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Erik Nielsen's Update On Greece
Since we feel there is little need to post on the Greek "update", we will instead provide that from Goldman's Erik Nielsen.
Since my Sunday email earlier this afternoon, which included details on the Greek program as published by the government, the IMF and EU Commissioner Rehn have issued the two attached statements, and the IMF staff held a conference call.
It is now clear that the total financing package will be “only” EUR110bn (as opposed to the EUR135bn that I had expected following the rumours on Thursday) with EUR80bn coming from the 15 Euro-zone countries and EUR30bn from the IMF. I maintain my estimate that the total financing requirement will be about EUR150bn over the next three years, so this means that the program will not be fully financed throughout, and that the IMF and EU expect them to regain access to commercial financing probably towards the end of the second year of the program. The program is surely fully financed for the next 12 months.
I maintain my view on risks as summarised in paragraphs 5 and 6 below.
Stay tuned; the official IMF and EU approval – which will both release the first tranche, and (more interestingly) will coincide with the publication of more details on the conditionality should take place within the coming week.
Erik
The IMF statement on the staff agreement: http://www.imf.org/external/np/sec/pr/2010/pr10176.htm
The statement from EU Commissioner Rehn and IMF MD Strauss-Kahn: http://www.imf.org/external/np/sec/pr/2010/pr10177.htm
Relevant paragraphs on Greece from my note earlier today:
- Earlier today, the Greek government announced the summary of the new austerity measures agreed with the visiting IMF-EU-ECB staff which will release the first tranche of the much discussed mega-sized rescue plan; the rest is a formality in terms of getting loans for the May payments. The program is being discussed now by the Euro-zone finance ministers who will recommend that the European Council (the heads of state) approves the loan package of some EUR90bn over three years, including EUR30bn for the first year. The heads of state will meet on the matter at the end of the week. Meanwhile, IMF management will send the detailed conditionality and loan request for up to EUR45bn equivalent to the IMF board which will approve it either on Friday or very next week; making potentially available the eye-watering sum of some EUR135bn for the next three years.
- The announcement includes tough fiscal measures on the spending and revenue side as well as a number of important structural measures. In terms of fiscal policies, the famous 13th and 14th month salaries for public employees will be eliminated for those earning over EUR3,000 a month and capped at EUR1,000 for those earning less. In addition, all public sector salaries will be frozen until 2014 and allowances (another income stream for public employees) will be chopped by another 8% (on top of the 12% cut already announced.) On the revenue side, the VAT rate will increase by an additional 2% (to 23%) on top of the increase announced in March of 2% to 21% and excise taxes on fuel, tobacco and alcohol will increase by another 10%. In addition, there’ll be new taxes on properties and the gaming industries; all topped off with a one-off tax on what’s been reported as “highly profitable” businesses. All in all, these measures are estimated to cut the budget deficit from 13.6% of GDP last year to 8.1% of GDP this year, to 7.6% in 2011, to 6.5% in 2012, 4.9% in 2013 and to 2.6% by 2014; all under the assumption that GDP will contract by 4.0% this year, followed by -2.6% next year, and then stage positive growth of +1.1% in 2012 and +2.1% in each of 2013 and 2014. If so, public debt to GDP will peak in 2013 at 149.1%, and decline to 144.3% in 2014.
- In terms of structural policies, which are hoped to deliver the economic recovery from 2012, the government has promised to begin liberalise labour markets by doing away with the present law that limits the number of firings any company can do to 2% of its labour force per month. They’ll also liberalise presently closed sectors, including in energy and transportation. And there’ll be several changes to the present generous pension system: The retirement age will be increased (from 65 for men and 60 for women) and will be linked to the average life expectancy – and early retirement will be curtailed. Also, the minimum contributions will be increased gradually, and future pensions will be cut by linking them to the average pay during the working life, rather than to the final pay.
- There is no doubt that this is a very tough program, although there are not enough details available yet to make a firm assessment of the program. On what’s been made public so far, I have two concerns: While partly fuelled by traditional May 1 demonstrations, the Greek public has not reacted well to the announcement, so one must wonder if it’ll all be legislated and implemented as intended. I notice that the previous insistence on cutting the budget deficit to 3% of GDP in three years has been abandoned. This is welcome because the “3% in 3 years” was a random concept unrelated to the depth of the Greek crisis and would likely have implied an even deeper “hole” in GDP.
- But here is my real concern: Remember, this is as much an economic crisis as it is a fiscal one, and on my numbers, Greece would need to engineer a (gradual) decline in private sector nominal wages by about 15% to re-establish competitiveness - and by up to 20% to start to generate the (non-interest) current account surpluses necessary for the ongoing transfer of interest payments to foreign creditors. Such a decline in private sector wages cannot be legislated, of course, so one has to cut public sector wages by at least as much and then liberalise labour markets in the hope that spare capacity will drive wages down. I am not sure exactly how much the public sector wages are set to decline on these latest measures, but from what’s been published so far, it looks like about 15%. If so, while of course substantial, unfortunately its probably not enough to drive people into competition with private sector employees to an extent that it’ll drive private wages down by 15%-20%. This, in turn, puts a big question mark on the 2012 recovery. Where will that growth come from? The working age population will be declining and the private sector will still be internationally uncompetitive while struggling with substantially higher tax burdens in the domestic market. And without the assumed recovery, where will the fiscal adjustment come about?
- With the May liquidity crisis now practically dealt with, here are the risks for the rest of 2010 and 2011 (and beyond) as I see them: (1) Implementation of the program in the face of a social unrest; (2) the likely need for further adjustments when/if GDP doesn’t respond as expected; and (3) European approval of the second phase of their part of the package (which will emerge in their fiscal bills for the next two years.)
Best
Erik F. Nielsen
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good luck with that
Too Generous
good f#%$&$&ing luck with that.
What a massively shitty way for the Greeks to eventually abandoning the Euro.
This Greek bailout charade feels like it's been running longer than the Doonesbury comic strip. And not nearly as funny.
http://en.wikipedia.org/wiki/Doonesbury
I was more of a Dilbert fan myself:
http://www.dilbert.com/fast/1991-05-24/
I am Chumbawamba.
Chumba,
There's an ugly rumor on ZH (I know because I just started it Dogbert style) that you're actually Dogbert and that you run Dogbert's New Ruling Class. Sounds very much like you Chumba.
Say it ain't so Chumba, say it ain't so. :>)
http://en.wikipedia.org/wiki/Dogbert's_New_Ruling_Class
Dogbert's New Ruling Class, or DNRC, is the official Dilbert fan club. It is a group of people who, according to Dilbert author Scott Adams, will form the new ruling elite once Dogbert conquers the Earth. DNRC members (defined in effect by their subscription to the (free) email Dilbert Newsletter, issued approximately four times per year) are characterised by their 'superior intelligence and good looks', whereas non-members ('induhviduals', a play on the word 'duh') suffer from idiocy and lackluster charm. DNRC membership currently stands at 533,198 (February 2008, Issue 68)[1] and has been fairly stable since September 2004.[2]
I'm on board. Where do we meet to start making the homemade signs?
Ascribing perhaps to malice what is explainable by incompetence I tend to see the entire G-Pap government as Catbert, the evil HR director.
Old Greek proverb; "My Word is My Bonds."
Loosely translates to; "Up Yours."
Pass the Kentucky jelly.
Sooooooooo-eeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee!!
I am Chumbawamba.
The best option for me is let Greece default, All this does is kick the can further while degrading the stronger nations, At some point this can kicking will sink the whole G20, Lets hope it works.
+1. I think this is the buffer to a soft landing for the other PIIGS while the Greeks engineer a default with the help of Lazard.
GDP estimates used: Garbage in - garbage out.
this is insane. The EU had something like a stability act. 60% debt to GDP were allowed...
Its like getting an awesome job with a fake 1.0 Diploma and if someone finds out they offer you another 10 years of study for free. The EU is a giant douche.
Greece will buckle up and take their medicine. Goldman will stop running off-balance sheet operations. The Fed will disclose the make up of its new-found "assets".
And yes Virginia, that is a purple lollypop.
Now Deutschland wants to send an EU Commissioner to live in Athens to enforce compliance on the Greeks.
Since a ReichsProtektor supported by many thousands of the Wehrmacht failed wretchedly in this, this attempt will be laughable.
The more the EU/IMF attempts control, the more resistance they will provoke in Greece.
so what? resistance is a good thing, isnt it?
What I don't buy is this idea that simply by cutting wages by a certain percentage, Greece can regain its "competitiveness". Greece can't compete with countries like Germany, Italy or France in terms of quality nor compete with Bulgaria or Turkey never mind China, in terms of price. The reduction in wages will improve the balance of trade, but only because their "standard of living" (actually all borrowed money) will no longer allow them to buy the products manufactured overseas. It will merely represent a drop in consumption.
This has nothing to do with Grecce, its just the Banks bailng out each other.. they could care less about Greece..lol
Who is the chap Erik Nielsen?
Not only that, but, also screwing the legitimate "savers" of the world with nearly 0% return for their money all the while they use free money and get high returns. They are so lucky that most of "plain folk" like myself don't connect these dots and revolt or pull their money.
The 10 million people of Greece are wholly dependent on using other people's money to support their socialist state. The few who do earn anything to tax are far from enough to return Greece to anything resembling prosperity.
The country can serve one final purpose before its people who have any ambition, brains, or talent eventually emigrate: This is the end result of a Socialist state, of which there are many, that no one in government or among the majority who vote to themselves that which they will not work for nor ever seem to understand, and rigorously vetted by Ayn Rand.
Eventually, a complete collapse is coming.
Whatever happened to the national character, the glory the was once Greece and to the people who descended from the mighty Greeks?
Greece will not default....unless....
Unless the USA deems it in the USA's best interest to let Greece default.
Let we forget, the USA is 'in big' when it comes to the size of the IMF and ECB reserve accounts at the FED. ALL calculations by the U.S. government are made with an eye toward keeping the ship of state afloat...not Greece's ship...the USA's ship.
There is NO WAY to avoid social dislocation in Greece---and Spain and Italy and the Baltic states, etc. etc.---over the long haul. There is NO growth model sufficient to keep the European ideal of state-support from foundering on the rocks of social discontent. None. The ONLY answer at this point is massive support from ECB and IMF accounts---all made liquid by the men behind the curtain at the FED.
So you patch Greece up but Portugal has to come up with around €2billion and Ireland over €1 billion to fund their part of the bailout. Think no one will notice that these two Piigs have piled up more debt and that debt is secured by Greece?
I guess you could say their just Greeceing the skids for the next country's bailout.
First you tell the police to bend over, we're going to ram this 20% reduction IMF up your backside and then you tell them to run out there and tell those crazed rioters to behave.
I can see no reason why this will not work.
I've already seen a video of cops not on the riot line clapping for the demonstrators.
OT:
@More On Australian Levy:
Australia to raise a 40% on mine profits, this is also a re-election platform. They tried the same thing in the Province Of Alberta and failed miserably.. It looks like a planned banker’s bailout so their credit default swaps can stay in the money if you ask me:
“Australia plans new 40% tax on mining sector
By Peter Smith in Sydney
Published: May 2 2010 20:00 | Last updated: May 2 2010 20:00
Australia’s centre-left government angered the country’s mining industry on Sunday when it announced plans for a 40 per cent tax on profits generated by resource companies.
The so-called resources super profits tax, which mirrors a levy imposed on offshore petroleum projects, forms part of an overhaul of the country’s taxation system to address the challenges of an ageing population and rising healthcare costs.”
http://www.ft.com/cms/s/0/ba5cf366-5616-11df-b835-00144feab49a.html
Let's see if I have this right: they are going to cut pay to a large portion of the populace, make it easier for companies to lay off more people, and increase taxes on business, fuel, tobacco alcohol and property - and that is going to grow the economy. Obviously I am not smart enough to be an economist.
I don't suppose that, in a democracy, the masses might just throw all those who agree to this plan out of office and replace them with other idiots who promise not to do any of the above.
Who needs wealth when you have 'liquidity'. It's starting to feel like the world is asymptotically approaching apocalypse.
Every poster is correct in one way or the other and to some degree. No matter how you slice it, the current "Greek Tragedy" is a microcosm of future events to come. We are not out of reach in the US. All western economies are basicly insolvent due to unchecked spending/debt in one form or another that has come to obvious fruition since 2007. We are witnessing an economic collapse on one hand and the machinations of TPTB to try and hold it all together with the magical glue of QE. We all have a front row seat if we choose to pay attention? What can we do? Fall back and punt and pay attention. An excellent post indeed although I totally agree that most if not all of the intended IMF ideas will fall greatly short of their intended purposes. Unfortunately the IMF has fucked up everythiong they have touched, not at all unlike the rest of our federal gov(the HC bill will be no different and likely cost 10X). All of which is at taxpayers expense. So how long are we going to let the malfeasant elitists run the show and destroy us? Thats what is happening, they are all criminals one way or the other. Dems/Reps just a different flavor fuckin. I promise I won't repeat that again........Today anyway!
Poor Greeks probably wish there were Keynsians at the IMF. Whatever happened to "spending your way out of debt" like they do in the good ole USA?
I always felt Sisyphus was a Greek allegory depicting what happens when "man" tries to cheat god, nature, physics and economics, but now I can add 'prophetic' to the list.
What, cause they had to drop the 13th and 14th month salaries? Paris Hilton called and said she was jealous.
So tax increases and wage cuts in the same barrel?? Gee, that should help people pay their mortgages. How many housing defaults do we see coming as a result of this ignorance?