13th January 2010 by Shaun Richards
You may wonder about the use of the phrase attributed to Benjamin Disraeli in the UK to Greece. Of course regular readers will already have a clue about where I am heading. However the situation is turning out to be worse than everybody thought according to the European Commission. It has reported that Greece’s budget deficit and public debt may be higher than even the new government in Greece claimed in October 2009. To recap on events the new socialist government in Greece had come into power and announced that the budget deficit would be 12.7% of Gross Domestic Product (GDP) which compares to the 3.7% estimated by the previous government that April. The figure for the previous year (2008) was revised upwards from 5% to 7.7% of GDP. In some ways the 2008 figures are worse than the 2009 ones because they had to be a falsification, although the scale of the 2009 revisions implies manipulation on a large-scale too.
The European Commission’s report, and remember this is from an institution the EU which has had trouble with getting its auditors to sign off its accounts for more than ten years, concludes that Greek financial statistics have been unreliable for some time. Indeed it also concludes that the figures were misrepresented when Greece joined the Euro in 2001. It states that with the figures known now Greece would have been refused entry to the Euro. It goes on to say that it has next to no faith in current Greek statistics saying that the current situation “does not guarantee the independence, integrity and accountability of the national statistical authorities.” It went on to give some examples of where in its opinion the money had been misreported in the last financial year. These were
1.Revenues from abolished extra-budgetary accounts
3.Adjustment for interest payments
4.European Union financial grants
In each case it feels hundreds of millions of Euro’s were involved. So it is very hard to know what Greece’s actual position now is as the European Commission says that Eurostat is unable to authenticate even the statistics produced by the current Greek government as it has unanswered questions and pending issues.
If we look at the Greek government bond market we can see that there was a reaction to this news. Last night the two-year Greek bond I have been following closed with a yield of 3.73% up from the previous nights close of 3.54%. The spread between it and the German 10 year bund rose from 2.26% to 2.36%. With yields already so comparatively high Greece does not need this. Each rise in yields makes the fiscal position worse as Greece will need to sell plenty of bonds this year (around Euro 50 billion) to balance its finances.
Another way of looking at this is to look at how much it might cost to insure Greek government debt against default. Back in August 2007 it would have cost 11 basis points for a five-year term, in September 2009 it would have cost 123 basis points and now it costs 263 basis points. So to insure $10 million of Greek national debt for 5 years will cost $263,000. The European average is around $71,000. Now this is an illiquid market so one should use the numbers cautiously but it is I think symbolic of Greece’s problems.
Mr Papandreou may well be wishing that he had not been elected in October! I would forgive him for ruefully wishing that the previous administration should have the job of cleaning up the mess. So far he has made promises for improvement and they have been a start but only a start. He has yet to challenge the “sacred cow” of Greek society i.e its bloated public-sector. He wishes to cut the budget deficit to 3% of GDP by 2012 but so far he has only really addressed one side of the balance sheet as he has plans for raising taxes but has said much less about cutting spending. For example further tax rises were announced on Friday (excise and inheritance taxes). It will not be easy to cut spending as PASOK will be dealing with its own supporters such as the unions in trying to do this. But it will have to be done as if you look at the history of Greece it has a problem with tax evasion. So raising taxes is likely to lead to a higher level of evasion and so it is likely that tax revenues will disappoint.
Implications for the Euro zone
There is one obvious implication here. In the run-up to Greece’s entry to the Euro the wool was pulled over the eyes of the European authorities at a minimum. The more critical view is that Europe’s political masters were so obsessed by their planned federal project that they were willing to ignore Greece’s fraudulent behaviour. I say fraud because ever since Greece joined the European Community it has received billions and billions of Euro’s from Europe. This money transfer given to the Greek’s to level their economy and standard of life to that of their peers in the rest of Europe. Now we know that the data presented by Greece to back up these payments was based on lies. Every euro transferred to that country is effectively an act of fraud.
My view is that Europe will act tough and threaten tough sanctions on Greece. Personally I am not sure that it really intends to carry them out, after all the scale of what has happened means that expulsion from the Euro should be on the cards. However I have some suggestions which I feel are realistic and will help Greece out of its difficulties.
1. A new independent statistics agency needs to be set up. Whilst this is happening Eurostat should take over responsibility for Greek economic statistics.
2. Those responsible for the fraud such as the Greek politicians who authorised it should be tried in court for fraud. I understand this does not happen in Greece! OK but there are European courts and laws. One of the problems of the current economic crisis in my view is that the truly guilty often slip off into the sunset with no punishment and sometimes with their ill-gotten gains. Until we deal with this it concerns me that we may be in a repeating cycle where bad behaviour is in effect rewarded.
3. Public-spending needs to be cut substantially.
Finally I would like to wish Greece and its population well, these are not easy times. To Europe’s politician’s I would just like to politely enquire, is Greece the only one?
Update 14th January: Market Reaction
Yesterday was a poor day for Greece. The spread which compares its yield with the one on German government bunds widened to 2.60% and the two-year bond I have been following closed with a yield of 4.01%. This compares with 2.36% and 3.71% respectively. Let us hope that negotiations with the IMF team that are in the country go smoothly.