This needs to be read by Britons because Greece is merely two steps ahead of us but on the same path to Banana Republic status. Today it loses its AAA rating. The only difference is that their debacle has merely been postponed by being in the Eurozone.
The EUObserver below also deals with Ireland.
Christina
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FINANCIAL TIMES 8.12.09
Greece can expect no gifts from Europe
By Wolfgang Münchau
After Dubai, will Greece be next? This question is technically a category error, since Dubai World is not a state but a state-owned company. But many investors rightly do not care about the difference. Last week investors started to fret about sovereign default in earnest. So what about Greece?
We were already wondering about a Greek default at the beginning of this year, when eurozone bond spreads suddenly widened. In February Peer Steinbrück, the former German finance minister, abruptly ended the speculation by saying the eurozone would act if someone got into trouble. There was no concrete action plan. No work had been done to amend European treaties. There was no budgetary appropriation. Just a sentence. Investors believed him and all was well – for a while.
The speculation is now back, but there is one difference. The eurozone will not come to the rescue this time, verbally or otherwise, unless Greece meets a number of conditions the European Union is likely to impose in the coming months.
The EU’s authorities, rightly or wrongly, are more afraid of the moral hazard of a bail-out than the possible spillover effect of a hypothetical Greek default to other eurozone countries. If faced with a choice between preserving the integrity of the stability pact and the integrity of Greece, they are currently minded to choose the former. To safeguard what is left of the stability pact, they are determined to link any help to a country’s willingness to comply. Otherwise the EU fears it might lose all leverage over budgetary processes elsewhere in the eurozone. And no country in the eurozone has flouted the pact more than Greece.
Here are the numbers. This year, the budget deficit will rise to 12.7 per cent of gross domestic product – and this assumes there are no further accounting tricks to be uncovered. Deutsche Bank calculated in a recent research note that the country’s public debt-to-GDP ratio is headed for 135 per cent. Gross external debt – private and public sector debt owed to foreign creditors – was 149.2 per cent at the end of last year. The real exchange rate has gone up by 17 per cent since 2006, which means the country is losing competitiveness at an incredible rate. Had Greece not been in the eurozone, it would be heading straight for default.
The government’s 2010 draft budget foresees a deficit reduction to about 9.1 per cent of GDP. But the number is misleading. The lion’s share of the total deficit reduction effort is earmarked to come from tax measures, and most of those from the fight against tax evasion. Tax evasion is always the item first on the list of desperate governments. The European Commission and Europe’s finance ministers, who have heard this story before, are rightly asking for genuine deficit reduction.
So is George Provopoulos, the Greek central bank governor, who demanded that two-thirds of the entire deficit reduction effort should come in the form of spending cuts. If the Greek parliament confirms the government’s soft budget next month, the European Commission will almost certainly judge the effort insufficient and demand a supplementary budget. It might also ask for structural reform, including pension reform.
If the Greek government refused to comply, which is quite possible, the next step could be the penalty procedure under the stability pact. So instead of helping Greece, the EU might be asking Greece to pay a penalty. This in turn would aggravate Greece’s financial position in the unlikely event that the government would agree to pay it.
The current strategy of the EU is to raise the political pressure – perhaps even provoke a political crisis – with the strategic objective that the Greek government might eventually relent. It is a dangerous strategy that could easily backfire. Even if George Papandreou, the Greek prime minister, were sympathetic to the EU’s demand, he would face enormous political headwinds if he tried to implement draconian austerity measures. This would be the very opposite of what he promised during the recent election. The real problem is that the Greek people have not been prepared by their political leaders for what lies ahead.
So what happens if Greece cannot meet a payment on its bonds, or fails to roll over existing debt? About two-thirds of Greece’s public debt is held by foreigners. According to calculations from Deutsche Bank, Greece is looking to raise some €31bn ($46bn, £28bn) in new borrowing and €16bn to roll over existing debt next year. In the absence of help from the eurozone, the Greek government would have to resort to the International Monetary Fund if it were to encounter difficulties refinancing the debt. Unlike Argentina, Greece cannot devalue, and leaving the eurozone is not a realistic policy option either.
Latvian-style austerity could thus come one way or the other, with or without default. But it might be politically easier for the present government to have austerity imposed on it from the outside than from the inside. This is another reason why the EU would be happy to let the IMF take a lead.
Just as the Greek people are unprepared for austerity, investors are unprepared for what awaits them. I would still bet that outright default is unlikely. But I wonder whether the current Greek bond spreads reflect the true risks.
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2. Fitch strips Greece of A-grade credit rating
By David Oakley, Capital Markets Correspondent
Greece saw its credit ratings downgraded on Tuesday because of the poor state of the country’s public finances.
Fitch Ratings cut Greece’s credit ratings to BBB plus with a negative outlook, a day after rival ratings agency Standard & Poor’s threatened Athens with a downgrade.
It is the first time in 10 years that one of the three leading ratings agencies has lowered Greece below the A grade category.
Fitch said: “The downgrade reflects concerns over the medium-term outlook for public finances given the weak credibility of fiscal institutions and the policy framework in Greece, exacerbated by uncertainty over the prospects for a balanced and sustained economic recovery.”
George Papaconstantinou, the Greek finance minister, on Tuesday said the downgrade by Fitch didn’t accord “with what has been accepted by the Eurogroup (of finance mministers) and the Eurpean Commission concerning the reduction of the deficit thorugh permanent structural measures”. But he added that Greece would do whatever was necessary to narrow the country’s budget gap.
”We will do whatever it takes for the reduction of the deficit in the mid-term,”he told reporters.
Fitch had cut Greece to A minus with a negative outlook at the end of October, after the new socialist government revealed deficits were much bigger than previously reported.
Greek bonds on Tuesday saw their biggest one-day fall since November last year and the main Athens stock exchange tumbled close to 5 per cent at one point.
Yield spreads between Greek and German 10-year bonds, one of the best gauges of stress in the eurozone, were the widest in seven months.
The country’s banks were the worst hit amid worries about their exposure to the worsening economy. Piraeus Bank lost 5.6 per cent to €9.24, National Bank of Greece fell 4.8 per cent to €19.26 and EFG Eurobank declined 4.1 per cent to €8.44.
The Fitch downgrade makes Greece the first eurozone country to have its sovereign debt reduced below investment grade A by the credit rating agencies. The dollar rose 0.3 per cent versus the euro in early afternoon trading on Tuesday, following the move by Fitch, to $1.4774.
Greece has been under pressure since the the socialist government unveiled its statistical revisions, which showed the public finances in a much worse condition than thought. This resulted in the European Commission changing its projections to show an expected deficit of 12.7 per cent of gross domestic product this year and 12.2 per cent in 2010.
EU OBSERVER 8.12.09
ECB urges Greece to follow Irish example
ANDREW WILLIS
BRUSSELS – European Central Bank (ECB) chief Jean-Claude Trichet has urged the government of Greece to follow Ireland's example of taking tough decisions to bring its budget deficit down.
Forecasts suggest both countries will run deficits close to 12 percent of GDP this year, the highest amongst euro area members. The figures compare poorly to an EU average forecast of 6.9 percent.
The Irish government has won praise in financial quarters however by taking a number of drastic steps to tackle the problem, including an emergency budget in April that doubled income tax surcharges and slashed spending.
"In Greece and Ireland we are in a situation which is particularly demanding," Mr Trichet told MEPs in the European Parliament's economic committee on Monday (7 December).
"In the case of Ireland very, very tough decisions have been taken by the government and rightly so," he said. "And I am confident that very difficult and courageous decisions will be taken in Greece too."
Greece caused widespread alarm in October when the newly installed Socialist government announced a large upward deficit revision compared to previous projections put forward by the former centre-right government.
Commission forecasts suggest both countries are headed for "business as usual" deficits in excess of 12 percent next year – assuming a lack of new budgetary measures.
However the Greek government hopes that new measures contained in its recently announced budget for 2010 will bring the deficit down to 9.1 percent for that year. The commission and EU finance ministers have indicated they will be monitor proceedings closely.
"The problems in Greece are problems of the euro area," the EU's economy commissioner, Joaquin Almunia, said recently.
The exact measures that need to be taken in the southeastern European country "are commanded by the situation," indicated the central bank chief on Monday.
Question of confidence
The Frenchman - whose term at the euro area's monetary helm is due to expire in 2011- indicated that restoring public confidence was crucial to recovery.
"For all countries without exception, it's extremely important to be able to reassure your households, your corporate businesses that you have a sustainable strategy for your public finances," he said.
For its part, Ireland's embattled government is expected to deliver the harshest budget in a generation this Wednesday, making €4 billion in spending cuts as part of a four-year program to cap its soaring debt.
The ruling centre-right Fianna Fail party is already the least popular in modern times.
Public servants staged the biggest strike in at least three decades last month, with about 250,000 workers protesting against plans to cut pay.
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