Greece: It is all about debt dynamics
ATHENS - Three chunks of news overnight into Tuesday:
- Siemens, according to a report in the Financial Times, withdrew over 500m euros from a French bank and stored it with the European Central Bank (ECB), and in total has parked 4-6bn euros at the ECB recently;
- Italy got its sovereign credit rating downgraded by Standard & Poor's (S&P);
- Greece wrangled with the International Monetary Fund (IMF) about the terms of its bailout money, failing to reach a deal, and opening up Tuesday as a potential decider.
What unites these three stories is the concept of debt dynamics. When you are in debt, the question is not by how much, but whether your economic circumstances are favourable to paying off the loan.
Each of these developments is a negative signal for the debt dynamics of the players involved, and for the eurozone.
Taking Siemens first, it can store money at the ECB because as a global conglomerate, it has a banking licence. Its motives were, clearly, that it did not feel the money safe enough at a major French bank - that is the scale of contagion risk from Greece to Spain.
BNP Paribas has denied being the bank involved. SocGen and Credit Agricole are the two most exposed banks to Greece.
In Italy, S&P is saying, basically, that even with an expanded austerity package, Italy's high debt (120% of GDP) and low growth mean it will not meet the new numbers. Being downgraded and put on negative watch simply means that Italy, like Greece, will be forced into a strategic, structural move on public sector pay, jobs, pensions and services.
In Greece, what is happening is that the IMF and eurozone are, effectively, overriding the traumatic austerity package passed on 24 June 2011, and revising the bailout deal they did on 21 July 2011. Greece has missed this year's deficit reduction target - it is 2.7bn euros short, mainly due to falling tax revenues and a shrinking economy.
The IMF has, from the comments of its delegation, clearly looked at the numbers and decided this is not a near miss. One City economist, poring over the figures, sent me this reading (which is considerably bleaker than anything the IMF or Greek government have said publicly):
"Nominal GDP has fallen, with the last two quarters (Q4 and Q1) showing an average decline of 5.1% y/y. The real GDP data showed a faster rate of decline - down 7.3% y/y. Either way, if it is assumed (optimistically) that the decline in nominal GDP is no more than 5.0% y/y for 2011, this would be enough to push the deficit to GDP ratio up to around 13.1% of GDP."
Gradual cutbacks in the state, combined with a perennial shrinkage of the economy are clearly not working, hence the IMF is advocating an economic shock. IMF delegate Bob Traa told journalists on Monday:
"If you can do it (staff cuts) up front, you get over it much more quickly. Whether society can support that is a different issue. Our experience is that... if you do things gradually that may induce the public getting very tired. Adjustment fatigue is something that happens in every country." (Associated Press)
So what is being planned - it is reported - is to put 85,000 public sector workers, including some teachers, on enforced leave pretty promptly, cutting their pay by 60%. The number of public entities to be closed is to be doubled, to 65, and all kinds of pension cuts are to be enacted immediately, rather than in 2012.
Will the patient survive?
The question is, as with all shocks, does it kill the patient? Or, through catharsis, lay the basis for rapid recovery? What the IMF/EU will be asking is:
a) Can the Greek government actually deliver this slaughtering of its own electoral base;
b) Once it is done, can economic growth come back fast enough, and the tax take rise fast enough (it is falling 5% right now despite the tax hikes) to prevent default?
The implication of any deal today is that they have modelled the debt dynamics and see it working.
But then, to make it work, the Greek government has to deliver. Some of the measures listed in the putative IMF deal involve legislation, even the ones requiring only ministerial diktat will be hard to do given the level of friction and resistance in the economy.
Greek Finance Minister Evangelos Venizelos compared himself to Winston Churchill over the weekend, battling to save the country and imposing hardship. One oppositionist tweeted in reply Churchill's famous quote: "Up to now we said the Greeks were fighting like heroes; in future we shall say heroes fight like Greeks".
Into this rhetoric-laden city (and Twitter-sphere) I will now set forth… First stop a school kids' demo. Some schools have opened without text books this term, apparently.