FOR GOD'S SAKE STFU, EPISODE III: THE VASSAL STATE STRIKES BACK

Yup, you guessed it. This is the sequel to this post, a propos  the latest three-notch downgrade of Greek debt by Moody's.

This news initially moved Greek bond yield spreads wider, as some dumb money will react in a knee-jerk fashion to anything that sounds like bad news and some clever clogs make excellent returns on this idiocy, as well they should. If that's all there is to it, spreads should come back down very shortly as there is no incremental information in the Moody's assessment. Greece is too closely watched by now. In fact, today's debt auction returned yields only fractionally higher than the last one, well within reason if you ask me, and the Euro was up. The real fundamental reason for our bond yields going up is that we've missed our revenue targets again, despite twice adjusting them downward in the face of a steeper-than expected GDP fall..

Certainly the implications of a Moody's downgrade (our current credit rating implies that we have a 20% chance of defaulting in the next 5 years) are much more optimistic than the markets' implied probability of ca 59% (source is this CMA report, which is slightly dated, but I'm not paying for an update!). In fact, they are more optimistic than the market was in Feb 2010 - pre-bailout! If credit rating agencies had any credibility, the Moody's announcement would tighten, not widen our spreads. Cue trivia item: in Russian, "Moody's" sounds a bit like the word for "bollocks".

Mind you, on the basis of this statement by S&P, it appears to me that the credit rating agencies have the same probability-adjusted haircut in mind for our bondholders as the markets do, but tend to interpret the data in favour of bigger haircuts with smaller probability. I would expect credit rating agencies to be biased in this way, as an abundance of low-probability, high-impact default risks helps generate demand for their services. Or perhaps I'm giving them too much credit and they just don't know what they are doing.

Now I don't envy our Finance Minister. He has to lie, score cheap points for internal YOMAMA-nomic consumption and look macho while doing it. And that's assuming he's a straight guy and our Finance Ministry genuinely looks after the people's best interests. It's a bum deal (like the one I offered Yorgo here). If I were in his shoes and had to peddle the same bullshit as he does, here's what I would have said:

A: Moody's have lagged the market's implied default probability for Greece throughout the current turmoil and their two-notch downgrade only reflects their need to be taken seriously by the markets; I wish them well but am unconcerned by their latest guesswork on the chances of Greece defaulting. As things stand, I think markets have finally caught up with our fiscal situation in March 2010 and Moody's are about a year behind them.  Let me tell you what they will all be catching up with for the rest of the year...

And this is what he actually said (emphasis mine):

The rating downgrade announced by Moody’s today is completely unjustified as it does not reflect an objective and balanced assessment of the conditions Greece is presently facing. Furthermore, its timing and the multi-notch nature of the downgrade are incomprehensible and raise a number of questions. 

[…] The arguments made can in no way be justified by the additional information available since Moody’s last downgrade in June 2010 and the progress achieved since.   

[…] Ultimately, Moody’s downgrading of Greece’s debt reveals more about the misaligned incentives and the lack of accountability of credit rating agencies than the genuine state or prospects of the Greek economy. Having completely missed the build-up of risk that led to the global financial crisis in 2008, the rating agencies are now competing with each other to be the first to identify risks that will lead to the next crisis.  At a time when the global economy is fragile and market sentiment is sensitive, unbalanced and unjustified rating decisions such as Moody’s today can initiate damaging self-fulfilling prophecies and certainly strengthen the arguments for tighter regulation of the rating agencies themselves.

You see the man knows what we also know. But he reverts to the old mantra of evil specuLOLtoring and calling for regulation of the CRAs. Don't get me wrong, the CRAs have severe faults and getting their ratings the hell out of regulatory capital requirements is, for instance, a hugely important agenda. But threatening to tell our mum every time they downgrade us to WAY above where our credit rating should be makes Greece look ridiculous.

Why does he do that? Because he can get away with it. Dagong, the Chinese credit rating agency, has long held that Western CRAs are too soft on Greek debt and given us the same rating as Nigeria. Did he complain? Did he hell. He kissed the dainty toes of the Chinese. As well he should because they were buying our highly speculative bonds.

Please Mr. Papaconstantinou. We only have a few months to go now. Try not to tarnish the reputation of the Greek people any further with these tactices.



In the age of the internet, it takes literally seconds to find this old statement by the head of Greece's public debt management agency (the guy actually in charge of selling our debt), which welcomed a single-notch downgrade by Moody's in the face of market expectations of a double-notch downgrade. No agenda back then, no specuLOLtoring. Just good old Moody's refusing to follow the pack and giving us a break, despite people calling their rating 'ridiculously' high. Three months later we were of course bailed out, so Moody's had obviously missed a number of tricks. Strange, by the way, how statements are now made by the finance minister and not the head of the PDMA. It's politics, not trading.

FOR GOD'S SAKE STFU, PART II

There are few people left in the world who don't believe Greece will default, outside of our ever shrinking circle of creditors, none of whom are actually spending their own money. I imagine that a year from now, Trichet will be left on his own in the no-default (and long Greek debt) camp, his eyes sewn shut, scrawling 'Greece will not default' all over the walls of his office in his own excrement.

In the meantime, our own Government is still on the default denier camp, as indeed they must be until we're 100% ready to flick the entire financial world the notorious Focus finger. This is fine, and in the national interest. However, it would be nice if, in maintaining appearances, the Government would try to avoid building our whole nation a reputation for being petulant, ignorant idiots. Part of this involves conceding that talk of a Greek default is based on some objective facts, and explaining that we're doing our best to change these facts. Simply put, no one thinks we can grow fast enough to get out of debt before we're overwhelmed by the rising interest payments. We should be telling foreign commentators that we're reforming in order to enable growth, that we have a plan for where growth will come from and that we're winning concessions on the terms of our external financing. That would do.

UPDATE: Many thanks to my journo friend M.S. for pointing out that it was the Focus finger after all. Schoolboy error brought to you by Google Image Search.


Instead, our Ministry of Finance has chosen another tactic. In our response to the recent Fitch downgrade to Junk status, they issued the following statement:

"Based on this assessment, the credit downgrading of Greece’s sovereign rating by Fitch Ratings by one notch (BBB-to BB +) with negative outlook underlines the need for a new framework for rating agencies at a European level."

Translation from the usual Yo'mamanomic terminology:

"If you think Greece will default, you are an instrument of teh evil specuLOLtors. Well, we still have some MEPs and a seat at the Council left and we'll make you pay for this by setting Commissioner Barnier's dogs on you. We'll show you who's Junk-grade."

This might be problematic as Barnier's dogs have already been found to be barking up the wrong tree regarding speculators' bets on Greek debt. And of course, people like Dagong who, like us, feel that the credit rating agencies are subject to political and speculative manipulation, tend to think they have overestimated Greece's creditworthiness.

UPDATE: It doesn't help that our Government has been in talks with both Moody's and Fitch about avoiding a two-notch downgrade and managing the fallout for bank balance sheets, and we seem to getting our way. There's a saying in Greece, "Don't lick where you once spat."

Incidentally, a BB+ rating means, in Fitch's own words, that

"there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met."

Which sounds entirely fair. A BB+ rating also implies a probability of default that is less than 10% over 5 years. I know Fitch doesn't say this anymore, but that's the benchmark. Now, I dare anyone to sit in front of a mirror and say the words 'the probability of Greece defaulting over the next 5 years is less than 10%' three times. Apparently the ghost of Charles Ponzi shows up and drags you to hell if you do.

The Government's correct reaction would be to point out that since the market has priced in a 56% to 75% probability of default already, Fitch is giving us some very good news indeed and everyone should buy our massively underpriced bonds. Or we could just be honest and tell Fitch that they're always lagging our credit situation (and everyone else's) by about 6 months so no one believes them anyway. They're basically peddling tabloid celebrity breakup stories for the financially educated. Everyone just makes up the stories and when the truth comes out they are as surprised as the rest of us but still pretend to have known all along.

But no! Telling the world to fuck off even as we beg our creditors for more time to pay off their loans is apparently the way to do it. Because making us all look like idiots somehow makes the Greek Government feel better about themselves.

UPDATE II: It's important to note that by default I mean any credit event which leaves our creditors holding Greek debt whose present value is less than what they originally held - and which forces them to recognise losses on the P&L.  Some restructurings of our debt and of course any haircuts will constitute defaults.

EVIL SPECULOLTORS, BRUSSELS EDITION

As my readers should probably know by now (and could probably guess anyway), the Greek government and many of my compatriots spent months blaming evil specuLOLtors for our problems before discovering that deep-seated, decade-old distortions were a little bit closer to the heart of the matter and that the most active speculators in Greek CDS were in fact Greek banks.

For a while, Brussels was keen on this version of events because in what seemed to be a golden age for Euro power-grabbing the popular outrage over evil CDS gave it the right to intervene in yet another lightly regulated market. So it commissioned a report by way of justification. The report, however, prepared in May 2010, found that CDS prices actually reflected fundamentals quite well and that the CDS market was actually often more transparent than bond markets. So the Commission simply buried it.

Having had some experience of EC research bids I immediately assumed that this was a report commissioned from one of the magic circle of monster consultancies (or even the Big Four) that hover around EU tenders like vultures around a battlefield. So I put the EC's embarrassment down to either covert lobbying from the financial industry or over-zealous tendering requirements. [If you ask people to demonstrate in their tenders their ability to provide a thorough and rigorous analysis, you shouldn't be surprised to find that you've bound them contractually to actually perform a thorough and rigorous analysis.]

However, I was wrong. The report was compiled by EC staff, which is why it was so easy to bury in the first place. Technically, the Commission did nothing wrong. Politically, however, they were definitely in the wrong as against the advice of their own staff the Commission decided to appease politicians, blame specuLOLtors regardless, and try to regulate them away. How ironic, given what we now know, is this amazing quote from Commissioner Barnier? 

"These people don't like to come out in the light of day. We are going to flood them with light."

A few months later, Europe knows it is in a worse shape than those specuLOLors dared imagine at the time. It is literally plunged into darkness. The only thing that has finally seen the light, is the Commission's report exonerating the CDS markets.

How do we know all this? Because the Netherlands' Het Financieele Dagblad (Financial Daily) put in a Freedom of Information (FoI) request and obtained the actual report, which can be read here. I'm sure this goes some way towards exonerating the Dutch for their bizarre love of Zwarte Piet. 

Btw, this episode shows clearly how some journos are vastly better than others. The Telegraph's triumphant coverage of Eurocrats messing up provides no link to its source, merely mentioning that it has 'seen' the report, as though the authors were handed a copy by a man in dark glasses while feeding ducks at Regent's Park and lowly peons couldn't possibly access it. Bloomberg's coverage duly links back to the original Dutch article. The Dagblad links back to the actual report. 

UPDATE: The full report can now be found here. 

IMF STAFF REPORT WIN

The IMF is lovin' it.

IMF staff have published today their review of the stand-by arrangement with the IMF which will no doubt make G-PAP and even some of our journos happy. The full report can be read here.

In summary they suggest that reforms are proceeding according to plan and economic growth has only been affected to the extent they had planned for.

I sincerely hope they are right.

However, they also note the following risks to the plan:

• Out-of-control inflation - only to be expected when one racks up VAT in an economy with a very rigid labour market. 
• Healthcare and local authority expenditures not entirely under control - primarily because we still don't know what they are
• Publicly owned enterprises are invoking public sector guarantees on their debt.
• The pensions reform bill is on track but we don't actually know what savings it will achieve because the actuaries are taking forever to crunch the numbers - not their fault really as the system is too complex in the first place. 
• Greek banks are still locked out of the interbank lending markets 
• Too many naysayers are still talking about default - credibility is not yet restored. 

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.

EVIL SPECULOLTORS, DOMESTIC EDITION

How do you know you're a good-for-nothing evil specuLOLtor?
Apparently, it's when you refuse to supply a customer when they haven't paid you for FIVE years.

Here's the deal the Greek government recently offered hospital suppliers, to whom we owe EUR5.6bn:

• We'll pay you EUR230m in cash.
• The other EUR5.27bn will be paid in zero-coupon bonds. That's Greek Government bonds that pay zero interest. The kind recently downgraded by a second credit rating agency, which means they are likely to land you with a nasty loss if you sell them for cash, and equally likely to land you with a nasty haircut if you hold them to maturity.
• So to be very clear. In return for putting up with 5 YEARS of deferred payments - credit terms that would be unacceptable to a stunt codpiece - we we make you give us a 19% discount AND lend us money to boot.

Remember, this is not how we deal with suppliers of paperclips. This is how we deal with hospital suppliers. The people we depend on to keep our national health service running. Unsurprisingly, they've given up supplying us so the National Health survice isn't running as it should.

This means that we now have a Third World country's public health infrastructure, to match our Third World fiscal figures. This, my friends, is crunch time - the make-or-break moment when our Government can doom the country forever or lead the way back to sanity (although we will still end up defaulting). Cue an inspirational and reassuring statement from our health minister, Mariliza MUPPET Xenogiannakopoulou. More here and here. I translate below:

"The Government and the State will not be blackmailed. We will push through with this settlement, because we have an obligation to restore sanity to the Healthcare sector, but everyone has to finally get the message: the party is over."

"Unfortunately these days we see a double blackmail being carried out, against the National Health System and, ultimately, the Greek people. While the Government has proven that we mean what we've been saying all along, namely that we will do a deal and settle the debts of the past, which as you know we took over upon coming into government, as they date back to the 2005-09 period, we see this double blackmail taking place."

"On the one hand, one share of suppliers, who do not accept the terms of the settlement, and on the other those who do not want the new rules we're imposing to come into effect, so that order, proper oversight and lower prices can be brought to the market for consumables."

"It is inconceivable that they refuse to accept the settlement. They made a lot of money in the past few years. We know about their surcharges. There will be rules. We are fighting every day." 

The lack of humility is staggering. It doesn't matter one jot to our suppliers that Mariliza didn't run up the debt herself - she's the person holding the bill, and her other hand is empty. That's the continuity of government for you. But most perverse of all is the lack of any concept of supplier cashflow, or the basic rules of credit. Anyone ever run a small business over in the Ministry of Health? Surcharges are par for the course if you insist on ludicrous terms of credit. Except of course small businesses (or medium-sized ones, or even most large ones) can't get away with 5 years. Well now we can't either. Because our debt is junk.

Here's a statement that will please me: here's the bonds, folks. If you take them and we default, we will back them up with a stake in the actual hospitals you supply. Happy? Thought so. Since we're never going to default anyway (right??) that's a win-win. We get our better terms and they get peace of mind.

Over to you Mariliza.

UPDATE: People have finally cought on to the fact that the restructuring of Greek hospital debt is tantamount to default. H/T To Nick Shay for pointing out this story. 

GREEK FINMIN DISMISSES BEAR POOP IN WOODS RUMOUR

I was overjoyed to hear today that our Government spokesman George Petalotis trashed rumours of a Greek default. No doubt some clever clogs in one of G-PAP's endless consultative committees thought that using our PR bitch instead of the actual minister to make this statement would be a true macho statement - slapping the markets around while keeping our pimp hand strong.

For the non-Greek speakers among you, here is what the great man said:

"Lately we are witnessing various rumours of a return to the drachma, of debt restructuring, hybrid funding facilities and other such novel matters [...] It is obvious that such spreading of entirely unfounded rumours can only bring about confusion and disorientation to all of Greek society's efforts to effect a safe exit from this crisis."

"We of course categorically dismiss all of these fanciful scenaria, wherever they come from, whatever their motivation, and whatever the means by which they are spread throughout Greek society."

"There is no question of default, of a return to the drachma, or of any of the things being alleged these days" [and citizens should feel secure based on the Stability Programme being implemented by the Government] "which will set us on a different course henceforth."

[When asked about the origin of these rumours, Mr. Petalotis said that] "we cannot make assumptions or conjectures" [and stressed that it was important to note that] "some people are profiting from the insecurity being spread around society."

[Moreover, Mr. Petalotis said that] "everyone has their opinion and motives when making statements regarding the Greek economy." Wink?

[He also stressed that "this Government is hard at work and has made great efforts in order to put in place the support mechanism] "without which we would not be able to speak with the certainty and security with which we do."


There are many layers of FAIL in this story. First, the reporting itself.

Out of 36 stories on this subject, once Google News' duplicates filter was in place, 33 were removed as precise duplicates; many duplicates came from reputable sources, not the odd blog.
Which left me with this:

Does anyone doubt this ridiculous litany of bravado was disseminated by the Government itself?

Second, the christening of statements by named commentators (of whom I am the lowliest) as "rumours".

Default theorists may be wrong ( I doubt it) but there is no doubt they go by their own names when making predictions. Try Wolfgang Munchau, Edward Harrison, Mohamed El-Erian,  Desmond Lachman, Ben Chu, Paul Krugman, Felix Salmon, Paul Donovan, Jacob Funk Kirkegaard, Matthew Yglesias, and of course myself. I did not pick these people because they are "right" or because their credentials are impeccable. I picked them because they featured in the top 4-5 pages of google results and are named commentators, most with the wherewithal to offer some opinion, even if you and I don't agree with them.

So come on, FinMin, get one of your bitches to tell me I'm wrong. You may convince me yet. But do not dismiss my opinion as "rumours". I'm shouting it from the rooftops and anyone curious to find out who I am need only click through a single link. You can look up where I live and work.

Third, the sense of déjà vu.

First came the emphatic assertions back in 2009, that we were nothing like Dubai.

Then came the assurance by G-PAP himself, that we would not need the EU's nebulous gesture of support back in February.

Then, there was the assurance from ourselves and the Germans, and from the IMF, that we will not need an IMF-financed bailout. We called the suggestion "a joke". A joke? Who the hell is laughing?

Then we told the evil specuLOLtors that they will lose their shirts betting on a Greek default. No one has yet.

Now we tell everyone we will never default. History is just not on our side on this. If FinMin were remotely honest they could just say: "we don't want to default; and we do not believe we have to default; we will stake our political careers on not defaulting. We may still do it, but not while this government has any options left this side of dictatorship." Don't tell the market what it will do. Tell them what you are going to do and cross your fingers.

Good luck FinMin. Save me some of your lovely furniture when you liquidate.

THE END OF THE LOL – WHY I BELIEVE IN A GREEK DEFAULT

It is time, dear readers, for Greece’s creditors to take a haircut. They’ve had a good run but it’s just not going to work anymore. They made a bad bet on us as on many other risks and now it’s time to take the consequences.

In late 2009, Greece had a small window of opportunity in which to signal in a credible manner that there was more political capital to be made from reducing our liabilities than from increasing them. Similarly we needed to demonstrate that there was more political capital to be made from paying our creditors than from defaulting. I am convinced that this window of opportunity started to close in December and then slammed shut in January, when Joseph MUPPET Stiglitz supposedly came to our aid and our political elite gave up trying to convince the people that we are going to have to change voluntarily.

One after another, our politicians, our journos, and of course our people, came out in favour of a mild adjustment, or none at all. They cried “speculator” until they were hoarse. Our state banks even shamelessly played the CDS market ourselves, making money out of our own profligacy. Commentators threw tantrums, made absurd demands and blamed everyone except themselves (and their respective main constituents) for the state of our country.

Well it’s all over now – for a simple reason. We’ve left things to escalate for so long, let confidence sink so far and borrowing costs rise by so much that the math doesn’t work anymore.

Greece’s real GDP has never in the past 10 years grown faster than 4.8% per annum (see here).

Government revenues have never been more than 43% of GDP and Government spending has never been less than 43.2% of GDP. Expenditures excluding interest on public sector debt have never been lower than 38.8% of GDP (see here).

 The above suggests that we could not, over the past 10 years, ever have run a deficit of less than 0.2% of GDP, let alone a surplus. In actual fact, however, we’ve never run a budget deficit smaller than -2.9% of GDP (see here).

Finally, the informal economy has never been less than 22.6% of GDP (see here) in the past 10 years.

Now, I will assume that everything works out for us within the three years from 2010-03. We bring expenditure and the informal economy to their 10-year minima, and revenues to their 10-year maximum. I am using the IMF’s projections for real GDP growth the GDP deflator (basically the price segment of value added). I assume that the GDP deflator will tail off after 2015, while GDP growth will work out to the IMF’s projections and then gradually converge to our GDP growth maximum of 4.8%.

Under my rather rosy but at least realistic projections, debt servicing costs of anything over 9.25% would mean that our mountain of debt would never fall below current levels and eventually rise to infinity. If the market handed us that kind of interest rate, they would be handing us a death sentence. Unfortunately this came to pass as our 2-yr yields climbed above 20% in early May, courtesy of our army of subsidy-junkies, extortionists and murderers and the idiots who shelter them; hence the EU/IMF bailout. 

So far, so rubbish.

But now we have a different problem – the one at the heart of the Credit Crunch, the Great Recession, and in fact every episode of such in the past half century. In a world of fiat money, all money is debt and no monetary value is truly real. It exists only as long as it’s backed up by a web of implicit guarantees – in practice right up to the people with the biggest and best balance sheet. Hence the pressure on Germany, and potentially on the US, to guarantee everyone’s debt.  

So while have established our guarantors as the markets have demanded, the markets are still unsure they are good for the money. Why? Because if we go under, European sovereigns will have to bail out their own banks, to whom we owed north of EUR70bn last time I checked. They will also automatically become more likely to have to bail out our fellow PIIGS, with which we also have a web of liabilities. The IMF itself doesn’t have enough money by any stretch of the imagination to bail out the PIIGS – Greece is a bit of a stretch actually. So the guarantee is weak and our debt is looking decidedly blurry.

Now we can drag this sorry mess out forever, give up sovereignty over our own country and feed the delusions of Eurocrats for another couple of years before everything comes crashing down. Or we could bite the bullet, prepare for a seriously no-frills existence, and renegotiate our debt.

Is debt restructuring or indeed default a new thing? Historically it most certainly isn’t. Nor is it outside the realms of our recent experience. We have already tried restructuring our hospitals’ debts to suppliers in the past and done so again in May. Many state employees, even some that foreigners are likely to meet, are left unpaid for some time as a matter of course. The state also owes money to its pension funds. In the private sector, any of these things would be called “defaulting”. It is only out of respect for the sensibilities of a sovereign state that people do not call us bankrupt.

Perhaps more importantly, debt markets are pricing a 75% probability of Greek default by July 2015 into the price of insuring our bonds. Our creditors are already taking the damage to their share prices and those who are forced to mark-to-market will eventually take actual losses. The damage is already done.

Finally, it is fair to say our people want a default, as long as it doesn't hit pensions and benefits. That can be arranged.

What we need is an orderly wind-down; a cloak-and-daggers summit of creditors like the one held for Hungary should map our liabilities and the effects of different levels of default on them. Each creditor should come clean on the full extent of their individual exposure and write down an agreed percentage of the debt. Instead of financing us, the IMF will agree support for those banks over-exposed to our debt.

Now let’s see if anyone will bite the bullet and say it.

UPDATE: People have finally cought on to the fact that the restructuring of Greek hospital debt is tantamount to default. H/T To Nick Shay for pointing out this story. 

WE IZ IN UR BOND MARKETS, CONTAGIONIZING UR SOVARAINS

I just came across this study by IMF staff on the patterns of the European debt crisis; I urge everyone to read it if possible.

The key graph, however, is pretty easy to read just below. Just remember that the Y axis is bond yields, thus plus = bad news. Enjoy.

NO RUSSIANS HERE, BUT...

Apparently our government turned down a rather conveniently-termed loan in February, from an evil specuLOLtor US PE fund no less. I wonder how the Orthodox Axis nutcases back home will try to spin this.

ZH reports here that our insistence on any creditors promising not to hedge against our debt appears to have forced our hand on this and other deals. This I find very easy to believe in light of our threat to keep all specuLOLtors out of our future debt offerings. As I said at the time, this was a case of cutting off our hairy noses to spite our hairy faces.

Anyway, this sounds a lot more plausible than the idiotic Russian bailout rumours mooted by Troktiko and repeated by ZH but, given their rather poor due diligence on these stories, I think we ought to let matters come to light by themselves.

If true, this will really plunge everyone back home into some very hot water.

We can has bailout part 2

Enjoy the music my friends

Full statement here

The damage to our Eurozone partners: a loan of EUR30bn, at 5%, and here's how it breaks down according to the deal:

To put this in perspective, I could get a 90% mortgage from HSBC at this interest rate tomorrow. A young professional with a house for security is apparently a safer bet than a sovereign with the tax bills of an entire nation from now to the end of statehood as we know it as security.

But then again, I'm not borrowing a mindIboggling amount of money against the promise of simply borrowing more to pay the bank back. (In fact, to reassure friends and family, I am not getting a mortgage at all!)

Now back to our story.

Who benefits from this bounty of nowhere-near-free cash?

Not the Greek state - this money will cement our commitment to painful austerity with a contractual arrangement, not to our friendly eurozone partners but to the decidedly unlovely IMF.

Of course, the Greek people may benefit from having to pay less interest on this debt. 2 to 3 per cent less to be precise, which could in years to come cut our interest burden by more than a third.

Our Eurozone partners may benefit from containing contagion - to the extent that it can be contained, and they are getting a pretty good return on their money, but amazingly, some pretty hard-up countries will have to dig deep to bail us out. Germany, of course, will pay some EUR8.4bn, but what about Ireland paying half a billion? And what of the supreme irony of Portugal, who T-PAN said would be next to face the markets, paying the biggest percentage of their GDP in loans to Greece?


Our banks will benefit from being able to borrow from the ECB against government bonds - something they would not be able to do after the inevitable further downgrades of Greek debt without a bailout. Insofar as that increases lending that might be a good idea. But given the fact that our banks' loan to deposit ratio is way lower than 100% (80-something if memory serves), the return on this injection of cash may not stellar. But it will do wonders for capitalisation - for now.

But along with our banks, the big winners are investors in Greek debt in general - especially those that bought recently - as they bought securities one whisker above junk and they'll suddenly find themselves holding securities with an iron-cast implicit guarantee. Ka-ching!

And then there are the REAL winners. The ones that really took a gamble on this one - the Eurocrats of Brussels. The Greek bailout has given them what treaty after European treat has refused to cede to Brussels - explicit control of member states' fiscal policy. This is now a de facto reality - and by the time we are our of recession, no one will remember a time when it was not.
An update on this story: our finance ministry has leaked that we would very much like double the amount of money pledged by our partners, just minutes after the aid package was announced. Oh dear.

Full story here

More on the bailout as details emerge.

FOR GOD'S SAKE STFU

Theodoros MUPPET Pangalos, the alabaster Ganymede of Greek politics, has done it again.

In a recent statement, the monolith of Greek socialism suggested that Portugal would be next to face the wrath of global sovereign debt markets. This may or may not be an accurate assessment, although frankly I doubt Pangalos has the wherewithal or the clarity of mind to make accurate predictions on the future of financial markets.

But this is all particularly rich coming from a man who only a few weeks ago also said:

"By speculating on Greek bonds at the expense of your friend and partner, by allowing credit institutions of the country (Germany) to participate in this deplorable game, some people are making money [...] As long as southern Europe is under fire, the euro is being shaken and falling and the conditions under which they (Germany) can win massive exports to the third world, to the rest of the world, are improving"

How about you STFU about Portugal then, Teddy Bear? Are they not our friend and partner? Or do specuLOLtors only take cues from ze Germans?

Even more disingenuously, T-Pan (as he is now known) suggested that the real reason for Germany's opposition to a Greek bailout is not the fact that they have enough problems as it is without having to throw their sort-of-good money after our definitely-bad money, but the fact that they are racist - and jealous of our good cheer and good weather to boot.

No doubt in T-Pan's doughnut-addled brain this is a matter of "hitting them where it hurts". If so, one wonders whether he has any concept of irony. Is this the man to throw Germany's fascist past in their face when he is himself the grandson of one of the more famous in our long line of dictators - for whose inept reign he has yet to apologise or pay compensation?



And yet, what if it is? What if our repeated jibes do really provoke a reaction? Will this point-scoring mean anything if Greece has to drag itself on its knees into the widely-reviled and often counterproductive IMF straightjacket?

But perhaps the greatest irony of all is Pangalos' eagerness to share his wise words of warning with the Portuguese, telling them they are "next" as if our storm in a yoghurt churn were over. As today's bond offering once again hit a yield rate that I could probably get a mortgage at, perhaps Portuguese readers were less eager to bask in the endless lard-dripping glory of our elder statesman than he'd thought.

The brilliant finale to all of this MUPPETry, meant to provide a distraction from the austerity package being put into place this is the following quote:

"Greece will always exist, as we have existed for 8,000 years, out of the euro and EU".

Yes, T-Pan, it's true, we will exist exactly as we did thousands of years ago. Half-naked, barefoot, half of us in slavery and everyone buggering each other silly.

Well done asshole!

STOP PRESS - MALOLCIOUS FORCES EPIC FAIL

Once again: who are the evil specuLOLtors pushing up CDS prices?
George MUPPET Romaios blamed "the Anglo-Saxons". The Great Statesman, Pagkalos, (admire him here) blamed German banks. Everyone and their dog blamed Goldman, including people who couldn't get the bank's name right.

Of course, it should have been known all along that the CDS market was being moved by buyers of CDS, not bond shorts. We also know that the major players, buyers or sellers, in the market for Greek sovereign debt CDS were, and always will be, Greek banks.

What we didn't know what just how explicitly this was done. Well it turns out the sleepy but state controlled Ταχυδρομικό Ταμιευτήριο (Postal Bank of Greece) apparently controlled 15% of the entire Greek CDS market just before selling the lot after being ordered to when the new government took over. They made a hefty profit out of the deal too!

The original article here and reported abroad here.

Who profited from this? Oddly enough, the Greek state.

Well done assholes.

CREDIBLE THREAT FAIL

I must apologise for the long radio silence on this blog. I have been busy with other things but have not lost track of events in the Greek fiscal drama, I promise you.

Try this for a quick taster.

Our Government is out to get the evil specuLOLtors who have first helped us fudge our numbers and then used their inside knowledge to short our debt. To show them the error of their ways, we have banned them from our latest debt offering.

You guessed right, this is another EPIC FAIL for Yorgo.

To see why this is the case, consider how serious our threat is... to ban people from our future debt offerings. The seriousness of the threat is directly proportionate to the expected value of our debt offerings. This means that the worse our fiscal position gets, the more we implicitly punish the evil specuLOLtors. That will show them not to signal to other people that our fiscal situation is bad.

That's cutting off our hairy noses to spite our hairy faces.

STOP PRESS - CONSPIRACY FAIL

Remember my little rant late January about maLOLcious forces - the general view, propounded by our own government, that speculators are largely responsible for the pummeling Greek debt has taken in the markets? Well, our Minister of Finance has, in the past been a little more specific, noting that some market pariticipants are shorting Greece and presumably making a killing out of their own self-fulfilling prophecies.

Sadly for him, such claims are testable.

FT Alphaville reports on this analysis from Dataexplorers. I don't know what to call this company, so let's go by their own strapline:

"Data Explorers (www.dataexplorers.com), based in New York and London, is the world's most complete resource for data, analysis and insight into short-selling. The company's proprietary data gives an unrivalled, comprehensive view on share lending and short-selling activity, with data representing the majority of the global securities lending market."

So they've got some inside info on short selling activity, which is notoriously hard to document except in its effects. What's interesting to me is that they've run a comparison of short-selling activity for Greek sovereign debt between late Jan 2009 and late Jan 2010, and found the following. Standby for FAIL.

Have you spotted it yet? That's right, there was more or less as much shorting of Greek debt in early 2010 (and, recall, this was before our updated SGP was approved) as in early 2009, when Karamanlis was in charge and was still maxing out the overdraft.

So the vultures our PM has been going on about are, in fact, for the most part people with previously long positions in Greek debt, who simply don't like the amount of risk associated with it anymore. A simple story, finally told well.

WE CANZ DREAM OF CHEEZBURGERS

The only news that has mattered for some time now is finally out. The Commission has approved our Updated Stability and Growth Programme. They are still suing us for tampering with statistics but that can't be helped.

This took some painful last-minute tweaks following Yorgo's tour of Davos and his consuming bro-mance with Joseph Stiglitz. In order to flesh out the proposed savings in our government consumption, which, as I've blogged before, are quite substantial, we've announced a host of detailed adjustments, including a longer public sector pay freeze. There's going to be a lot of striking over this but, as the following graph (sourced from this study) clearly shows, our civil servants have little to complain about.

I believe that this is the beginning of the end of the Greek fiscal drama. Already the people reviled by our PM as speculators are looking to the next weakest PIIG, most likely Portugal, to Poland as the weakest CEE link, and quite deservedly the UK as the weakest EU link.

Now all we need to do is come up with a good implementation schedule over the next month, meet our targets and keep quiet and this could yet blow over. The Conservatives have pledged cooperation and they better keep their promise. They are as guilty as a puppy next to a pile of poo worth EUR 80bn and their attempts to produce incremental policies are starting to annoy me.

This won't be the end for us Greeks, of course. The SGP still leaves us, if perfectly successful, with a structural deficit of 2% of GDP. This is nothing to celebrate; it simply means that any macro-economic pressures in the near future, especially a double-dip in the US and Western Europe will send us back into the straitjacket.

But for now, let's remember to thank the "evil" speculators. They may not be nice and they may not give a hoot about us, but they've saved us all the same.

The EU couldn't get us to stop robbing our grandchildren in order to pay ourselves lavish pensions or ill-deserved public sector and quango wages. Not even when we broke their rules every year (bar one) for 13 years straight (see table below, source here). Our politicians couldn't stop us. We certainly couldn't control our urges ourselves. These guys made us and the Commission sit up and take notice.

Despite all our brave words about getting governments to rein in the excesses of financial markets, we really ought to thank goodness the financial markets are there to rein in the excesses of governments.

MALOLCIOUS FORCES

The FT reports:

Mr Papandreou said on Friday: “Everyone knows there is speculation and hedge funds that are pushing the market. That is a reality we must deal with, but what we need to do is not changed by that fact. We need to reduce the deficit and do it in a quick and orderly fashion.”

Then along comes BNP Paribas. The bank's comments on Friday are particularly intriguing:

As Greek sovereign CDS spreads continue to widen and underperform today, we ask ourselves the question more pressingly about who is most exposed. We hate to break the news, but it is impossible to say. We detail cash exposures below from the information available to us. However, what will spook the markets is CDS / counterparty risk (our understanding is that Greek banks were active CDS players), and there is no way of finding out about these particular exposures. Therefore, as long as Greek sovereign and bank spreads remain under pressure, this will weigh on the wider European banking sector.

More on this later today.

LOLMAN?

Original story here.

I am willing to bet that the editors of the Greek Communist Party instrument, the Radical, will leave this story as it is even after somebody inevitably picks up their reference to "Golman Satz". Is it not appropriate that the last unreformed Communist party in Europe can't even spell the name of the Vampire Squid?

DON'T MENTION THE WAR - GREEK MUPPETRY EDITION

Last week I asked for a New Year's resolution of not blaming other people and playing by the rules even when we don't like them. I'm not going to get my wish am I?

Well, that's one thing. But it's quite another when the exact opposite happens. No one came closest to breaking all of my resolutions at once than George MUPPET Romaios, in his "letter" to Wolfgang Schäuble, the German Minister of finance. I summarise his argument here:

• Ze Germans are saying we owe people way too much money and they don't want to bail us out
• Well ze Germans can go swivel because we've given them too much money already by allowing them to do business here, by doing them the favour of honouring our treaty obligations as an EU member, and by allowing them the privilege of bribing our state officials.
• Besides, they still owe us reparations from World War II. And they are, like, totally Nazis. Although they're also siding with Israel against us.
• And what's the deal with their economy - they are running a big deficit too! Who are they to lecture us?
• We're too good for them anyway. We've been through worse shit than this and we don't need them. They'll see.

Which is precisely the type of muppetry that got us into this mess in the first place. In fact, it sounds a bit like something out of the Jeremy Kyle show:

"Yeah I kicked her in the belly when she was pregn't, hold my hand up to that, but did she tell you Jeremy that she was smoking dope while she was carryin our daughter LaTrina? An' she cheated on me twice with her own bruvver innit."

My advice to George MUPPET Romaios would be as follows:

1. Don't call the German Finance Minister names, dear. He's your Daddy. Well, one of your Daddies. But don't piss him off, all the same.
2. Your Prime Minister, whom you adore to a cringeworthy extent, is VERY busy kissing this guy's ass along with those of his Eurozone colleagues. Ask yourself- does he know something you don't?
3. Don't worry about the Euro falling a little. It's good for both you and the Germans. 
4. If you don't like all these "sour-faced" foreign commentators you can always tell your hero Yorgo to quit the Eurozone. Just give me a week's notice to get my family out of the country before it implodes like the house at the end of Poltergeist.
5. Try actually sending your "letters" next time instead of throwing hissy fits like a girl. I look forward to the replies.

Technical note:

An interesting LOL fact about the Reparations is that, when the Allies audited our claim for reparations immediately after the war, they found that the amounts we had estimated had been inflated three-fold. That's usually called PWNAGE, but WWII is very serious business so let's call it an EPIC FAIL.

Worse still, if ze Germans were to pay back everything our most belligerent compatriots are asking for in current prices, they would pay back EUR70bn. That would take our debt back down to ca. EUR230bn, and at current rates of spending it would pay for our next three or four budget deficits. But as you guessed this would be a one-off, so in three years, we'd be right back where we are today.

New Year's ResoLOLtions

[This post is still under construction]

Happy new year! Turns we're getting our ποδαρικό courtesy of the Comssion as reports have started flying that our deficit may have reached 16% of GDP by the end of the year and we were forced to borrow privately for the second time in a row. Oh and that nobody is going to bail us out. Our current Government did not cause this mess (it's been three decades in the making), but I'm not sure they're getting round to fixing it either.

The Government's resolutions keep changing, but they are more or less out there for anyone with internet access to read. There is a catch though. As with all New Year's resolutions, vowing to change what you do is pointless. Changing how you think works, but it's a hell of a lot harder.

My New Year's resolutions for the Greek state and its fiscal policies are simpler (they don't cost money), but they are way harder to stick to. Here goes:

1. We will not blame other people for this mess, even if they have had a hand. Yes there are vultures in the capital markets, but they are attracted by the smell of death. (Although if you blame a Jewish, reptilian or Nephelim conspiracy you are most likely plain stupid). Most importantly, at the end of the day the only guarantee foreign investors have of ever seeing their money again is that there is political capital to be made in Greece from not letting the debt get out of hand. If our Government can turn around and say: "Of course, we're not sorting out the deficit, but I'm standing up for you against all these foreign predators" this guarantee becomes weaker. If we cross that tipping point where there is more political mileage to be had from failing to tackle the deficit than from succeeding - and we're not too far from that - we will truly be in trouble.
   
   
2. We will learn to play by the rules even when we no longer like them. Yes credit rating agencies are unaccountable brothels, but that's not what we were saying when we waved our AA rating in the capital markets' faces last year (post-Lehman, when their shortcomings were plain for all to see). Last year we managed - quite heroically - to turn over about a third of our public sector debt against that AA rating. Next time, let's just say, "OK, investors, forget S&P and co., you come have a look at our data and tell us how much interest you want." Who's with me? No? That's what I thought. Don't lick where you spat, and vice versa.
   
   
3. We will learn that our creditors are colour-blind. At home, we treat elections as though they were a regime change - for better or worse, the slate is wiped clean, and the new administration goes about erasing all traces of the old one out so it can take root. Blue Greece and Green Greece are supposedly two different places. But to our creditors, Blue Greece and Green Greece are one and the same. If the one borrows, the other still has to pay. If the one messes up, the expectation is that the other will mess up. They know that the one constant in this country is her people; dysfunctional as our politics may be, in the long run the people call the shots and they are pretty set in their ways.
   
   
4. We will learn that our creditors can hire Greeks to explain all the inside stuff. Time was when we could fiddle the numbers, cook the books and basically pull the wool over their eyes because frankly they were not watching too closely. They are now. Everyone is. Next time we decide that stocks can be flows and vice versa, that payments can be brought forward or pushed back, or that our army isn't part of the state after all, they will put an asterisk next to the figure and ask some spotty intern to find out what the real number is before he goes home at 11. Next time our minister of finance kisses their arses in English in London, or Frankfurt, or Brussels, they'll get a colleague to translate what he says in Greek at a rally two days later.
   
   
5. We will only let one person speak at a time. Having another cabinet member overrule the minister of finance is not just embarrassing; it's expensive.
   
   
6. We will no longer assume that every other Greek out there has our back. Papademos will not pretend he got your memo, he won't approve it on the sly, he won't change collateral rules and he certainly won't quit his exalted job at the ECB to come bail you out just because he's Greek. Get over yourselves.
   
   
7. We will not try to keep everyone happy. Crisis is a Greek word; it means judgment. Unless you show yourself for what you are, you can't get out of it.
   
   
8. We will not console ourselves with how badly everyone else is doing. Yes Spain has more unemployment, Britain has the same deficit etc, Japan has more debt. If you put them all together, they make up one country that's worse off. So?
   
   
9. We will not rely on the dead tree press to keep quiet when we mess up. Blogging is free; people can read, and if the Government won't publish, others will.
   
   
10. Sometimes, it really is best not to ask "the people" what they think. The people include all manner of fuckwits who have more of an incentive to respond to consultation than their calm and literate compatriots who can turn CAPS LOCK off. Besides, the people got us into this mess in the first place.