Today is something of a crunch day for Greece as this afternoon her parliament will vote on her latest austerity package. This comprises some 28 billion Euros of austerity over the next four years combined with 50 billion Euros of privatisations under what is called the mid-term fiscal programme. Has anybody noticed how the demands made of Greece are getting larger rather than smaller? Indeed if we think of the original aid package of 110 billion Euros which was supposed to solve the problem we now have proposed just over a year later a new aid package of 120 billion Euros! Not only is the second aid package larger than the first but if we add them together we have 230 billion Euros which is two-thirds of Greece’s total national debt! Some care is needed because there may be some double counting in the two aid packages but we will not need much more before all of Greece’s current national debt is matched by the bail out.
Christine Lagarde for the IMF
One of the architects of the somewhat bizarre and failing package I have described above was the French Finance Minister Christine Lagarde who was fond of describing it as a “shock and awe” effort. As the shock and awe inspired by it was at the incompetence and hubris displayed you might think that she would be debarred from any major finance job going forwards. Well apparently not as in a version of giving a junkie the keys to the pills and medicines cabinet Mademoiselle Lagarde is now head of the International Monetary Fund.
I see that as a sad development for Greece as one of the things that would genuinely improve her situation a restructuring of her debt has been labelled “unthinkable” by the new head of the IMF. So Greece can only expect more of the same failing policies and the level of moral hazard in the world nudges slightly higher as once again failure in a role is rewarded by promotion. I am reminded of the theory of the Peter Principle where “in a hierarchy every employee tends to rise to his level of incompetence”.
The French Proposal for Greek bonds: some more analysis
I wish to return to this subject as having read it several times some new points come to mind. You may not be surprised to read that a plan constructed by banks favours the banks as it places more obligations on the EU/ECB/IMF troika and means that Greece will have to pay a higher interest-rate than you might initially think. The idea of the programme favouring the banks is of course a familiar theme.
If we think of obligations on the troika we get this bit in the plan that the troika continues to “disburse funding” so it will be made to promise to keep funding Greece. The problem with that is that it clashes with the IMF/ECB mantra that disbursing such funding requires strong conditionality i.e Greece has to do certain things such as the austerity package discussed above in return for the funding. These two objectives plainly clash as under the new plan Greece will know she is getting the money.
The cost to Greece goes as follows she gets 70% of the money rolled over into longer maturities and 30% goes into the Special Purpose Vehicle but an interest-rate of 5.5% is guaranteed on all of it so the true rate is more like 7.8% if we compare it to the funding Greece receives. There is also a bonus element which can add an extra 2.5% if Greek GDP growth hits or exceed that amount and this is calculated independently for each year. So by the same logic the maximum rate of interest is 11.4%.
This will be badged as cheaper for Greece than current interest-rates which is true. What nobody seems to have pointed out yet is that Greece cannot afford such interest-rates and they leave her profoundly insolvent.
Let me now refine my point about the deal being good for banks. I do not mean that it will be good for their shareholders, borrowers or depositors as the pack of cards described above will fall down at some point. In my opinion it would be better for them to have some sort of resolution (restructuring) now which can be done in a rational manner rather than the likely panic atmosphere of a collapse of this plan. However if you are a bank director this plan will allow you to continue the charade that your Greek investments are viable and maybe even profitable and so the usual carousel of bonuses and large salaries can continue. In the worst case scenario you extend your highly paid tenure and in the best case you might even retire (on a large pension) before the deal founders. If we look at the UK experience even when a bank collapsed as a consequence of a Chief Executive’s grandiose expansionary plans he kept an enormous pension. So moral hazard is written here in capital letters.
In other words we have yet another liquidity based solution for a solvency problem ignoring the fact that liquidity is not the real problem.
Spain’s problems mount
One of the features of Spain’s finances is that she has a government system which is more devolved than may of her peers. This means that regional governments have more power over their spending and spend more than their peers around Europe. So Spain’s government does not have full control over her country’s fiscal policy as some of it is outside its control. This places an additional risk on its austerity plans which was added to yesterday by this warning from Moody’s.
We expect several Spanish regions to exceed the 2011 deficit target of 1.3% of GDP.This was confirmed by Catalunya’s recent 2011 budget plan, which foresees a deficit that is twice the size of the target…………..If the regions do not implement new measures, we estimate that the overall regional deficit would deviate by an additional 0.75% of GDP from the initial target of 1.3%.
One of the issues here is the fact that the Spanish regions are responsible for much of the health care spending which is of course a major issue in many other countries too. If we look abroad we see the arguments over President Obama’s extension of state health care in the US and the u-turn performed in the UK by the coalition government over its planned reforms for the National Health Service. So it is a genuinely difficult issue and improvements are not easy to find.
Unfortunately for the Spanish government Moodys concludes that.
Therefore, in the absence of credible commitments by the regions to take the steps needed to achieve sustainable improvements in their fiscal positions, we believe the central government will find it very hard to achieve its overall fiscal targets.
So in effect it has received a shot across the bows on a subject it will find hard to change. This has been exacerbated by the steady rise in Spanish government bond yields I have been recording as this raises the cost of both new finance and refinancing maturing debt which also weakens Spain’s fiscal position. This factor is compounded by the fact that over the next year or two Spain has a lot of funding to do.
Today optimism that the austerity vote in Greece will succeed has seen a reduction in peripheral bond yields which may well continue later if a yes vote is achieved. But we have seen such rallies have a shorter and shorter half life as time has gone on as hopes realise that rather than being based or reality realise they were based on a mirage.
The Greek super league
From time to time I use football as a metaphor for wider themes and this week has seen something sadly symptomatic of Greece and which on first reading make you wonder if this is fiction or reality. The Greek football super league is mired in a corruption and match-fixing scandal that she was warned about several years ago by European authorities but did nothing about. Sounds familiar does it not? This goes right to the top as it appears that the President of the league and various club owners are implicated in a scandal and at the latest board meeting of the league some of the attendees were only there because they had been let out on bail!
So we have match-fixing,illegal betting and no doubt money laundering and tax evasion on a grand scale which has involved many matches. The problem with this sort of thing is that in addition to the above it erodes the credibility of a game from which many including me derive much pleasure (and at times pain!). It is a great shame to see one of life’s pleasures corrupted in such a way and I would hate to see such events affecting the league I support. So my sympathies yet again go to the Greek people.
The Price of Oil
This has undertaken quite a rally since I discussed it on Monday and some of the inflationary pressure has returned as it has rallied to above US $ 109 for a barrel of Brent crude which is up some six dollars since I wrote that article. So the impact of the International Energy Agency’s release of 60 million barrels of oil seems to be reducing. However one of the features of these times is that the price of oil is very volatile and can spin on a sixpence so we will only be able to judge the full impact of the move by the IEA with some historical perspective.
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