First Steps in Consolidating the Greek Debt: OASA/OSE

Back in February, I posted on this blog that the Greek government had at least a further EUR 40 bln, and possibly up to EUR 50-55 bln, in debt which was not declared on the central government’s balance sheet.

Today Kathimerini reported that the “Troika” of the European Central Bank, IMF and Eurozone have finally gotten around to demanding that the debt of certain semi-governmental organisations be transferred onto the Central Government balance sheet. These are:

·         OSE, the National Railroad Organisation, who’s total debt will hit EUR 10 bln this year

·         ETHEL, the natural gas-powered bus network

·         HSAP, the electric tram line that runs from Pireaus to Kifissia

·         HLPAP, the trolley lines in Pireaus

·         OASA, the bus and trolley company for Athens and suburbs.

These organisations are estimated to owe at least EUR 12.5 billion, with their annual 2010 loss estimated at EUR 1.26 bln. They are entirely public sector organisations, and the debt is guaranteed by the central government.

If the Greek government accepts this demand, it means that Greece’s debt-to-GDP ratio will rise by at least 5.4% (assuming a minimum 4% GDP fall in 2010 to EUR 230.4 bln).

In turn, this means that Greece’s deficit in 2010 will be around 12-13%, well above the 8% target in the Stability and Growth Plan.

Together with the agreement in the hospital procurement sector, we can assume that approximately EUR 18-20 bln have been added to the central government’s debt so far this year. This means that, not counting current expenses and added interest costs incurred so far in 2010, the total national debt will now be approximately EUR 328-330 bln, or 143% of 2010 GDP.

In the meantime, the government has embarked on a political courageous process of social security reform, which contains many of the elements PASOK voted against over the past 5 years. They have also launched the process to consolidate public sector organisations which, though it will not result in the reduction of permanent government workers, will result in the reduction of temporary staff and theoretically some overhead costs.

These are all very necessary reforms, and long overdue. But they will not be enough to make a significant reduction to the public debt burden, and thus the annual financing requirement, by 2013-2014. The government will have to identify at least EUR 10-15 bln additional spending cuts or revenue raises per year to give Greece the chance to survive without a debt restructuring.

The government also needs to start acting faster. Particularly the Ministry of Economics, led by Dr. Louka Katselli, is not working anywhere near as fast as it should be. As a result, several key pieces of legislation have been delayed, while the absorption of EU funds is at extremely low levels.

This Ministry probably needs to be split up into 6 units if any of these sectors/functions is to operate effectively:

·         Shipping

·         Investment Promotion

·         Public Sector Reform / eGovernment

·         Economics / Competitiveness

·         European Union Cooperation

Normally, I am against fragmentation, but the inter-ministerial cooperation framework is so dismal in Greece, the only solution is a temporary increase in the number of Ministries until things get sorted out.

Related Links on Philip Atticus

The Next Greek Debt Discovery

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Thinking about Government: The Role of OSE

Restructuring of Greek Debt Continues

General McChrystal and Afghanistan

I’ve just read Michael Hastings' Rolling Stone article on General Stanley McChrystal and America’s campaign in Afghanistan that yesterday resulted in his dismissal. It’s honestly been one of the most enjoyable articles I’ve read in weeks. General McChrystal sounds like a formidable Special Forces commander who probably never should have been put in charge of the campaign in Afghanistan. Not because he is unqualified or unsuited for command, but because the civilian authorities appear to be.

The paradox was that on the one hand, the US wanted a counterinsurgency strategy for Afghanistan, but on the other hand wants to do this by minimising civilian casualties and keeping military activities at a minimum. The two goals are admirable, but contradictory, at least in the way they have been translated into policy. For instance, the article described the reaction of troops at Combat Outpost JFM, who have been given laminated cards that say: "Patrol only in areas that you are reasonably certain that you will not have to defend yourselves with lethal force.” I’m trying, and failing, to think what part of Afghanistan that would be.

The article also points out a salient fact: that the main Taliban rear areas in Pakistan have been largely untouched by the ground campaign, except by aerial drone attacks. This means that, just as in Vietnam, the US army is fighting on behalf of a political leader with little apparent authority in his own country, while the enemy’s main force huddles in safety on the other side of the Pakistani border.

Add to this the fact that the surge has been slow in getting off the ground, and that it is timed to end next year. It seems that in terms of strategy, the campaign is bound to fail: all the enemy have to do is remain in the fight. By not losing, they win.

Either the US and its allies need to fight with every means at their disposal, or they need to find a way to reach some accommodation with the Taliban and withdraw. If these two options are unacceptable, then the campaign will continue as it is presently configured: an expensive and inconclusive effort, with no end in sight, and little possibility of victory. Hamid Karzai has come to precisely the latter conclusion, according to recent press reports.

As for General McChrystal: I got the impression of a tremendously competent man, a warrior, who should be out planning missions and kicking down doors than suffering through dinner in Paris. He sounds like a classic Special Forces officer in the impossible and undesirable position of managing a conventional war planned and stage-set from national capitals, against an unconventional enemy that he probably understands better than anyone else.

The “trash talk” so magnified by the press honestly seems insignificant. The group of officers in that hotel room were blowing off the not inconsiderable steam that comes from being in a combat zone. While it’s unfortunate their comments had to be relayed in this way, I’m sure hundreds of thousands of other American citizens, government employees and members of the Armed Forces share similar thoughts.

It’s also interesting to note the double standard at work. None of the comments made by McChrystal or his aides were as vitriolic as those made by one senator against another in the 2008 Presidential race. Or by one senator against the President in a State of the Union speech. Both senators and generals are supposed to be leaders, and both are paid by the government, right?

When do you remember a US senator ever resigning for something they’ve said?

Time for a Margaret Thatcher Moment

Dear Prime Minister,

This morning, and all through today, a group of about 100 dockworkers from 2 small unions of marine employees are blocking the departure of several high speed ferries from leaving the port of Pireaus.

This is despite that fact that a court ruled that the strike was illegal. Hundreds of tourists, businesses and ordinary citizens were prevented from boarding ferries to get to the islands. Besides the inconvenience to ordinary citizens and the damage to Greek enterprises, the damage to Greek tourism and Greece's public image are devastating.

To add insult to the injury, television broadcasts showed policemen protecting the dockworkers by pushing away the hundreds of unhappy travelers who simply wanted to board and get on with their journey. Why are the police protecting an illegal strike against the legal rights of Greek citizens?

Either Greece will be a country governed by anarchy, where the ordinary citizens and tax payers are systematically held hostage by a small group of corrupt special interests and dead-enders. Or it will be a country governed by the law, where society and the economy are allowed to operate unhindered by blockades and special interests.

It’s your choice.

Please act soon. We are all waiting.

Sincerely yours,

Philip Ammerman

Hello Stagflation

The Hellenic Statistics Authority (ELSTAT) released quarterly and 5-month economic statistics yesterday which make for grim reading:

· Inflation (CPI) in May 2010 is up 5.4% year-on-year

· GDP fell by 2.5% in QI 2010 (temporary figures)

· Unemployment rose to 11.7% in QI 2010

· Industrial production fell in April 2010 by 5.1% over April 2009

· Construction fell by 35% in March 2010 over March 2009.

These figures are worse than expected, and can be forecast to continue into the future.

The CPI increase is due mainly to the VAT rise as well as excise taxes on fuel, cigarettes and other items. Only about 1% is estimated to by underlying CPI. With the price of oil predicted to top $ 80/bbl this summer, and future tax rises in the works, we can only assume that inflation will continue to rise, despite the dismal economic situation.

The increasingly present danger is that Greece enters a period of stagflation for the next 2-3 years. A combination of economic stagnation (GDP contraction) and high inflation, this is potentially the worse outcome for a government struggling to implement its Stability and Growth Agreement. It means that basic consumer products become more expensive at the very time when economic activity is less, and unemployment increases.

Figure 1 shows monthly CPI and unemployment figures in Greece from January 2004 – March 2010, sourced from ELSTAT. It’s interesting to note that the period January 2004 – July 2008 appear to be a classic “Phillips Curve”, or an inverse relationship between unemployment and inflation. (The original Phillips Curve was the relationship between wage growth and unemployment). Right in July 2008, however, at the height of Greece’ tourist season, things start to fall apart: unemployment gives a mysterious jump upwards, while inflation peaks and starts to fall.

It’s interesting to note that at roughly the same time, the price of oil collapsed from about $ 140/bbl in July 2008 to below $ 40/bbl in January 2009. Figure 2 shows Greek unemployment and CPI, with an added plot of WTI crude prices in $/bbl on the right axis.

That was also the point where Greek GDP started to fall precipitously. In September 2008, Lehman Brothers collapsed and the credit crisis began in earnest. Figure 3 plots GDP (annual change, current prices) with unemployment and CPI. The GDP figures are temporary and subject to revision.

Looking to the future: most economic analysts indicate a GDP decline of between 2-4% in 2010, followed by a further decline in 2011 and possibly 2012. Assuming a continuing inflation rate due to taxes, oil prices and other factors (such as food prices), it’s clear we are in for a very difficult 2-3 years.

Restructuring of Greek government debt begins

Perhaps unnoticed by the national or international media, the restructuring of the Greek government’s debt has officially begun. Despite all protestations to the contrary, the restructuring effort has started right here in Greece, with the draft debt payment schedule for suppliers in the medical sector.

What is a debt restructuring? It is a situation in which a debtor is unable to pays its creditors the full amount owed, according to the payment terms agreed. In this case, there are several options for restructuring:

a. A new payment schedule is agreed upon;

b. A “haircut” on the debt occurs, in which the debtor pays back only a certain percentage of his debts to his creditors;

c. An agreement is made to reduce interest charges;

d. Other forms of compensation are agreed.

According to today’s Kathimerini, the government owes EUR 7.1 bln to suppliers of pharmaceuticals, equipment and disposables/consumables. Some of this debt dates to 2005.

According to an agreement reached yesterday, the government has proposed the following payment system:

a. Debts of EUR 1.45 bln dating from 2005 and 2006 will be settled in cash;

b. Debts of EUR 1.1 bln dating to 2007 will be settled with an interest-free, 1-year government bond as well as a further cash payment of EUR 100 mln;

c. Debts of EUR 2.2 bln dating to 2008 will be settled with an interest-free, 2-year government bond;

d. Debts of EUR 2.05 bln dating to 2009 will be settled with an interest-free, 3-year government bond.

Of the total amount of EUR 7.1 bln owed, approximately EUR 6 bln will be repaid, given that the bonds carry a “discount” of about 15%. The bonds can be redeemed at participating banks, who will in turn use these bonds for collateral at the European Central Bank.

So, the restructuring has begun, and fittingly, it has begun in Greece, to the detriment of its own companies and citizens (and Greece's international medical suppliers).

Make no mistake: this is definitely a restructuring, all protestations to the contrary. Greece’s creditors receive less than they are owed and receive it at a later nominal date.

And my next question is: when will this process start with Greece’s national and international bank creditors?

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Enjoying Greek Public Television (or not)

I’m increasingly convinced that at least 25% of the “problem” in Greece is the lack of a really good, objective and independent national media. This has always been the case, of course, but I’m not sure this sad situation can or should be allowed to continue given the magnitude of the crisis.

On the “NET” news bulletin today, the final clip just before the athletic bulletin was that of Deputy Minister of Health Fofi Gennimata touring a hospital somewhere, possibly in Boeotia. The clip was footage taken from “Star TV”, one of the more ridiculous Greek channels. The clip was entirely out of synch with anything important going on today: the subject was the functioning of some new piece of equipment.

Does Greek public television, a mammoth public organisation financed by mandatory household taxes, really need to show a “Star TV” clip of the Deputy Health Minister in Boeotia? Why? To assure us that she is actually working? Can’t we be a little more subtle in the political manipulation of the news?

What will PASOK order up next? Reports on Greece’s annual wheat cultivation, proclaiming a record harvest? Or the targets of our next 10-year plan for agricultural tractor production?

A little while later, the ET3 anchor was presenting the hospital – pharmaceutical provider “crisis”. His sentence was to the effect that “patients are being held as hostages (ομηρία) by the pharmaceutical providers.”

Hello? There are companies which are still trying to collect debts which date back to 2007 and before, and who have stopped supplying the public hospitals because they are owed money. Yes, of course there have been lots of scandals regarding the cost of pharmaceuticals and consumables in the public healthcare system. And we know exactly why: so that administrators and doctors would make bribes off the procurement contracts, just as they take bribes (“fakellakia”) to arrange routine medical treatment. Did anyone force the government or the public healthcare system to enter these agreements?

There is a double standard at work:

· When dockworkers close off the ports and prevent tourists from boarding their ships, is this called “ομηρία”?

· When student unionists prevent university staff from leaving or entering their university offices, is this called “ομηρία”?

· When the government delays payments to fire fighters, teachers and social workers on part-time contracts, is this called “ομηρία”?

· When the government unilaterally decides to delay the refund of VAT until September, is this called “ομηρία”?

Of course not. It’s only when the government realises it has to pay, that it’s erstwhile “opponents” become “hostage takers.”

This may sound like a minor issue, given the state of things today. But to me, it shows a sloppy and politicised approach to public broadcasting, which unfortunately reflects the double standards and lassitude of public sector officials today.

It does nothing to contribute to an objective public understanding of critical issues affecting the Greek taxpayer. When adding this to the fact that ERT employs over 3,500 staff, runs at least 8 TV channels, and 5 orchestras, it’s very clear that the public sector reforms are not nearly as comprehensive as they should be. The opposite is true.

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Moody's Downgrades Greek Debt - Correctly

Moody’s yesterday downgraded Greek government bonds to Ba1. This was met by predictable furor in some Greek media. SBC TV, a financial channel, identified this as a conspiracy yesterday afternoon, suggesting that the reasons this happened was so that the European Union did not develop its own ratings agency. Sofokleous 10, a financial blog, termed this a “terrorist act”.

The Ministry of Finance issued a press release, which I quote and translate from Kathimerini:

Today's downgrade of the Greek economy from the Moody's agency in no way reflects either the progress made in the last few months, nor the prospects created by the public fiscal adjustment and improvement in national competitiveness.

The budget execution figures show with great clarity that the programme which Greece has agreed with the European Union, the European Central Bank and the International Monetary Fund is being implemented normally, with the deficit having fallen by 40% compared to 2009. This important improvement has been recognised by the European Commission, the European Central Bank and the International Monetary Fund. In addition, the recession in the first quarter was smaller than that foreseen for the whole year in the Memorandum. VAT revenues collected in the first quarter were higher by 6%, whereas last year they had fallen by 11%.

All structural adjustment activities foreseen by the Memorandum of Understanding are being implemented regularly and many are already ahead of their established deadline. The progress of the debt, although currently rising, is expected to peak in 2013 or perhaps sooner, depending on the creating of more favourable conditions.

The Hellenic Government remains entirely committed to the adjustment of its public debt and the improvement of the development potential of the country.

From the viewpoint of any potential investor, the Greek reform programme is fraught with risk. The good efforts of the Ministry of Finance notwithstanding, the government has been taking serious measures only in the last 3-4 months, and as I recounted in yesterday’s post, there are still very many questions left unanswered. Moody’s had already announced a negative outlook in its last rating on 22 April 2010.

All three major ratings agencies have now downgraded Greece’s sovereign debt to junk status. Standard & Poor’s and Fitch had already done this in April; Moody’s followed this week.

Whatever criticism we can raise against these agencies on their previous ratings of Greek government debt, or mortgage-backed securities, or European banking issues, I believe that their current rating on Greece is correct.

There remains a critical lack of quantitative data on the full extent of Greek public debt. Beyond this, it is clear that the EUR 110 bln package will not be sufficient to fund Greece's public sector borrowing needs past 2012. Unless it is renewed, Greece and Europe will be hit by a new sovereign debt crisis.

It remains to be seen whether the reform package will actually work. I believe it will, but that at least 10 years of austerity will be needed, together with a more radical reform. At present, it’s clear that neither the wider public sector nor the political party system has made the radical changes needed for competitiveness.

Good intentions and Parliamentary committees notwithstanding, much has been announced, but little accomplished. It requires a major leap of faith to assume that the very politicians and political parties responsible for Greece’s current predicament will be able to change the system.

I copy the Moody’s press release below.

London, 14 June 2010 — Moody's Investors Service has today downgraded Greece's government bond ratings by four notches to Ba1 from A3, reflecting its view of the country's medium-term credit fundamentals. Today's rating action concludes the review for possible downgrade, which Moody's initiated on 22 April 2010. Moody's has also downgraded Greece's short-term issuer rating to Not-Prime from Prime-1. Greece's country ceilings for bonds and bank deposits are unaffected by the review and remain at Aaa (in line with the Eurozone's rating).

The outlook on all ratings is stable. “The Ba1 rating reflects our analysis of the balance of the strengths and risks associated with the Eurozone/IMF support package. The package effectively eliminates any near-term risk of a liquidity-driven default and encourages the implementation of a credible, feasible, and incentive-compatible set of structural reforms, which have a high likelihood of stabilizing debt service requirements at manageable levels,” says Sarah Carlson, Vice President-Senior Analyst in Moody's Sovereign Risk Group and lead analyst for Greece. “Nevertheless, the macroeconomic and implementation risks associated with the programme are substantial and more consistent with a Ba1 rating.”

Moody's believes that the Eurozone/IMF support package has sheltered the Greek government from the markets while it enacts the very ambitious fiscal austerity measures and structural economic reforms stipulated by the package. These have the potential to restore market confidence, depending on the effectiveness of the government's execution, and place the country on a more stable debt trajectory. The rating agency's base-case scenario envisions Greece implementing the policy changes it needs to stabilise its debt-to-GDP ratio at around 150% by 2013, and reduce its debt burden, defined as the interest payment/revenues ratio, gradually thereafter (expected at 20% in 2014).

Should the economy respond positively to the competitiveness-enhancing structural reforms, debt stabilisation could be achieved earlier. “There is considerable uncertainty surrounding the timing and impact of these measures on the country's economic growth, particularly in a less supportive global economic environment,” says Ms Carlson. “This uncertainty represents a risk that leads Moody's to believe that Greece's creditworthiness is now consistent with a Ba1 rating, a rating which incorporates a greater, albeit, low risk of default.” Moody's outlook on Greece's ratings is stable, reflecting the substantial probability that the rating will not change over the next 12 to 18 months.

The key factors that will influence the rating agency's view will be the performance of the Greek economy, especially that of GDP and tax revenues. Information on these developments will take some time to accumulate and may prove to be either credit positive or negative. For further information, please see Moody's Special Comment “Key Drivers of Greece's Downgrade to Ba1″ available on www.moodys.com. Moody's previous rating action on Greece was implemented on 22 April 2010, when the rating agency downgraded Greece's rating to A3 and placed it under review for further downgrade.

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Will there be a real economic audit this week?

This week, officials from the “Troika” of the European Central Bank, the IMF and the Eurozone are due in Athens to begin an economic audit designed to monitor progress on Greece’s EUR 110 bln bail-out package.

The PASOK government has launched a critical, even historic round of reforms, in agreement with the Troika. If implemented correctly, these reforms will greatly improve the Greek fiscal situation and part of its competitiveness.

They will not, however, be enough in themselves to assure Greece’s longer-term survival and competitiveness. Indeed, unless the EUR 110 bln package is extended in 2012, Greece will again face a difficult lending situation, and will probably have to default without a further debt renewal.

This will be the subject of a future post. What I am most concerned of today is the fact that although the government is moving in the right direction, it is not moving fast enough, and it is clear that it will not meet many of its targets in the agree time frame.

Let’s take the budget progress as an example: according to the 5-month budget estimate published by the Government Accounting Office, the total deficit “fell” from EUR 14.65 bln to EUR 8.97 bln in the first 5 months of 2010 versus 2009 (all figures in EUR mln).

This is undeniable progress. However, both the income and the expenditure lines are “skewed”:

· The government has decided to delay return of VAT to September 2010, unless tactical audits are undertaken. This means that the “Tax Returns” line of “income” is artificially low.

· Several items of “Expenditure” are not reported:

a. The government has put off paying medical sector debt. It is currently locked in negotiations with pharmaceutical and other providers over its proposal to pay recent debts, from 2007 onwards, using Greek government bonds.

b. The government has not counted the retirement cost package of Olympic Airlines, which has a total price tag of EUR 1.3 bln, and which apparently will, despite previous declarations to the contrary, be paid. It is unclear whether this will be booked to the central budget, or towards the insurance funds.

c. The government has not paid a large number of state employees on temporary contracts, such as teachers, medical assistants, social workers and firefighters, for several months.

d. A large range of government ministries have delayed payment to private sector organizations for services provided. Perhaps the most famous example of this is the Hellenic Tourism Organisation (EOT) / Ministry of Tourism, which is rumoured to owe several hundreds of millions of Euro in debt for previous years’ tourism promotion campaigns.

This budget is therefore open to serious questions. What we see here is probably the “massaging” of data to fit into the terms of the Stability and Growth Agreement. Yet this creativity will unfortunately not make the debt go away. Greece needs more time to consolidate its public sector accounts, and it would be better to be fully honest with its European partners and with the Greek people.

Unfortunately, such full honestly would result in yet another firestorm on European sovereign debt markets. So I can understand if, by the end of this week, the Troika announces itself satisfied with the progress of the SGA and releases the EUR 9 bln tranche.

This causes new questions to arise:

· Moral Hazard: Will the Troika become a willing accomplice in concealing the true measure of Greek debt?

· Medium-term Impact: What will happen in 2012-2013, when the EUR 110 bln package expires, and Greece needs to turn to the markets to refinance at least EUR 60 bln in sovereign debt?

The changes that Greece is making are necessary and long overdue. Some of these, such as the first national inventory to formally record how many people actually work in the Greek public sector, indicate the pathetic state of the latter.

The Troika should insist on close monitoring, but perhaps increase the amount of lower-cost funding as a form of incentive payment for meeting budget conditions.

Otherwise, we are all deluding ourselves. Let’s not forget that of Greece’s EUR 310 bln debt, the maturity was approximately 8 years in total last year. Given the economic crisis that began in 2010, each year will bring a lower maturity at a higher interest rate. Assuming the total debt reaches a minimum 5% rate, Greece’s annual interest rate costs alone rise to EUR 15 bln, which will far outweigh the total savings imposed by the SGA in the next three years.

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