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Greek deficit games

Turning the tap off will leave countries who live beyond their means high and dry.

At this point it seems obvious – Greece will not be saved by the EU. There is no mechanism to do this and only a political decision will help. No one is ready to do it however.

The only ray of light is that S&P left Greece’s rating unchanged BBB+/A-2 so the government will still be able to refinance its bonds with cheap money from the ECB. If the rating goes down, which is quite likely, the ECB may decide to take the political decision for a higher risk margin and not shut the last door in front of Greece.

This however is a little comfort, given that the country cannot find resources to cover its deficit and pay the interest on its debt. Soaring to above 120% of GDP, the debt of Greece matures In end of April and May (see below for details) – two months which will be a test for the Greek economy and the Eurozone. The odds are high that with the current situation Greece would announce default and will stop covering its financial obligations. This will then be the second government default after Dubai’s at the end of last year. Back then Abu Dhabi bailed out the smaller emirate. But will there be someone to give a hand to Greece?

This seems unlikely as the German chancellor Merkel clearly pointed out that she will not cover Greece financial gaps with German money. In the same train of thought was the statement of economic Bundesminister Rainer Bruederle, who criticized ‘the countries which have lived beyond their means in the past’. Although his statement was a rebuttal to French criticisms, the line of thought and action of the German government is more than clear. Furthermore, Wolfgang Shoeble, finance minister in Merkel’s cabinet asserted that there is no political support for the financing mechanisms that EU leaders supposedly agreed on.

To this I should add that Merkel called for an option to exclude countries from the Eurozone – something that none of the fathers of the euro would have argued for in the late 80s and early 90s. However, Germany as well as the other members of the euro learnt a bitter lesson by allowing poor cousins from the south enter the common currency. Just a reminder – Greece adopted the euro one year after planned, because of failure to cover the convergence criteria. A few years later it turned out that it eventually did cover them by writing the transfers from EU structural funds in the budget balance sheet. That’s how Greece hid its deficit.

But now it can’t. And it is surely going towards a default and IMF support. This will be humiliating for the euro and it will suffer a very hard blow. Greece will not recover easily, which in fact leaves us in a lose-lose situation. Once again, if the EU is turned from ruled-governed behaviour to political decisions about everything, this is the inevitable result. Diplomatic and political logic has no place in measuring financial indicators or deciding on the profitability and technical requirements of a huge gas pipeline. If this rule is not observed, we get in the bog of Nabucco and the Greek financial crisis.

IMF has already saved Hungary and Romania from bankruptcy. Back then no one thought to save EU member states with European money. Maybe it was worth to try. Because when the crisis strikes and the enemy is already at the door, it is a little late to prepare our defenses.

How did we get here?

Greece shocked markets in October by revealing its budget deficit would reach 12.7 percent of gross domestic product in 2009, raising borrowing costs and weighing on the Euro currency. As a result borrowing became much higher.

Budgetary income shrunk drastically during Q4 2009 and Q1 2010 adding oil to the debt fire.

In February Greece asked its European partners to express political will to back up  Greece (read bail it out) if needed. Prolong discussions supposedly reached a positive agreement without specific details. Markets were unmoved. Interest for Greek bonds remained about 6,5% (3-4% more than other eurozone bonds).

End of February New austerity measures introduced by Greek government decreased budget deficit to 8%  for 2010.

March 16 Jean-Claude Juncker, president of the Eurogroup states Greek support is likely to be bilateral loans, only if necessary. Later that day Germany makes clear that such decision will not be taken by the end of March

March 17 German Chancellor Merkel stated that no eurozone country should be left alone in the crisis but added that ‘A quick act of solidarity is definitely not the right answer.’ She also called for mechanisms to kick out errant states from the eurozone.

March 18 Greek PM Papandreou implies that Greek may resort to IMF support.

What’s next?

EU’s Foreign Ministers’ GAERC summit will take place Brussels 22-23 March to discuss Greek problems among other issues.

March 23 Spain issues 3 to 6-month Treasury bills

March 25 Portugal Parliament to debate a program for decreasing deficit from 8,3% now to 2,8 in 2013

April 20 – Government has to refinance 8.2 billion euros of a maturing five-year, 3.1 percent fixed-coupon government bond.

April 23 – Another 1.92 billion euros of short-term debt becomes due — 13-week T-bills issued in January this year.

May 19 – Greece will need to refinance 8.5 billion euros of a maturing 10-year fixed-coupon 6.0 percent bond.

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