When “Austerity” and “Reform” are Probably Meaningless

The latest austerity measures announced by the Greek government in an effort to comply with the Troika’s demands for meeting fiscal targets are certain to prolong and exacerbate the current economic recession, and transform it into a depression.

These measures include:

·       The cut of one entire monthly salary for all public sector workers. This is on top of the elimination of nearly one monthly salary for most workers (through reduction of the thirteenth and fourteenth salary “bonuses) as well as the fact that salaries above EUR 1,500 were reduced.

·       The levy of an additional special tax on property values. This is estimated based on varying rates per square meter, adjusted by a regional coefficient as well as other factors, and multiplied by the number of square meters of floor area. This tax is collected on electricity bills, which already contain municipal taxes, a wealth tax, a tax for the public television broadcaster, and value-added tax. It should also be remembered that there are already two additional property taxes in effect.

·       Rationalisation of semi-governmental organisations as well as placing some 30,000 public sector workers in a “labour reserve”, which implies reducing their salaries to a level of 60% their former salary for a period of 12 months. If they do not find another public sector position in this time, they are fired.

·       Acceleration of other structural reforms, including privatisations and the implementation of a uniform pay structure in the public sector.

Whether these measures are justified or not in the name of greater public sector efficiency is debatable. It is difficult to see a strategy which translates into greater efficiency or productivity in the public sector. Most likely, the burdens on the citizen and company will increase, since the public sector will simply under-perform yet further.

What is not debatable is the deleterious impact these “reforms” will have on the real economy. Public sector salaries have already been cut extensively: cutting an entire additional monthly salary is not only a major counter-incentive to productive work, but it bears a real price in terms of consumer spending.

Given that Greece’s GDP (as with that of most countries) is based on consumer spending for about 70% of total economic activity, it is only logical that reducing spending reduces GDP, which in turn reduces VAT income as well as income taxes.

As September nears its end, we expect a further decline in basic economic indicators:

a.     The tourism summer boom is over. Seasonal employment is ending; tourism enterprises are closing for the winter. Unemployment is likely to accelerate dramatically, perhaps reaching 18% by the end of 2011.

b.     The collection of the new property income taxes for 2009, 2010 and 2011 will shortly start to occur. Today, several classes of self-employed professionals also received supplemental income tax demands. These will now be increased by the latest round of tax increases and payment cuts.

c.     As the winter approaches, heating fuel will be distributed, priced up at least 100% over 2010 prices due to the increase in taxes designed to bring the price of heating fuel to the price of diesel gasoline.

All this translates into a major shock to consumer disposable income, either due to wage cuts or tax increases. Together with continuing government cutbacks in the public investment programme and operating expenditure, this means that the recession will probably continue at a rate of at least 5% GDP in 2012, while unemployment may rise to 20-22%.

It is remarkable that, looking back to September 2010 when the Prime Minister made his last “Speech to the Productive Classes” at the Thessaloniki Trade Fair, just how little the fundamentals have changed.

With the Athens Stock Exchange index trading between 800 and 900 points, privatisation income from the sale of state-owned enterprises is likely to be less than 50% of most enterprise book value, depending on how the privatisations are handled. The National Bank of Greece, for instance, has assets of EUR 119 billion and a total market capitalisation of just over EUR 3 billion. Other companies on the privatisation list have far lower valuations.

Although Spain, Luxembourg, France, Italy and Belgium have passed a national law expanding powers for the European Financial Stability Fund (EFSF), other countries face delays. This means that the second bail-out package for Greece remains in limbo. Results on participation by private banks in Greek loan restructuring, coordinated by the IIF, remains unknown. It is ironic that Greece is being pressed to implement its commitments, when so few Eurozone commitments have been implemented.

A pushback against talk of a Greek Eurozone exit or default has thankfully started. Yet the fundamentals remain the same, while the domestic and international economies are slowing. Angela Merkel’s CDU has lost five regional elections in Germany this year; this Sunday, it is likely to face its sixth loss. 

Absent a major, concerted effort to address the fundamentals of this present crisis, we are likely to see a continuing failure to meet fiscal targets in Greece, and a worsening economic situation in Europe. In such a situation, neither “austerity” nor “reform” are the panaceas they are made out to be.

We see the manifest signs of the real crisis: international companies are pulling their expat staff out of Greece and preparing for the worse. The number of empty apartments and commercial sites has reached record numbers. Sales at all retail outlets are down. The number of homeless people is apparently the highest it’s been since World War II.

On July 22, 2010, I concluded a blog post with these words:

My advice is: prepare for the worse-case scenario to materialise. The clock is ticking. The scale of the problem is clear; the end-date in the best case is late 2012 or early 2013: it may come sooner than we think if the bond yields on recent issues are any guide. 

Regrettably, so little has changed in this assessment. What is unfortunate is how long all this has been visible, and that so little has been done to reverse it.

Related Posts

Some Progress: Major Problems Ahead. 10 September 2010

The Greek Bail-out Package and the Future Political Risks of Debt Restructuring. 22 July 2010

© Philip Ammerman, 2011

Navigator Consulting Group Ltd.

www.navigator-consulting.com

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 2^nd. 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 Bankingnews.com, 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 21^st. 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 

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 6^th. 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

Navigator Consulting Group

www.navigator-consulting.com 

Black September?

Forecasts made in a number of posts on this blog are regrettably taking shape. Today’s (Monday’s) sell-off of banking stocks over fears of exposure to an Italian debt downgrade resulted in Royal Bank of Scotland, Societe General and Credit Suisse lost over 8% in a single day. When a single rating agency, S&P, downgraded the United States from AAA to AA in August, the sell-off resulted in a similar magnitude drop, with an equally quick recovery.

Italy’s problems are far worse than the United States’.  All three rating agencies have Italy on review and will be announcing results in mid- to late September or early October. The recent flip-flop in the Berlusconi government’s austerity plan has not helped matters, and is the proximate cause of todays’ volatility.

It is impossible to tell where the “Lehman moment” will occur. This may be a mix of bank failure, as sovereign bonds are “marked to market” (few banks are willing to do this; most are “marking to model”). This may also be a sovereign debt crisis similar to that which pushed up Greek, Irish and Portuguese rates, but for a commensurately larger economy such as Belgium or Italy. It looks like Italy is next in line. Spain remains quiet, but the crisis is far from over in that country.

As stated repeatedly here: European policy-makers are trying to treat symptoms, not root causes. They are doing so in an infuriatingly slow manner, challenged (rightfully) by their voters and (less rightly) by ancillary political and commercial interests at every turn.

Efforts by observers such as Christine Lagarde, IMF managing director, to suggest recapitalisation of European banks, have been rebuffed by a number of policy-makers. Yet a banking crisis is a real consequence of a sovereign debt crisis, as we saw in today’s sell-off. And if the banking system fails, then any economic recovery will take that much longer to implement, if it can be implemented at all. Recapitalisation is the natural response to a market valuation of sovereign bonds held by banks. It is understandably difficult in the current climate.

There are also real dangers for Greece. Although many Greek commentators have been smugly commenting that Greece was in the vanguard and no longer the only “target of speculators”, this viewpoint ignores the fact that the second bail-out hasn’t been approved, and depends extensively on privatisation receipts and private sector participation. Neither the second bail-out, nor the privatisation targets will be possible to deliver if a financial firestorm hits Europe this month.

As I have stated repeatedly in this blog, as well as on my corporate pages: prepare for the worse. We are entering a period of extreme volatility, partly due to technical issues (computer trading models, shorting, rating release schedules) but also partly due to fundamentals. We have not yet touched bottom with any degree of confidence. There are excellent momentum-trading opportunities right now, but for the average citizen, there is only fear, confusion, anger and disbelief as the full extent of the failure of politics is exposed.

Related Posts

The Greek Debt Crisis and International Contagion

13 July 2011

Global Risk Analysis Update

1 March 2011

The Return of the Bond Vigilantes – and Common Sense

14 November 2010

ΚΑΛΟ ΧΕΙΜΩΝΑ!

Returning to Greece after a 2-month work sojourn in France, Cyprus and a few other countries, I am sardonically following Greek custom in wishing my friends «Καλό Χειμώνα» - «Happy Winter». With the temperature reaching 38 degrees today and tempers short due to a strike of the Athens Metro and Train system, winter seems a long way away.

I have made good use of these past two months. The last one, August, was spent largely in the northwest corner of France, in Bretagne, a blessed land of green pastures, granite cliffs and long sandy beaches, where everything seems to be in its place, according to custom and common sense. People are polite; the food is excellent; there is no end of cultural or recreational activities, from church concerts to market fairs to guided chateaux tours to golf and sailing and kite surfing. The contrast with Greece could not be greater.

My return to Greece is, as every summer, marked by a power sense of unreality. This is heightened by watching television news broadcasts, which give the most visceral sense of what’s happening at a high political and social level. Three points really stood out today:

1.     ET3 proudly reported that a church dating to the 12^th century in Tournikiou Grevenon was being moved on rail up a hill to avoid an encroaching artificial lake, the result of a dam. “The longest such removal in Europe”, crowed the commentator. The expenses were paid by DEH, the Public Power Company of Greece, and perhaps one of the worse-managed public utilities in the country. Besides the shock of that familiar triumphalism “the greatest in Europe….”, I couldn’t help but wonder: why is PPC, and therefore the Greek taxpayer, paying for this? Why doesn’t the Greek Orthodox Church move its own church? Sure, I know this is cultural heritage. But Greece is bankrupt, and PPC is about to be hit by major financial problems from (a) carbon emission taxes in 2013, and (b) paying higher energy feed-in tariffs from PASOK’s grand renewable energy drive. Does the Greek public sector really understand the meaning of austerity?

2.   This was, however, hardly the most shocking news. I reserve that for the continuing occupation of public universities and schools, due–once again–to higher education reform.  The reform bill is relatively minor: it involves evaluation of teaching staff and greater powers for rectors under a decentralisation package. These are commitments already made at the European level by the Bologna process, and already adapted in Greece under the reforms made by Minister Marietta Giannakou under the previous government. They have, of course, never been implemented.

If anything, the reforms don’t go far enough: They don’t allow the function of private tertiary level institutions: the public sector retains its monopoly on recognition of degrees from public universities. They don’t institute a co-pay principle: students continue to get everything for free, including tuition, books, etc. They don’t truly decentralise the universities, transforming them into independent institutions with a budget depending on enrolment, the ability to raise funds independently, and truly autonomous decision-making, e.g. on admissions.

We were treated to the spectacle of Anna Diamantopoulou, Minister of Education, imploring the head of the Synaspismos Party, Alexis Tsipras, in coded language during a Parliamentary debate, to stop occupations of schools and universities, and restrict the debate to the Parliament. Once again, at least two political parties are using proxy groups to occupy and destroy public property, which in many other countries would be considered illegal if not treasonous activity. In Greece, this is considered normal.  

3.  Another really shocking development was the proposed law on illegal construction proposed by Minister of Environment George Papaconstantinou. This law foresees the partial legalisation (over a limited term of 30 years) of houses built on public or forest land, in exchange for a financial fine. This is yet another desperate attempt to gain revenue, ignoring the fact that laws have been broken, and contributing to the sense of total lawlessness in Greece. What this law proves is that few laws much be respected, since they will be recalled or “settled” in the future.

Furthermore, it becomes clear that this law does nothing to address the root causes of illegal activity on public land: the lack of a unified, town planning strategy which would progressively free land for integrated development. The Ministry of Agriculture, for instance, has proposed turning over unused public land to young, unemployed farmers for development. This will lead to yet more investment in a low-productivity, subsidy-driven sector of the economy. Why not implement a similar programme for development of public land for urban development and vacation residences?  

And apart from this, it appears that little has changed. There is still no plan for privatisation, on which so much of the second bail-out plan is based. No plan for a real or useful liberalisation of closed professions. No resolution of the taxi crisis. A growing deficit and a worsening economic situation, with unemployment over 16% and a GDP decline now forecast at a minimum of 5%. The Athens Stock Exchange has reached historic lows. The instability in the banking sector continues.

Some good news is occurring, however, although we probably won’t see this reported on the private TV channels:

·       Tourism is estimated to rise from about 15 mln arrivals in 2010 to about 16.5 mln in 2011, based on industry estimates. This rise is largely attributed to the elimination of Tunisia and Egypt as holiday destinations, rather than to any organised national plan for tourism.

·       The number of new business starts is rising due to simplified procedures as well as due to the growing recession, which is forcing people to take their economic futures into their own hands, rather than rely on employers.

·       A major Germany investment in photovoltaic energy production is set to be announced in September or October. There are approximately EUR 20 bln in foreign investments undergoing a fast-track licensing procedure. A deal on the Hellenikon airport site may also be announced soon.

On the downside, the Troika will likely report a lack of progress on major reforms as a result of its most recent evaluation visit, while Greece’s deficit and public spending continue to rise over the planned target. Far too many reforms have been announced but not implemented. Rumours and reports of elections and an uncontrollable crisis situation abound.

I expect further demonstrations and gridlock, slow implementation of reforms, and the likelihood of a major international crisis, both economic and military, as we move into the fall. It’s definitely going to be a “hot September”, no matter what our wishes for a good winter may be.

Continued Risks in the Greek Reform Programme

The risks in the Hellenic Republic’s Medium-Term Fiscal Consolidation Programme (MFCP) continue to mount. Despite the short-term easing following the passage of the two MFCP laws on July 21st and 22nd, 2011, there is growing evidence that the national and international situation may not contribute to the expected solution. Unfortunately, all this has been covered before in this blog, but a short summary follows here:

a. The reform programme continues to lag in the absence of bold, headline reforms or a coherent, cost-benefit approach to reforms. The EUR 50 bln privatisation plan has not yet begun. This is both due to declining values on the Athens Stock Exchange and the Greek economy in general, as well as due to a lack of preparation and credibility at the government level.

b. The recession in Greece is becoming wider and deeper—as has widely been expected and commented in this blog and by many other observers. In addition to a potential GDP revision for 2010, I anticipate a minimum recession of 5% in 2011 and a rise in unemployment to 18% not taking into account the active labour market measured by OAED (which is currently subsidising over 300,000 labour positions while paying unemployment insurance on at least 650,000 more).

c. The international economic environment continues to decline. Second quarter growth in France and Germany has, as expected, slowed to near zero. Contagion has spread to Italy and other Eurozone countries. Indicators such as container shipping prices and shipping company profits show growing volatility in the face of fluctuating demand and sectoral overcapacity. A number of indicators in China, including commodity price inflation, inflation and trade volumes, indicate an extremely uncertain situation. (The picture is not uniformly negative or positive, but the volatility and uncertainty given this stage in the presumed economic cycle is very worrying).

d. I believe there is a strong chance that one or more Eurozone parliaments will refuse to ratify the second Greek bail-out package, pointing to the lack of constitutionality in expanding the European Financial Stability Fund (EFSF) or to the lack of progress on the first bail-out package. Already, four countries are demanding specific guarantees in exchange for further loans. I widely expect premature national elections in one northern European country, with Germany a strong candidate, over parliamentary deadlock over the bail-out.

e. Key aspects of the second bail-out package remain unresolved, including the expansion of EFSF powers (subject to parliamentary approval in many countries) as well as the basic problem that interest costs have not been adequately reduced.

This international uncertainty and the lack of a coherent national plan conceal many useful reform measures that have been taken in Greece. Examples including the expansion of retirement age, the proposed streamlining of government units, the reduction in public sector headcount, changes to income tax levels, etc. But most of these remain insufficient in their scope, and are not enough to offset the main problem, which is the lack of effectiveness in the public sector, the high debt interest costs, the lack of political will in implementing reforms, and the continued corruption in the public sector (and among political parties).

Adding donor fatigue and a worsening international economic environment, and I believe it is clear that the true crisis point has not yet been reached.