An Underfunded Program For Greece

By Peter Boone and Simon Johnson

The EU, led by France and Germany, appears to have some sort of financing package in the works for Greece (probably still without a major role for the IMF).  But the main goal seems to be to buy time – hoping for better global outcomes – rather than dealing with the issues at any more fundamental level.

Greece needs 30-35bn euros to cover its funding needs for the rest of this year.  But under their current fiscal plan, we are looking at something like 60bn euros in refinancing per year over the next several years – taking their debt level to 150 percent of GDP; hardly a sustainable medium-term fiscal framework.

A fully credible package would need around 200bn euros, to cover three years.  But the moral hazard involved in such a deal would be immense – there is no way the German government can sell that to voters (or find that much money through an off-government balance sheet operation).

Alternatively, of course, the Greeks could make much more dramatic cuts to their primary deficit – the government budget balance if you take out interest payments – in order to stabilize their debt-GDP ratio.

But with no significant resurgence of growth in the eurozone coming for a long time, that would really mean moving from last year’s 7.7% GDP primary deficit  to around a 6% GDP primary surplus (assuming they face a real interest rate of 5%, i.e., below what they are paying today).

The government won’t (or can’t?) do that.  In 2009 Greek wages and pensions rose by 10.5% – an amazing spending spree.  In the 2010 budget they are forecast to rise by 0.3%.  Where is the austerity?  No wonder the prime minister is popular – they aren’t really cutting much.

The bailout package is really just an opportunity for European banks to get out of Greek debt.  The Greeks can’t really collapse until they lose access to funding, so the hope is that this prevents the problems from spreading – and the prospects of such a “rescue” will keep bond yields down for Portugal, Spain, and others. 

Our baseline view is that Greece enters into quite a bad recession this year, their banks and corporates continue to have trouble raising financing – thus causing broader liquidity issues, and it all comes to a head again as we near the time the government needs to take ever harsher measures next year, when there is again no bilateral funding in place.

This is the new Greek cycle.

38 responses to “An Underfunded Program For Greece

  1. The biggest cuts possible (in Greece) will not even cover the compounded interest, let aside the turmult those would cause; Germany (and all the rest) has no means left to help Greece out, even if that was feasible and allowed. The other PII.Sx are trying to stay put in their starting blocks only to follow Greece. The battle for the cheapest labour, lowest cost, i.e. weakest currencies is won in Asia, not in Europe.

    How can anybody believe that there is a way out of this; we will see nothing else but postponing, retarding and lots of secondary theatres of war while we hear the Euro’s swan song.

  2. In Greece those on strike are a privileged minority( albeit a large minority). They are civil servants and protected businesses.
    They don’t seem to be very serious about cuts so far, so I think bailing these people out now will just make it worse for all Greeks.

  3. Aleksandar R.

    If the Greek economy is going into recession then the tax revenue will decline meaning that the budget deficit will stay high. Afterward, if the Greek government decide to cut spending even more another recession will arise leading to less tax revenues and still big deficits. As Simon said the “Greek cycle” will appear. If EU or it member states doesn’t intervene bankruptcy seems inevitable because even if the Greek government cuts spending in the first cycle it won’t be able to continuously lower the expenditures to infinity because things like police, army and education needs to be financed no matter what happens.

    Perhaps now everybody wants to sell Greek bonds and get rid of the risk they carry. Given that that will lead the prices downwards should you think the EU or its member states will help Greece, today is a great time to buy Greek bonds. I know I won’t.

    But still, i think bankruptcy won’t be as bad as everyone think (and I don’t say this because I am Macedonian or FYROM-er as Greeks call us). It will teach Member states to think before they borrow making them more fiscally responsible. That will also speed up the reforms of the welfare state much needed in the EU. And in my opinion the consequences of bankruptcy for the euro will be short to medium term and far less severe then in the case of Greece leaving the euro-zone, even temporary.

  4. @Alexsandar R: Z.Bauman reminds us of an important distinction between the ‘social state’and the ‘welfare
    state’, in dire straits in most parts of Europe:
    “More than even, the ‘welfare state’ was an arrangement of human togetherness invented as if precisely to prevent its present-day tendency, triggered, re-inforced and exacerbated by the desire to ‘privatize’, the tendency to break down the network of human bonds and undermine the social foundations of human solidarity, whereas the ‘social state’ tended to unite its members in an attempt to protect every and each of them from the morally devastating competitive war of ‘all against all’ and ‘one-upmanship’..”( Living on Borrowed Time, 2009

  5. …anything is possible at this stage of the ‘bail out’ game :-)

  6. ” But the main goal seems to be to buy time – hoping for better global outcomes – rather than dealing with the issues at any more fundamental level.”
    ———————-

    or “…buy time-hoping for better euro/USD exchange rates..” Being that we have a global race to the bottom re: sovereign currencies, it appears the core EU nations are gaming this out fairly well. Greece and other EU nations that used Enron type accounting to mask their budget deficits need to be held fully accountable for their lies and deceitful pratices. If this causes the weaker members to weaken further, so be it. The return of a devalued drachma may be the best solution for all.

  7. Looks like the growth fantasy is pretty much over. We still have to muddle through the EU fantasy, the globalization fantasy, the financial innovation fantasy, the priceless CEO fantasy, the nanny government fantasy, the permanent war fantasy and the IMF fantasy. This morning we had three hours of Warren Blowhard dispensing the buy and hold fantasy.

    Pepsi or Coke, McDonalds or Wendys, Democrats or Republicans? We still have choices, just none that matter.

    Abandon limited government and honest money and this is what you get. Better get used to it.

  8. There will be no bail out. The EU has been stringing everybody along to keep the markets from melt down. Germany and their banks are not on board. They have zero intention of helping and are worried about throwing good money after bad.

    The bailout package will be some half baked affair that offers help in drips whilst the Greeks are supposed to slash so much it wipes out their economy and any chance of growing out of debt.

    The EU is saving itself for the big game later this year, Spain.

    The Greeks will at the end of the day will go to the IMF, maybe next year if they last that long.

    The danger is the Greeks will get so disenchanted with the EU games that they will go to the IMF and get out of the euro.

    The EU has much more to lose than Greece now.

  9. Feb. 28, 2010 – CBSnews.com – excerpt

    “The real fear is not Greece going under to be honest, as sad as that would be, because Greece is actually a pretty small country,” said Steven Bell, chief economist at British financial firm GLC Limited. “The problem is if Greece goes the speculators will move on to Portugal and then to Spain and then to Italy and that really would be a big effect.”

    And if the recession has proved anything, it’s that once things start to go bad, they go bad everywhere.”

    http://tinyurl.com/ydzl3lx

  10. I think there’s going to be a lot of Greek emigration…probably to Germany. I hope the Germans enjoy it.

  11. Warren must be looking for a post-conscious post–maybe a stature alongside the Wash. Monument. His lapping of Hank P. at the Omaha gathering was stomach-wrenching, as is his current defense of Blankfein.
    Guess we have to wait until the 2018/AIG papers release to find out what kind of implicit guarantee ol’ Warren got for Goldman.

  12. Everyone assumes Germany will bail out Greece either covertly to dodge the political ramifications or overtly to calm finacial markets, but lets look at Germany’s incentives shall we?

    1) If the Euro is devalued, this may hurt a lot of EU countries, but not Germany which is still a net exporter and would actually be made more competitive by a devaluation
    2) If Greece gets its debts guaranteed or transferred, why wouldn’t speculators simply go to the next country (pick your favorite) and do it again? You think Merkel can get support for a bailout of Portugual or Spain, we’ll see. There is no political benefit and no economic benefit. And this would simply invite similar moves in other weak EU states.

  13. As of March 1, there are seriously conflicting reports about the bailout. I don’t believe it is as probable are some are reporting, like the NY Times.

    Merkel says no bailout (Feb 28).

    <>

    http://news.smh.com.au/breaking-news-world/no-german-rescue-plan-for-debtridden-greece-20100301-pbj7.html

  14. If the Greek government returned to 12 “monthly” payments instead of the current 14 under the “bonus” system, they could immediately save 14% of personnel costs. Immediately raising the retirement age to German levels would save another substantial chunk of money, and improving tax collection could compensate in what would otherwise be a fall in revenues.

    “Austerity”, or immediate budget rationalization, can work if the Greek government has the courage to impose it. Otherwise, alas, reality will impose it for them in an even more austere fashion.

  15. The number of Greeks that would want to make this move is probably manageable for Germany. The hypothetical emigrants are quite likely to obey the nearly univeral emigrant experience of being younger and more ambitious than the stay-at-homes and if were to be the case, there are advantages for Germany. But hold onto your hats if this starts to look like a blueprint for solving addressing Italy’s imbalances.

  16. Indy wrote:

    “Austerity”, or immediate budget rationalization, can work if the Greek government has the courage to impose it. Otherwise, alas, reality will impose it for them in an even more austere fashion.”

    Reality is already baked into the Greek Baklava.

  17. Angela Merkel was quoted as saying that there is no possibility that Greece will be bailed out. So, what is going on?

    Last week the Wall Street Journal ran a chart of German ownership of PIIG sovereign debt. Greece at $43 bn is around 8 % of PIIG debt totals. Around 60 % of the debt of Greece matures in 2010. Any deal with Greece will automatically have to extend to the other PIIG states. Look at the comical problems the Bear Stearns deal set up during the 2008 Wall Street Collapse. Everyone wanted a “Jamie Deal” to salvage tanking investment banks. Yet, the Fed and Treasury kept trying to override that insistence and finally gave up after losing highly critical time. That experience must be uppermost in the political technocracy of the EU.

    The dilemma used to be called a ” Mexican Standoff”.

    It will be up to Greece to solve her own problem politically.

    Greece is a sovereign state and can adjudicate her own bankruptcy. If not, Greece is a surrogate state with pretended sovereignty. It is one or the other.

    Any action has consequences and simple repudiation with some finesse looks to be no more costly politically than all the heat the creditors wish to apply.

    The creditors have the problem , not the debtor .

  18. I think that the “symptoms” are discouraging us from diagnosing the illness. We are concerned with the potential failure of Greece and other EU countries (ie the symptom).

    The illness is the structure of the EU and specifically the use of a common currency with no or at best a very weak central government. The obvious solution is to “strengthen” the central government and transfer autonomy from the state to the EU.

    The alogory that I’ve most commonly heard is that Europe tried to create the United States of Europe but instead created the “European Confederation”. The US articles of Confederation lasted about 10 years before rewritten as the constitution and the strong central government.

    Under the current structure, individual EU countries do not have the tool set available to successfully manage long term trade imbalances or react to significant localized economic deteriorations.

    Greece’s failure will not be enough to incent the necessary structural changes, but if Spain and Italy follow….

  19. Spot on observations,tanstfl. We have here illustrated the same problem that would plague a globalist monetary system. US elites, I suspect, have long understood the problem and buttressed the dollar and Federal Reserve as a single dominant currency and central bank by use of massive military might. That now seems very problematical. Time will tell though.

  20. tanstfl,

    Why do you assume that moving to an integrated federalist approach is an efficient solution – must be pavolovian.

    ” The obvious solution is to “strengthen” the central government and transfer autonomy from the state to the EU” – ah yes the French and Germans harmonious at last

    It is not the least bit ironic that the US/UK is/are lauded for retaining the ability to pint its/their way of the situation (in acadamia that is). Irony has no limits when you consider the Washington Consensus (and even more so in applying to one of its own).

  21. Anon,

    Perhaps it’s because it’s the beast we know.

    The event we are currently descibing is an uncommon destructive event. Suddenly, we see specific countries in the EU extremely uncompetitive (ie Greece, Spain, Portugal, Ireland, Italy). To regain the competitiveness, services (labor) and assets need to be “revalued”.

    Historically, this has been accomplished by “devaluing” the local currency in terms of other global currencies. This has the benefit of a relatively quick and consistent revaluation of labor and productive assets. Standards of living are likely to decline in the very short run, but it sets the stage for future growth and investment. Unfortunately, this option is not available to Greece et al because of the use of the Euro.

    The tool set that Greece must now use is much more painful. Greece will need to individually reset the “pricing” of labor inside their economy and politics being what they are, the process will be slow; uneven and likely to extend and deepen the local recession.

    If the conditions only affected Greece, the collective “we” would be dismissive of the problem and more or less indicate that Greece was responsible for its decline and would pay the long term public price. The concern is that Greece is not alone and the contractory policies that the EU is forcing on Greece (and potentially on Spain, Portugal, etc) risk the economic stability of the region and perhaps the world.

    Similar contractory policies are widely credited with creating the great depression. So, the natural concern is that the EU is “tone deaf” to history and starts the cycle that engulfs the world in a second great depression. This is a highly unlikely outcome, with the more likely worse case scenerio of a decade of no/low growth for the EU.

    The secondary issue, which will take much longer to work through the system, is resolving cash flow imbalances within the EU. For example, Germany continues to be a net exporter within the EU. Each year, the individual countries borrow more Euro’s to pay Germany. Eventually, something has to give. Once again, historically it was currency devaluation which isn’t available.

    Similar imbalances occur in a strong central structure, but government transactions (taxes paid and services rendered) “smooth” the regional imbalances and allow the overall government to function. Common central government laws and regulations also allow for more efficient movement of labor and capital assets within regions.

  22. 03- 1-10 02:56 PM – Huff Post

    “California’s debt is seen by investors as riskier than Kazakhstan’s, according to Bloomberg News…And last week, Jamie Dimon, the CEO of JPMorgan, the nation’s second largest bank, warned that California’s $20 billion budget gap could pose a bigger risk than the Greek debt crisis. Here’s Dimon: “Greece itself would not be an issue for this company, nor would any other country. We don’t really foresee the European Union coming apart.”

    http://tinyurl.com/y99elz5

    I wonder how Borat would handle this?

  23. Over the last decade or so, a net 75 thousand Greek citizens have emigrated from Germany, 360,000 in 2001 -> 285,000 in 2008.
    The increase in immigration from Greece to Germany would have to be quite substantial to make up for (past) emigration alone.

  24. Lambert Francis

    EU (European Union) exist as much as its ghost budget.
    Around 1% of its GDP. And most of that money goes back to its Nations.
    Would the USA exist with a 1% budget ?
    France’s budget is 53% of its GDP.

    EU is just a bunch of Nations sharing the mass graves of their parents … at the cost of a scarecrow.
    In fact the main utility of EU is to give to its nation’s politicians some reason for their failures: it is always that “stupid Union”.

    EU is a scam or, more frequently, its politician’s loo.

  25. Each year, the individual countries borrow more … to pay Germany. Eventually, something has to give. Once again, historically it was currency devaluation which isn’t available.

    Historically, I think it was Hitler. Don’t bet he isn’t available. A little newsreel footage, some makeup, three hundred industrialists at Davos…

  26. Would it help to ship Hollywood to Kazakhstan? Throw in a million Mexicans to care for the pools and lawns?

    Think of the ssving in transport costs on dope. We could send the DEA too.

  27. How does someone read stuff like this and then turnaround to argue that gold is in a bubble?

    I would say that gold is a great place to be vs. developed world currencies. http://www.planbeconomics.com/2010/03/01/gold-bubble/

  28. I think they’ve had some experience, but usually the other way around.

  29. I would suggest another option, asset preservation/hunker down. Only use risk capital to chase profits.

  30. MARCH 2, 2010 – Wall Street Journal – excerpts

    Swapping Blame Over Athens

    “At this point, “news” about Greece’s manipulation of its budget and deficit figures is about as shocking as the fact that there was gambling in Rick’s Cafe. But that hasn’t prevented a full-blown Claude Rains in “Casablanca” moment over Greece’s use of currency swaps to help meet the budgetary requirements for euro-zone entry back in 2001.”

    http://tinyurl.com/Rickks-Cafe

  31. Greek Prime Minister: If Greece Can’t Borrow At Normal Rates, Fallout Will Be ‘Worse Than Catastrophic’

    ELENA BECATOROS | 03/ 2/10 01:50 PM

    http://www.huffingtonpost.com/2010/03/02/greek-prime-minister-if-g_n_482136.html

  32. Mar. 02, 2010 5:35PM EST – Globe & Mail – excerpt

    “Greek Prime Minister George Papandreou said Tuesday his country was fighting for survival against bankruptcy and urged civil servants and pensioners to accept sacrifices to save the debt-burdened nation. In a dramatic speech to his Socialist PASOK party on the eve of a cabinet meeting expected to approve new austerity measures, Mr. Papandreou said:

    “ I will fight to save the fatherland from whatever the nightmare possibility of bankruptcy might entail.”

    http://tinyurl.com/y9vw2ms

  33. ‘A fully credible package would need around 200bn euros, to cover three years. But the moral hazard involved in such a deal would be immense – there is no way the German government can sell that to voters (or find that much money through an off-government balance sheet operation).’

    I thought banks require zero capital trequirement when lending to sovereign borrowers. Is this correct? Then an EU bank could lend the 300 billion to Greece over three years?

  34. Scenario 1

    Greece goes to IMF and takes the loan bailout. IMF (gloatingly) gives the funds , which have come out of thin air (from the USA naturally). IMF imposes conditions on trade and currency, and also sets an interest, which greece would have NO way of repaying in another 5-6 years. Greece drowns further. Recession, Hyperinflation and a financial implosion take place, and you find a sudden spurt in institutional bankruptcies – which are taken over by the US funded agencies at the earliest – these will include Shipping and exports units, thus getting a stranglehold on the grecian economy. IMF laughs and sits back contended – it’s achieved what it was hoping for. Credit risk fears start in spain and other EU countries. Revolts and dissent in the EU ranks. US is happy.

    Scenario 2 to follow tomorrow

  35. The Scary Reason Europe Is Doomed To Crisis After Crisis After Crisis

    Mar. 3, 2010, 9:52 AM – Business Insider

    http://tinyurl.com/y8t56ft

  36. The headlines say that Germany is going to “stand by” Greece. What does that mean? Apparently it does not mean sending money. Does it mean sending riot police?

  37. “If the Greek government returned to 12 “monthly” payments instead of the current 14 under the “bonus” system, they could immediately save 14% of personnel costs. Immediately raising the retirement age to German levels would save another substantial chunk of money, and improving tax collection could compensate in what would otherwise be a fall in revenues.”

    Doable, but the money will go into hiring police and into buying riot gear.