Unreliable Greek statistics are a speculator’s dream and an EU nightmare

Greece may not be insolvent but something needs to be done now argues Nikos Skrekas from Athens.

Speculators are making serious money betting against Greek securities of all forms from derivatives, to bonds, as well as equities. –
The local economy is on the ropes and macroeconomic deficits look like black holes.

This has fuelled the accumulated anger of an exasperated EU in Brussels whose patience has worn out. Meanwhile, the combined spectrum of the local political system is debating about moving around chairs on this Titanic.

To be clear, Greece is not insolvent, even if that can’t be ruled out for forever given the divergent systemic problems that have arisen in countries like Iceland and Dubai, but time is running out for sound implementation of effective and inspired economic policy. The next few months are critical for Greece. –

Spiraling budget deficit and EU supervision

If it was not bad enough that the current account deficit is likely to reach between 8 to 9 percent, the budget deficit for 2009 will spikes to 12.7 percent. Under EU Maastricht rules it has to be under 3 percent and worse still the previous government had told the European Commission that their forecast was about 7 percent. –

Conservatives still argue that the deficit would have topped no more than 9 percent if the new Socialists government wasn’t manipulating figures. New Democracy says that the current government is booking some budget expenses earlier in 2009 and apportioning some budget revenues forward in 2010.

Is it any wonder that Brussels technocrats approach Greece with disbelief since estimates have changed so drastically in the space of a few months and there are even contrasting local views. –

The 2010 budget plan to be debated in mid December aims to reduce the budget deficit to 9.1 percent of GDP, or by 8.4 billion Euros.

The budget aims to cut spending by 1.2 percent of GDP and by raising net revenues by 2.1 percent of GDP.

The targeted revenue growth is expected to come from banks returning liquidity support and from a clamp down on tax evasion, which is estimated at 12 percent of GDP.-

The budget plan is not unreasonable but it is not enough. Debt to GDP should be in the region of 110 percent this year and around 120 percent next year. Arresting this trend will require substantial fiscal consolidation. –

Underlying major economic balances need to be redressed and the European Commission (EC) is pressuring for more reforms and heightened fiscal responsibility.

The new government has not been persuasive enough that it is determined to use its political capital to bring about the necessary changes.

Expenditure cuts need to be much deeper as far as the bloated and unproductive public sector is concerned. Moreover, Greece is notorious for not being able to effectively implement budgets.

Given the fact that the government is not implementing any permanent measure to correct the fiscal and trade imbalances, it is an almost certainty that Greece will be put under ‘enhanced budgetary surveillance’ by the EC in January.

In practical terms, this means that the government will have to report every three months to Brussels what progress it has made in terms of slashing the deficit and implementing structural reforms. The audits will be thorough.-

The trust deficit of markets

The country has become the laughing stock of Europe and the term “Greek statistics” is used widely and derisively.

The Bank of Greece is a more honest broker of number than the politicised local statistics service and its Governor is for the most part issues calming statements. That is no surprise since there had been a sell off on the Athens Stock Exchange primarily of Greek banking shares.

Some of that selling is not justified because local banks’ liquidity and asset quality is probably better than other countries.

But the underlying rationale is that stockholders are selling off Greek exposure and not individual shares.

It is the country risk driving the sell off.-
The credit default swap (CDS) market, which provides insurance for securities holders in case of a default, required even greater sums to provide protection for potential Greek sovereign debt default.

The CDS market got to the point that Turkey, which is an emerging markets and not a member of the EU or Euro-zone, is considered by markets less likely to default than Greece. Bond holders were less comfortable holding Greek debt than Turkish securities.-

Further still, international bond markets have recently punished Greece’s wasteful ways and the EC and the European Central Bank may also follow that lead.

We aren’t likely to get any more breaks from Europe and as many have said in Brussels “the game is over with Greece”.-

Speculators sell off Greece-

The concerns of the derivatives market quickly shifted to the Greek bond market. Spreads of Greek bonds to German bonds blew out from 100 to more than 200 basis points.

That means that compared to Germany, Greece is penalized with a 2 percent risk premium on its borrowing, even if both countries are members of the same currency zone. –

To some extent a rise in spreads was natural given international rating agencies have downgraded Greece. But the way and speed with which it happened means that the market for Greek bonds has been seriously destabilized.

Greece probably can still borrow on international markets next year when it will need to raise about 55 billion Euros, but given such wide spreads it is going to be far more expensive.

The country already pays 5 percent of GDP just to service its debt and this is going to climb.-

However, predictions by some hard line foreign analyst that Greece may not be able to borrow and have to go cap in hand to the International Monetary Fund are stretched scenarios, even if not completely impossible.

Moreover, the EU is unlikely to allow Greece to default on bonds since such a default would have systemic implications for the whole of the European banking sector and other heavily indebted European countries.-

But foreign hedge funds in the last week of November had a field day with Greece, despite the mainly positive third quarter results announced by Greek companies. They succeeded in knocking Greek CDS swaps, bonds and shares off their perch. They have been able to speculate in this way because the country is an easy target. And the slew of foreign press reports likening Greece to Iceland and predicting catastrophe have assisted them.-

A new economic model is needed-

The Greek economic model of borrowing from overseas to consume foreign made goods is now dead after 40 years.

Fundamental systems like health and pensions are also in dire straits since no one is even sure just how much debt they have amassed. –

They are in urgently needs reform, even if that is politically difficult. The government cannot afford to wait until 2011 to begin the process, as they currently plan.

It’s early days for the Socialists who have only been in power two months, but they have to get moving.-
Greek economic development policy needs more than just a shift to Green renewable energy, even if it is a good start.

The country needs to save more, produce more goods local, export far more and ramp up public and private investment. –

Improving Greece’s competitiveness with structural reforms is equally urgent. And generally, Greece needs to be more welcoming of foreign investment and stop pandering to special local interests.

For example, it can’t undermine Chinese investments in Greek ports and then ask them to buy Greek bonds to finance its deficits. Of course, appropriately enforced competition law in the Greek market would be a welcome relief to spare the local consumer being victimized by oligopolies.-

No one is advocating a scorched earth policy of austerity but simple matters, like a stable and fairer tax policy cannot wait to the second quarter of 2010 and then be applied retrospectively, as is currently planned. Naturally, a clamp down on widespread tax evasion by Greek professionals needs to be undertaken, but every government has promised it for the last 30 years and no one was successful in implementing it.

Nevertheless, one has to agree with Prime Minister, George Papandreou, that pensioners, low income and salaried folks, should not pay the bulk of the bill for previous incompetence by the combined poor administration of prior governments. –

The main Conservative opposition party has finally elected a new leader, and this may open the door to reaching a long needed broad political consensus to help smooth the reform process without cheap political point scoring. Greece simply cannot afford more political squabbling.-

Speedy action is vital for a stable future-

No one is saying the job of the new PASOK government is an easy one and it is nothing new in Greece for a government to be sworn in with a vague plan and little reserves to implement its promises.

PASOK have inherited the mess and if they don’t get moving, the economy and the country is heading into a long dark tunnel and may eventually need to be bailed out by international institutions that will exact a high price and impose austere measures.-

It is unlikely that we will default on our bonds or be kicked out of the Euro-zone since there is no provision for that in treaties we have signed. But our underlying economic fundamentals will drastically worsen and we may even see dramatic social upheaval.-

Greece’s economy will continue to be potentially destabilized by speculators at a drop of a hat and that will sabotage the real local economy.

There are no more excuses and time is of the essence for Greece to restore its reputation with global markets and Brussels. Greece this your wake-up call!-

Nikos Skrekas currently authors books for Thomson Reuters and acts an independent investment banker in Athens who was commissioned by NKEE.