June 27, 2022

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We have finished our review of the Italian "Austerity" plans to whip its debt load into shape. As with Greece (see "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!), we have found it wanting. Believe it or not, the biggest issue is the credibility of the government. They stretch the facts, assumptions and gray areas to the point where you tend to doubt everything else. It is almost as if they believe no one will actually read what they have written, which very well may have been partially true in the past. Alas, that was the past and this is the present. Information, and to a lesser extent, knowledge travels through the web at the speed of atomic particles. On that note, I release to my subscribers the Italy public finances projection Italy public finances projection 2010-03-22 10:47:41 588.19 Kb. For those that don't subscribe, I would like to make clear that my assertions of flagrant and unsubstantiated optimism on the part of European governments stem from how quicly they feel their economies will grow despite the fact that they failed to see this maelstrom coming in the first place. This is Italy's presumption of economic growth used in their fiscal projections:

The Greek government's macroeconomic assumptions also seem overstated when compared with EU estimates.

I don't think the EC's assumptions are sufficiently stringent enough. Thus, if the EC is a little optimistic, what does that make Greece and
Italy?

Of course, if you still believe in the integrity of EU government numbers, then I suggest you carefully plow through Smoking
Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware! Even the most naive and gullible of us will start to doubt...

You see, the Italian economic situation wasn't that great to begin with since they were one of the hardest hit in the recession of 2009.

 If their overstatement of the ability to pull out of this falls flat (which it most likely would) then you will see a spike in devt service and interest, of course accompanied with the tried and true "Nobody could have seen this coming" statement from the BIS. No, not the Bank for International Settlements, but the Bureau of Internal BS (excuse my Italian).

Above, you see the Italian government projections of interest expenditure as compared to ours. We have not fully factored in the full potential of tax revenue collapse due to the after effect of a sharp recession, but I do believe you get the picture.

Subscribers should reference the our Italian Banking Macro-Fundamental Discussion Note for a list of banks that may be affected by the drag of excess debt on the Italian economy.

The Pan-European Sovereign Debt Crisis, to date:

  1. The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem
  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
  3. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  4. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  5. The Beginning of the Endgame is Coming???
  6. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
  7. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
  8. Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…
  9. The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino
  10. As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

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The People's Party, the largest group in a five-party coalition, walked out amid disputes over how to cope with the country's severe problems.

Unemployment has now hit 20 per cent and the economy contracted by 18 per cent last year.

The People's Party quit after its action plan failed to get the backing of Valdis Dombrovskis, the Latvian prime minister, who labelled it "populist".

Mr Dombrovskis warned the People's Party's departure could cause yet further economic instability.

"Any contradictions in the government are immediately reflected in the financial markets, and they directly affect the fiscal stability our country... a policy that is truly responsible for the country cannot be self-centred," he said.

But he said remained confident that an emergency IMF bail-out worth £6.7bn would remain unaffected by the political instability. New Era, Mr Dombrovskis's party, confirmed it had already extended invitations to other parties to join a new coalition in an attempt on gain the majority in Latvia's 100-seat parliament. It attempted to play down concerns about the prospect of a minority government at the helm of country in severe economic turmoil. Laila Dimrote, a spokeswoman for New Era, said: "This is not a big deal. Latvia has had many minority governments in the past, and often this is the case prior to elections." 

financial and economic contagion to the wealthier western countries that have large economic claims on Latvia and do trade with them.

  • The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  • and Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter? I will be publishing the foreign claims model (which will tie all of the myriad global risks into one, cogent risk model) and my analysis of Italy early next week for subscribers, along with a free accompanying analysis for non paying subscribers and readers. Ireland, the UK and Spain are on tap...

Earlier installments of the Reggie Middleton's Pan-European Sovereign Debt Crisis:

  1. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? – illustrates the potential for the domino effect
  2. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  3. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  4. The Beginning of the Endgame is Coming???
  5. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
  6. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
  7. Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…
  8. The Greece and the Greek Banks Get the Word “First” Etched on the Side of Their Domino

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The Greek Tragedy is unfolding pretty much as I expected. Readers, at least (if not Greek citizens) should be comforted to hear that things are going as anticipated. From CNBC: Greek Bank Shares Fall on EU Support Worries

Greek bank shares fell more than 4.0 percent on Thursday, underperforming the broader Greek market, on worries Greece may be forced to turn to the IMF to deal with its debt crisis for want of EU aid.

"There are concerns over the lack of concrete EU support and because Greece seems to be dragged towards the last resort, which is the International Monetary Fund," Cyclos Securities analyst Constantinos Vergos said.

Shares in National Bank, which reports full-year results after the market's close, were down 3.8 percent to 15.03 euros, withAlpha Bank shedding 4.1 percent.

"The IMF scenario was off the table but now seems to be coming back, raising question marks as to what this would entail," said analyst Nikos Koskoletos at EFG Eurobank Securiries.

For those subscribers who didn't get to act on my Greek bank warning a while back (see Banks exposed to Central and Eastern Europe and Greek Banking Fundamental Tear Sheet), don't fret. If I continue to be correct, this is but the tip of the iceberg, subscribers see Greece Public Finances Projections). The Greek PM is implicitly backing my analysis: Papandreou Urges EU Emergency Plan After German Officials Suggest IMF Aid

 March 18 (Bloomberg) -- Greek Prime Minister George Papandreou set a one-week deadline for the European Union to craft a financial aid mechanism for Greece, challenging Germany to give up its doubts about a rescue package. Papandreou said he may turn to the International Monetary Fund to overcome the debt crisis unless leaders agree to set up a lending facility at a summit March 25-26. The IMF option has already been dismissed by European Central Bank President Jean- Claude Trichet and French President Nicolas Sarkozy, who say it would show the EU can’t solve its own crises.

He's throwing the gauntlet down, and the gauntlet is made out of US forged IMF metal. Greece is willing to diss the EU in order to offer an ultimatum. Whose going to be the first to flinch?

“It’s an opportunity to make a decision next week at the summit,” Papandreou told reporters in Brussels today. “This is an opportunity we should not miss. When you have that instrument in place, that could be enough to tell the markets hands off, no speculation, let this country do what it’s doing.” 

After reviewing your austerity plan, it appears that you are doing more speculation than the market! 

Greece pinned its hopes on the Brussels summit as German officials voiced qualms about an EU-led rescue, potentially backtracking on a commitment hammered out by finance ministers just three days ago. Greek bonds and the euro fell. Greece, which was brought to a standstill on March 11 by the second general strike this year, needs to raise about 10 billion euros ($14 billion) to refinance bonds that come due on April 20 and May 19. Papandreou said current markets rates are unsustainable. 

Brinkmanship

The yield on Greece’s 10-year government bond rose 12 basis points to 6.21 percent. The euro fell for a second day against the dollar, slipping as much as 0.7 percent to $1.3648. Credit- default swaps on Greek sovereign debt rose 7 basis points to 295, the highest in a week, according to CMA DataVision prices.

“There’s a good deal of brinkmanship involved to get the EU and euro group members to come up with a more concrete plan,” said Klaus Baader, co-chief European economist at Societe Generale in London. “It’s also directed at capital Markets, to reassure markets that Greece is not about to go into default.”

German Chancellor Angela Merkel yesterday ruled out “overly hasty” aid pledges, shifting the pressure back to Greece to fix Europe’s biggest budget deficit. Signs of a split in the German government emerged after Finance Minister Wolfgang Schaeuble endorsed the use of European channels at an EU meeting on March 15. ...

The risk premium on Greek 10-year bonds has more than doubled since the beginning of November on concern about the country’s ability to bring down last year’s deficit of gross domestic product, the largest in the euro’s 11-year history.

Papandreou’s government has passed three packages of deficit reduction measures this year to try to convince the EU and investors it is serious about bringing the deficit down to 8.7 percent of GDP. I doubt this!

Soaring Greek borrowing costs threaten to erode the fiscal gains made from forcing the country to make sacrifices including wage and benefit cuts for public workers, Papandreou said.

“We are under a basically IMF program, whether it’s called that or not,” he told a European Parliament committee earlier. “We don’t have on the other hand facilities that the IMF would give. We don’t want to be in a situation where we have the worst of the IMF if you like and none of the advantages of the euro.” 

I doubt this! Valid and honest point! For those of you who don't subscribe, read up on my take on the Pan-European Sovereign Debt Crisis:

  1. The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect.
  3. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  4. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  5. The Beginning of the Endgame is Coming???
  6. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
  7. Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!
  8. Germany Finally Comes Out and Says, “We’re Not Touching Greece” – Well, Sort of…

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March 17 (Bloomberg) -- Greece should turn to the International Monetary Fund if it needs aid, the chief finance spokesman for German Chancellor Angela Merkel’s party said, in a reversal that signals a rift with European leadersJean-Claude Trichet, Jean-Claude Juncker and Nicolas Sarkozy.

“We have to think about who has the instruments to push for Greece to restore its capital-markets access” if ultimately needed, Michael Meister, a lawmaker with Merkel’s Christian Democratic Union, said today in an interview in Berlin. “Nobody apart from the IMF has these instruments.” Attempting a Greek rescue “without the IMF would be a very daring experiment.”

Daring indeed! As my subscribers know, there has been a lot of creativity in coming up with those "austerity" plans (subscribers, see File IconGreece Public Finances Projections). I wouldn't bet the farm on their ability to accomplish their stated goals. For those that don't have a paid subscription, reference my Greek Tragedy in prose: "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! Don't forget to notice the optimism...

The Greek government's macroeconomic assumptions also seem overstated when compared with EU estimates.

The German shift underscores Merkel’s attempts to steer clear of any commitment to a Greek bailout and risks scuttling European Union efforts to establish a contingency plan for the debt-strapped nation. Merkel used a budget speech in parliament in Berlin today to caution against “overly hasty” pledges of financial support. While EU leaders on Feb. 11 pledged coordinated action to safeguard financial stability in the euro area, they’ve yet to spell out aid plans for Greece. Juncker said March 15 that the euro-area group of finance ministers he heads “clarified the technical arrangements” to enable action. “The problem has to be solved from the Greek side and everything that is being considered has to be oriented in that direction,” Merkel told lawmakers. “There’s no alternative” to the Greek government’s measures to cut the deficit, she said.

Therein lies the problem. It can't be solved from the Greek side in the near term without a default or devaluation. Even then, we are talking a very deep recession. Greece's remedies appear to lie outside of the EU, and Greece is not alone, either. 

EU Warning

 Merkel was speaking as the EU warned that a dozen member governments, Germany among them, risk missing their deficit targets. Greek Prime MinisterGeorge Papandreou, whose government has pledged to narrow the euro-region’s biggest budget deficit, met with European Commission President Jose Barroso in Brussels today.

Fair not, dear reader. I will have similar analyses of Italy, Spain, Ireland, the UK and German coming up next. Germany is in more hot water than many realize, as is much of the EU. I may even be able to release the Italian analysis tomorrow. 

Solve Their Problems’

Any IMF involvement would signal an about-face from Finance MinisterWolfgang Schaeuble’s position of March 17, when the Welt am Sonntag newspaper cited him as saying that accepting IMF help would be an “admission that the euro countries can’t solve their problems by their own means. 

It's not an about face! He is actually admitting in public "that the euro countries can’t solve their problems by their own means.” He did not recant his original statement. The positive spin to this story is showing. 

 Juncker, who is Luxembourg’s finance minister and prime minister, said March 5 after meeting with Papandreou that there’s a need for “technical assistance from the IMF” without the fund “taking the lead.” The previous day, European Central Bank President Trichet said “I don’t trust that it would be appropriate to have the introduction of the IMF as a supplier of help.”

For that would relegate Greece to the level of emerging market and third world nations that needed IMF assistance, at least in the eyes of many speculators. 

Standard & Poor’s affirmed Greece’s investment-grade BBB+ rating yesterday and dropped the country from “creditwatch negative,” saying the budget cuts “were appropriate to achieve” the goal of cutting the EU’s biggest deficit to 8.7 percent of gross domestic product this year from 12.7 percent. 

Standard and Poors also rated many subprime CDOs and MBS AAA as well! 

They are going to pay for Greece's woes, actually for the ill-prepared construction of the EU, regardless of whether they send funds to Greece or not. A Greece failure will reverbrate through the EU one way or the other. 

“The Germans see the same thing that all of us see: that at the end of the day, they’re going to be part of the solution and it’s going to cost them something,” said Paul Hofheinz, president of the Lisbon Council, a Brussels research group. “When push comes to shove, I don’t think anyone doubts that the Germans will be part of this settlement. But why should they play easy?” They are going to pay for Greece's woes, actually for the ill-prepared construction of the EU, regardless of whether they send funds to Greece or not. A Greece failure will reverbrate through the EU one way or the other.

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There is an ancient Greek legend describing the education of the common man Damocles. You see, Damocles exclaimed that, as a great man of power and authority, Dionysius (the current ruler) was truly fortunate. Thus, Dionysius offered to switch places with him for a day, so Damocles could taste first hand that fortune which he savored so fervently. Later that night during a lavish banquet Damocles indeed

did savor being waited upon like a king. Only at the end of the meal did he look up and notice a hand sharpened sword hanging directly above his head by a single strand of horse-hair. Damocles immediately lost all taste for the amenities of royalty, pomp and circumstance and asked leave of the tyrant, saying he no longer wanted to be so "fortunate" [adapted from Wikipedia].[1][4]

Little did Damocles realize that what he experienced was of value, significant value. He simply failed to recognize the value as we has blinded by the fair maidens who served him hand and foot. The moral to this BoomBustBlog telling of the Sword of Damocles is that: "When one sits on the Throne, the true value of the sword is not that it falls, but rather, that it hangs." Recent history has given weight to this moral as Greece has fed high on the hog for nearly a decade, while being totally oblivious to the value held within that single strand of horse hair, protecting it. Till this day, that strand, although dwindling, has yet to snap.

On that note, we have this headline from Bloomberg: Greek Crisis Is Over, Rest of Region Safe, Prodi Says
"The worst of Greece’s financial crisis is over and other European nations won’t follow in its path, said former European Commission President Romano Prodi.
“For Greece, the problem is completely over,” said Prodi, who was also Italian prime minister, in an interview in Shanghai today. “I don’t see any other case now in Europe. I don’t think there is any reason to think the euro system will collapse or will suffer greatly because of Greece.”"
Reggie says "Liar, Liar, Pants on Fire". In all seriousness, while I don't truly believe Mr. Prodi is lying, he is also obviously ignoring the facts as they currently exist, whether purposefully or in error. Let's walk through a few excerpts from the most recent addition to the Pan-European Sovereign debt crisis. BoomBustBlog subscribers can download the full15 page analysis here, which contains more than enought evidence to throw serious doubt on the ability of Greece to come anywhere near their stated goals:

The Austerity Package, in a Nutshell


The revenue measures include increasing tax rates, reducing tax evasion and some one-off measures while the expenditure measures consist of salary reduction, freezes in hiring and salary hikes as well as cutting other public sector expenditures. According to the Stabilityand Growth Program, January 2010, the government is aiming to reduce its fiscal deficit from 12.7% of GDP in 2009 to 8.7% in 2010. However, if the impact of the additional measures that were estimated at 2.5% of GDP is also added, the fiscal deficit is expected to come down to 6.2% of GDP in 2010, based on government's estimates. The government further envisages additional proceeds from the sale of stakes in some of the government-owned entities as well as proceeds from the payback of financial assistance provided to the Greek banks, which will be used to reduce the massive government debt of around 113% of GDP in 2009. However, there is strong evidence to support the assertion that the budgeted impact of these measures is grossly overstated, since a) The Greek government's base casescenario for the economy is overly optimistic when compared with analystexpectations, and b) the dynamics of the announced measures shall lower the total projectedimpact.

 The Greek government's base case scenario builds in GDP growth of -0.3% and 1.5% in 2010 and 2011, respectively, which is simply unrealistic vis-à-vis analyst expectations. A recent Reuters poll revealed consensus estimates for GDP growth of -1.5% and 0.5% in 2010 and 2011, respectively. Local subject matter experts such Gikas Hardouvelis, Chief Economist at EFG Eurobank and professor of economics at the University of Piraeus are expecting a deeper recession with GDP declining 2.8% in 2010. Deeper recession and delayed recovery is expected primarily on the back of reduced private and public consumption as a result of the government's austerity measures. Economic performance lower than the government's estimates will result in lower tax base and lower tax revenues, and shall consequently offset the projected impact of the revenue measures like increase in tax rates. Evidence of this is already apparent in the ability of Greek labor unions to shot down much of Greece during 24 hour strikes which effectively eliminate large swaths of revenue and productivity for the day. Tax collectors, customs inspectors, the police, doctors, teachers... The striking populace apparently encompasses a very broad swath. This has happened several times in the last month and several future strikes are planned as well. The Greek government's macroeconomic assumptions also seem overstated when compared with EU estimates.

Revenue Generation Measures? It appears more like hoping one can change the centuries worth of behavior by the end of the year...

 The Greek government has so far announced revenue measures with budgeted impact of nearly € 10.7 billion, or 4.4% of GDP. The announced revenue measures range across an increase in VAT rates, excise rates, fuel tax, property tax; unique taxation scale and elimination of tax exemptions; and reduction in tax evasion. However, there are very serious concerns to be raised concerning the successful implementation of these measures and meeting the targets. The perception of performance of these measures (largely consisting of an increase in tax rates and reduction in tax evasion) in Greece is seriously undermined (at least in the eyes of the prudent practitioner) by the lengthy history of high tax evasion in the country. Over the years, the authorities have failed to crack down on the rampant tax evasion and there is no evidence to suggest that this will change, particularly amidst the current environment of declining income levels and higher tax rates.

  1. Friedrich Schneider, chairman of the department of economics at the Johannes Kepler University. - Greece's
    unreported -- and untaxed -- shadow economy is one of the largest and equals
    about one-quarter of GDP. That compares with 22% of GDP in Italy (keep in mind that this is inclusive of the evasion performed by the
    famed La Cosa Nostra as well as the lesser known Camorra, the 'Ndrangheta or the Sacra Corona Unita,
    as well as foreign organized groups) and 20% in Spain and
    Portugal, according to his estimates.
  2. Bloomberg -Prime Minister Papandreou says that the Greek workers and companies have skirted tax worth € 31 billion,
    more than 10% of GDP. According to EU statistics, Greece's revenue from income
    tax was 4.7% of GDP in 2007, compared with an EU average of 8%. Tax revenue
    fell 2.5 percentage points of GDP between 2000 and 2007 to a Euro region-low of
    32% even as economic growth averaged 4.1% a year.
  3. Analyst Ed Sollbach,
    Desjardins Securities
     - Tax evasion in Greece is a huge problem. Nearly 94%
    of personal income declared relates to annual incomes of less than € 30,000.
  4. Matsaganis, Hellenic
    Observatory, The European Institute
     - Under-reporting of income in Greece is estimated at
    10%, resulting in a 26% shortfall in tax receipts.

EXPENDITURE MEASURES

 Announced expenditure measures are expected to cut the government's expenditure by nearly € 8.1 billion or 3.3% of GDP. Expenditure measures include salary cuts, freeze in hiring and salary hikes, as well as cuts to other public sector expenditures. The biggest risk factor in the implementation of these measures is the growing social unrest, which is likely to put political pressure on the government to roll back some of the planned actions. The newly elected socialist government is facing strong resistance against the announced austerity measures in the form of nation-wide strikes, clashes by thousands of people, and growing public fury may force the government to cut certain targets for salary reductions, pay and hiring freeze, etc.

PROCEEDS FROM PRIVITIZATION

 It can be argued that the Greek government is factoring in a control premium for their majority holdings. Theoretically this is acceptable, but realistically this will be very difficult to translate into cash. The government would have to find large buyers who are willing,to purchase the entire stake at the premium suggested, from a seller who is in obvious and globally publicized distress - and the Greek government will have to do this several times over, all within a period of less than 8 months to meet the 2010 deadline. We find this to be highly unlikely. It has been our experience that distressed seller's often take DISCOUNTS to the market value of their assets, not PREMIUMS!

  1. Since the Greek government is seen as a distressed seller, it will have to take a discount from any prudent buyer
  2. If the government sells directly into the equity market (the most expedient and likely scenario), the control premium is not applicable.
  3. It will take time to market the properties, negotiate the terms and close on the large deals to capture the control premium, if one is actually attainable. This is not going to happen for all of the properties slated for sale in 2010.
  4. If the government is being aggressive in valuation of public properties, it is most likely to be even more aggressive with non-public properties, where pricing is considerably more opaque.

Click image to enlarge

PROCEEDS FROM PAYBACK OF FINANCIAL ASSISTANCE PROVIDED TO THE GREEK BANKS

 The Greek government is expecting payback of the financial aid provided to the ailing Greek banks, and has built in total proceeds of € 3.8 billion in the coming years in its public finance projections. However, the Greek banks are still struggling under the current financial and economic crisis gripping the country with added (and quite material) pressures coming from the drastic austerity measures. The deep recession expected in 2010, with only mild recovery in 2011, will not only see sharp declines in public and private consumption that will inhibit credit growth, but will also result in deterioration (rising NPAs) in the credit quality of their consumer and commercial loans portfolio. Thus, the banks are far from reaching a stage where they can generate incremental operational cash flows or raise equity from the market to pay back the capital injections from the government, or at least do so on a prudent basis. Consequently, financial assistance is expected to stay, with the possibility (probability?) of some additional assistance being injected (or at least needed) into the banks in the coming years. Subscribers should download our overview of key Greek banks here: Greek Banking Fundamental Tear Sheet.

GOVERNMENT DEBT AND INTEREST EXPENDITURE

The Greek government has accumulated significant debt over the years to finance its annual fiscal deficits. The government debt has risen from 97.1% of GDP in 2006 to 113.4% of GDP in 2009. The implications of this massive debt are reflected in its overwhelming interest burden which has precipitated its current weakened fiscal situation - all of which culminates into high sovereign risk. This creates a feedback loop, and self-devouring cycle that increases the interest costs on debt roll-over and new issuance in the market which again adds additional burden to the weakened Greek fiscal situation that requires additional funding at ever higher interest rates. The Greek government is trapped in a vicious circle where the interest expense as well the primary deficits are adding to the debt levels which itself goes on to increase the interest expense. While the government is aiming to reduce its debt in the coming years by generating primary surplus (through austerity measures) as well as by collecting funds from the privatization and payback of financial assistance package, this is expected (by us) to yield much lower proceeds than budgeted, in light of the observations mentioned above.

An immediate and much larger concern is an increase in interest cost owing to refinancing of the maturing debt as well as raising new debt (to finance the fiscal deficits) under distressed credit conditions for the government. Nearly 55% of the total debt is maturing over the next five years, with nearly 10% maturing in 2010. Additionally, new borrowing will be required to finance the fiscal deficits of the coming years. Interest cost on government debt is on the rise as reflected by the yield on Greek government 10yr bonds, which has risen to 6.2% in March, 2010 from 5.7%, a year ago. 

Given the higher borrowing cost for the Greek government and the large debt roll-over and new issuance lined up, the average interest cost is expected to increase or remain the same rather than decline. However, while making projections for 2010 and later years, the Greek government is assuming a decline in the average interest rate on the government debt, which would underestimate the interest expense projected in the coming years. 

GREEK PUBLIC FINANCES PROJECTIONS

While the government outlined complete projections of revenues and expenditure along with a change in government debt in its Stability and Growth Program, January 2010, it subsequently announced additional measures with impact of nearly € 1.2 billion or 0.5% of GDP and € 4.8 billion or 2% of GDP in February and March, respectively. We have built in the announced impact of additional measures in the government projections, and based on new projections, the government is expecting a primary deficit of 1.0% and fiscal deficit of 6.2% in 2010, against primary deficit of 7.7% and fiscal deficit of 12.7% in 2009.

However, in light of the observations discussed in the earlier sections, there is a strong possibility of deviation from the targeted performance. We have therefore built three scenarios, each with a set of assumptions about the variation from the budgeted impact of the various revenue and expenditure measures as well as variation in the budgeted proceeds from privatization and payback of financial assistance by Greek banks.

Over the next week or two I will comment on several other European nations whom I feel have very little practical chance of accomplishing what they have stated in public and the likely consequnces of their failure to accomplish such. I will also be releasing my pan-European stress model to subscribers, along with a public excerpt by the end of the week. In the meantime, anybody who has not caught up on my Pan-European Sovereign Debt Crisis series should click the links below.

Earlier installments of the Reggie Middleton's Pan-European Sovereign Debt Crisis 

  1. The Coming Pan-European Sovereign Debt Crisis - introduces the crisis and identified it as a pan-European problem, not a localized one.
  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? -illustrates the potential for the domino effect
  3. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!

  4. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt BuyerBeware!
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