Thursday 8 September 2011

European Cacophony on Greece continues

The past five days have seen a continuation of the typically bewildering array of conflicting viewpoints on Greece.

Over the weekend, Minister of Economics Evangelos Venizelos learned, in no uncertain terms, that the Troika was not prepared to accept a re-negotiation of deficit targets in 2011. This lead to the announcement of an acceleration of measures in 2011, including:

-       The placement of up to 180,000 civil service employees in a labour reserve
-       The merger and closure of state organisations
-       The acceleration of privatisation measures designed to gain EUR 5 bln in 2011
-       Additional taxes, mainly via measures planned in 2012

These measures were announced on Tuesday, September 6th. Yet the “full court press” of European partner opinion on Greece intensified through today, with Wolfgang Schauble, Ollie Rehn, Jean-Claude Trichet, and others insisting that Greece meet its targets as originally agreed.

This is sound advice. Although these measures were agreed in the Mid-term Fiscal Adjustment Programme, voted in July 2011, progress had slowed over the August holidays. To some extent this is natural. What is not natural is the continual apparent vacillation over critical reforms, together with an investment of political capital in areas such as taxi liberalisation which bring no economic benefit whatsoever to Greece.

While we should not disregard the massive resistance to change within PASOK, we should also not forget that the Mid-term plan has been voted on in Parliament, and now requires implementation. It can be implemented without further votes.

Yesterday and today talk has intensified about Greece leaving the Eurozone, with discussions among German and Dutch officials quoted in Bloomberg and Reuters. When asked directly about these chances, however, officials such as Angela Merkel or Wolfgang Schauble repeat that such an option is impossible.

Overlooked in this cacophony is the actual progress made in Greece. General government income reached EUR 60.74 bln in July (year to date), while general expenditure reached EUR 78.5 bln. The government deficit was EUR 17.7 bln YTD. Of this, however, the primary deficit was only EUR 7.2 bln: the remaining EUR 10.5 bln is interest payments.

Given that Greece now has official unemployment of 16.5% and an annualised GDP decline in QI 2011 at 8.1% and QII at 7.3%, I hardly find it surprising that the government has failed to meet the deficit target. Given that unemployment is a lagging indicator who’s corrosive impact will be felt long after GDP growth resumes, I expect a further GDP decline in 2011 and 2012. This will affect tax revenue, and in turn affect the achievement of the deficit targets.

For the record, the Troika is discussing a shortfall in the deficit target of EUR 1.7 bln. The magnitude of this shortfall is trifling at this point in the economic cycle. It is also trifling given the many mistakes made in the first and second bail-out packages so far, mistakes that can be equally attributed to the Troika as to the Greek government.

All this speculation on Eurozone exit and failure of the austerity programme has had predictable negative impacts on Greek yields and CDS prices. Five-year CDS contracts reached 3,001 basis points while the 10-year yield climbed to 20.13%, according to Bloomberg. The fact that apart from France, no other European parliament had passed the second bail-out package has inflamed the situation.

I understand full well the need to consistent external pressure on Greece to fulfil its commitments. However, the cacophony of opinions, many of which are transmitted by major news channels without apparent qualification, is regrettable. It only confirms the fact that multiple priorities are in play:

a.  European political figures appear bent on doing their level best to destroy the viability of the Greek reform programme. Whether this is due to domestic political priorities, donor fatigue, simple ignorance, or other priorities is unclear.

b.  The European creditors cannot appear to decide whether they want to bring about a Greek default as a means of limiting contagion in the Eurozone, or whether they want to avoid a Greek default as a means of limiting contagion in the Eurozone.

c.  The Greek government and wider political system has lost credibility. PASOK is fighting a rearguard action to protect its political patronage system; ND loses no opportunity to destroy PASOK’s programme in the hopes of getting elected. There is no clear area of reform focus; there is no prioritisation in terms of urgency or return-on-investment of reform areas.

d.  The ethics of European taxpayers providing a face value reimbursement of Greek debts to European banks, including full interest rates, are questionable, not to say absurd. The fact that the second bail-out package has stalled in the Eurozone parliaments is equally absurd, as was the entire policy coordination process leading up to this point since April 2011.

It appears that absent a hard default, we are going to see the same charade playing out every three months. I cannot think of a worse way to handle what should be a simple sovereign debt restructuring process. The quality of decision-making and policy coordination is abysmal on all sides, and is making a bad situation worse.

(c) Philip Ammerman, 2011 

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