Greek troubles are now affecting Portugal too

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.

Eurostat

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.

The IMF

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.

Market Reaction

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.

Political Grandstanding

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.

Contagion: Portugal

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.

Comment

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.

Comment

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.

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11 thoughts on “Greek troubles are now affecting Portugal too

  1. In the end issues of vanity and face have won out over a set of mathematical imperatives. When the UK faces it’s eventual crisis will we have we learned from the Greek tradegy and be willing to accept our fate with humility? Or do we rail against the world looking for someone to blame?

    • I think that if a country could get away with it default would be very attractive, it would also be attractive to any rabble-rouser on a street-corner. Lets face it in such a scenario default would seem easier than austerity and might even seem painless. However there are costs to it and what bothers me the most is the second and third order impacts of it. The world banking system remains very fragile and in particular the European part must have been playing the carry trade of buying peripheral national debt and using it as collateral at the European Central Bank.

      Also as we saw with Lehman Brothers a shock event can have consequences which are not predicted what I think Donald Rumsfield called the “unknown,unknowns”…. So default even by a small nation is likely to have quite large knock-on effects which could easily rebound on them….

    • My understanding is that the debtor might have an interest in default if they have a primary surplus or at least a balanced budget before maturing debt and interest payments (Shaun, is this right?). Greece however appears to be running a 7-8% primary deficit. The 8% value is from Greek press reports, the 7% is approximately consistent with the Eurostat tentative revisions — 13.6% deficit and 115% debt for 2009. The Greek press reports that Eurostat is moving towards a 14.1% deficit for 2009 and a 2009 debt of 120% of GDP, which, I think, would more or less account for the uncovered hidden debts.

      Anyway, Greece is running a significant primary deficit, so it needs to keep borrowing. It is not clear from the government budget when and how they are planning to or can even turn this around. Hence I do not see the basis for any debt restructuring talk at this stage. Perhaps now that the IMF is getting involved there might be some clear plan to turn the budget around, at which stage debt restructuring would make sense. My two drachmas is that the Greek budget cannot be turned around without major overhaul of the public sector, including salaries, benefits, pensions, health coverage, etc (good luck with all that). But, who knows, anything can happen.

      js

      • My two drachmas is that the Greek budget cannot be turned around without major overhaul of the public sector, including salaries, benefits, pensions, health coverage, etc

        Perhaps in the end the solution is a form of two-sided default/restructuring; bondholders get a haircut, and perhaps the same haircut gets applied (across the board?) to everybody else who is a “creditor” of the Greek government’s obligations (pension holders’ payouts, employees’ salaries, etc).

        While it is a difficult situation for those involved, it is an intellectually interesting one to watch. Relative to the Greek economy, the Euro is sound money (and more importantly not directly under the control of the Greek government or central bank). So as long as they stay in the “sound, un-fudgeable” Euro (I do speak relatively 😉 , what can and can’t happen seems analogous to how things might unfold under a gold standard.

        Time now to brush up on the social and political rants historically used to justify leaving a gold standard; if they start coming into the discourse it could be an advance warning of them leaving the Euro…?

      • Hi John
        To answer the question you pose at the end of your first sentence then a fiscal surplus and a balanced budget would be fine. In theoretical terms you could run a fiscal deficit up to the amount you could finance from domestic savings but you would have to be able to refinance yourself. You could really stretch that and rather than thinking of that ad infinitum then allow for a time period up until you can borrow again from abroad. But in cases like Greece the truth is that what could be financed domestically would be limited when compared with current expenditure. So you could end up with an even more severe austerity programme.
        Also the default would probably take with it the Greek banking sector so the economy would be in a distressed state to say the least.

  2. The Euro is tanking overnight; it closed just north of $1.33; it’s fallen to $1.3215, a strong drop. This will continue, especially if Portugal’s problems become more serious. Not too many people have looked at this part of the puzzle, but it’s affect can be strong indeed, beginning with price hikes for basic goods throughout the EMU.

  3. Dear Shaun and Mr. Kowalski,

    Regarding Portugal, an ECB report of december 2009 grouped Portugal rather differently than it is portraied now:

    “The results of grouping the euro area countries into risk categories show that half of the
    16 euro area countries are assessed as high risk in terms of the sustainability of their public
    finances, namely Ireland, Greece, Spain, Cyprus, Malta, the Netherlands, Slovenia and Slovakia
    (see table below). Belgium, Germany, France, Italy, Luxembourg, Austria and Portugal are
    assessed as medium risk, while Finland is the only euro area country that is assessed as low risk.”

    source link: http://www.ecb.int/pub/pdf/mobu/mb200912en.pdf

    Furthermore a Dutch financial website is citing that German production is accelerating at the fastest pace since at least 1996 and is having a positive knock on effect on the service sector as well.
    link to source: http://www.rtl.nl/(/financien/rtlz/nieuws/)/components/financien/rtlz/2010/weken_2010/16/0422_1015_duitse_industrie_gaat_te_goed.xml

    So I actually have two questions in this debate which are somehow linked:

    1. Are you aware of a reliable source projecting portugese debt and its ability to serve its debt?

    2. Is the acceleration of the German production linked to the weakening Euro? And if so will this new ‘German Miracle’ push the Euro up again vs other currencies?

    Kind regards,

    Johan van den Heuvel

    • Hi Johan

      Sorry for the late reply. I have been getting figures from various sources. One of the things I have found intersting is going back in time with Portugal and looking at how she has got into her current position, there are more differences that similarities with Greece… As to question one there are a lot of stats on the April 2010 version of the IMF’s world economic outlook and here is a link to it http://www.imf.org/external/pubs/ft/weo/2010/01/pdf/text.pdf. Not all of the sections specify Portugal individually but quite a few do.

      As to question 2 I would think that for the first part an increase in German production is more likely to be due to the world and european economic recovery as it would probably be a bit soon for the euro fall to be having an impact I think.For the second part I suspect that new shocks will come which will push the euro down over say the next year so if Germany’s economic performance drove it up it would ( after this current post Greek call for aid rally ends) be indeed a “miracle” in my view!

      Thanks for the ecb link it is one of the things that has prompted me to review Portugal’s economic history. In a way she has had her own “lost decade” and it has made her vulnerable.

  4. It would seem the markets are now testing the current EU resolve to ‘help’ Greece and actually pushing her into ECB/IMF arms. Spanish and Portuguese bonds are moving north too

  5. ‘They [our politicians] are frightened of standing out and being accused of peddling misery and bad news. ‘
    Exactly, but I think it’s probably worse than that. I don’t doubt Brown has a huge wave of economic advice splashing on his desk every morning, and digests from civil servants and other advisers probably litter the floor to a depth of several inches (sorry, Brussels, cm). But does he have the capacity to make a judgement on all this surely contradictory stuff? I doubt it, his experience to date has been mostly in good times, before which he was an opposition politician and did various irrelevant things including a doctorate in something rather non-financial.
    I think Labour’s top team shows every sign of being blinded by conflicting data, and taking the easy way out – shove the economics elephant off to the post election period then deal with it in the traditional Labour way, stiff inflation and all manner of tax increases while ‘protecting front line services’. Economic crises are far less urgent than survival, let’s deny the elephant for a few more weeks.
    The Tories are far less well informed, being in opposition, but in a sense that’s an advantage. They and the LibDems could easily stand back and take a dispassionate view of what has been happening. To their shame, they have failed to take the opportunity presented to explain to voters what we are really up against. I think that’s probably because there are too many PR people in the opposition parties, second guessing their opponents, wasting everyone’s time. However the electorate is far from homogeneously stupid and a good proportion has now understood the key points but needs some leadership as to the alternatives that face us.
    More of the same Labour economic rubbish as occurred in the ’70s and ’80’s will damage the UK. I wish I could say that (eg) the Tories had a plan, but if they do – which I doubt – they are very quiet about it.

    We are badly served in economic terms by all three main parties. Why do they assume we can’t deal with the facts but prefer endless spin?

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