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Sunday, 11 July 2010

AI IZ IN UR BOND MARKETS, CHANGINGZ UR MATURITIES

This was never going to be pretty, my friends. After talks with potential investors to test their appetite for Greek debt, our Government decided not to put any 1-yr Treasury bills up for sale in our first brush with the markets since the May bailout. This contradicts our earlier statement of 28 June.

This is of course not important enough for the Ministry of Finance to put up on its website for our edification – unlike, say the Minister’s tedious interview with Athens News, for instance. But I was wondering how our more liberal minded media would spin this. My favourite example is the E-net coverage:

“The head of the Public Debt Management Organisation, P. Christodoulou, was forced to circumvent 1-yr bills in favour of 6-month and 3-month bills in order to keep the cost of public borrowing at levels that would not further whet the appetite of rent-seekers.”  

In fact it is a little more complicated than that, Christo my friend.

It appears that in announcing the sale back in June, we have actually played into the hands of specuLOLtors – such as they are. Note, for instance, the reaction of Goldman’s chief European Economist Erik Nielsen when this sale was originally announced:

“Since the IMF-EU package is fully funded (i.e. no need for commercial borrowing) through 2011, and the numbers [on Greek austerity measures] are coming in somewhat better than expected, there should be no need for this borrowing – so why are they doing it? Could it be that they are responding to demand from banks and other investors who have started to appreciate that a debt restructuring [in] the next 12 months is very unlikely and therefore looking for high-yielding assets? If so, this would be a mis-guided move, in my opinion, and – frankly – I hope the IMF and EU would tell them to back off.” 

What? Could it be that the uber-evil, uber-specuLOLtoring Goldman urged against this entire auction? Did we really get talked into the whole thing by greedy bankers, only to slam the door on their face halfway through?
My guess is our motivation was very different: only a few days earlier, our Ministy of Finance reported a projection-busting 39% reduction in the Greek deficit. Hoping that the market would be impressed by this figure, our Government sought to capitalise on the good news by successfully raising a little bit of money and sending a powerful signal.

I must admit that I don’t think this was such a bad idea – in principle. If our figures were robust and we could be seen to raise even a small amount of money on the market at near – bailout terms we could signal to investors that we were serious about not defaulting and willing to take the pain, and also signal to our domestic audiences that we are that much closer to being able to tell the IMF to f—off. So full points to G-PAP and his merry men for going to the markets in the first place.

Unfortunately, the 39% figure is clearly not what it seems. From our own Government’s triumphant announcement:

“Net revenues of the ordinary budget increased by 8.3% year-over-year against a targeted 11.7% annual increase foreseen in the SGP, including the additional measures of March.
This reflects receipts of 779 million euro from an extraordinary tax on profits of large companies in 2008, an increase in receipts from the excise tax and corresponding VAT on fuel, tobacco and alcoholic beverages, as well as a 364 million euro year-over-year reduction in tax refunds. It is estimated that the additional measures adopted in March and May 2010 will begin yielding results in the coming months, thus rendering feasible the achievement of annual targets. 
Ordinary budget expenditures declined by 10.5% year-over-year against a targeted 4.8% annual decrease foreseen in the SGP. In particular, primary expenditures declined by 11.3% against a targeted 4.4% annual reduction and interest expenditures decreased by 7.5% against a targeted 5.1% annual increase.”

So to be clear: we’ve raised less incremental net tax revenue than we thought, mostly as a result of the last tax hike under the previous incompetent Government – which was a growth-killing one-off that we can’t really repeat – and by delaying (not really reducing) tax refunds.  I.e. we haven’t reduced the structural shortfall in tax revenues. We did, however, manage to cut expenditures twice as much as forecast. Now this is suspect, considering that our original plans were severe enough to threaten social cohesion. One does not casually achieve double the savings in question without some trickery at play. The announcement goes on...

“The decrease of primary expenditures is mainly due to expenditure restrictions for salaries and pensions, in health and social security (lower grants to the Social Security Funds by 1,139 million euro compared to the respective period of 2009), a 939 million euro reduction in operational and other expenses, such as grants and consumption expenditures, and a 486 million euro reduction in the allocation of earmarked revenues. 
Public Investment Budget (PIB) expenditures declined by 29.6% and PIB revenues decreased by 43.2%, compared to the respective period of 2009.”

So we’re inflating the savings figure by cutting public investment faster than public spending – which research tells me is the worst way to cut the deficit – and we’re delaying payouts to our Pension Funds, risking social unrest and implicitly defaulting on our debt. I can see that going down well.

No wonder nobody’s psyched about this announcement. But it gets worse. Recent polls suggest that the vote for the two main parties is plummeting. With the country now only nominally sovereign, voters are happy to try out a minor and radical party or to not vote at all. At the same time, voices within our own Government (perhaps with plans to topple G-PAP) are talking about a need for democratic legitimisation of the policies of our ruling Socialists, who of course campaigned on a very different set of policies than the ones they have since been forced to pursue.

If a new election returns a hung parliament, our creditors know with 100% certainty that they cannot count on the Greek Left to stay the course of the Stability and Growth Programme as the Communists have long denounced both the IMF and the EU and the liberal left is slowly disintegrating into a myriad disparate groupings. Worse, they now know that they cannot count on the rapidly fragmenting and increasingly populist Conservatives or the nationalists (who are busy talking about J-LO’s touring schedule instead) to act as responsible coalition partners. This means that any hint of G-PAP weakening or of elections approaching is tremendously bad news.

At least, in a rare display of maturity, our own people oppose a snap election.

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