Monday 15 February 2010

The next Greek debt discovery

Bloomberg started running a ticker this morning entitled “Greek Probe Uncovers ‘Long-Term Damage’ From Swaps Agreements, which details how the government signed up to a series of long-term interest rate swaps. According to this article, Goldman Sachs was one alleged beneficiary of the swaps, which generated $ 1 bln in 2002.

For me, this article is more interesting because it is the first time I see reference in any serious international press of the findings of the Commission formed by the Ministry of Finance in October 2009 to investigate the true magnitude of Greek public debt. At least, I believe this report (and its follow-up) is what is referred to in the Bloomberg article

Greece used the swaps to defer interest repayments by several years, according to a Feb. 1 report commissioned by the Finance Ministry in Athens.

It’s interesting that Bloomberg mentioned Goldman Sachs, but not Ethniki, which has apparently played a much greater role in exchange rate swaps (over EUR 5 bln).

It’s also interesting that until now, none of the implications of this Commission report, which have been widely reported in the Greek press, have been taken up by the major sources of international economic and financial information. The implications are, after all, severe:

· Interest rate swaps generate an additional EUR 5.5 bln in debt to Ethniki;

· It is estimate that there are at least a further EUR 6 bln in debt to public healthcare organisations beyond the EUR 6.3 bln already added to the debt in the debt revision of October 2009 (which lead to Greece’s deficit rising to over 12%);

· The Central Government has guaranteed a further EUR 26.2 bln in debt from various semi-government organisations and local authorities which should be stated on the government balance sheet, but is not.

The Commission also points out that it is impossible to estimate current debt due to two additional points:

a. Most social security funds have not yet published accounts for 2008 and 2009. Many other semi-governmental organisations are equally in arrears.

b. The precise level of government expenditure obligations under the raft of public-private partnerships signed during the Karamanlis years cannot be established.

All this means that there is at least EUR 37.7 bln in “known” debt which is not currently recorded. I suspect that there is far more. For instance, the Hellenic Railway Organisation (OSE) has recently been recording annual loses in excess of EUR 500 mln in recent years. The state aid that was to be repaid by Olympic Airways was estimated at EUR 650 mln, while the Karamanlis government also agreed to absorb a further EUR 700 mln in early retirement costs for Olympic staff (which the Papandreou government has recently repudiated).

I would say that a conservative estimate of “off-the-books” debt is at least EUR 40 bln, and quite possibly EUR 50-55 bln, as has been stated in a number of press reports in Greece.

Today the Eurogroup meets to decide what specific steps to take for supporting Greece. My bet is for a government-to-government purchase of Greek sovereign debt at the next debt issue in April (or earlier, if possible). After all, if the rate is 6%, it’s an excellent deal for European governments (some of whom, like France, made good money bailing out their national banks).

But in line with my previous posts, it seems to me that we are only treating the symptoms, not the root cause. The Papandreou government’s proposals on freezing and reducing salaries is good, but it is a temporary measure that will become all the more difficult to maintain as we approach the next general election. The government needs to take urgent measures to streamline and reform the public sector, which include staff reduction, permanently closing some organisations, real privatisation, and stopping the hire of new staff. It also needs to start collecting taxes. All this is known: it remains to be seen whether the government can put together and implement a coherent, integrated framework for achieving it.

1 comment:

  1. "At least, I believe this report (and its follow-up) is what is referred to in the Bloomberg article"

    Is there a title to this (these) reports? Have they been published?

    I am curious to know if there is any specific news on this.