Thursday 31 March 2011

Symptoms of a worsening public finance situation in Greece

All public announcements to the contrary, many signs indicate a worsening short-term public finance situation in Greece. Some of these warning signs are recounted below: there are quite a few more, many of which cannot be precisely quantified.

1.      Construction companies are owed EUR 2.5 bln by the Greek government for completed works;

2.      Pharmacists’ unions are on strike due to unpaid reimbursements by public health insurance funds: media reports indicate that EUR 300 mln are owed;

3.      Public hospital staff are on strike over unpaid wages, particularly for overtime and short-term contract staff;

4.      Police staff held a protest march, claiming that over 2,000 vehicles where not working due to lack of maintenance, and that unjustified cuts in operating expenditure and overtime were taking place;

5.      An article in Kathimerini claimed that a Eurostat audit revealed a deficit of EUR 500 mln in public pension funds, versus a surplus claimed of EUR 900 mln (the Eurostat results have not yet been published).

The Ministry of Finance has made statements to the effect that the severity of the recession is lessening, and that the central government deficit in January-February 2011 was EUR 1,024 bln, or some EUR 55 mln lower than forecast. They also point to the expiration of one-time taxes, such as taxes on heating fuel, as well as “savings” in the Public Investment Budget.

Yet the five warning signs mention indicate that something is wrong with public cash flow and expenditure. The debt to construction firms, for instance, logically should have been paid through the Public Investment Budget (unless the works concerned maintenance): the sector claims EUR 2.5 billion in unpaid bills for primary construction. How is it possible that “savings” have been achieved if bills have apparently not been paid?

Greece and its international creditors have been claiming that Greece’s financial needs have been met through 2012 / early 2013. Yet there is increasing evidence that government obligations have not been paid. In the absence of information from the Ministry as to which specific obligations are still unpaid, and whether these are been included in the monthly budget progress, it is extremely difficult for any external observer or analyst to understand what is going on.

The situation in the private sector is worsening. Unemployment will rise following sectoral lay-offs in retail, although the overall situation may be minimised by higher seasonal tourism employment, partially higher manufacturing and by people exiting the labour force. With corporate income tax filings in April, we should have a clearer picture of 2010 GDP figures. 

There are press reports that the final 2010 deficit figure will be revised upwards to 10% (against an original target of 8.2%). This fact, more than any other, indicates that something is seriously wrong.

The difficulty of what Greece is trying to achieve should not be underestimated: a paradigm shift in state operations and function; the liberalisation of sectors and professions; large-scale privatisation; real structural reforms; fully repaying the public debt of EUR 340 bln. These reforms are taking place not only during a major recession, but against a long-term loss of competitiveness in key sectors such as tourism, industry or shipping.

And while the structural reform agenda is a worthy one, the fundamental dangers remain: 

·         Large segments of the Greek population, and apparently a large share of the public sector, do not accept the need for real structural reforms;

·         The pace of reforms is slow; reforms are sometimes watered-down or not implemented in their entirety; the most serious reforms have not yet taken place;

·         There remain significant questions on whether the economic data provided by the wider Greek public sector is valid;

As I have also reported in earlier posts, the scale of debt instalments and repayment period is severely challenging to manage. Although I believe a debt restructuring is almost inevitable, and to some extent has already begun, the current process must run its course, if for no other reason than to gain even some limited traction in terms of structural reform.  

(c) Philip Ammerman, 2011
Navigator Consulting Group

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