04 February 2012

Greece 2011 Budget execution and the (bleak) future

A year ago, European politicians were hailing the progress made by Greece stating that the nadir of the crisis was behind and difficulties ahead would be dealt with forcefully. As my readers may recollect, I did warn that the plan will fail and the Greek situation would worsen, the country being bankrupt.
Let’s see what happened in 2011 in the Greek Budget:
Note that the last column was the planned 2011 budget as of December 2010, whilst the column (5) contains the budget post-revisions.
A few remarks:
  • Compared to the original plan, the budget implementation failed miserably with a EUR 5.5 bn wider borrowing requirement, i.e. a staggering +23%.
  • A much larger gap would have been registered (EUR -3.3 bn) without deep cuts in military spending (EUR -1.3 bn.) and the Public Investment Program (EUR -2 bn) during the course of the year compared to the initial budget.
  • Revenues were lower than in 2010 and EUR 5.5 bn less than in the initial budget, EUR 6.7 bn if it was not for a new line of revenues that “miraculously” appeared in November and December, registering EUR 1bn (“special revenues from licensing public rights”). Primary expenditures were contained but did not decrease enough to compensate.
  • Interest payments were marginally higher than in the initial budget, but EUR 3 bn more compared to 2010.
As I forecasted early 2011 (and also in 2010) the situation has worsened, not improved. Greece is insolvent with a 155% debt/GDP, a 10% budget deficit/GDP (there are rumors that it would finally be closer to the 9.1-9.4% mark thanks to an emergency property tax representing a good EUR 1 bn –looks like a desperate trick to “improve” the picture of a desperate situation) and EUR 350 bn debt (not talking about high unemployment, dismay current accounts and trade balances, insolvent banking system, deposits going abroad, weak productivity, antiquated social welfare state, continued weak tax collection – whilst improving -, etc.). 

As of this Saturday morning, discussions with the financial sector are ongoing regarding the level of write-downs, or more exactly the strength of guarantees on the new bonds to be swapped with the existing ones.
The schedule of T-bills maturing during the next 5 months is:

In March, add two 5 years bonds due for redemption:
5 yr

Therefore, Greece will need to auction T-Bills next week and the following one to refinance maturing ones (which should go fine if nothing dramatic occurs with the discussions between banks and Greece on existing debt) and find EUR 16.5 bn in March, i.e. EU and IMF money.
To regain solvency, the discussions are centered around how much the financial sector would forgo, and the latest discussions are 70% of their current debt holdings, beyond EU/IMF rescue packages and drastic austerity measures. Would this be sufficient? No: Europe is at best growing flat, debts continue to go north and trade imbalances between countries are not reduced, and these imbalances are one of the reasons of the current crisis, themselves a result of the widening competitiveness gap between countries, with no currency adjustment possible within the euro.
This crisis cannot be solved by only reducing the stock of debt but also by improving cash flows, i.e. growth. Whether the financial sector forgoes 70% of its Greek debt pile (estimated at EUR 200 bn with themajority of it held by Greek banks and, in my view, a substantial chunk of thebalance with the ECB), this is just kicking the can down the road as it has been done for the past 2 years (well, really for the past 10 years). Let’s see the simple equation below:
GDP = private sector consumption + public sector consumption + (exports – imports). This is a very important equation largely overlooked by commentators.
For Greece all of theses items are negative yoy, according to the latest official statistics, and in many countries at least two items are negative: in the current economic environment there is no way that Greece (and others) can get out the over-indebtedness black hole. Greece and Club Med countries (France included) need to improve competitiveness to gain/regain a positive trade balance.
Growth based on retail demand in southern Europe was unsustainable with negative trade balances, and the potion to remedy to this situation will be very bitter indeed: a sharp fall in the standard of living. This is compound by the fact that within a state welfare, redistribution represents a substantial chunk of revenues for individuals, which these countries will drastically reduce to get their finance in order. To regain competitiveness, salaries/social transfers are to decrease by 15-35% - depending on countries - multiplied by the productivity differential with the main exporting countries. The euro is indeed a kind of gold standard where individual countries can no longer devalue their currency to adjust their lack of competitiveness and boost exports.
None of the European political sphere is addressing what is at the core of a flawed eurozone construction.
The table below provides the effort required to get Greece’s finances back under control: this is unsustainable since I do not believe official figures of a EUR 50 bn privatization plan, and will lead to social unrest to a scale not seen so far, the more so that the OCDE announced that the situation is worse in the tune of EUR 15 bn and the EFSF/ESM is not large enough:
“The current EFSF/ESM resources of € 500bn are not enough. Furthermore, the EFSF/ESM has not found it easy to raise funds at low yields even with guarantees.”…
Hellenic Republic - Ministry of Finance: various publications

The Telegraph: Eurozone bail-out funds not enough, warns OECD

OECD: Solving the Financial and Sovereign Debt Crisis in Europe
Markets & Beyond: European rescue package: truth and fallacy