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Bank Of Greece Had Warned About Exploding Credit Spreads In February 2009, Says Administration Is Again Overly Optimistic On Economy
It turns out that the massive credit spreads that Greece is currently experiencing (300+ bps over Germany and what not) have nothing to do with CDS speculators and other scapegoats, and all to do with the administration's complete avoidance of warnings issued a year earlier by the Bank Of Greece which previously said in its 2008-2009 Monetary Policy Report that it "warned about everything that is happening today – stressing,
in particular, the possibility of a rise in the cost of borrowing. As
that Report stated, 'a widening of the yield spread would increase the
future burden on taxpayers'." Furthermore, in the just released Monetary Policy Report for 2009-2010, the Bank of Greece is warning that things in Greece are about to get much worse once again, and is debunking the administration's still overly optimistic and rosy expectations. "In 2009, as the Bank of Greece had warned, the
general government deficit reached 12.9% of GDP and public debt stood
at 115% of GDP." Keep in mind that the G-Pap administration noted the deficit would be "just" 12.7% of GDP in 2009. Surely this is just another thing to blame the speculators for. What's worse, the BofG now says the GDP decline in 2010 will be -2%, also more dire than the government's rosy -1.7%. The conclusion which nobody will heed again until it is too late: "The Greek economy has fallen into a vicious circle with
only one way out: the drastic reduction of the deficit and
debt." Most damning is the proposed (lack of) way out: "Because of the low level of
private savings in Greece, the public debt cannot be financed from
domestic sources, resulting in a widening current account deficit and a
rising external debt." Oddly, blaming CDS speculators for the earth's roundness was nowhere in the Bank's report, and instead it notes that it is "most important, [that] Greece must
eradicate the patterns of behaviour, attitudes and policies that have
brought us to the present crisis situation." Once again, we hope that the BofG does not expect anyone to read this 2009-2010 100 page + report, once it is released, cause that would mean the government would have to do the right thing for once.
Full summary of the Bank of Greece Monetary Policy 2009-2010 report below.
The
report is submitted at a particularly difficult time. The Greek economy
is in the midst of a deep crisis, characterised mainly by a large
fiscal deficit, huge debt and the continued erosion of its competitive
position. These problems arose before the international crisis of 2008
and it was inevitable that, in the absence of bold and decisive
actions, they would lead to an impasse. There were no such actions, the
situation deteriorated markedly, culminating in the derailment of
public finances in 2008 and 2009. The international crisis amplified
the cumulated negative effects of those chronic weaknesses and
accelerated the downturn of the economy.
The Bank of Greece had issued timely warnings concerning the gravity of the situation:
•
In October 2008, i.e. about a year and a half ago, the Bank of Greece
stressed in its Monetary Policy Interim Report that the Greek economy
was at a crucial juncture and that, as the global economic situation
worsened, the macroeconomic imbalances and structural weaknesses of the
domestic economy would become more severe and more difficult to address.
•
In the Monetary Policy Report that followed in February 2009, the Bank
of Greece warned about everything that is happening today – stressing,
in particular, the possibility of a rise in the cost of borrowing. As
that Report stated, “a widening of the yield spread would increase the
future burden on taxpayers”.
•
Lastly, in October 2009, the Monetary Policy Interim Report underlined
the need to send a clear message to the markets that Greece is
determined to implement a multi-year plan of fiscal consolidation and
structural reforms.
Unfortunately,
the developments during the past few months have confirmed the Bank’s
warnings and undermined confidence in the future of the Greek economy:
Since April 2009, Greece has been subject to the Excessive Deficit
Procedure, as the deficits of both 2007 and 2008 exceeded the reference
value set by the Treaty. In 2009, as the Bank of Greece had warned, the
general government deficit reached 12.9% of GDP and public debt stood
at 115% of GDP. These developments triggered a series of downgradings
of Greece’s credit ratings and led to a large widening in the yield
spread between Greek and German government bonds – resulting in
increased borrowing and debt-servicing costs for the Greek government.
The increase in debt-service expenditures, in turn, increased the
country’s budget deficit, made fiscal consolidation more difficult to
achieve, and had serious repercussions for the real economy and the
banking system. The Greek economy is caught in a vicious circle, with
only one way out: the drastic reduction of the fiscal deficit and debt
so that there is an immediate reversal of the current trend.
Large
fiscal deficits and debts can, of course, also be found in other
countries. Unlike Greece, however, these countries are able to finance
their deficit mainly from domestic savings. Because of the low level of
private savings in Greece, the public debt cannot be financed from
domestic sources, resulting in a widening current account deficit and a
rising external debt. Thus, the problem of the fiscal deficit becomes
intertwined with the problem of the external deficit and debt and the
twin deficits emerge as the main factor fuelling a dangerous vicious
circle.
The
main manifestation of this situation is growing budgetary imbalances,
rising public debt and a loss of competitiveness, which is clearly
reflected in the current account deficit. But the crisis is also taking
its toll on the entire economy, hampering the functioning of the
banking sector, undermining confidence, creating unprecedented
uncertainties, and challenging social and economic attitudes and
patterns of behaviour that have prevailed in the country for decades.
The ramifications of the economic crisis are spreading across all of
society, which must now recognise the problem and change attitudes and
practices in order to come to terms with it.
The data presented in the Report shed light on the multi-faceted crisis that the Greek economy is currently experiencing.
After
a decade of positive performance, GDP contracted by 2% in 2009, mainly
because of the sharp drop in investment, but also due to weakening
private consumption and exports. GDP is projected to fall in 2010 as
well, although the size of the fall will be decisively affected by the
effectiveness and the pace of implementation of the economic policy
measures recently announced by the government. At the present time, the
decline in GDP is projected this year to be around 2%. It is also
important to note that the Greek economy remains in recession while the
economies of many other industrialised countries are recovering, albeit
at an uneven pace. In the euro area, in particular, the recovery has
been under way since the third quarter of 2009. The euro area recovery
remains fragile, however, because it has been largely driven by
expansionary fiscal policies. These policies will gradually have to be
phased out, given that most advanced economies have accumulated large
fiscal deficits and debts.
The
recession in the Greek economy has spread to all sectors of production,
negatively impacted on employment, and raised the rate of unemployment.
According to provisional data, total employment declined by 1.1% in
2009, while the number of employees is estimated to have fallen by
about 1.5%.
The
adverse developments in the economy and, above all, in Greece’s fiscal
balances, together with impaired confidence, have also taken their toll
on the banking system. Unlike what happened in many other
countries, where the crisis first broke out in the banking system and
spread from there to the real economy, Greece’s banking system, which
is fundamentally sound, has faced liquidity constraints since the
severe fiscal imbalances have led to a downgrading of the country’s
credit ratings, thereby restricting bank access to finance, and raising
funding costs. Meanwhile, the recession led to a slowing in the growth
of deposits, affecting the supply of credit. In spite of these
problems, the year-on-year rate of credit expansion to the private
sector remained positive throughout 2009, contrary to the situation in
the euro area as a whole, where negative growth rates have at times
been recorded. As the Bank of Greece has repeatedly stressed, the Greek
banking system showed remarkable resilience during the international
crisis. In order for it to retain this resilience, it will be necessary
to remove the exogenous factors that affect its functioning and to
restore confidence in the future of the Greek economy.
In
response to the serious challenges brought about by the crisis, policy
makers have recently shown a strong resolve to reverse the negative
trends of previous years. Thus, the Budget for 2010 and the Stability
and Growth Programme (that sets out the general medium-term policy
orientation) were supplemented by measures that strengthen the
probability of achieving the fiscal targets.
The
overall policy formulated seeks to reverse a trend that led to
accumulated problems and a dangerous impasse. Changing that course will
not be easy. It will require an equally prolonged effort to break the
vicious circle that was pushing the economy into a state of decline,
threatening to undermine standards of living. The recently announced
policy measures mark the beginning of a large-scale effort. If
implemented effectively, these measures will lead to a durable virtuous
circle that will restore the Greek economy to a path of sustainable
growth, enabling Greece to achieve economic and social progress.
For
this to happen, the policy measures announced must be implemented in
their entirety and without delay. This would make a crucial
contribution to the restoration of confidence, which would have a
favourable impact on the cost of government borrowing, with positive
repercussions on bank funding costs and, further down the line,
borrowing costs for businesses and households. In the present
circumstances, fiscal consolidation is a sine qua non for restarting the economy.
The
next step will be to support the recovery process with structural
reforms aimed at substantially bolstering competitiveness, steadily
improving productive conditions and modernising the growth model. Such
reforms must also aim at greater transparency and, most importantly, at
improving the operation and increasing the efficiency of the wider public administration.
The
crisis that the Greek economy is facing today is all-encompassing and
multi-faceted. It therefore calls for a bold response of the same kind:
immediate, sustainable, ongoing and convincing fiscal consolidation,
coupled with structural reforms aimed at facilitating the operation of
markets and improving competitiveness. Most important, Greece must
eradicate the patterns of behaviour, attitudes and policies that have
brought us to the present crisis situation.
»
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Accordingly, the people of Greece will go on strike (again).
It would seem that Greco/German relations are less than warm.
“Greece accuses Germany of 'squalid game' in debt crisis”
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7499916...
“Unfortunately, the developments during the past few months have confirmed the Bank’s warnings and undermined confidence in the future of the Greek economy.”
One wonders what is the future of the Greek economy.
Is it to exist as a producer of olives and feta cheese? Is it to be a seasonal depository for German beach towels and English larger louts?
What is the Greek economy? If it were not in the Euro would anybody care?
Hey 'Merica, can't start a fire without a spark. Looks like we will be dancing in the dark....
This whole Greek thing is only a precursor to what's up ahead. Enjoy the peace and calm whilst they protest on the streets of Athens. You're streets might be next.
This ceased to be a finance problem long ago. It is a social problem. They can design all the escapes they want in Brussels, Berlin, or Athens, but as long as the people of Greece are the final destination for any hurt or pain, there will be no endings but unpredictable beginnings.
The bright boys in charge still think they are Loki, the trickster god, and can con Greece's way out of this mess. They can't. They have a few options, none of them painless, and this thing will drag on until they choose one... or time and fate chooses one for them.
Jesus. It's like a 6 month long circus with these guys. Isn't that Pampa-G idiot a Harvard Grad? 2008, 2009, 2010, VERY bad years for Harvard Alum IMO.
Harvard Poetic Book Keeping, I remember that course.
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