it does not address the root of the Greek problem: its lack of competiveness and structurally negative trade & services balance. And the lack of competitiveness is not only a question of labor cost, it is also and mainly having goods and services that other want to buy: the DM, like the Swiss franc, always revalued versus the Club Med currencies and Germany has had positive trade balances for decennials. The strong euro did not deter Germany to remain the world largest exporter. And on this count, I do not see what Greece can do… On a more fundamental basis, this leads to wonder how countries (generally small ones because lacking of critical mass) without a specific competitive advantage will be able to remain independent in a world which is increasingly opened and interconnected. 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 has cumulative 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 are asking the taxpayer to lengthen the rail tack faster instead of stopping the train before the disaster occurs and the eurozone ends up in a wreck. The EU is in denial as usual whilst there is absolutely no way Greece can abide, even lousely, by the original bailout terms (for example to private capital markets in 2012): there is no way Greece can increase its tax receipts by +/- 35% (on official numbers, 50% according to my calculations) to get a flat budget. In order to get a budget surplus to pay down debt in a reasonable way (say 10% a year), Greece needs to more than double its tax receipts – so, forget it.
A default is certain (whatever you call it: debt restructuring or rescheduling, interest deferral or reduction, etc.): let’s investors (banks and money market/bond funds) pay for their mistakes and if this leads to some bank not being well-capitalized enough (I would not buy shares of Dexia! – nor any European bank for the matter), let shareholders be wipped-out and bondholders take their losses, not the taxpayer: this is called capitalism.
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.


Der Spiegel (international edition): Greece Considers Exit from Euro Zone

Moody’s: Moody's places Greece's ratings on review for possible downgrade
Hellenic Republic - Ministry of Finance: Budget Execution Bulletins
Eurostat: Statistics
OECD: Statistics from A to Z
Associated Press: IMF chief accused of sexual assault at NYC hotel