Last nights UK election debate and developments in Greece

After asking for more clarity on plans for cutting the UK’s fiscal deficit from the three men who would be our Prime Minister in their televised debate yesterday I hoped for it but in all honesty did not expect it. In the circumstances it was no great surprise that all three of them ducked the issue and flunked their chance. There was no new  insight and yet again the debate swirled around the Conservatives planned reduction in Labour’s National Insurance increase that will come into effect in 2011. As I pointed out yesterday we have a £163 billion a year problem and all our politicians talk about is a measure which costs £6 billion a year. I am not saying that £6 billion is a small amount, plainly it is not, but on the scale of decisions facing the new or re-elected government it is relatively small.So on the real issue there simply has been no real debate. If you look at it in terms of mandate when whoever occupies the position of Prime Minister on May 7th starts the required austerity measures they will not have a mandate to do it.

I noticed an interesting point in the comments section of the Financial Times and repeat it here

The modern career politician wants to BE something, not to DO something. To that end, they will say anything they have to say, and do anything they have to do to, and any problems they face in office are a bridge to be crossed when they come to it. A term in the hand is worth a dynasty in the bush.

The saddest part is that I cannot say that this point of view looks wrong…

Sir John Gieve

In case you do not know who this man is he was the Deputy Governor of the Bank of England and a member of the Monetary Policy Committee. He is what you might call an “insider” and this week gave an interesting speech. For example he does not think much of the election debate either

Everyone’s saying they will do everything that is necessary but they are not spelling out how draconian some of these are going to feel on the ground

However then he referred to the issue of independence of the Monetary Policy Committee

There’s no reason why you should not try to fill that out through some sort of meeting in which the Bank, the Treasury and the Financial Services Authority get together and discuss sequencing and what order you are going to do it in. The Monetary Policy Committee is still independent in judging whether you are on track.

I disagree as in my view you cannot be partly independent, it is something you have or not. Also the very fact that an “insider” talks about such a thing (and is looking for more of what he calls co-operation) pretty much speaks for itself as to the current state of play.

As to the supposed claims about the Governor of the Bank of England and his supposed statement that whoever wins the next election may face a poisoned chalice and may accordingly find themselves in the political wilderness. Is it really such a shock? I do not mean if he said it or not I mean the idea. The next five years are likely to be very difficult and personally I thought the same in the US Presidential election that the winner (who turned out to be Barack Obama) would do very well to avoid being a one term President.

The Greek Problem

We seem finally to be approaching the point where Europe’s leaders will actually activate their plan to aid Greece and it is not before time. Frankly it is certainly two months late at best as I have remarked many times during this crisis. However as Europe’s politicians have been so ineffective it is good to see the International Monetary Fund involving itself in this issue and her President gave the German Parliament an indication of what we can expect this week.

A proposed package

Leaks suggest that Greece will get an aid package of between 100 and 120 million Euros. It is hoped that this will mean that she will not have to borrow on financial markets for three years. Should it turn out to be so then Greece will be able to borrow over the next 3 years at a maximum interest rate of 5% which is much better than financial markets would currently provide evn after yesterdays rally.

The Price

Yesterday the Greek Prime Minister meet with Greece’s trade unions and requested their support for an austerity package amounting to 24 billion Euros. Taxes would rise with Value Added Tax going up ( to either 23% or 25%) and fuel alcohol and tobacco taxes rising by 10%. All of these taxes have already been raised once this year. On the spending side we will see the end to the 13th and 14th salary payments that is the Greek custom ( they have 14 rather than the usual 12), a reduction in supplements to state sector salaries. There may be others and the comments section on this site have been illuminated by views and rumours coming from inside Greece herself.

One thing that is sure is this is going to be a real squeeze, it will be harsh and austere and I will return to this later.

Comment and Analysis

It would appear that finally a fund is being put together that approaches the size of Greece’s problems over the next 3 years. However there is still some debate over whether 100 or 120 billion Euros will be the size. Let me give my opinion, Greece has heavy borrowing years planned for 2011 and 2012 so it should be larger of the two and I would have trebled the original plan to 135 billion Euros. As I have mentioned before this is not going to be a period in which running out of ammunition is going to look an attractive scenario should it happen.

When this crisis began I felt that it would be better not to involve the IMF as I felt that it would have plenty of other calls on its resources and as Greece is only around 2.7% of the euro zone in terms of economic size so it should have been containable by Europe’s leaders. I was unaware at that time that my already low view of Europe’s politicians was to be downgraded as fast as Greece’s financial status. Their dithering has turned a containable situation into a crisis that leaves not only Greece facing a period of (even more) severe financial adjustment and all that entails it also questions the future of the Euro project itself.


It would appear that the IMF is now taking a higher role in this crisis and this is now wellcome as the EU has proved unfit for the task. However it is still not absolutely clear that it has the primacy I have called for. It should be given it immediately. Also another disturbing rumour is doing the rounds and as it appears to come from the Head of the IMF I shall repeat it. IMF loans will be junior to those of existing bondholders. This is very significant and I would like to remind readers of my question to you on Monday 26th April

I have a question for my readers here and it relates to the recent increase in loan capital for the IMF. This was announced to great fanfare at the April 2009 G20 meeting by the UK Prime Minister Gordon Brown. He announced it as if it was a rabbit from a hat. However there are potential implication from it, for example what would happen if some of the money was lent and the loan was not repaid? Who is then liable? Has there in any country been a debate on this?

Well making the loans junior to existing bondholders certainly increases the chance  of it losing money so where do the losses go if it does? Just to be clear the IMF’s usual terms involve it being paid out first. This is a technical factor that many may miss but it is very important as this crisis is full of events which have not happened before.

The Banking Sector

I have written this week about problems for Europe’s banking sector and there are more and more signs that it is struggling with this crisis. Anybody looking at Greece’s banks must be wondering how much the fall in Greek government bond prices has affected them . Other banks around Europe (if the official figures are accurate particularly in France) must have losses too. It would appear that this is now affecting interbank lending and according to the FT many banks are now shut out of this market. Another sign of such problems is that the yields on German 3 month Treasury Bills are now only 0.19% . This starting to sound reminiscent of what happened to US Treasury Bills after the Lehman crisis.


I have commented on the fact that we can use Latvia to gain some insight into what might now happen to Greece and my main article on this was on the . In December 2008 Latvia called in the IMF because of her fiscal and balance of payments problems and agreed an austerity plan with the IMF. I quote some details below from an article on this at that time from the Latvia Economy Watch. They may look rather familiar.

In return for the loan the IMF have agreed a “strong package of policy measures” with the Latvian government and these will involve sharp cuts in public sector salaries, and a tight control on Latvian fiscal policy. The IMF have insisted on a substantial tightening of fiscal policy: the government is aiming for a headline fiscal deficit of less that 5 percent of GDP in 2009 (compared with an anticipated deficit of 12 percent of GDP in the absence of new measures) – to be reduced to 3% in 2010 (thus the Latvian economy will face not only tight effective monetary policy in 2010 – via the peg – but also a less accommodating fiscal environment, frankly it is hard to see where the stimulus to economic activity is going to come from here) . Structural reforms and wage reductions will also be implemented, led by the public sector, and VAT will be increased, all with the longer term objective of further strengthening Latvian competitiveness and facilitating the external adjustment. The problem is really how the Latvian population are going to eke it out in the shorter term.

You see in 2009 Latvian GDP then fell by nearly 18%. Now I do not predict this for Greece in the next year as plainly 2009 had its own credit crunch problems but I think you cannot avoid the view that Greece’s GDP will now fall if the planned austerity plan comes in by a substantial amount over the next year.


1. In the poker game I discussed between European and Greek politicians then the Greek government gambled and then capitulated.

2. Euro zone politicians have proved to be inadequate for the task and the more involvement we get from the IMF the better.

3. There are disturbing issues around primacy for the IMF and seniority of its debt. One way of making a bad situation worse would be for the IMF to actually lose money.

4. Portugal’s three-year bonds were still yielding more than 5% yesterday so she still faces a loss on any aid to Greece.

5. There are plenty of rumours and promises but remember any rescue plan still has to go through the majority of euro zone Parliaments and looking at the German situation there still seems to be disagreement there. Even if it passes Germany’s Parliament there is her Constitutional Court. So our relief rally in Greek shares and government bonds has plenty of dangers for it in the days ahead.

6. The proposed plan does address Greece’s liquidity problem but it does not settle her solvency problem. There are still may scenarios in which we come to the end of the three years and Greece’s future still looks insolvent. I still believe that some sort of debt restructuring will be necessary and this only reinforces my concerns about IMF debt possibly being junior to other debt.


31 thoughts on “Last nights UK election debate and developments in Greece

  1. Thank you for your extremely interesting posts. I apologise if I am asking a very naive and uninformed question here but what puzzles me is whether the British taxpayer stands to lose money directly as a result of the IMF bailing Greece out. I notice Mr Cameron said last night that it is fortunate we are not in the Euro, otherwise we would be bailing Greece out, but am I mistaken in thinking that we will indirectly be involved in a bailout via the IMF and that if Greece reneges in any way on its debt we will still suffer a loss?

    • Hi Liz
      It is true to say that we are not in the Euro so we would not be liable for any losses on aid from the eurozone. There are two ways we as UK taxpayers can lose money.
      1. In the IMF constitution we have a notional share or quota of 4.94% in it. This share is likely to be higher in the new expansion of its lending ability I have mentioned as this was by the G20 and not all members. There are no real examples of how a loss would play out as in his history so far it has avoided any large losses. My point is what if that changes? And further there are changes in its behaviour and rules which make losses more likely in my opinion as I have discussed today and this week. It does have some gold which could possibly be used to offset a loss.
      2. UK banks have investments in Greece and two of them RBS and Lloyds are mainly and partly owned by the taxpayer respectively so we could be affected there if conditions worsen.

  2. I confess I can hardly bear to watch anything to do with our election. We have a choice between 3 grey men in suits and as someone said this morning on the Today programme “you couln’t get a Rizla paper between them”.

    My worry is that there will be the same dithering and burying of heads in the sand here as in Europe. Our only saving grace is that we’re not in the Euro.

    I think I have read on this site that you favour raising the rate of VAT (maybe to 20%) and I have also come to this same conclusion. It can be done quickly so tax revenues start to increase immediately and has the added major advantage that it is not a tax which can be wriggled out of. In fact the rich would be paying far more than the poor straight away since they spend more. (The current exemptions on essentials would remain) This would buy UK plc some time to discuss (dither) about any other methods the government might like to consider towards debt reduction.

    As has been illustrated by the EU fiasco with Greece, time is of the essence; dithering by the EU has turned a bad situation into a disaster. If we want to avoid the same fate we need to get on with it; the election has been but a side-show. As Caroline Lucas of the Green party also said on the Today programme there are many issues which have not been discussed and we are in danger of missing opportunities such as creating “green jobs” which would lessen our environmental impact, save money and lower unemployment at one and the same time.

    • Hi Jan
      The coalition government has made me think of your quote from the Today Programme again “you couldn’t get a Rizla paper between them” .
      Currently with their public statements members of our coalition government are trying to make this point true for 2 of the parties anyway…

  3. I think this is another false dawn for Greece. Here are my cynical predictions for Sunday’s mooted announcement

    (i) A plan long on words and short on numbers

    (ii) It will be unpicked in a matter of days or hours,the biggest flaw (as you rightly point out Shaun) being primacy; prior to any parliamentary approvals you will see contradictions in statements between the concerned parties.

    (iii) the required degree of austerity is more than Greek politics can bear.It will not take long for (one way or other) this government to fail and the plan will be ripped up.

    I hate to be wrong but hope I am.

  4. Shaun,
    It could be argued that the human spirit rises to difficult challenges and we might see a world class leader emerge and take control of our economic problems and sort them out. Sadly considering the choices on offer that may not be such a self fulfilling prophesy!

  5. Presumably the bulk of the Greek bailout still comes from Germany. And since that’s illegal under Maastricht and a case has already been put before the Germany constitutional court this plan could still fall at the last hurdle.

    • That would be really great. I am pretty sure that many Greeks and left-wing parties in Greece which are against the bailout would have liked to contribute to the arguments.

  6. Are IMF contributions basically written off the moment they are given by the memebr states? I know they do not appear on anyones balance sheets as a liability due to the fudgy accounting rpactices in use (or is that ECB only?)

    But are IMF contributions considered loans or donations?

  7. Being able to borrow at 5% or so is clearly a great help to Greece. I agree that it looks as if they will need more than €120bn. But what about repayment? Will these amounts be written off, or repaid over 30 years, which is roughly the same thing? When the 3 years are over, will Greece have improved its productive capacity or will it simply roll over the loans and ask for more?
    Your comment about the ethos of UK politicians (Be rather than Do) strikes me as 100% correct. There are dozens of examples of this species and very few, perhaps only a couple, of the other kind.

  8. I think that the UK public has to shoulder a lot of the blame. When the tories started talking about reducing the deficit (not the debt!) they dropped in the polls.
    I think the problem with any democracy is that you are asking people what they want!!! What they want is to have their cake and eat it!!!

    • Couldn’t agree with you more Max, have been saying the same on numerous blogs. People whinge about not being told the truth. When they were, they switched off.

  9. The talk in Dutch media is about a 150 Billion Euro plan for Greece.
    Some even suggest 300 Billion in very long term bonds.

    And the conditions to the help are announced as the end of “Greece pseudo-Paradise”. So i reccon some severe austarity measures such as some grip on the public work force and their idiotic benefits and a pay by achievement policy.

    Further more there is a lot of praise for Merkel who is pushing for a long term solution 3-10 year plan.

    Hope it is something substantial now to plug the money leak and not just talk.

  10. It looks like for the moment that Greece is saved; but I said that exactly one week ago as well, and look where it got me. Andy of Yarm might yet be right; expecting incompetence from EUrocrats is good money. But even they now must understand the seriousness of the situation, so I’m (again) hopeful that this will be resolved. Stratfor listed in chronological order the next sequence of events:

    May 3
    •ECB/EU Commission Approval: The European Central Bank (ECB) and the EU Commission will have to approve the May 2 deal between Greece and IMF/EU negotiators. This is a key step before eurozone leaders can vote on it.
    •The German Cabinet Weighs In: Germany’s executive branch will likely agree to the deal this day. However, this is part of a process that is expected to take a week.

    May 5
    •Greek General Strike: Greek trade unions — which have more than 1 million members — are expected to hold a general strike. The one thing that can derail the bailout of Greece at its start is potential for social unrest. If Greek unions sustain strikes over a considerable time period, or if violence in the streets intensifies, the government could become unable to enact the agreed-upon austerity measures.

    May 7
    •Germany Decides: Germany is expected to seek parliamentary approval for the bailout deal by the end of the week of May 3, although the Bundestag’s final vote could take place on May 10. May 7 could bring the vote of the Bundesrat — the upper house — and a deal between the major parties. This is a key hurdle that needs to be cleared in the bailout process because Germany’s decision will signal to the rest of the eurozone — particularly countries skeptical of the bailout, like the Netherlands and Austria — which way Berlin is leaning. The vote is expected to pass, with key German officials no longer referring to the financial aid package as a “bailout of Greece,” but rather a defense of the euro against speculators — a marked shift in tone likely to rally public support for “protecting the euro” as opposed to “bailing out the Greeks.”

    May 10
    •Eurozone Summit: Eurozone leaders will meet in Brussels to most likely officially approve the Greek bailout package, although they could also pre-approve it at a teleconference on May 2. The key at this point will be for the bailout to be large enough to “shock and awe” investors into feeling reassured about the eurozone’s support for Greece.
    •Germany’s Final Decision: The final vote in the Bundestag, Germany’s lower house, could take place on this day.

    May 19
    D-Day.. Greece will either make the payments on it’s debts or default as it can no longer borrow on the open market.

    • The final decision will either be taken in the Bundestag or the Hellenic Army HQ.
      My good wishes to the people of Greece and earnest hope that whatever happens next will not involve bloodshed.

    • On a lighter note I could understand the Greeks asking for people to stop saying they have been saved! Each time it has been said so far their situation has in fact got worse…

      On a more serious note very few of the Euro zone countries have done much about approving their share of the loans and getting them through their respective Parliaments and of course this was when they were expected to be a third smaller than we are expecting now

  11. I’ll stand by what I said here on 25th April..

    “Judging by the previous announcements made by EU ministers, the fact that Greece has now asked for assistance does not (to me at least) mean that Greeces problems are reduced either this year or any other.

    To my knowledge not one parliament across the Eurozone has agreed the bailout as yet. IF they do each individually agree a bailout package then what conditions will be imposed by those EU members on the Greek Government in return?”

    Nothing has changed since then except a whole lot more hot air. This fudging will probably only continue for as long as the EU is run by politicians and not economists.

  12. The deal is done (we hear).No haircut it seems? So,is this more about saving Europe’s Banks or saving Greece?

    • But the good people of Greece still are stating that they will not accept the pubic spending cuts which go with this supposed deal! So it looks to me as if this is another game only of words.

      What next, and how long can this game of cat and mouse continue before the falling confidence of the markets turns to disaster?

      • Certainly if I were an Irish taxpayer I would burst into flames.Based on a 1.6% share they are looking at a eur1.5Bn ‘loan’.So much for biting the bullet.

  13. Sensing the mood from Greek media and from talks with relatives, these measures have gone worse than I had thought. I expect some extensive and ugly riots in the coming days in Athens but probably not a general uprising. Probably it could be ok. However, my impression is that they have gone as far as they could go with cuts. Not that they cannot require more in 3 months but to put it simply the people won’t take any more cuts. More austerity measures means poverty for all and people will become outraged seeing there is no end to this, and you could have hundreds of thousands in the streets giving their own rapid end to the saga.

  14. And another point, no plans for redundancies in the public sector were announced. If there are massive lay offs in the public sector expect big big trouble. Perhaps, they won’t be needed because of the non-renewal of many contracts of temporary workers in the public sector. This could be ok, they were not permanent anyway (remember the job security of permanent public workers is guaranteed in the constitution!).

  15. Hopefully all goes well in Greece, Basil.. the Greek people deserve better than this. Their governments promised too much to too many and borrowed too much to make it happen. I still stand by my ideal that in the long run, you cannot solve a problem of debt with more of it. This has only one ending on a long enough timeline..default.

    • Agreed.These measures will only add to the contagion risk when default eventually happens. Given the amount of support required,which is unlikely to be repaid I would prefer to see a default. The same money could then be spent providing direct Aid to Greece to allieviate the worst effects of poverty and domestically to deal with the fallout from Northern Europe bank’s exposure.

      It seems globally we are hell bent on undermining the robustness of our financial systems, by refusing accept any sovereign or banking failures.

      • I am under the impression that the BBC in particular hides the austerity plan details on purpose, to portray things slashed here as ‘luxuries’…

        For instance, they are talking about ‘holiday bonuses’, failing to reflect on the fact that the cuts made constitute a heavy loss of income percentage-wise to all public servants, and all pensioners (of any sector) alike.

        Their Europe editor blogs reinforce this opinion of mine.

        I feel sad for BBC, it used to attempt and take a more objective stance on things. It’s not that simple as black and white – there are several shades of gray in between…

        PS: Most people I see here in the office, on the streets, etc, wear a depressed look. I suspect therapists and shrinks will have their own ‘boom’ in the coming months and years.

  16. Ioannis,
    you are so right for BBC. I couldn’t agree more. It is extremely sad. Their reporting is music to the ears of a public that they want to hear for lazy, bonus-paid Greeks when the harsh reality is very different.

  17. This is starting to look more like a bail out for the banks involved than any real restructuring for Greece which will produce the necessary economic returns. Is membership of the Euro club really in Greece’s best interest?

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