The Math Behind The Greek Myth

Submitted by Alexander Gloy of Lighthouse Investment Management

The Greek (Ministry) Mystery of Finance

  • The Greek January – September budget deficit was EUR 19.16bn versus 16.65bn same period last year (+15%). This only includes the central government.
  • The initial deficit target for 2011 was EUR 17bn. We blew past that after only 8 months. The revised target (July) is now 22bn (9.5% of GDP).
  • Latest estimate from the Greek government: 8.5% deficit (19.5bn) for 2011 (instead of 7.6% or 17bn).
  • Here’s a chart of the budget deficit (cumulative):

  • You can see that 2011 pans out to be worse than 2010 (dashed line).
  • Revenues are negatively impacted by the severe recession. Okay, but what about expenses?

  • While 2011 revenues are trending below 2010, expenses are trending higher.
  • Despite all the austerity measures, Greece is still spending 150% of its revenues:

  • Of course, the Ministry of Finance sees a reduction of the deficit to a miniscule 2.6% of GDP by 2014 as revenues rise and expenses come down:

  • How is that possible? Somehow, after spending four consecutive years in recession (2009-2012), the economy will rise like a phoenix and grow by 5.8% in 2014.
  • I leave it up to you to decide if this is credible.
  • One more thing: interest expenses were 14bn after 9 months = 18.7bn annualized.
  • As of June 30, Greek government debt stood at EUR 353.7bn.
  • You do the math – Greece is paying an average interest rate on its debt of 5.28% (less than Italian 10-year bond yield).
  • If Greece were to pay market rates (let’s be generous and take 10-year yields of 24%), it would spend EUR 84bn on interest.
  • This would exceed government revenues.