I've been reading quite a bit of handwringing over Greece in the UK papers, and came upon this piece from one of my favorite writers, Ambrose Evans-Pritchard, early this week. It was in the "to do pile" to put on the website, but I never got around to it. It appears with events in the past 48 hours, there is no time like the present.
- Greece is disturbingly close to a debt compound spiral. It is the first developed country on either side of the Atlantic to push unfunded welfare largesse to the limits of market tolerance. Euro membership blocks every plausible way out of the crisis, other than EU beggary.
- When the European Central Bank's Jean-Claude Trichet said last week that certain sinners on the edges of the eurozone were "very close to losing their credibility", everybody knew he meant Greece.
- The interest spread between 10-year Greek bonds and German bunds has jumped to 178 basis points. (it's jumped yet again, just since the article was published on the 22nd) Greek debt has decoupled from Italian debt. Athens can no longer hide behind others in EMU's soft South.
- "As far as the bond vigilantes are concerned, the Bat-Signal is up for Greece," said Francesco Garzarelli in a Goldman Sachs client note, Tremors at the EMU Periphery.
- The newly-elected Hellenic Socialists [PASOK] of George Papandreou confess that the budget deficit will be more than 12pc of GDP this year, four times the original claim of the last lot. (the United States of Debtors is now up to 13% of GDP due to "emergency measures to *save* the economy"... hmm, about 4x the normal range, imagine that) After campaigning on extra spending, it will have to do the exact opposite. "We need to save the country from bankruptcy," he said. (So the Keynesian theory no longer can work in Greece, even as it is "saving" the US)
- Mr Papandreou has mooted a pay freeze for state workers earning more than €2,000 a month. This has already set off an internal party revolt. "There is enormous denial," said Lars Christensen, emerging markets chief at Danske Bank. "They don't seem to understand that very serious austerity measures are needed." he said.
- Brussels says Greece's public debt will rise from 99pc of GDP in 2008 to 135pc by 2011, without drastic cuts. (US fast approaching 100% without taking into account unfunded liabilities of Medicare and Social Security, at current pace just the budget deficit should be 200% of GDP by the end of the 2010s... again, putting our head in the sand regarding he unfunded liabilites which DWARF the budget deficit)
- Modern economies have reached such debt levels before, and survived, but never in the circumstances facing Greece. "They can't devalue: they can't print money," said Mr Christensen. ("thankfully" we Americans can reduce the standard of living for our citizens by this action - all hail Ben)
- Greece has long been skating on thin ice. The current account deficit hit 14.5pc of GDP in 2008. External debt has reached 144p (IMF). Eurozone creditors – German banks? – hold €200bn of Greek debt.
Key point below... by being inside the Euro Union, Greece was able to borrow far below where it should have. Instead of taking advantage of that, and paying off debt or realigning the economy, it squandered it by doing even more fiscally irresponsible behavior. Sound familiar? Just switch the phrase "by being inside the Euro Union" with "by having the world's reserve currency"....
- Athens squandered its euro windfall. For a decade, EMU let Greece borrow at almost the same cost as Germany. It was a heaven-sent chance to whittle down debt. Instead, the country dug itself deeper into a hole by running budget deficits near 5pc of GDP at the top of the boom.
And now they are between a rock and a hard place, especially because they don't have their own central bank to "bail themselves out".
- Austerity may prove self-defeating, without the cure of devaluation. Greece risks grinding deeper into slump.
- .... the danger for EMU laggards is that the ECB will begin to tighten before they are out of trouble. It is German recovery that threatens to stretch the North-South divide towards breaking point.
Snap. Crackle. Pop.
- The EU can paper over this by transfering large sums of money to Greece. (works in America) But will Berlin, Paris – and London, also on the hook – feel obliged to bail out a country that has so flagrantly violated the rules of the club, not least by holding Eastern Europe's EU entry to ransom over Cyprus? That is neither forgotten, nor forgiven.
- During the panic last February, German finance minister Peer Steinbruck promised to rescue any eurozone state in dire trouble. He is no longer in office. The pledge was, in any case, a bounced political cheque even when he wrote it. Greece can assume nothing.