The Good News from Brussels: Extending Greece's EUR 110 bln Loan Term

Over the weekend, the Eurozone and IMF agreed on a EUR 85 bln bail-out for Ireland (the total sum includes IMF and Irish own contributions).

The excellent news for Greece is that its own loan repayment term has been extended from 5-6 years under the current agreement, to at least 10 years in total, i.e. to 2024. This is to harmonise its conditions with those of Ireland’s.

This is excellent news, because one of the main risks since the drafting of the EUR 110 bln bail-out has been the apparent impossibility of repaying the bailout and refinancing private sector loans in 2013 and 2014, which total EUR 70 bln in 2013 and EUR 76 bln in 2014.

This news should, however, also be viewed with caution:

·         The greatest threat now would be a diminishing appetite for further austerity and reform efforts: we should be reminded that so far, only the simplest of reforms have been enacted.

·         The total interest on the debt will continue to rise, with the bail-out itself at 5.2% on the normal loan term, and the debt to the private sector coming in at astronomical yields (under current conditions). This is not sustainable. It remains to be seen whether Greece’s purported primary surplus in 2013 and thereafter will be able to deal with this added debt load.

·         The continuing contagion in the financial market, and the unchanged severity of public deficits and debt in the OECD (together with longer-term economic decline and apparent political paralysis), means that conditions continue to deteriorate over the long term. What will the financial markets be like in 2013-2014? Hard to tell.

The government has gained some breathing room, and for this we should thank the feckless EU banking stress tests in the summer of 2010, and the apparent dissimulation of the Irish government on the true severity of its banking crisis. Or at least the Eurozone's apparent reaction to the latter. For once, PASOK has nothing to do with it. Eireann go braugh!

Watching the Decline

Since November 1^st, I’ve been shuttling back and forth to Cyprus for a consulting project. From this vantage point, I’ve been able to monitor the remarkable decline of Greek political and economic fortunes from a more remote and objective viewpoint. The events of this past month have been staggering:

·         On November 14^th, the second round of local and regional elections took place. It would seem that the lessons of the financial crisis have not been learned, since these elections proceeded in much the same way as those before, driven by personalities or party affiliations, without any practical plans or budgets on offer. Five of the six parties running differentiated themselves as being “anti-Memorandum”, as though their “resistance” against an act of Parliament was relevant, and as though our European creditors would be amused to learn that the legal conditionality of their bail-out loan to Greece was now being challenged, at least in the court of public opinion.

·         The elections themselves were carried out again the backdrop of a magnificent blackmail by the Prime Minister: “Vote PASOK, or I will call national elections.” Again, our European creditors were hardly amused—Papandreou backed down on the evening of the first round, claiming, somewhat weakly, that the results in the first round provided enough support. In any event, it would not seem that the voters themselves were convinced, since over 50% of them stayed home or cast a white ballot.

·         The elections themselves were prefaced by PASOK engaging in pre-election maneuvers of the worse kind. ERT announced the hiring of 640 staff (perhaps ERT’s 5 orchestras needed more trombone players); the Prefecture of Pireaus hired 67 workers; a range of other organisations announced or implemented last-minute hires.

·         On November 15^th, Eurostat published its revised and final (they claim) estimate of Greece’s 2009 deficit. This included the addition of EUR 18 billion is semi-governmental organisation debt to the central government’s books, driving the deficit to 15.4% GDP, and total debt to 126.8% GDP. As predicted, the government deficits from 2006-2009 were increased as well. As the government’s 2011 draft budget succinctly states:

From EUR 168 billion in 2003, the total debt grew to EUR 298 bln in 2009, an increase of EUR 130 bln.

This debt level is obscene, and the fact that most of it occurred during the Karamanlis government’s 6 years in power is regrettable.

·         On November 18^th, the government announced its 2011 draft budget. Given the deteriorating financial situation, the budget calls for a massive fiscal adjustment. With the 2010 deficit estimated at 9.4% GDP, the 2011 target has been set at 7.4% GDP, and 6.5% in 2012

·         On November 21^st, Dora Bakoyianni launched her new, centre-right political party, “Democratic Alliance”. Its platform calls for a number of interesting policies, including a 20% flat tax, but makes no reference to how these will contribute to solving the debt crisis. Given Bakoyianni’s own record as Mayor of Athens, it is difficult to see how credible her calls are for transparency in the public sector, but this is not a problem unique to this politician or this political party.

·         Her political launch led to the expected paroxysms in Antony Samaras’ New Democracy, including the expulsion of one MP, and it would now appear that, following the left, the right will splinter as well. For all the good the right has been doing recently, I can’t say this outcome is the wrong one.

·         These events have led the government to announce a panic-ridden search for additional sources of expenditure cuts and revenue increases. Unfortunately, it is difficult to see how this will happen given the implementation record to date, and when Ministers such as Louka Katseli or Dimitris Reppas continue to pander to the unionised public sector.

But these facts, dismal though they are, regrettably confirm the longer-term trend:

a.       Greece’s public debt at end-2009 starts at EUR 298 bln, but the deficit target set out in the 2010 estimate and 2011 budget is based on each government component meeting its targets. So far, this has not been happening. Social security funds, hospital debts, and the debt of other entities such as the Hellenic Railways Organisation or the Agriculture Insurance Funds continue to rise. The government itself manifests a cash flow debt of at least EUR 7 bln, which until now has been met by payment delays and delays in VAT reimbursements.

b.      The major problem affecting Greece is not necessarily the public debt, but four far more serious, systemic “debts”:

·         The lack of political will among Greece’s political elite, and even within the governing party, to implement painful yet necessary reforms.

·         The lack of a competent, value-driven civil service capable of right-sizing itself and developing a meritocratic approach.

·         The lack of a comprehensive approach towards reducing corruption and prosecuting past instances of corruption. The fact that major cases such as Siemens, Skaramanga, MAN, Vatopedi, hospital procurement, military procurement, and many other cases remain unresolved or even unprosecuted is an insult not just to Greek taxpayers, but to our European creditors, who are increasingly wondering whether they should pay for the orgy of crime which has occurred for years, and apparently continues.

·         The fact that the Greek professional and commercial classes continue to avoid paying their fair tax assessments, while making increasing use of standard tax avoidance (e.g. by not reporting income), or “legal” tax avoidance, using offshore structures.

c.       The micro- and macro-economic environment against which Greece is making its reforms appears to be almost ignored. We are working in an environment characterised by three major trends:

·         The long-term trend of declining international competitiveness, both within Greece, but also within the EU. In this environment, Asian producers are increasingly winning market and value share, and climbing the innovation ladder. Greek and wider European producers, in contrast, rely excessively on protected markets or subsidy schemes, most of which nurture sunset industries such as agriculture or cotton textiles, while penalising (through regressive tax systems) future industries.

·         The fact that we are not fighting against the deflation of one bubble, but two. The first bubble is the high sovereign debt issues which characterised most countries in the past 10 years, and which are regrettably set to continue into the future. The second bubble is the fact that nearly every sector in Greece (and Europe) is characterised by massive overcapacity, at a very time when public and private sector consumption must fall to balance excessive debt. Much of this overcapacity is value-destroying (based on sunset or protected industries) rather than value-creating, or is based on the import of Asian products (textiles & garments, electronics).

·         The fact that the primacy of the state as a means of development is still followed avidly in Europe, and particularly in Greece. This is despite the fact that state spending in Greece has crowded out and distorted (through corruption, regulation and subsidies), private sector investment, and created much of the overcapacity mentioned. Until the dead hand of the state relinquishes its rigor mortis grip, we cannot expect serious economic development, i.e. development based on commercial viability rather than government subsidies, protectionism or crony capitalism.

I believe that the changes sought by the PASOK government are necessary. But I also believe they are doomed to fail. Neither the Greek political system nor Greek society appears aware that they are operating in a deeper, wider, global economy characterised by a fundamental paradigm shift in competitiveness, demography and debt. The Greek budget forecasts, while an improvement over previous years, suffer a massive credibility deficit and implementation risks, not to mention further hidden system debt. And all the time, the interest on EUR 340+ billion public debt keeps rising, while the threat of default looms as it is highly unlikely the markets will be prepared to resume lending to Greece by 2013 at the levels needed to refinance its debt.

We should therefore see the situation as it really is, rather than as we would like it to be, and prepare for the inevitable. In this case, we should prepare for the worse. 

The Return of the Bond Vigilantes … and Financial Common Sense?

This past week saw the return of the bond vigilantes in force, as Irish yields were pushed up to nearly 9% on Thursday, driving up yields in Spain and Portugal as well. In Greece, Prime Minister George Papandreou’s threats to hold an early election resulted in Greek yields rising to over 11%. His retreat from this position last Sunday, after extensive and well-merited criticism from Eurozone partners, was made under the cover of what could only be described as anemic results in the first round of regional elections.

This coming week will see a likely exacerbation of the public sector funding crisis, at least on the Eurozone periphery. On Monday 15 November, Eurostat announces the revised Greek debt levels for 2009 and presumably for earlier years. Ireland is being pressured to take action by announcing plans to access the European financial stability mechanism before the Eurofin meeting on Tuesday, 16 November.

In Greece, the crisis illuminates the worsening stage of the country’s public finances. New measures on public expenditure and revenue will have to be announced given the shortfall in revenues in 2010 and the fact that many financial and policy measures have so far not been implemented.

Concealed by the election furor is the fact that the European Commission has called upon Greece to pay back illegal state aid or improper disbursements in Common Agricultural Policy subsidies, agricultural insurance, investments in rail terminals and a range of other projects, which may reach a level of EUR 650-800 mln in 2010 alone.

In 2010, the Troika has decided to add OSE’s EUR 10 bln debt to the central government’s books (presumably over several trailing years) as well as the debt of other semi-governmental organisations. I forecast these additions driving Greek public debt to a level of 150-152% of GDP by end-2010.

This level may even be overshot, as media sources announced yesterday that, according to initial reports by the Hellenic Statistics Authority, 2009 GDP was probably lower than expected, at EUR 233 bln rather than EUR 240 bln.

Adding the 2011 expected deficit level brings the 2011 Greek public debt to at least 160% of GDP in 2011, and 168-170% of GDP in 2012.

The greatest threat, therefore, will be in 2012-2013, as I have already stated in a number of posts here. In 2013, Greece will have to pay back the first installment of the EUR 110 bln bail-out package which, together with rollovers or repayments (impossible to imagine given the current budget levels) of remaining private sector debt, will reach EUR 70-80 bln.

It is impossible to assume this level of funding will materialise. There will be three likely scenarios which emerge:

a.       The loan term of the current bail-out package will be extended to 6-8 years, with a second bail-out package of at least EUR 80-100 bln to cover bonds maturing in the next 2-4 years. In this case, we can anticipate an austerity programme in place to 2020.

b.      A rescheduling of the bail-out package will take place, together with an orderly restructuring of Greek debt to private sector organisations. In this case, the haircut will have to be on the order of 45-50% for this to have any real impact. A condition for this will be a budget surplus in Greece, enabling it to at least service part of the EUR 110 bln bail-out package.

c.       A total collapse of funding for Greece, leading to a disaster scenario where no further bail-out packages are possible, and where no further private sector loans are forthcoming.

We should not discount the third option. Our tendency at present is to focus on investor sentiment turn-around in individual markets on a time scale of months. Yet the public finance situation in most OECD countries is deteriorating rapidly, and by 2013 will have reached crisis levels absent the successful implementation of major austerity packages.

In this category, I particularly place Italy (likely public debt 128% GDP in 2013) and the United States (likely public debt 118% GDP in 2013).

Official Italian debt-to-GDP was already over 115% in 2009, with a 2010 deficit forecast at 5%. Given the likely impending collapse of the Berlusconi government and the fact that there is no clear political majority or political will for public sector reform in that country, it is difficult to understand why Italian bond yields are so far below Spanish ones.

In the United States, the total public debt limit was lifted to $ 14.3 trillion earlier this year. While President Obama’s Fiscal Responsibility Commission recently recommended $ 3.8 trillion in debt reduction, the divided Congress makes it highly unlikely that any rational decisions will be taken. Together with the QE2 package of $ 600 bln announced by the Federal Reserve and underlying economic weakness in unemployment, housing prices and foreclosures, we should expect that the risks of future lending to the US government will rise. Perhaps these will be offset by a currency decline or yet another “safe haven” flight to “quality”, but I would not place too much hope in this.  

We may, however, find ourselves in a “new normal”, where public debt levels of over 100% GDP are the norm, and where bond yields rise by 1-2 percentage points, without an adverse economic impact. This scenario would be similar to boiling a frog by slowing increasing the temperature in the pot, rather than pitching it directly into the boiling water. Either way, the frog gets boiled.

To summarise: there is nothing on the intermediate-term horizon which suggests to me that Greece will be able to repay its debts in 2013 as predicated by the EUR 110 bln bail-out. The quality of the regional election campaigns ending today, and of the general political debate over the last 6 months, has been abysmally low, with political parties refusing to accept reality and engaging in immoral electoral promises which have no hope of being realised.

Regrettably, exactly the same political climate exists in the United States or Italy. There is a total lack of political will to focus on the root causes of economic problems, and implement solutions. I have a higher regard for the economic reform being undertaken in the United Kingdom or Ireland, despite the major risks of the size of the fiscal adjustment being planned.

Together with the Franco-German proposal for making financial institutions bear a share of responsibility for future public finance defaults, and all the ingredients appear to be in place for major problems ahead.  

(c) Philip Ammerman, 2010

Parachutists at the Astir Palace

A world-famous parachutist* was in town last week. I didn’t know Jeffrey Sachs, a proponent of economic “shock therapy” in Eastern Europe in the early-1990s, visited Athens until I read his column in the New York Times, In Athens, New Beginnings.

Professor Sachs drank long and deeply of the PASOK Kool-Aid at the Astir Palace, where he attended the launch of the Mediterranean Climate Change Initiative. Dr. Sachs had this remarkable finding to report:

Yet Papandreou has done something even more difficult and remarkable. He has insisted that Greece look decades ahead to protect the fragile Mediterranean environment while building skills and technologies for a new era. 


Dr. Sachs was apparently not aware that holding international conferences in 5* hotels are one of PASOK’s few genuine achievements. Every month, it seems, another grand initiative is launched at another sparkling event. Has anyone forgotten George Papandreou’s Road Plan for Balkan Accession by 2014, delivered just a few days after winning the October 2009 elections? If holding conferences or making empty promises were an Olympic sport, Greece would be a gold medalist.

It is of course doubly ironic that Dr. Sachs singles out Papandreou’s apparent commitment to the environment for praise. Is he not aware that Greece has one of the worse environmental records since joining the EU in 1981? Greece has consistently flouted the letter and the spirit of EU environmental legislation, and today finds itself paying fines or losing cases in the European Court of Justice for a wide variety of offenses, from illegal landfills and releases of carcinogenic PCBs to violations of the Natura 2000 directive.

The environmental scandals affecting this country have not yet been fully investigated, let alone prosecuted or solved. The illegal toxic waste disposals in the Asopos River which [continue to] cause mercury, chromium and dioxide poisoning have been widely documented, but no substantive legal action taken. The high occurrence of cancers and birth defects around DEH’s power plants is well-known, but monopolist DEH continues its commitment to high-sulfur coal-burning power generation. The eutrophication of inland seas such as the Corinthian Gulf or lakes such as Lake Kastoria, Koronia or Ioannina due to pesticide run-off is painfully apparent to both sight and smell. The fact that Greece has a disastrous record in recycling or litter prevention is evident on every street, every beach and forest, and every country road.

If George Papandreou wants to save the Mediterranean environment, I suggest he ends his conference circuit, sells the government jet, and starts implementing existing Greek and EU law right here at home. There is more than enough work to do for the next 15 years, without attending a single conference or making any more promises. We’ve heard far too many of them already and frankly, we are tired of paying for them. And Dr. Sachs should take parachute lessons elsewhere.  

* A parachutist in this context is an amicable journalist/pundit, usually (but not exclusively) an elderly white male, who flies into Athens for 2-3 days, stays at the Astir Palace or the Grande Bretagne, and then flies out to write profound articles about Greece.

© Philip Ammerman, 2010s

The Astakos Debacle and Need for a Real Investment Strategy for Greece

The Astakos LPG/LNG debacle and the government’s spasmodic efforts to pass a “Fast Track” legislation indicate that Greece’s (or rather, PASOK’s) strategy for attracting and facilitating investments remains fatally flawed. This blog post will explore the Astakos investment as an illustration of the general problem: a later post will explore the problems and potential of investment policy in Greece as a whole.

The Astakos investment was announced by the government with great fanfare in late 2009/early 2010, and promptly handed over for negotiation by the then Minister-without-Portfolio Haris Pamboukis. There followed a constantly-changing investment plan and investment consortium which included the following elements:

·         Development of a liquefied petroleum gas (LPG) and partial liquefied natural gas (LNG) power station at the port of Astakos. Additional infrastructure included an LNG terminal and a pipeline linking Astakos with the Turkey-Greece-Italy IGI Poseidon pipeline, which passes through northern Greece and enters the Ionian Sea south of Igoumenitsa.

·         The capacity estimate was for a 1,010 MW power station which would distribute power in Greece, while further capacity (estimated at 30% total output) would be sold to Italy. The total investment value was listed at $ 7 bln.

·         The investment consortium* included the Quatar Investment Authority and Qatar Petroleum with 34%; Sabbagh and Khoury (Lebanon) with 33%; and Rosebud Energy (Germany) with 33%.

A rapid glance at Greece’s geography and the site of the proposed investment underlines the unclear business logic of the project:

1.      Astakos is geographically-isolated. The nearest major urban centres are Preveza to the north, Agrinio to the east, and Nafplio and Patras to the southeast. Connection to the grid would have been required, together with a careful capacity planning. In any event, the Ministry of Energy indicated that at this point in the system, the grid could only absorb 300 MW. There are therefore two commercial risks to consider:

a.     The direct risk, i.e. the cost of investing in transmission and distribution grids, and

b.     The indirect risk, i.e. the fact that the power generation and distribution system in Greece is heavily regulated and dominated by a monopoly player, the Public Power Corporation of Greece (ΔΕΗ).

2.      To say that Astakos is isolated is perhaps to underestimate the actual situation. The port of Astakos (which is not in Astakos town) has only a small rural road connecting it to the national highway system. There is no infrastructure around the site. The region does not have the engineering and skilled worker capacity necessary to run the site: staff would have to be attracted to the location, and living quarters built. The situation in Greece as regards labour costs, payroll taxes and work/residence visa issue is not the same as Qatar and the United Arab Emirates, which are far more flexible and investor-friendly in this regard.

3.      Astakos is far from the IGI connector, which enters the Ionian Sea south of Igoumenitsa. Investing to connect to the IGI, given the minor quantities of gas available in the initial plan, requires a very careful planning of costs and benefits. If I were planning an investment designed to supply Italy with natural gas via the IGI, it would not be located in Astakos.

4.      The ostensible reason for the withdrawal of the Qatari partners from the project—that the price of electricity offered by Italy was too low—is a direct consequence of the size of the investment costs and the capacity planning. Taking into account the costs of seaborne LPG or LNG, there is little commercial sense in setting up a small storage unit at Astakos, and investing in an expensive pipeline to connect with IGI. It makes far more sense to locate the LGP/LNG terminal directly in Italy, and indeed, further north, where demand is higher. (The marginal cost of transport by sea 200-300 km further north is far lower than the cost of building pipelines for this reason). Alternatively, the terminal could be located at Otranto to offset a potential fall in supplies through IGI. 

5.      Taking into account the energy demand of Greece, it is difficult to see why such an investment should not be made in the region of Elefsina, where an extensive energy cluster already exists, and where major demand and infrastructure (between Athens and Corinth) already exist. Alternatively, the station could have been located in northern Greece, which would enable Greece of offset energy imports from Bulgaria with domestically-produced energy.

6.      The choice of partners is an interesting point for any investor interested in doing business in Greece. The dominant player in the energy sector in Greece is the Public Power Corporation, with the Public Gas Corporation of Greece (ΔΕΠΑ) being the primary player in gas production and distribution. Although the energy sector has theoretically been liberalised, in practice it has not. Any investment generating 1,010 MW of energy for consumption in Greece would be a direct competitor to PPC’s powerful, entrenched interests, which include lignite-fired plants in northern Greece. Given that PPC controls both production and distribution of electricity, any investor would have to seriously consider the political resistance which would likely be created by these interests.

The fact that PPC is in the process of privatisation / liberalisation, and the very real political conflict which is now underway, illustrated the danger posed by such a competitor, particularly since the Minister of Energy is also the Minster of Environment in Greece. A natural choice to offset this resistance would be a powerful local player such as the Vardinogiannis group, which already has extensive energy interests and is perhaps the only partner capable of withstanding the tangled political interests of the governing party. The logic and ulterior motives of choosing Rosebud as an investment partner should be questioned.

7.      The choice of LPG as a feedstock is a controversial choice. Given that natural gas is in general cheaper and that Qatar has the largest LNG production capacity in the world, it is difficult to see what advantages are offered by LPG. This is further open to question given that Greece has already invested in gas distribution capacity and that an LNG plant would be more in line with the national energy policy.

To conclude: it is difficult to determine the commercial and business logic of this investment, given the peculiarities of the Greek investment climate, the Greek energy mix and the location of the investment.

The fact that an investment site was readily available and had to be marketed to a potential bidder is no substitute for the classic investment budgeting for any greenfield site. The costs of land, in any case, are a small fraction of the investment in pipelines and grid that would have had to be made for this project to function effectively.

This difficult situation was, in my opinion, compounded by the unhealthy government involvement in its development. It was clear that the reason the Greek government was promoting the project was to develop a troublesome “asset” which was started under previous PASOK governments, and to “win” a battle of public opinion. The involvement of different ministries, and the involvement of ministers with vastly different priorities, resulted in conflicting messages and estimates. A kind of “personal investment promotion” occurred, which cannot possibly substitute for carefully-planned, economically-logical strategies and plans.

The culmination of this exercise was the sudden and embarrassing withdrawal of the Qatari partners and the collapse of the project. The attempts by PASOK to cast the blame on the investment consortium are, in retrospect, suspect, since the commercial logic of the project was being promoted by PASOK in the 9-10 previous months.

It is also interesting to note that any number of actors, including both the government and private sector players, have served as active cheerleaders of the project, before the investment even took place. I was particularly struck by the statement of Michael Massourakis, Chief Economist of Alpha Bank, in the FT on October 12^th:  

Judging from the dust the Qataris and the Chinese leave behind as they scramble to invest in Greece, as well as the more than €20bn in European Community structural funds in the pipeline, a resurgence of investment may not be such a far-fetched scenario.

Alpha Bank is one of the owners of the Astakos Port, and is particularly exposed to Greek public debt. As if this conflict of interest were not enough, any objective evaluation of Chinese investments in Greece to date, or of EU fund absorption and effectiveness, should be enough to convince an observer of the opposite conclusion.

I forecast the same type of fundamental conflict of interest in the ongoing $ 5.0 bln MOU for Qatari government investments in Greece. This project is being planned by committee, with the Qatari and Greek sides each putting up members. While I do not want to sound unduly pessimistic, it is difficult to see how  committee staffed by political appointees of PASOK (or indeed, any political party) is expected to lead to sustainable investments for the objective benefit of Greece.

Where are the investment professionals? Where is the long-term investment planning designed to generate jobs and improve the trade balance? Why such focus on large-scale investments (FastTrack), when research from every EU country (and the United States) indicates that small and medium-enteprises produce the large majority of employment and economic benefits?

Greece needs a far different kind of investment policy. In a subsequent blog post, I will try to outline what this should look like.

* NB My company, Navigator Consulting Group Ltd., is a consultant to one of these investors. The opinions expressed in this post are my own. Neither Navigator nor I have advised the principals in the Astakos project.

© Philip Ammerman, 2010

Pending Confirmation of Higher Greek Debt

The events of the past 2 weeks, and notably Eurostat’s delay in releasing its revised figures for the 2009 deficit, as well as the rumours of a possible delay in EUR 110 bln bail-out payment schedule, confirm the thesis that has been proposed in this blog since late 2009:

·         that on the one hand, total Greek debt is higher than the amount found in the official figures

·         that on the other hand, Greece’s return to the markets in 2013 for the amounts in question—approximately EUR 70-80 bln—will be impossible, or very expensive.

Regarding the first issue, that of the restatement of the 2009 deficit. Numerous media sources have claimed that the deficit will rise from 13% of GDP to 16%. The factors which will be included in the debt include the EUR 5 bln Ethniki swap, as well as higher healthcare spending and debt of certain semi-governmental organisations.

A brief review of the deficit difference–3%, or EUR 7.11 bln—is probable only of one includes the EUR 5 bln swap* plus EUR 2 bln in additional spending. In my opinion, this is insufficient, which is why the announcement has been moved passed the November 7^th elections:

·         Either the revised estimate of 3% does not include a far higher amount of debt which will be added to the central government books in 2010, or

·         Additional debt must be added to the central government books for the period 2006-2008 as well as 2009.

The reasoning behind this is simple: As explained in previous posts, the added debt “transferred” to the central government in 2010 alone is at least EUR 13.8 bln (OGA + OSE), not counting a number of other lines, such as the military industry, healthcare, construction and others.

In order to avoid a “ticker shock”, I fully expect Eurostat to update not just the 2009 deficit, but the deficits going back to 2005. However, at the end of this exercise, I expect Greek central government debt to reach EUR 347 bln at end-2010, or approximately 152% of GDP.  (My GDP estimate for 2010 is unchanged at EUR 225 bln. If anything, I regard a 5% real GDP decline as an optimistic case).

This will cause yet another round of shock in the international markets. It is difficult to understand why the ratings agencies and many other forecasters do not reach this conclusion by themselves.

This also creates significant uncertainty for the prospects of Greece’s repayment of the EUR 110 bln bail-out, which is due to start in 2013. I regret to say that I have still not had the time to crunch the numbers on the PDMA website. However, I understand from serious press reports that the minimum debt payment in question in 2013 is at least EUR 70 bln, taking both the bail-out and private sector issues into account.

It is increasingly difficult to see how Greece will borrow EUR 70 bln, given that by end-2012, we can expect debt-to-GDP to be at least 165%, if not 170%. Unless Greece receives a longer grace period, or a 5-year bail-out repayment schedule, or a further bailout from the EUR 750 bln Stabilisation Fund, it does not seem probably that the assumptions on which the bail-out was designed will materialise. In other words, it seems impossible that Greece will be able to return to the markets in this time at an annual interest rate of less than 7-8%. Thus, it seems impossible that Greece will be able to meet loan obligations in the period 2013-2015.

It gives me no pleasure at all to be proven right in what has been an often lonely attempt to consolidate Greek public debt figures and understand the true dimensions of the debt. This is particularly the case when well-respected financial publications such as the Financial Times or The Economist appear to have taken Greek debt figures since March 2010 at their face value.

However, without a proper, unbiased understanding, it is impossible for any government or creditor to begin the process of a debt work-out or restructuring, or to decide on future lending. Although this comes at a critical time, I continue to believe that the sooner we have a full picture, the sooner we can lay the foundations for a real recovery.

In this respect, the bravery with which Ireland and the United Kingdom have recognised their true debt picture and put in place an austerity plan is instructive.  

In Greece, the fact that Eurostat has finally been granted audit rights over the Hellenic Statistics Service is a major improvement.

Any investor looking for a market rebound in recent weeks (due to Ethniki’s recapitalisation or Eurobank’s EUR 200 mln interbank borrowing) should be very careful about holding Greek equities one week past the November 7^th election.

* NB Determining the true value of the Ethniki swap may be technically difficult, and I would be very interested to see how Eurostat values this trade.  

© Philip Ammerman, 2010