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"Greek Crisis Is Over, Region Safe" Prodi Says, I say Liar Liar Pants on Fire!
There is an ancient Greek legend describing the education of the common
man Damocles. You see, Damocles exclaimed that, as a great man of power
and authority, Dionysius (the current ruler) was truly fortunate. Thus,
Dionysius offered to switch places with him for a day, so Damocles could
taste first hand that fortune which he savored so fervently. Later that
night during a lavish banquet Damocles indeed
did savor being waited upon like a king. Only at the end of the meal did
he look up and notice a hand sharpened sword hanging directly above his
head by a single strand of horse-hair. Damocles immediately lost all
taste for the amenities of royalty, pomp and circumstance and asked
leave of the tyrant, saying he no longer wanted to be so "fortunate"
[adapted from Wikipedia].[1][4]
Little did
Damocles realize that what he experienced was of value, significant
value. He simply failed to recognize the value as we has blinded by the
fair maidens who served him hand and foot. The moral to this BoomBustBlog
telling of the Sword of Damocles is that: "When one sits on the Throne,
the true value of the sword is not that it falls, but rather, that it
hangs." Recent history has given weight to this moral as Greece has fed
high on the hog for nearly a decade, while being totally oblivious to
the value held within that single strand of horse hair, protecting it.
Till this day, that strand, although dwindling, has yet to snap.
On that note, we have this headline from Bloomberg: Greek Crisis Is Over, Rest of
Region Safe, Prodi Says
Region Safe, Prodi Says
"The worst of Greece’s
financial crisis is over and other European nations won’t follow in its
path, said former European Commission President Romano
Prodi.“For Greece, the problem is completely over,” said Prodi, who was
also Italian prime minister, in an interview in Shanghai today. “I don’t
see any other case now in Europe. I don’t think there is any reason to
think the euro system will collapse or will suffer greatly because of
Greece.”"
Reggie says "Liar, Liar, Pants on Fire". In all seriousness, while I
don't truly at the facts as they currently exist, whether purposefully
or in error. Let's walk through a few excerpts from the most recent
addition to the Pan-European Sovereign debt crisis. BoomBustBlog
subscribers can download the full15 page analysis here, which contains
more than enought evidence to throw serious doubt on the ability of
Greece to come anywhere near their stated goals: 
Greece Public Finances
Projections
2010-03-15 11:33:27 694.35 Kb/.
makes clear why Germany is so hesitant to contribute funds to a Greek
bailout.
The Austerity Package, in a Nutshell
The revenue measures include
increasing tax rates, reducing tax evasion and some one-off measures
while the
expenditure measures consist of salary reduction, freezes in hiring and
salary
hikes as well as cutting other public sector expenditures. According to
the Stability
and Growth Program, January 2010, the government is aiming to reduce its
fiscal
deficit from 12.7% of GDP in 2009 to 8.7% in 2010. However, if the
impact of
the additional measures which was estimated at 2.5% of GDP is also
added, the
fiscal deficit is expected to come down to 6.2% of GDP in 2010, based on
government's estimates. The government further envisages additional
proceeds
from the sale of stakes in some of the government-owned entities as well
as
proceeds from payback of financial assistance provided to the Greek
banks,
which will be used to reduce the massive government debt of around 113%
of GDP
in 2009. However, there is a strong evidence to support that
the budgeted impact
of these measures is overstated, since a) The Greek government's base
case
scenario for the economy is overly optimistic when compared with analyst
expectations b) Dynamics of the announced measures shall lower the total
projected
impact.
The Greek government's
base case scenario builds in GDP growth of -0.3% and 1.5% in 2010 and
2011,
respectively, which is simply unrealistic vis-à-vis analyst
expectations. A
recent Reuters poll revealed consensus estimates for GDP growth of -1.5%
and
0.5% in 2010 and 2011, respectively. Local subject matter experts such Gikas
Hardouvelis, Chief Economist at EFG
Eurobank and professor of economics at the University of Piraeus are
expecting
a deeper recession with GDP declining 2.8% in 2010. Deeper
recession and
delayed recovery is expected primarily on the back of reduced private
and
public consumption as a result of the government's austerity measures. Economic
performance
lower
than the government's estimates will result in lower tax base
and lower tax revenues, and shall consequently offset the projected
impact of
the revenue measures like increase in tax rates. Evidence
of
this is
already apparent in the ability of Greek labor unions to shot down much
of
Greece during 24 hour strikes which effectively eliminate large swaths
of
revenue and productivity for the day. Tax collectors, customs
inspectors, the
police, doctors, teachers... The striking populace apparently
encompasses a very
broad swath. This has happened several times in the last month and
several
future strikes are planned as well.
The Greek
government's
macroeconomic assumptions also
seem overstated when compared with EU estimates.
Revenue Generation Measures? It appears more like hoping one can change
the centuries worth of behavior by the end of the year...
The Greek government
has so far announced revenue measures with budgeted impact of nearly €
10.7
billion, or 4.4% of GDP. The announced revenue measures range across an
increase
in VAT rates, excise rates, fuel tax, property tax; unique taxation
scale and
elimination of tax exemptions; and reduction in tax evasion.
However, there are very serious
concerns to be raised concerning the successful implementation of these
measures and
meeting the targets. The perception of performance of these measures (largely
consisting of an increase in tax
rates and reduction in tax evasion) in Greece is seriously
undermined (at
least in the eyes of the prudent practitioner) by the lengthy history of
high tax
evasion in the country. Over the years, the authorities have failed to
crack
down on the rampant tax evasion and there is no evidence to suggest that
this will
change, particularly amidst the current environment of declining income
levels
and higher tax rates.
1. Friedrich
Schneider,
chairman of the department of economics at the Johannes Kepler
University. - Greece's
unreported -- and untaxed -- shadow economy is one of the largest and
equals
about one-quarter of GDP. That compares with 22% of GDP in Italy (keep
in mind that this is inclusive of the evasion performed by the
famed La Cosa Nostra as
well as the lesser known Camorra, the 'Ndrangheta or the Sacra Corona Unita,
as well as foreign organized groups) and 20% in Spain and
Portugal, according to his estimates.
2. Bloomberg - Prime Minister Papandreou
says that the Greek workers and companies have skirted tax worth € 31
billion,
more than 10% of GDP. According to EU statistics, Greece's revenue from
income
tax was 4.7% of GDP in 2007, compared with an EU average of 8%. Tax
revenue
fell 2.5 percentage points of GDP between 2000 and 2007 to a Euro
region-low of
32% even as economic growth averaged 4.1% a year.
3. Analyst Ed
Sollbach,
Desjardins Securities - Tax evasion in
Greece is a huge problem. Nearly 94%
of personal income declared relates to annual incomes of less than €
30,000.
4. Matsaganis,
Hellenic
Observatory, The European Institute - Under-reporting of income in Greece is
estimated at
10%, resulting in a 26% shortfall in tax receipts.
EXPENDITURE MEASURES
Announced expenditure
measures are expected to cut the government's expenditure by nearly €
8.1
billion or 3.3% of GDP. Expenditure measures include salary cuts, freeze
in
hiring and salary hikes, as well as cuts to other public sector
expenditures.
The biggest risk
factor in the implementation of these measures is the growing social
unrest,
which is likely to put political pressure on the government to roll back
some
of the planned actions. The newly elected socialist government is facing
strong
resistance against the announced austerity measures in the form of
nation-wide
strikes, clashes by thousands of people, and growing public fury may
force the
government to cut certain targets for salary reductions, pay and hiring
freeze,
etc.
PROCEEDS FROM PRIVITIZATION
The government is planning
to procure funds by offloading stakes in some of the government owned
entities,
and plans to raise € 5.6 billion or 2.3% of GDP over the next three
years, with
€ 2.5 billion planned to be raised in 2010. In the Stability and Growth
Program, the government has outlined a list of companies in which the
government
owns equity, and gave estimates of values of the government's equity
stakes. We
back-calculated the government's estimates for total equity of the
companies
and compared the same with the current market values (market cap) of the
total
equity of the companies and observed that in most of the cases the
government's
estimates were overstated (and in some cases, drastically) when compared
with
the current market value.
It can be argued that
the Greek government is factoring in a control premium for their
majority
holdings. Theoretically this is acceptable, but realistically this will
be very
difficult to translate into cash. The government would have to find
large
buyers who are willing,to purchase the entire stake at the premium
suggested, from a seller who is in obvious and globally publicized
distress -
and the Greek government will have to do this several times over, all
within a
period of less than 8 months to meet the 2010 deadline. We find this to
be
highly unlikely. It has been our experience that distressed seller's
often take
DISCOUNTS to the market value of
their assets, not PREMIUMS!
1. Since the Greek
government is seen as a distressed seller, it will have to take a
discount from
any prudent buyer
2. If the government
sells
directly into the equity market (the most expedient and likely
scenario), the
control premium is not applicable.
3. It will take time
to
market the properties, negotiate the terms and close on the large deals
to capture
the control premium, if one is actually attainable. This is not going to
happen
for all of the properties slated for sale in 2010.
4. If the government
is
being aggressive in valuation of public properties, it is most likely to
be even
more aggressive with non-public properties, where pricing is
considerably more
opaque.
Below, you can find a sample from the Greece Public Finances
Projections
2010-03-15 11:33:27 694.35 Kb/
visually drive the point of overvaluation home. Ironically, mismarkng
the value of its assets is what contributed to Lehman Brothers downfall.
Click image to enlarge
PROCEEDS FROM PAYBACK OF FINANCIAL ASSISTANCE PROVIDED
TO THE GREEK BANKS
The Greek government is expecting payback of the
financial aid provided to the ailing Greek banks, and has built in total
proceeds
of € 3.8 billion in the coming years in its public finance projections.
However,
the Greek banks are still struggling under the current financial and
economic
crisis gripping the country with added (and quite material) pressures
coming
from the drastic austerity measures. The
deep recession expected in 2010, with only mild recovery in 2011, will
not only
see sharp declines in public and private consumption that will inhibit
credit
growth, but will also result in deterioration (rising NPAs) in the
credit
quality of their consumer and commercial loans portfolio. Thus, the
banks are
far from reaching a stage where they can generate incremental
operational cash
flows or raise equity from the market to pay back the capital injections
from
the government, or at least do so on a
prudent basis. Consequently, financial assistance is expected to stay,
with the
possibility (probability?) of some additional assistance being injected
(or at
least needed) into the banks in the coming years. Subscribers should
download
our overview of key Greek banks here: Greek
Banking Fundamental Tear Sheet.
GOVERNMENT DEBT AND INTEREST EXPENDITURE
The Greek government has accumulated significant
debt
over the years to finance its annual fiscal deficits. The government
debt has
risen from 97.1% of GDP in 2006 to 113.4% of GDP in 2009. The
implications of
this massive debt are reflected in its overwhelming interest burden
which has
precipitated its current weakened fiscal situation - all of which
culminates
into high sovereign risk. This creates a feedback loop, and
self-devouring
cycle that increases the interest costs on debt roll-over and new
issuance in
the market which again adds additional burden to the weakened Greek
fiscal
situation that requires additional funding at ever higher interest
rates. The Greek
government is trapped in a vicious circle where the interest expense as
well
the primary deficits are adding to the debt levels which itself goes on
to
increase the interest expense. While the government is aiming to reduce
its debt
in the coming years by generating primary surplus (through austerity
measures)
as well as by collecting funds from the privatization and payback of
financial
assistance package, this is expected (by us) to yield much lower
proceeds than
budgeted, in light of the observations mentioned above.
An immediate and much larger concern is an
increase in
interest cost owing to refinancing of the maturing debt as well as
raising new
debt (to finance the fiscal deficits) under distressed credit conditions
for
the government. Nearly 55% of the total debt is maturing over the next
five
years, with nearly 10% maturing in 2010. Additionally, new borrowing
will be required
to finance the fiscal deficits of the coming years.
Interest cost on government debt is on the rise
as
reflected by the yield on Greek government 10yr bonds, which has risen
to 6.2%
in March, 2010 from 5.7%, a year ago.
Given the higher borrowing cost for the Greek
government
and the large debt roll-over and new issuance lined up, the average
interest
cost is expected to increase or remain the same rather than decline.
However, while making projections for 2010 and later
years, the Greek government is assuming a decline in the average
interest rate
on the government debt, which would underestimate the interest
expense
projected in the coming years.
GREEK PUBLIC FINANCES PROJECTIONS
While the government outlined complete
projections of
revenues and expenditure along with a change in government debt in its
Stability
and Growth Program, January 2010, it subsequently announced additional
measures
with impact of nearly € 1.2 billion or 0.5% of GDP and € 4.8 billion or
2% of
GDP in February and March, respectively. We have built in the announced
impact
of additional measures in the government projections, and based on new
projections, the government is expecting a primary deficit of 1.0% and
fiscal
deficit of 6.2% in 2010, against primary deficit of 7.7% and fiscal
deficit of
12.7% in 2009.
However, in light of the observations discussed
in the
earlier sections, there is a strong possibility of deviation from the
targeted
performance. We have therefore built three scenarios, each with a set of
assumptions about the variation from the budgeted impact of the various
revenue
and expenditure measures as well as variation in the budgeted proceeds
from
privatization and payback of financial assistance by Greek banks.
Over the next week or two I will comment on several other European
nations whom I feel have very little practical chance of accomplishing
what they have stated in public and the likely consequnces of their
failure to accomplish such. I will also be releasing my pan-European
stress model to subscribers, along with a public excerpt by the end of
the week. In the meantime, anybody who has not caught up on my
Pan-European Sovereign Debt Crisis series should click the links below.
Earlier installments of the Reggie Middleton's Pan-European Sovereign
Debt Crisis
- The
Coming Pan-European Sovereign Debt Crisis
- introduces the
crisis
and identified it as a pan-European problem, not a localized one. - What
Country is Next in the Coming Pan-European Sovereign Debt Crisis?
-
illustrates the potential for the domino effect - The
Pan-European Sovereign Debt Crisis: If I Were to Short Any Country,
- attempts to illustrate the highly
What Country Would That Be..
interdependent weaknesses in Europe's sovereign nations can effect
even
the perceived "stronger" nations. - The
Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to
Western
European Countries -
Depression is Already Here for Some Members of Europe, and It Just
Might Be Contagious! -
Beginning of the Endgame is Coming???
-
I
Think It's Confirmed, Greece Will Be the First Domino to Fall
-
Smoking
Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
Beware! - Financial
Contagion vs. Economic Contagion: Does the Market Underestimate the
Effects of the Latter?
- advertisements -
Wonder if Turkey is reconsidering wanting to be part of the EU.
REPO 105.13 Credit Enlargers: http://williambanzai7.blogspot.com/2010/03/repo-10513-credit-enlargement...
Iceland with a tan
but no tan lines
same theme over at investors insight.com.@ 9:06 a.m. could you be cribbin' Reggie?...or is this just a manifestation of the synchronous nature of the collective unconscious? at any rate, I am well edified by the poetic and historical allusion. Dionysius II of Syracuse was along with so many other tyrants of whom he is emblematic, "incompetent in governing men" and known for his "lavishly dissolute lifestyle", both of which issues have timely relevance. Your usual thorough analysis leaves little room for doubt as to the future of Greece and Cali /USA as well. Though not one to split hairs, I would suggest the precariously suspended sword has already departed from its tenuous moorings and is plummeting to its appointed target. Though Germany will hesitate to deflect its path, the IMF might be the ultimate backstop. The structural adjustments and "austerity measures" being inflicted on the Greek populace and productive of the patented Stiglitz "IMF riot" are already the handwriting on the wall bearing the oft repeated and indelible signature of that plenipotentiary agency.
Peter Boone and Simon Johnson noted the other day that 80% of Greek debt is owed to foreigners and to service it might require sending as much as 12% of current GDP out of country if interest rates are not reduced. They note that Germany under the Versailles Treaty only paid out about 2.5% of GDP as reparations for WW1! Clearly Greece cannot afford to payout anything like and not have an economic and or political collapse.
Wow... that turned out to be so easy to fix.. Everyone deserves a pat on the back / job well done.
Gotta hand it to them though, they've played the bazooka ploy much better than paulson did.
All I know is come this summer, people are going to need a vacation from all this gloom & doom. Looking forward to seeing the hotties in Mykonos (hopefully the euro goes much lower):
Oh la la Leo...You have Mykonos...I'll have London for 3 weeks. Hopefully the lager louts will be in Ibiza.
Truth shall be told when the Greek Doormen's Association goes on strike. Then, Poof! That's the way the soulvaki crumbles. No more cash tips for you, Gastone.