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.
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.
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,”
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,”
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.
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.