Today I thought that I would look again at the public finances of the peripheral euro zone countries as there have been some developments this week. I wrote on Tuesday about the deteriorating state of Greek public finances and concluded that in my opinion Greek is in effect insolvent and that the situation is getting worse. So she is becoming even more insolvent. This may not seem important as you are either insolvent or not but remember that any such view depends on thoughts about the path for economic growth, interest rates and inflation as I discussed in my update on the UK public finances yesterday and these are unknown and variable. So the situation for Greece is that for her to escape her apparent destiny something even more extraordinary will have to happen such a perhaps cold nuclear fusion being invented as a realistic proposition.
Greek statistical discrepancies have emerged again
Today is likely to see an update on her fiscal and national debt position from the EU/Eurostat and the figures it produces according to the leaks in the Greek media are likely to show that yet again Greek statistics have been in error. The leaks suggest that the estimate of the fiscal deficit will rise from 13.4% to 15.5% or so and the ratio of national debt to Gross Domestic Product from 115% to 127%. I will update when the actual figures are produced. The articular period which caused these problems was 2006/09 according to Eurostat.The net effect of these new concerns is that the yield on Greek government debt has started to rise again. Her ten-year government bond yield had dipped below 9% for a while and I reported it was 9.09% on Tuesday, but now it has risen to 9.3%. In spite of the recent promises of Chinese and Norwegian buying the situation is worsening again and Greece’s return to world bond markets looks to be pushed ever further into the future. She is currently issuing only short-dated debt. In terms of developments the rail strike that is planned for four of the five weekdays next week is unlikely to help sentiment much particularly as the strikes in France appear to be long-lasting and attracting a lot of media attention which may spill over into coverage of the Greek strikes.
Ireland and her banks: Anglo- Irish makes a move on its debt holders
There has been a lot of debate as to what Ireland should do about the holders of subordinated and non-subordinated debt in her banks. For those who have not been following the story Ireland has been forced to pump ever-increasing sums into her banking system but holders of such debt in Irish banks have not been taking their share of the pain. This has to two lines of accusation. The first is cronyism with Ireland’s political system and that does seem to have been evident at times. The second is that other banks in the euro zone are also involved as holders of such debt and some have suggested that in return for EU help Ireland may have promised not to hurt these banks
Either way the failure of bondholders to take their share of the pain has been a feature of Ireland’s difficulties. Yesterday that changed as Anglo-Irish bank offered 5% payment on what is called Tier one or highest risk bonds and 20% payment on what is called Tier 2 or slightly lower risk bonds. This was then added to by a statement which said that there would then be an EGM and if this voted in favour then those who vote against will get nothing at all. As you can imagine this has rather stirred up a hornets nest!
One suggestion is that these “mutually advantageous talks” may be illegal and matters have gone so far that the Irish constitution has been invoked. I am not a lawyer but Article 43 seems relevant although I will be interested to see if any lawyers read this and whether they think that 2 or 2.2 is more relevant here.
In essence the problem here is that such moves should have taken place some time ago as this type of debt is supposed to share in any pain. The allegations of cronyism hit hard here and it is not to the credit of Ireland’s political class as there is already suspicion that some may have been able to exit these bonds at much better levels. To move now whilst its supporters call it “innovative” may indeed be innovative in that it is a sovereign in effect acting in a possibly illegal manner.
Looking at this further there may be another problem. There is a market for credit default swaps or CDS’s and these should be triggered by what is called a credit event and this looks like a credit event to me. To put this another way the whole CDS market is likely to be called into question if investors can be treated in this way without them paying out.
Fears over what all this “innovative” action might cause have led to Irish bond yields rising strongly again and they rose by 0.2% yesterday to 6.5% for her ten-year government bonds. The potential problems include whether investors might avoid Irish debt in future due to fears about being treated in an “innovative” manner. Also it reminds investors again of Ireland’s underlying fiscal problems as the Economic and Social Institute has just published some worrying figures for the future path of the Irish economy which involve estimating a further 4 billion Euros of fiscal austerity in the emergency budget due in November.
Spain and her troubles with her economic statistics
I wrote on the 1st of October about concerns that exist over Spanish economic growth figures and in particular concerns about them having been overstated. Unfortunately there are also now concerns about the property statistics produced by the Spanish National Institute of Statistics (INE). It recently produced statistics which indicated that Spanish property prices had risen in the second quarter of this year. This reversed a three-year trend and allowed Spanish Prime Minister Mr. Zapotero to give interviews suggesting that the market had bottomed. Those who follow the Spanish property market simply did not believe the figures and their disbelief will only be added to by the fact that the Tinsa price Index showed that house prices fell again in September and at an accelerating rate. The annualised rate as recorded by this index is now at -5%.
An additional development this week has been that a small Spanish town has suspended all payments bar essentials. Whilst Villajoyosa is not large and in itself is a small section of Spanish economic life it has reminded everybody of the way the Spanish system has devolved a lot of expenditure to towns and regions. These towns and regions do not appear to have been following the central governments austerity mantra as the regions have increased their debts by 25% over the last year according to the latest Bank of Spain data.
So these troubling developments have led to Spain’s ten-year government bond year edging higher again.It has been holding steady at or just above 4% and has now risen to 4.2%. Spain issued some 3.85 billion Euros of new bonds yesterday and this appeared to unsettle the market when combined with the worsening news.
Portugal and her economic problems
Any analysis of Portugal ahs to start with the sad but not well understood fact that she has suffered from her own “lost decade” featured by low growth,problems with unemployment and emigration. Accordingly the credit crunch has hit hard and I analysed the implication for Portugal in articles on the 24th June,14th May,5th May amongst others.
Problems appeared to be mounting again recently when Portugal’s public finance statistics revealed that rather than reducing the fiscal deficit was in fact increasing! This was a bit more than just a presentational problem and Portugal was plunged back into crisis again. Her government’s response was to introduce (yet) another austerity package designed to cut the budget deficit from a record 9.4 per cent of GDP last year to 4.6 per cent in 2011. The package is planned to be two-thirds spending cuts such as reductions in civil service wages averaging 5% and pension reforms and one-third tax increases such as a rise in Value Added Tax by 2% to 23%.
Portugal’s government keeps telling us that its deficit plans are front-end loaded but her statistics keep failing to back this up. Now the new plans have not been passed by Parliament yet but even so it is troubling that the latest official figures released this week show that on a year on year basis Portugal’s central government deficit widened by 200 million Euros in the first nine months of 2010 compared with 2009. Her attempt at austerity was sabotaged by income tax revenue falling 7.6 % and social security spending rising by 6 %.
We are back with a problem which Portugal has faced for quite some time her inability to maintain any sort of economic growth even in the good times has obvious implications for these more difficult times. The tough austerity budget plans led to a fall in her government bond yields of around 1% but can she implement them? In spite of an extraordinary gain of 2.6 billion Euros from transferring the pension funds of Portugal Telecom to the state Portugal is still unlikely to hit her targets for this fiscal year. Accordingly the improvement in her government bond yields is ebbing away and they rose by 0.15% yesterday to 5.92% for ten-year bonds.
We are seeing a push-me pull-me situation for government bond yields in these countries. The economic problems from which they are suffering mean that they offer sovereign yields for what are considered to be first-world sovereign nations which are higher than elsewhere. So bond funds looking for yield in a world where yields are generally declining are likely to buy at any time of perceived improvement. However,it is my sad duty to note that the perceived improvement seems to be invariably followed by a deteriorating reality.