There is another option I’ve discussed that Greece could take unilaterally.
For new issues, Greece could announce that in the case of default, its bonds would be accepted at maturity value for payment of Greek taxes.
Tag Archives: Greece
More on the euro zone deficit report
Yes, the deficit went from 6.3% to 6% of GDP, but the question remains as to whether they are at the point where further slowing from austerity measures continue to reduce the overall deficit or, instead, an induced slowdown begins to increase it.
Euro Zone 2010 Deficit Shrinks, Debt Rises
April 26 (Reuters) — The euro zone’s aggregated budget deficit fell last year as most countries slashed government spending to restore market confidence in public finances, but the debt still grew, Eurostat data showed.
The European Union’s statistics office said on Tuesday the budget deficit in the euro zone in 2010 was 6.0 percent of gross domestic product, down from 6.3 percent in 2009. Public debt, however, rose to 85.1 percent from 79.3 percent in 2009.
All euro zone countries except Germany, Ireland, Luxembourg and Austria improved their budget balance last year, but debt rose in all euro zone countries except Estonia.
Eurostat said Greece, which was forced to seek emergency funding from the euro zone last year because it was effectively cut off from market borrowing due to its large debt, cut its budget gap to 10.5 percent of GDP from 15.4 percent in 2009.
This is well above the initial target of the Greek austerity programme of 8 percent and even above the latest estimate from the European Union and the International Monetary Fund of 9.6 percent.
Greek public debt rocketed to 142.8 percent of GDP from 127.1 percent in 2009.
Ireland saw its budget deficit more than double to 32.4 percent of GDP last year from 14.3 percent in 2009 and its debt jumped to 96.2 percent from 65.6 percent as the country had to borrow to bail out its banking sector.
WARNING- Euro Zone Automatic Fiscal Stabilizers Deactivated!
I now believe that system risk in the euro zone is being grossly under discounted.
The implied assumption for the major currency regions is that during a slowdown the automatic fiscal stabilizers- falling government ‘revenues’ and increased transfer payments- will kick in to increase deficit spending, and thereby add the income and savings to catch the fall and support the next expansion.
This has always been the case, and as we all know, the most accurate forecasts are the ones that assume it’s not different this time.
But the relatively new and evolving euro zone arrangements are qualitatively different.
Spending by euro zone national governments is now market constrained in Greece, Ireland, and Portugal, with the rest looking like they aren’t far away from those same market constraints.
In a slow down, this means as tax revenues fall, markets may not permit government spending to rise, unless the ECB immediately funds all the national governments as well as the banks. Just as we see happening to the US states.
Not that the ECB won’t eventually do that, but that they are unlikely to proactively do it.
In other words, it will all have to get bad enough for the ECB to write the check that only they can write.
This means the euro zone is now flying without a net.
And the potential drop in aggregate demand is far higher than markets are discounting.
And that kind of catastrophic collapse in aggregate demand in the euro zone will have immediate catastrophic global impact.
And the fiscal discussions going on in Japan and elsewhere tell me there is a clear risk even the operationally unconstrained nations will be very reluctant to immediately and proactively move towards fiscal expansion.
Instead, they will let it all deteriorate until their automatic fiscal stabilizers to kick in.
Much like what happened with the 2008 financial crisis, where the lack of a will to engage in an immediate fiscal response let that financial crisis spill over into the real economy.
Can all this be avoided? Yes, and the remedy is both simple, immediate, and would quickly lead to unprecedented global prosperity.
All the euro zone has to do is have the ECB write the check, and announce immediate and annual distributions of 10% of GDP to member nations to pay down their outstanding debts, and at the same time impose national deficit ceilings sufficiently high to promote desired levels of aggregate demand. And the penalty for non compliance would be the withdrawal of ECB support. This would remove credit concerns, without increasing government spending, so there would be no inflationary impact.
And all the rest of the world has to do is recognize that federal taxes function to regulate aggregate demand, and not to fund expenditures per se. And then set taxation and/or government spending at levels that sustain desired aggregate demand.
They need to know the question is not whether longer term the budget deficit is sustainable- as it’s always nominally sustainable- but instead worry about sustaining aggregate demand at desired levels, both long term and short term.
But, unfortunately, I see the odds of a catastrophic collapse in aggregate demand as far higher than the odds of an awakening to a global understanding of actual monetary operations.
EU Daily | German Investor Confidence Falls for a Fifth Month
Yes, ‘incentives’ are running out and will be nearly impossible to reinstate with their fiscal policies now being market constrained, as per what’s happening with Greece and Portugal.
The US, Japan, UK, etc. will never be market constrained. And while their misguided political constraints are capable of doing much the same damage they don’t have the funding risk of the eurozone.
Highlights
ECB Says Loans Harder to Get for Small Firms in Second Half
European bond tensions hurt lending
European exporters see boost from weak euro
European Car-Market Growth Slows as Incentives Are Phased Out
German Investor Confidence Falls for a Fifth Month
German Economic Recovery Remains on Track, Ministry Says
German Companies Plan to Take on More Staff
Eurozone tells Greece to ready new cuts, taxes
Eurostat to Look Into Greece’s Debt Swaps
Spanish government struggles with crisis message
Spanish unions protest austerity
Issing Says IMF Better Suited Than EU to Greek Rescue
Except Greece probably doesn’t qualify under normal IMF standards, and the IMF would have to get short euro to make the payment.
And ideologically it means ceding control of EU macro policy to an external international institution with strong US influence.
Nor does the macro work, as the ‘strict enough conditions’ imposed will further weaken demand in Greece and the rest of the EU.
Also, the rapidly expanding deficit of Greece has benefited the entire EU and a sudden reversal will reverse those forces.
Likewise, leaving the EU would be contractionary/deflationary for the EU.
But if they all believe the IMF is the way to go there’s a good chance it happens.
Meanwhile, Greece and the rest of the eurozone is being revealed as necessarily being in a continual state of ponzi that demands institutional resolution
of some sort to be sustainable.
Issing Says IMF Better Suited Than EU to Greek Rescue, NYT Says
By John Fraher
Feb. 8 (Bloomberg) — Former European Central Bank Chief Economist Otmar Issing said the International Monetary Fund may be better suited to rescuing Greece than the European Union, the New York Times said, citing an interview.
“I don’t think that the EU can impose the kind of sanctions that would be needed, and it would make Brussels too unpopular,” the newspaper cited Issing as saying in an article published Feb. 6. “A better way is for Greece to approach the IMF. It is the only institution that can impose strict enough conditions.”
Issing said he doesn’t see support “in Germany or elsewhere” for a bailout that would involve “a more or less disguised transfer of taxpayer money,” the paper said.
Issing said leaving the euro region would be “economic suicide” for Greece, though he dismissed the idea that it would hurt the euro region as “misguided,” the paper said.
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Greece update (Erik Nielsen)
Seems to me they need Eurozone approval of any plan, along with a ‘check.’
Without the check there’s a good chance the curve continues to go vertical.
Good time to be way on the sidelines (US govt secs, USD, etc.)
From: Nielsen, Erik
Sent: Wednesday, February 03, 2010
First of all, apologies for the radio silence last night and this morning ; caused by a “technical” problem. We are back in business:
Last night Greek PM delivered an important speech to prepare for today’s publication of the European Commission’s conditional approval of their 2010 budget. It was marginally positive, but – as always – the devil is in the details, and those we don’t have yet.
There is no time set for the Commission’s statement today, but sometime around noon seems likely. In a nutshell, PM Papandreou delivered something good and something less good:
1. Most importantly, the PM appealed to the opposition for national unity, and he received guarded support from the main opposition leader Samaras. Papandreou also appealed to the social partners to accept the hardship; he didn’t really receive any assurances from that side. Also positively, Papandreou outlined further fiscal measures, aimed at securing the 4% of GDP decline in the deficit this year, even under a more pessimistic (i.e. more realistic) forecast for GDP; now seen to decline by more than 1% this year rather than by 0.3%. The additional measures were not spelled out in detail, but they seem to include further wage restrain for the public sector and indirect tax hikes.
2. On the disappointing side, Papandreou launched into the blame game – while acknowledging policy mistakes in the past, he suggested that the trouble now is also the result of speculators. On this basis, he suggested that this is a Euro-zone problem and that the Euro-zone should issue a joint Euro-bond for the benefit of Greece. This was, of course, ruled out very quickly by other Euro-zone members last night. Also, Papandreou emphasized the government’s focus on taxation of real estate owned by of-shore companies, a meagre EUR200mn revenue line in their original budget, which – in my opinion – is diverting their attention from the big and more fundamental reforms.
Stay tuned for later in the day when we hear from the EU
Erik
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Greece Condemned
That will teach them never to do that again…
Greece condemned for falsifying data
By Tony Barber
Jan. 12 (FT) — Greece was condemned by the European Commission on Tuesday for falsifying data about its public finances and allowing political pressures to obstruct the collection of accurate statistics. The Commission said figures from Greece’s were so unreliable that its budget deficit and public debt might be even higher than government had claimed last October. At that time Greece estimated its 2009 deficit would be 12.5 per cent of gross domestic product, far above 3.7 per cent predicted in April. “A substantial number of unanswered questions and pending issues still remain in some key areas, such as social security funds, hospital arrears, and transactions between government and public enterprises,” the Commission said. “These questions will need to be resolved, and it cannot be excluded that this will lead to further revisions of Greek government deficit and debt data, particularly for 2008, but possibly also for previous years.”
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Eurobond Being Mulled Again Amid Fears Over Greece
Looks like it’s serious enough for this, thanks.
And anything done at the national level serves to weaken the group as a whole.
Eurobond Being Mulled Again Amid Fears Over Greece>
2009-12-15 15:40:15.949 GMT
PARIS (MNI) – Eurozone leaders, reacting to worries about the situation in Greece and its potential fallout are looking at the option of a special fund to provide emergency aid, a well-placed monetary source told Market News International.
The source, who is familiar with the ongoing discussions, said that if a eurobond proposal ended up being nixed, “there is also the option of a solidarity rescue fund to which all eurozone countries can contribute.”
It’s not quite clear how the EU or eurozone would get around the so-called “no-bailout clause,” but there is a sentiment among many EU leaders that the clause has lost credibility because the political and economic costs of letting a member state fail would be too high.
The no-bailout clause, in article 103 of the EU Treaty, says that neither the EU, the ECB nor any national government “shall…be liable for or assume the commitments” of a member state.
A eurobond, depending on how it was structured, could be a hard sell in this regard. However, some sort of fund that loaned to a country – but did not take on any burden associated with its debt – might just pass muster.
It’s unclear what such a fund might look like, since one has never been attempted. But one option might be for large EU countries or the EU to create a special facility through which it borrowed money in the bond market to help the member in trouble.
Such an arrangement might be similar to the bonds that the European Commission has already issued for the emergency facility from which Hungary and Latvia have been borrowing. Under current rules, these particular EU Commission bonds can’t be used to help eurozone members.
Some observers have warned that any arrangement smacking of a bailout – whether a eurobond or “solidarity fund” — could potentially be regarded as unfair by countries such as Ireland, which has already announced stiff spending cuts to try and put its fiscal house back in order.
However, proponents of doing something would argue that Ireland is not yet out of the woods and could be submerged again in the market undertow should the situation in Greece lead to a more generalized selloff of peripheral EMU sovereign debt.
So far, other peripherals have been largely spared in the recent tumult surrounding Greece, which is by far the worst performing among sovereign eurozone issuers.
The spread on Greek bonds widened Tuesday by 24 basis points to 253 points above the benchmark German Bund, on market disappointment over a paucity of budget balancing details contained in the speech Monday night by Greece’s Prime Minister George Papandreou.
By contrast, Ireland’s sovereign paper was unchanged at a spread of 165 points above Bunds; Spain widened just 1 point to a spread of 62 basis points; Portugal widened 2 points to 67 bps above Bunds.
Papandreou pledged to bring Greece’s deficit back to within the Maastricht limit of 3% of GDP within four years, but some of the other details were sketchy. On the revenue side – Greece’s government has promised a hefty 40% increase – Papandreou mentioned a new progressive tax on all sources of income, as well as the abolition of certain tax exemptions, a new capital gains tax and a stiff tax on bonuses. He also promised new revenue from a reinvigorated fight against tax evasion.
On spending, he pledged a freeze on public sector wages above E2,000 a month; a 10% cut in supplemental wages; a hiring freeze in most sectors for 2010; and a 10% cut in social security spending next year.
Reaction was lukewarm not only in markets but also at the European Commission, which in each of the past 5 years has registered dissatisfaction with spending and revenue estimates posited by Greece, calling them overly optimistic.
“It’s not just a question of words but also deeds,” the spokesperson for European Monetary and Economic Affairs Commissioner Joaquin Almunia said Tuesday, adding that the Commission wants to see “concrete measures” to get [Greece’s] budget deficit “moving downwards as soon as possible.”
Greece is expected to submit specific proposals to the Commission shortly after the New Year.
Meanwhile, the ECB is expected on Thursday to consider the possibility of further ratings downgrades on Greek debt.
“In the case of a further downgrade, we must be prepared, as it could have a domino effect on other eurozone countries,” the central banking source asserted. “That in turn would put pressure on the euro and the euro is a prime concern.”
The source also seemed to hint that Greek debt, if hit by additional downgrades, could have trouble staying on the list of eligible collateral at ECB refinancing operations after next year, when
the current acceptable minimum rating of BBB- will revert to the pre-crisis standard of A-.
“We will have to take under consideration what will happen after 2010, when the temporary and more lenient stance of the ECB will stop,” he said.
“I don’t say that Greece is heading towards losing its eligibility for collateral,” he continued. “However, we always plan and assess how a situation will evolve in the medium-term, and there is a risk that some countries might be facing much more expensive borrowing conditions in the next two years, because of market conditions.”
The official added that, in the case of Greece, “if borrowing becomes even more expensive, it will create problems in its efforts to combat high debt and deficit.”
But he waxed optimistic, nonetheless. “Despite the fact that rating agencies are downgrading Greece, we do not believe that there will be a borrowing problem,” he said.
“We believe that the Greek government will adopt all necessary measures to satisfy not only the markets but also its EU allies and the ECB and work towards fiscal consolidation within the next four years.”
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Greek Facts
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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Greece – the catalyst on the puke in cash and CDS today was
Still looks to me like it’s probably one go all go as Greece guarantees its own banks and should deposit insurance be questioned a general run on the entire euro banking system could be triggered. That could result in the close the entire payments system until it’s all reorganized with credible deposit insurance. Much like the US in 1934.
Greece – the catalyst on the puke in cash and CDS today was
was the S&P action yesterday. The ECB this year relaxed their
own rules to accept collateral to BBB- from A-. This
accomodating criteria will last until the end of 2010. If the
ECB were todecide to go back to the status quo ante in January
2011 then GGBs may not be eligible as ECB collateral (assuming
S&P follows the negative watch with a downgrade).
Greece suffering badly in cash markets (helped by low liquidty
due to a religious holiday in Italy and Spain).In 3Y, Greek bonds
are losing some 35 bp to Germany, In 10Y it’s about 28 bp.
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