Monday 12 September 2011

Greece, the Troika and the missing EUR 1.7 billion

The latest installation in the Greek debt crisis comes from the Troika’s break-off of its monitoring mission in the week of September 2nd. The reasons for this have not been established by the Troika itself, but press leaks attribute this to insistence of the Greek Minister of Finance that no further public spending cuts or taxes be made this year. The international press have interpreted this to be that Greece is missing its targets.

What has happened in the week since is nothing short of instructive of the sub-optimal way in which this crisis is being handled. The European creditor partners rounded on Greece, stating that if the targets were not met, September’s EUR 8 billion tranche would not be released. Bloomberg, Spiegel and a range of other financial publications “leaked” information that Germany officials were examining the options for Greece’s default and exit from the Eurozone. Greek borrowing and CDS spreads hit record highs.

Over the weekend, the Greek government was forced to take new measures, including an emergency wealth tax on property, which will be collected automatically through electricity bills. This accompanies a range of similar taxes already in effect.

Yet it is interesting that not a single authority—starting with the Troika itself—has documented why this shortfall in budget targets has taken place. An objective look at the situation shows a very different reality than what the international press has to reveal.

1.     Greece’s 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. The primary deficit has been improving: a EUR 7 bln deficit is about 3.2% of current GDP.

2.     The first Greek bailout does not include an interest rate cut. The EUR 110 bln provided to Greece was under the condition that no debt restructuring take place, either in terms of interest, or debt maturity. This is in contrast to most previous IMF interventions. Besides this, the EUR 110 bln in new debt was actually issued at a higher interest rate. This approach hardly constitutes the political solidarity it has been made out to be in European capitals, and is unacceptable in a debt crisis. 

3.     One reason the budget targets were not met is because the government increased the state funding for the Institute of Social Insurance (IKA) and the State Labour Employment Organisation (OAED) by EUR 1.1 billion. This funding was necessary to provide for state pensions, unemployment benefits, and for programmes supporting employment which are keeping approximately 400,000 people employed. If these funds were cut, Greece’s unemployment would rise from the 699,658 people in July 2011 to 1.1 million people, or over 22% of the workforce. It would be interesting to see how such a development would be seen in terms of the success of IMF structural adjustment programmes, or the Eurozone’s solidarity in the present crisis, had the EUR 1.1 billion not been paid. 

4.     A second reason that the budget targets were not met is because the Greek Public Debt Management Agency (PDMA) proceeded with open market debt purchases in the spring of 2011. According to, the PDMA purchased EUR 2.5 billion in April 2011, achieving a significant discount on face value. Once again, the fact that this event has not been widely publicised is regrettable, as it would put a far different interpretation on the debt and budget situations.

5.     A third reason that the budget targets were not met is because Greece’s GDP is declining rapidly. Greece now has an annualised GDP decline in QI 2011 at 8.1% and QII at 7.3%: this is expected to accelerate given a range of internal and external factors (not least of which is the high unemployment rate). According to press reports, the Troika accepted that this GDP decline accounted for “only” 25% of the budget shortfall.

This is not to excuse the Greek government of all blame for the situation. The tax on real estate from 2009-2011 has still not been collected. There are delays in implementing the rationalisation of the public sector. There are payment arrears of about EUR 6.5 billion. There is no clear prioritisation of reforms, and some ministries are lagging far behind. However, the course of reforms is clearly on the right track.

The new taxes announced by the government and the Troika’s insistence will only worsen the recession, as they will take a substantial amount of consumer disposable income—at least EUR 500 per household. Together with the equalisation of the tax on heating fuel (will double the cost of heating fuel) and the existing tax on property, this this means that by the onset of winter, the average household will have to be prepared for further taxes of at least EUR 2,000 each on an annual basis. As a means of comparison, Greece’s GDP per capital was EUR 20,700 in 2009. This means that each person’s tax contributions rise by about 5% of GDP/capita from just three measures. What forecasts can the Troika make for GDP growth in 2011 and 2012 as a result of this?

So let us re-cap the “progress” to date:

a.    The initial Troika plan in May 2010 for Greece was flawed. It forecast a return to markets for Greece in 2012-2013, while simultaneously allowing Greece to continue a deficit until 2015. This means that the Eurozone country with the highest public debt (to GDP) and continuing to make a deficit was supposed to convince international bankers for more cash in 2012. That the Troika plan appeared to make no provision for the debt of the wider public sector (this was left to the Eurostat restatement in November 2010), or for interest rate accretion, in its calculations is almost besides the point. The fact that there was no debt restructuring was a clear give-away to the “fragile” international banking sector.

b.    In the face of a worsening debt, GDP, and unemployment situation, the government in Greece proceeded with open market debt restructuring operations in April, and with unemployment support in May-June, which cost a further EUR 3.5 billion in unforeseen expenditure. This  expenditure was a rational and correct policy choice.

c.   No European parliament besides France has approved the second bail-out package reached on July 21st. This leaves a major void in market confidence and actual debt management operations.

d.     The IIF-coordinated offer of “private sector involvement” in the Greek debt restructuring is similarly incomplete.

e.    Press leaks have been particularly intense from Germany this past week, forecasting a default and Euro-exit for Greece. The fact that Greece is now promoting investments worth over EUR 20 billion to Germany can surely not be a coincidence, as the fate of a German investment delegation to Greece in October has now been linked to further “reform”, in this case by making the investment environment more attractive to German investors.

The only conclusion I can draw from these facts is that the Greek debt crisis policy intervention by the Troika is abysmal, for lack of a better word. The poor communications and goal-setting policy of the monitoring team is creating a crisis of market confidence, unless one lives in an ivory tower. The manifestly conflicting priorities of the Eurozone political parties are no longer supporting a “bail-out” solution, but a default solution, largely due to domestic political pressure. The international media appears to do no due diligence whatsoever, but parrot whatever information is provided by the expert of the moment.

I can also draw several other conclusions, which are perhaps better not repeated in a public document of record.

Given this situation, the most rational course of action may be a unilateral Greek default. Or at the very least, the threat of one. It is high time everyone in this story took responsibility for their actions.

(c) Philip Ammerman, 2011
Navigator Consulting Group 


  1. Actually, the 7 bill. after interest IS the disaster, becuase it means that even if all Gr debt would be forgiven, Gr needs immediately about 3000 Euro from every working tax payer. With an average annual income of 16.000 Euro or so that is going to be difficult.

  2. Average per capita income is about EUR 20,900, according to Eurostat. However, we should also remember that companies and property can also be taxed. Individuals contribute EUR 9 bln in total taxes; companies only EUR 2 bln. There will be an income tax law change soon which will hopefully redress this. But you are right: a EUR 7 bln primary deficit is still large, and will increase by the end of the year.