European Union officials are exploring the possibility of providing a heavily-conditioned loan to Greece instead of seeing it turn to the International Monetary Fund. Officials are worried about the possible impact on banks elsewhere in the eurozone of Greece defaulting on its sovereign debt. But they would prefer to avoid the ignominy of a eurozone country seeking IMF assistance.
The worry is not, in fact, that Greece might leave the Eurozone, or even default in the short term, but that unless someone external takes control of the situation the Greek government will prove unable to sell those much needed competitiveness reforms to a population which will not be happy about being faced with what looks set to be quite a steep economic contraction. As Martin Wolf said on Monday:
Given these tight constraints, a big structural fiscal tightening will generate a deep recession. That is sure to increase the cyclical deficit. Assume, cautiously, that for every percentage point of structural tightening there would be 0.2 points of offsetting fiscal deterioration. Then the structural tightening needed to reduce the actual deficit to 3 per cent of GDP would be close to 12 percentage points. The Greek government would find that, for every step it takes forward, it would slip a bit backwards. So far Greece has not suffered a significant recession. That seems sure to change. The government will soon be facing miserable public and private sectors, with no policy levers.
And PNB Paribas's Luigi Speranza remains equally unconvinced:
In sum, while ambitious, the Greek Stability Programme did not resolve the main concerns expressed by the markets. Amongst the main shortcomings are: persistent lack of credibility of Greek statistics on fiscal accounts, lack of details on the adjustment beyond 2010 and overly-optimistic growth projections. A credible long-term strategy should be focused on sharp cuts to public spending, particularly for wages and pensions. But this would probably lead to strong social opposition. Against this backdrop, markets will remain sceptical on the feasibility of the overall planned adjustment.
The big fear has to be that a "contagion process" will lead the Greek problem to become a Spanish one.
In an interview with the Wall Street Journal yesterday Spain's Finance Minister Elena Salgado stated that the government was preparing "deep" cuts in spending, cuts which will only add to the difficulties of an economy which is already reeling under the weight of a very strong contraction:
Spain's Socialist-led government is trying to forge a broad political consensus with the country's regional leaders to rein in one of the euro zone's highest budget deficits, Finance Minister Elena Salgado said in an interview. Getting bipartisan support for deep spending cuts would be a crucial step to avoid the credit ratings downgrades now plaguing Greece, which this week has been scrambling to convince financial markets that it can get fiscal imbalances under control.
She also admitted that Spain's deficit was likely to come in above the government forecast, which makes me rather nervous about the kind of market reaction we might then see, given the nervousness which has been produced by events in Greece.
The government recently warned it would surpass its forecast of a 2009 deficit of 9.5% of GDP. "It will be a little more, we hope not too much," Ms. Salgado said, adding the overrun is the result of a new benefit introduced for the long-term unemployed and lower-than-expected value-added-tax revenue from a still ailing real-estate sector.
Basically, what the Spanish government lacks is a credible policy not only for reducing the deficit, but also for restoring growth and creating employment. How all this will finally work out is hard to see at the moment. It is, as they say, a "developing situation". As one Greek economist friend pointed out to me Finance Minister Papaconstantinou yesterday limited himself simply to saying "We are not expecting anyone to come to our rescue," ...he didn't say Greece didn't NEED anyone to come to the rescue. Reading between the lines is evidently something of a fine art in the Greek case. But then, ever since the time of Demosthenes, the art of rhetoric has been one of their strong points.
In similar vein, a spokeswoman for the European Commission, on being asked this morning by Dow Jones Wire Service about the reports said "she isn't aware of any financial bailout packages being arranged for Greece". Well, in the first place they may exist, even without her knowledge of them, and in the second, they would have to be total fools (which they most definitely are not) not to have any kind of contingency arrangement under the circumstances (for imminentl deployment or otherwise), and even while some degree of Euro weakening has been welcomed by some, there must be a "stop loss" button they can hit somewhere if the slide continues and if the spreads continue to rise. In Greek markets, the premium demanded by investors to buy Greek bonds compared with benchmark German Bunds rose to 311 basis points yesterday, the highest since the euro was introduced. The yield on Greek 10-year bonds is now 6.2 percent. And talk of issuing a people's bond, or bonds in US Dollars or Yen will do nothing to calm things down. And the yield premium on ten year Spanish bonds over the German bund jumped to over 100 bps this morning, a level which hasn't been seen since April last year. Whatever the issues of communal pride, simple damage containment considerations suggest the Greek government should be calmly told to go to the IMF, and they should be told to go now.
While everybody is talking about sovereign risk, what about the health of the greek financial system?
ReplyDeleteThe have suffered huge losses in their portfolios of public debt (built while the spread were much lower). And the increase in spreads surely means either they are losing deposits fast, or are hikig the rates they pay their depositors WHILE they cant increase the rates in the floating rate credits.
I guess that everybody is talking sovereign risk because if the sovereign goes down, the banks may well go down with it. As we have seen in quite a few instances, it does not work the other way round, that is, if the banks go down, the sovereign usually survives.
ReplyDeleteThe problem with Greece is that it will soon run out of investors willing to lend it money for any meaningful length of time, just because nobody really knows what is going to happen there next Friday.
Reading through the last Hellenic Republic Public Debt Bulletin one notices that in 2009, newly issued Greek debt had average maturity of just about 5 years - in each of the preceding four years they got way above 10. I would not be surprised if they were below 3 now, and you can not get far with that, I think.
. meaningful length of time.