Today in itself was never going to be an auspicious day for Greece because her civil servants have planned a strike for today. This strike has two aims the first is to protest against current austerity measures and the second is a pre-emptive move against expected future cuts should the Greek government end up asking for the assistance of the International Monetary Fund(IMF). This strike does not just include bureaucrats as doctors, nurse and teachers have joined in with this industrial (in)action. The only small bit of relief is that air traffic controllers have turned down the strike to help deal with the aftereffects of the problems caused by volcanic ash. This is the fourth nationwide strike organised by the public sector union (ADEDY) this year.
Just to add to the bad news Eurostat (the European Statistics agency) has come out with a report on EU government finances and I am unsure whether to say it has comic or tragic timing or both. The first number which catches the eye is that Greece’s fiscal deficit for 2009 has been revised up to 13.6%. Then we get
Eurostat is expressing a reservation on the quality of the data reported by Greece, due to uncertainties on the surplus of social security funds for 2009, on the classification of some public entities and on the recording of off-market swaps. Following completion of the investigations that Eurostat is undertaking on these issues in cooperation with the Greek Statistical Authorities, this could lead to a revision for the year 2009 of the order of 0.3 to 0.5 percentage points of GDP for the deficit and 5 to 7 percentage points of GDP for the debt.
Inaccuracy involving public finances statistics was a major reason that Greece got herself into her current mess.
Having now arrived in Greece to begin negotiations with her government I would imagine that it is hardly going to impress her team to see a nationwide strike, although I suppose that they must have seen it all before! After all the IMF by definition always goes into countries with problems. However negotiations do look as if they are going to be somewhat leisurely with a scheduled final text planned for the 15th May. Frankly this does seem rather dilatory and slow as Greece has to finance a bond of just over 8 billion euros which comes up for refinancing on the 19th May. This does not leave much of a time margin.
According to the Financial Times there have already been a couple of leaks from the negotiations where the IMF has suggested two things
1. That Greece’s national debt will reach 150% of her Gross Domestic Product in 2014.
2. That Greece will need to find 120 billion euros over the next 3 years.
So it would appear that Mr. Weber may be qualifying and correcting the speech I mentioned yesterday because he feels the numbers mentioned are in fact too low rather than too high! I jest but you get my point. As to her national debt I feel that there are dangers that it will hit the level quoted more quickly than that.
Also the negotiations may well be taking place in a rather cool atmosphere. After all the Greek Prime Minister was saying only a month ago that he did not want IMF involvement in Greece’s affairs. To add to this Greece’s Finance Minister George Papaconstantinou said on Wednesday no more austerity measures would take place this year. Rather a strange pronouncement from a man about to start negotiations with an organisation which usually insists on such things in return for finance.
Yet again yields rose on Greek government bonds. Remember this is from levels which were already very high. Greek ten-year government bond yields rose above 8% to close at 8.1% and the spread over German ten-year bunds now exceeds 5 %. I took a look at 3 year Greek government bond yields for comparison and they closed at 8.31% so the situation is grim across her yield curve.
What does this mean if you bought at one of the recent issues?
On March 11th Greece issued 5 billion euros of a ten-year bond with a coupon of 6.25% at a price of 98.742 according to the Greek Public Debt Management Agency. So by my maths it was yielding 6.33%. At last nights closing yield of 8.1% I estimate that investors have lost over 11 points. For a bond market that is quite a rate of capital loss, 12% in just over a month or 600 million euros. It will hardly encourage them to buy again. As it was heavily over-subscribed it turned out that many were lucky to miss out.
Haircuts and Debt restructuring
I notice that the Vampire Squid (Goldman Sachs to the uninitiated) is now publically stating that Greece “might offer a voluntary debt-restructuring”. After my initial thought of welcome to an issue that has been discussed on here for a while both in my articles and in the comments section it occurred to me that the Vampire Squid is often well-informed. So perhaps this is being actively considered by the Greek government.
As you know this is a theme of mind and thank you to Reuters for this excerpt from a speech by German Finance Minister Schaeuble who said: ” you saw how the markets calmed down after the decision by finance ministers on the Sunday (before last)”. If he did see that then we have found someone else in a group of one. I suppose a more hopeful view would be that he is a specialist in irony. Apparently a rise in yields from 6.7% to over 8.1% in just over a week represents a calming.
I wrote on the 16th April that I feared that Portugal was in danger of being sucked into the same type of whirlpool that has surrounded Greece in recent months.
If you pressed me for an opinion I would say that Portugal is currently in the most danger and I say it with regret as I have enjoyed time there and have Portuguese friends.Portugal currently has a national debt of 77% of her GDP but if you project this forward to 2012 and take a kindly view that she will hit her fiscal targets then it will be over 105%. Like Greece she is not accounting for the interest outright on her national debt, instead she is rolling it up and adding it to her debt. There is a marked lack of a fiscal austerity programme that approaches the scale of her problems.
Well the markets appear to be coming to the same sort of conclusion. They did not do much in response to her recent downgrade in ratings terms and the spread between her ten-year government bonds and Germany’s bunds has remained for a while at around+1.2%. Some of the press comment about her downgrade gave my a wry smile as they presented it as a dramatic and significant event when in fact the spread I have just mentioned responded by narrowing slightly. Oh dear! However it is now widening, for example it closed last Thursday at +1.26% but closed last night at just over 1.6%. They now yield 4.76% in outright terms.
My views on Greece remain the same. She needs decisive action involving three things.
1. Aid from Europe/IMF
2. Her austerity programme to be beefed up and backed by the IMF to give it credibility.
3. Debt restructuring.
In my view she should be discussing all three with the IMF right now. There has been too much delay already. For Portugal I think that there is a brief window of opportunity still for her to do an “Ireland” and impose a new austerity budget which gives investors some confidence in her. Otherwise the wolves will soon be knocking at her door too.
Update 4pm UK Fiscal Deficit Figures
The figures for these were a little like the unemployment figures from earlier this week as both sides of the debate can claim some success from these numbers. The newspapers will be full of headlines saying that the UK has borrowed more this year than in any year since the Second World War at £163.4 billion for the financial year 2009/10. This is of course true, but it is also true that we have borrowed less than appeared likely a few months ago when the official forecast was £178 billion.
As I have written before I have concerns that the improvement highlighted above may not last and will return to this subject in more detail tomorrow. The Eurostat report highlighted above also had some queries about UK figures in the period 2006/09 and I will discuss that too,as it is rather embarrassing to say the least. The rise in our national debt to 62% from 52.9% of GDP is another concern.