Greece is small, 2.7% of Eurozone GDP and roughly 3.9% of
Eurozone public debt.* Greece is not an economic basket case. GDP is declining by 1.1%
in 2009, much less than the 4.0% fall in the Eurozone as a whole (EU
Commission estimates).* Having had less of a recession, Greece will likely lag in the
recovery. For 2010, the EU Commission projects a 0.3% fall in GDP for
Greece and 0.7% growth for the Eurozone. We are much more optimistic
for the Eurozone (2.2% growth in 2010) and Greece (1%).
* Greece has a huge current account deficit. But the shortfall has
already declined from a peak of 15.2% of GDP in the year to 3Q 2008 to
11.9% in the year to 3Q 2009. It looks set to fall much further.
* One third of Greek export revenues come from transport services,
including shipping. Transport has been hit hard by the post-Lehman
collapse in global trade. The recovery in global trade should benefit
the external position of Greece and its corporate tax revenues.
* Greece does not have an unusually severe banking problem. Many
Greek banks have a solid domestic deposit base. Greek banks have
already scaled back their use of ECB liquidity from 7% of the total in
June to 5% in September. Our banking analysts foresee no major
problems for the Greek banks to unwind ECB liquidity further Greek
Banks, 26 November 2009
It is not about the specific banks. It is about the risk of a ‘run’ on the banks, a liquidity crisis, triggered by a fear that the govt. deposit insurance is not credible. See more below.
* Greece has a serious fiscal problem. The EU expects a fiscal
deficit of 12.7% for 2009, roughly in line with Ireland and the UK.
The critical distinctions is the UK obligations are at the ‘federal’ level, where Greece and the other ‘national govts’ in the Eurozone are more like a US state.
The EU projects that Greece will have the highest debt-to-GDP ratio of
all EU members in 2011 at 135.4%.
Far higher than California, for example, which was well under 25% of its GDP.
* The rise in the debt-to-GDP ratio for Greece from 2007 to 2011
will be 39.8ppts. This is bad. But it is below the projected increases
for the UK (44 points) and Ireland (71.1 points), roughly in line with
Spain (37.9) and not much worse than the US (35.7 points according to
IMF estimates).
* As we are more optimistic on growth, we believe that the rise in
the debt ratio will be smaller in Greece and in most other countries
than the EU projects.
None of the EU national govts could survive a liquidity crisis without the ECB itself.
* Greece has a new socialist government facing an immediate
crisis. That might even make the fiscal adjustment less difficult. The
government can blame the pain on its predecessor. It may face less
opposition from trade unions than a conservative government would. Of
course, the new government will have to make the promised adjustment
in its budget soon (vote due on 23 December). More may have to follow
in early 2010.
* Greece is not primarily an issue for the ECB. Central banks are
the lenders of last resort to banks, not to governments. Greece has a
fiscal problem, not primarily a banking problem.
True, but the point is deposit insurance, and not liquidity for the banks.
A run on the banks due to fear of credible deposit insurance would mean the ECB would have to fund the entire bank system which would mean extending ‘allowable collateral’ to any and all bank assets including the copy machines and the carpets, as well as any intangibles on the books.
In the highly unlikely case that worst came to worst, that is if the Greek
government could no longer fund itself on the capital market, the
decision what assistance the EU or the Eurogroup would offer to Greece
under which conditions would be up to finance ministers and heads of
governments, not to central bankers. It would be a political issue.
Yes, and how long would it take to make that decision?
If it is longer than a day or so, the govt would be shut down and the banks would have no source of deposit insurance.
* Greece is a member of the inner family of Europe, the Eurozone.
In the market turmoil in February and March, top European officials
(Eurogroup head Juncker, EU Commissioner Almunia and even some finance
ministers such as the German one) stated that a Euro member in trouble
would get an help if need be, in exchange for fiscal conditions.
All unspecified, and widely suspected to be empty rhetoric.
These statements have not been retracted. Of course, the Euro partners of
Greece may not be eager to repeat such statements just yet. They may
not yet want to take the pressure off the Greek government to make
fiscal adjustments.
Nor do they want to write the check and introduce moral hazard.
* Many Eurozone governments face fiscal challenges. Many finance
ministers of the more peripheral members would probably want to avoid
the rise in their own financing costs that would come if a
restructuring of Greek public debt were to blow out spreads across
Europe much further. The German government would be very unlikely to
veto conditional assistance, in our view. In the highly unlikely case
that assistance may be needed, such theoretical help could take the
form of an EU guarantee for newly issued Greek public debt in exchange
for some IMF-style fiscal conditions.
Yes, very possible. But, again, how long would it take to reach that decision if a liquidity crisis did happen?
I am not saying any of this is going to happen.
I am saying the systemic risk is inherent in the institutional structure of the Eurozone.
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