Yesterday saw the end of the Ecofin meeting where the finance leaders of the Euro zone met and Greece would have been high on the menu. My contention as the Greek crisis built up was that the Euro zones politicians need to act clearly and decisively and avoid the temptation to grandstand. Unfortunately Europe’s politicians have been unable to resist the temptation to grandstand and have in my view done her a dis-service. Jean-Claude Juncker who heads this Ecofin group said that aid if it materialised would probably be bilateral loans or loan guarantees from individual governments which frankly leaves us little the wiser.
What happens now?
Greece has been set some austerity targets which the Euro zone will review on the 16th March 2010. Now some see this as a reprieve but I do not. The reprieve view says that Greece has a month to get its house in order before March 16th when further austerity measures such as higher energy taxes might be imposed. I see it as the markets being given a month in which they may put Greece under pressure again. The truth is that everyone was expecting the Euro zone to make an announcement that it had found a way of lending some 20/25 billion Euros to Greece and that this would give Greece a substantial fighting fund to help finance her debt issuance. Yet no such announcement was made and she accordingly remains vulnerable as she has to issue some 8 billion Euros of government debt in both April and May 2010.
Another factor is the loss of faith in Greece’s numbers. For international markets to believe Greece is serious about an austerity plan is going to take time as it will take time for faith to be restored in Greece’s economic statistics and so she simply lacks credibility. The truth is that virtually no-one believes in the plan to reduce Greece’s fiscal deficit to less than 3% of Gross Domestic Product in 2012. As more revelations come out about the involvement of Goldman Sachs in swaps deals designed to hide government borrowing then this only reduces credibility more. It appears that the Vampire Squid has been paid some US $ 1 billion by the Greek government for helping her bond issuance. I suspect I will not be the only one wondering exactly what this was for and what it led to. One thing these deals clearly lead to was investors being given incomplete information and so it is an example of market manipulation.
Whilst I believe that the Greek Finance Minister Mr.Papaconstantinou has a difficult job which he is trying hard to fulfil he said something very revealing yesterday. He said that Greece can hit her targets partly because she is due to receive 16 billion Euros of structural aid over the next 3 years from the Euro zone. Think about this as it has many implications. One is with the misrepresentation of her numbers did she actually qualify for the structural aid money? But with the fact that Greece never actually qualified for the money as she lied about her financial position in joining the Euro back in 2001 then is this not a type of fraud ? The moral hazards here feel like they are surrounding me! His other reason for confidence was that he felt Greece would return to economic growth which is not entirely convincing at least for 2010.
The Euro zone were fortunate to end their meeting on a good day for Wall Street which took care of equity markets for them. The Euro has fallen some 5% this year (very welcome for Greece) against the US dollar but rallied a little yesterday. However the government debt market for Greece deteriorated. Her ten-year government bonds closed last night yielding 3.21% more than German ten-year bunds.The actual yield is now 6.40% and the two-year government bond I have been following closed yielding 5.37%. Remember hopes of a bail out took Greek ten-year government bond yields below 6% and the spread to German yields to 2.75%. This was only last Thursday! How quickly the dithering of the Euro zones leaders has eroded this.
During this crisis various people have contacted me and I have seen many examples in the news media and they all tell me the same thing that Greece has a lot of problems internally which will make a solution to her problems difficult. There was an interesting comment on this subject on my Monday article. However I can put some new numbers on this thanks to an excellent video on the FT website. The previous Greek conservative administration which was in power from 2004/09 oversaw a big expansion of the Greek state where they employed more teachers, bureaucrats and support staff. In net terms they employed 75,000 more civil servants which was a 20% rise. Interestingly the public-sector wage and pension bill rose by 30% so there were pay rises too. When we combine this with a black economy which is estimated at 30% of GDP and competitiveness which is estimated to have declined by a third since Greece joined the Euro in 2001 then it is easy to see how the 2008/09 recession has hit her public finances so hard. Another illustration of Greece’s problem is her labour market where 70 professions such as lawyers,pharmacists and lorry drivers are closed shops.
At a time when it should be easier to plot a course forward for Greece it is if anything getting harder. When this crisis started I felt that there was no way leaving the Euro would improve her position. If the Euro zone politicians continue to be as incompetent as they have so far I may need to change this view.
An International View
The Spanish newspaper El Pais has the following headline on this subject.” The European Union takes effective control of the Greek economy” with the Spanish Finance Minister Elena Salgedo in a picture looking at the Greek Finance Minister and making him look very pensive. Thank you to Mike Dixon who posted this on the BBC website as I like to get as many international perspectives as possible. It leaves me with the question , has anybody told the Greeks?