Europes aid plan for Greece, it’s a secret!

After a period of more than a month when the Euro zone authorities have claimed to have a plan for Greece this has finally been replaced. By claiming they have a plan to aid Greece! Oh and they will not specify what it is! The deal was announced somewhat breathlessly by the BBC’s European Correspondent Gavin Hewitt last night as if he was announcing a major event and I waited for the details of the plan, except he did not have any. I somehow doubt that President Roosevelt announced his New Deal and refused to tell anyone about it. You see this plan has two significant implications, firstly for Greece and her immediate future and secondly for the Euro zone itself as  a bail out plan will involve a fundamental change and is likely to be seen as a weakening of it by critics.

The Chairman of the talks Luxembourg Prime Minister Jean-Claude Juncker said

“We think the question (of aid for Greece) will not arise”

One might idly muse as to why they were discussing the subject then…… However let us look at Greece and remind ourselves why she needs help.

Greece’s Interest Problem

Greece has to issue debt to pay not only for its fiscal deficit which is heading for 13% of her Gross Domestic Product (GDP) for this fiscal year but also to pay for any maturing debt that needs to be refinanced. So far this year she has issued some 13 billion Euros worth and on both the main issues she has had to pay more than 6% as an interest rate. Over the rest of this  year she will have to issue another 40 billion Euros worth.

The Schedule

There are some dates more important than others as for example 8.2 billion Euros becomes due on April 20th with another 1.3 billion Euros due on April 23rd. Then another 10 billion Euros need to be issued in May. Once this phase is over then she only needs to issue around 20 billion Euros in the rest of the year, so there is a peak and then a drop in issuance rate. This schedule is another reason for Euro zone ministers to stop dithering as Greece is running out of time and needs help now.

The Cost

As of last night Greece’s ten-year government bond yield closed at 6.25% and on the evidence of the year so far this has proved to be approximately the level at which she can issue government debt. To do a comparison I have gone back in time two years to see the cost of this crisis. At that time Greek ten-year government bonds yielded 4.41% and in terms of the spread with Germany’s bunds were only at +0.68%, heady days! By comparison this spread closed at +3.06% last night.(As an aside German ten-year bund yields were half a per cent higher than now perhaps demonstrating an example of flight to quality during this crisis).

So the extra interest rate is 6.25% – 4.41% or 1.84%. Now if we take the debt issuance to be 53 billion Euros for this year than the extra cost is 975 million Euros a year. Remember this is every year. Putting this in terms of the size of Greece’s economy it is around 0.4% of Gross Domestic Product. So the interest cost this year is just under a billion Euros.

The longer the crisis carries on the worse this gets for Greece as next year not only would this have to be paid, but also if the situation remains the same then the extra margin will have to be paid on next years borrowing too and so on into the future until it ends. So Greece is carrying an extra weight just as she is trying to reduce her deficit.

As a warning I have seen this calculation done elsewhere looking at her total national debt, fortunately for Greece existing debt does not (usually) cost anymore until it matures and is replaced. So the numbers are not as appalling as others may incorrectly think but they are still bad and if  a resolution never arrived then in 8 years times (her debt maturity) she would have to pay the margin on her whole national debt, but that is a long way away.

Of course at the same time her national debt is growing and looking 8 years ahead with no resolution to this crisis then I could see Greece wilting and then collapsing under the strain. Which way it would happen is unclear.

The Financial Times has reported that quietly Greece has started to ask for around 25 billion Euros to help her through this time and would like to pay around 4.5% on it which would represent a considerable saving in interest costs. Officially Greece has made no such request.

The Euro Zones Real Problem

The ghost at the feast is plainly the taboo surrounding aid to Euro governments in a crisis. This is currently being backed up by the power of the German Constitutional Court which is hovering in the background. So Europe’s ministers have yet again fallen back on promises and rhetoric. Jean-Claude Juncker again,

“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,”

The statement from the Ministers added the following

“The objective would not be to provide financing at average euro-zone interest rates, but to safeguard financial stability in the euro area as a whole,”

The Detail

1. The size of any loan is unknown.

2. The cost of any loan is unknown

3.The length of any loan is unknown

4.Who will offer the loan is unknown

5. The trigger for the loan is unknown.

Perhaps the only thing that we do know is that loan guarantees will not be part of any deal according to Mr. Juncker. I guess he felt he had to say something of relevance to give his statement at least a semblance of reality. Perhaps the most revealing statement was from Spain’s Finance Minister Elena Salgado.

“There is no loan facility at the moment,”

Conclusion

In spite of the action from the news agencies the only thing that is actually new here is that yet more time has passed and more hot air has been generated. The real issues are as follows.

1. Greece will need help to get through 2010 and 2011.

2. The Euro’s constitution prohibits such help.

3. Even if it did not Germany who in essence is Europe’s paymaster has a Constitutional Court which may rule an aid plan unconstitutional.

4. Europe’s economic performance under the Euro is showing more signs of divergence than convergence.

And on these issues I cannot see any progress at all. So far today Greek government bond yields have edged marginally lower which is hardly a sign of a resounding success.

NB

Having looked at the numbers it was interesting to see that Germany can in effect borrow more cheaply now than she could two years ago. I referred to it earlier as a flight to quality which is true but now imagine you are Greek. Would you not perhaps think that Germany was in this sense benefitting from the crisis and could accordingly do more to help? If I was Greek I would supect I would be pointing this out.

Also today’s statement from the EU reminding the UK that our plans to reduce our fiscal deficit are unsatisfactory may well remind many that our deficit will reduce at a much slower rate than that of Greece. They plan to satisfy the 3% of GDP target in 2012 whereas we will not even hit it in 2015.

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13 thoughts on “Europes aid plan for Greece, it’s a secret!

  1. Isn’t the “plan” essentially a repetition of the “torture chamber” remark (Mr Juncker, if I remember correctly)? That is, a vague threat to use market operations to punish anyone who shorts Greek government bonds. The idea, I suppose, would be to get beyond the April and May re-financing deadlines you mention. If there are politicians thinking more than two months ahead we should we count ourselves really lucky!

  2. I agree entirely with your comments and analysis and one wonders just how much longer this procrastination can continue. Your point about the “extra” interest that Greek is paying on her bonds is particularly pertinent when you consider that every commentator I have read is projecting a fall in GDP of between 2 and 4% this year and unemployment reaching between 10% and 20% as a result of the austerity measures.

    Unleaded petrol is now 1.50 Euros per litre and we have yet to see the effect that this will have on retail prices, in addition to the VAT and other tax hikes (introduced yesterday).

    Tourism is a major source of income for Greece but visitors this year will be in for a shock! This does not bode well for 2011 and beyond .

  3. Each further day of procrastination increases the likelihood of a binary outcome. In fact I’d speculate it’s already a mathematical certainty that either we have a full scale bailout or a default.

    Personally I think the long term solution for Greece is a default.It is always surprising how quickly defaulter nations can come back to the markets without any support .

    Perhaps Greek politicians may also be looking closely at the Icelandic situation. It seems that there the populatione considers defying international creditors as in their interests.It may be politically asute to adopt that tone.

    And of course this is all a test bed for the rest of the sovereign creditors ,some of whom have no real plan as to how their long term structural deficits will be financed.

    ..and we all know who they are

  4. If I were Papandreou I would be turning to the IMF because

    1. The likely terms of any EU financial support is likely to be little different to that demanded by the IMF.

    2. The IMF have apparently already expressed their willingness to help Greece, and presumably would be able to move quickly to agree a package.

    3. Whilst public opinion in Greece so far appears to be supportive of the need to take action, an IMF package would strengthen the government’s hand in dealing with “waverers” if they appear (and I think they will when the full impact of the austerity measures are felt.)

    Having said this, Greece is no stranger to defaulting on loans. If it did and one consequence was a weakening of the Euro I cannot see that this would be a bad outcome for the rest of the Eurozone which is, by and large, struggling to be competitive.

    As a Briton living in Greece on a UK pension, however, perhaps I am a little biased ………….

  5. Interesting article comparing Greece to Argentina:

    http://www.marketwatch.com/story/greece-could-repeat-argentinas-2001-fiasco-2010-02-20

    How did the situation in Argentina end? Not too well. Economic depression, mass insolvencies, bank runs, forced seizure of deposits, unemployment and underemployment exceeding 40%, blood in the streets, a fall of the government, a complete reneging of the terms of the “rescue packages,” an abandonment of the hard currency monetary regime, a mega-devaluation, and a massive default of foreign debt obligations.

    Can Greece escape this same fate? There are no two situations that are exactly alike, but the similarities of the Greek and Argentine situations are striking.

    Interestingly, one difference is that Greek levels of deficits and debt are between two and three times as great as they were in Argentina. In principle this would seem to make the situation in Greece even worse. However, this demonstrates that there is no particular amount of deficits or debt that triggers a debt crisis. What triggers a crisis is more a product of psychology on the part of those that finance the deficits and debt.

  6. There is no real problem for the Eurozone as a whole.
    So from the outside looking in at the entire thing it is still in relatively good shape. Saving rates in the nordic countries of the Euro make up for all the borrowings in the south. Would it have been a true union with one entity issuing bonds there was no problem. Like Califronia is more or less the increased version of Greece of the USA. But it does not effect the entire dollar zone.
    The real problem is that there is no single bond market system. And the problem is there is no single policy on healthcare and pensions. Simply put the club Med governments promised the people stuff they cannot afford. Those same people were dumb enough to vote them in power anyway. Now the chickens are home to roost. Just to let you in on a little secret. The Nordic nations (such as the Netherlands) are in no way or form planning to put send a single cent of their hard urned cash to corrupt and incompetent states and politicians such as Greece.
    We have saved up for our pensions in the Netherlands in a scheme that guarentees their long term sustainability. Something all western nations should have done 30 years ago.
    If the club Med countries think they will get any bail out they are in for a bog shock. No money will be send, i repeat no money will be send. The countries that do have cash have stated that they will not send money. Dutch parlement is actively moving as we speak to force in the IMF to Greece. Despite what the French want they are in no position to talk. The money is not theirs. Dutch exess savings could almost make up for all the borrowing of Club Med, but if they attempt to get it I guarentee you the Dutch will step out of the single currency over night. It is a pitty you cannot read Nordic newspapers, but in reality the EU is pushed to the wall by those who actualy have the cash. They will not get a penny, never. And if they push to hard they risk loosing those members t hat make the Euro strong. It is even more likely that Greece will be ousted from the Euro all together, as legal experts in for example Germany are preparing a lawsuit against Greece for frauding its way into the single currency zone.
    If there ever will be any bailout it will be by those holding Greeck debt. so it might be that the Euro finance ministers are trying to figure out whom is holding what and what the scope of the risks are. Such a bailout will than most probably be a joint effort by creditors and their host nations and Greece.
    But I repeat, a bailout for Greece bu Nordic nations is imediate suicide for any ruling party or ruling part head in any of the Nordic countries. Public oposition is near 95% of the total electorate. We in the North have set retirement age to 67 in order to remain solvent and than to save over spenders who retire at 50 will give riots in Nordic streats that dwarf anything the Greecks are doing now. There is even talk of counter protest in the North against the Greeck unions, who are involved in fantasy politics and are spittting in the eye of every Nordic hard working Nordic worker who already made the nescessary adjustments decades ago.

    • You are forgetting that most of the Greek debt is held by French and German banks. That’s the only reason because they are still studying the financial markets. It’s also possible that those same banks in the meantime have bought CDS insurance contract. Hard to know. Yet I wonder if those banks have CDS and Greek bonds in their hands, who sold them the CDS? Hopefully not AIG again…

  7. Few days ago I wrote that EU politicians are sticking to the old say “if you do not have any idea, you’d better have a plan”
    http://mgiannini.blogspot.com/2010/02/too-little-to-fail-or-when-you-do-not.html
    Now it appears that they have a plan, kind of, whose details they do not want to disclose. They want to rely on the announcement effect and self-fulfilling expectations: that is markets should behave like a solid plan would really exist so that actually they do need it or the plan will never be implemented.
    I am afraid EU politicians are relying too much on their irrational expectations….and wishful thinking
    http://mgiannini.blogspot.com/2010/03/euro-zone-stress-test-or-how-pigs-could.html

  8. Guess we can all work out where Johan lives! I think this post perfectly illustrates the real problem within euroland. It’s a mess because we allowed the career politicians far too much influence!

  9. Hi Mac,

    well one of the problems is that corruption in the south has never seriously been tackled. Italy and Greece are absurdly corrupt. The other Club Med countries are also suspicious in this respect. I do not want our money to be wasted on those corrupt states. Bankrupty is a normal occurence in a Capitalist system. Just let them go bust. Maybe than they will start living in reality and tackle their own home grown problems.
    If you ask me personally, I think we should never had allowed them to join in the first place. Their criminal leaders are trying to drag us with them in their corrupt black hole. So again, just let them go bust. Take the losses and that will be it.

    • Hi Johan

      One theory along that line goes as follows in the UK which was brilliantly represented on the tv satire Yes Minister and Yes Prime Minister. We (the UK) are usually considered a nuisance in Europe but were allowed into the EU because the Northern European nations wanted another reputable country to help them deal with corruption in southern Europe. The UK joined because it thought it might be more of a nuisance on the inside than outside (according to the programme UK foreign policy is to disrupt Europe and has been for centuries).
      This satire was very funny and much of it has turned out to be true and prescient ( it is 20 or so years old). One irony was that we were expected to be bulwarks against corruption but it was the Kinnocks who (allegedly) were responsible for kicking the auditor who was challenging the EU accounts into the long grass. I have already apologised for this(them) on my blog.Another irony is that the Germans are turning out to be every bit as disruptive as the British perhaps more so. If you have never seen Yes Prime Minister some of the best bits are on youtube.

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