The Greek government's 2011 budget significantly underperformed projections, with a 23% larger borrowing requirement than planned. Revenues were lower than expected and interest payments increased substantially compared to 2010. Greece remains insolvent with a large debt burden and high budget deficit, and discussions are ongoing around private creditors forgiving 70% of Greek debt. However, this would only address Greece's stock of debt and not underlying issues like weak competitiveness and economic growth, which are needed to truly solve the crisis. The bailout funds available may not be sufficient, and Greece will require deep austerity measures that could lead to major social unrest.

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Greece 2011 Budget execution and the (bleak) future
A year ago, European politicians were hailing the progress made by Greece stating that the nadir
of the crisis was behind and difficulties ahead would be dealt with forcefully. As my readers may
recollect, I did warn that the plan will fail and the Greek situation would worsen, the country
being bankrupt.
Let’s see what happened in 2011 in the Greek Budget:
Note that the last column was the planned 2011 budget as of December 2010, whilst the column
(5) contains the budget post-revisions.
A few remarks:
• Compared to the original plan, the budget implementation failed miserably with
a EUR 5.5 bn wider borrowing requirement, i.e. a staggering +23%.
• A much larger gap would have been registered (EUR -3.3 bn) without deep
cuts in military spending (EUR -1.3 bn.) and the Public Investment Program
(EUR -2 bn) during the course of the year compared to the initial budget.
• Revenues were lower than in 2010 and EUR 5.5 bn less than in the initial budget, EUR
6.7 bn if it was not for a new line of revenues that “miraculously” appeared
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in November and December, registering EUR 1bn (“special revenues from licensing
public rights”). Primary expenditures were contained but did not decrease enough to
compensate.
• Interest payments were marginally higher than in the initial budget, but EUR
3 bn more compared to 2010.
As I forecasted early 2011 (and also in 2010) the situation has worsened, not improved. Greece
is insolvent with a 155% debt/GDP, a 10% budget deficit/GDP (there are rumors that it would
finally be closer to the 9.1-9.4% mark thanks to an emergency property tax representing a good
EUR 1 bn –looks like a desperate trick to “improve” the picture of a desperate situation) and
EUR 350 bn debt (not talking about high unemployment, dismay current accounts and trade
balances, insolvent banking system, deposits going abroad, weak productivity, antiquated social
welfare state, continued weak tax collection – whilst improving -, etc.).
As of this Saturday morning, discussions with the financial sector are ongoing regarding the
level of write-downs, or more exactly the strength of guarantees on the new bonds to be
swapped with the existing ones.
The schedule of T-bills maturing during the next 5 months is:
26wk 09-Aug-11 10-Feb-12 1,000
13wk 15-Nov-11 17-Feb-12 1,600
26wk 06-Sep-11 09-Mar-12 1,455
13wk 20-Dec-11 23-Mar-12 1,600
26wk 11-Oct-11 17-Apr-12 1,600
13wk 20-Jan-12 20-Apr-12 2,000
26wk 08-Nov-11 11-May-12 1,600
26wk 13-Dec-11 11-Jun-12 2,000
26wk 13-Jan-12 13-Jul-12 2,000
In March, add two 5 years bonds due for redemption:
5 yr 07-Feb-09 20-Mar-12 7,000
05-May-09 20-Mar-12 7,433
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Therefore, Greece will need to auction T-Bills next week and the following one to refinance
maturing ones (which should go fine if nothing dramatic occurs with the discussions between
banks and Greece on existing debt) and find EUR 16.5 bn in March, i.e. EU and IMF money.
To regain solvency, the discussions are centered around how much the financial sector would
forgo, and the latest discussions are 70% of their current debt holdings, beyond EU/IMF rescue
packages and drastic austerity measures. Would this be sufficient? No: Europe is at best growing
flat, debts continue to go north and trade imbalances between countries are not reduced, and
these imbalances are one of the reasons of the current crisis, themselves a result of the widening
competitiveness gap between countries, with no currency adjustment possible within the euro.
This crisis cannot be solved by only reducing the stock of debt but also by improving cash flows,
i.e. growth. Whether the financial sector forgoes 70% of its Greek debt pile (estimated at EUR
200 bn with the majority of it held by Greek banks and, in my view, a substantial chunk of the
balance with the ECB), this is just kicking the can down the road as it has been done for the past
2 years (well, really for the past 10 years). Let’s see the simple equation below:
GDP = private sector consumption + public sector consumption + (exports –
imports). This is a very important equation largely overlooked by commentators.
For Greece all of theses items are negative yoy, according to the latest official statistics, and in
many countries at least two items are negative: in the current economic environment there is no
way that Greece (and others) can get out the over-indebtedness black hole. Greece and Club
Med countries (France included) need to improve competitiveness to gain/regain a positive
trade balance.
Growth based on retail demand in southern Europe was unsustainable with negative trade
balances, and the potion to remedy to this situation will be very bitter indeed: a sharp fall in
the standard of living. This is compound by the fact that within a state welfare, redistribution
represents a substantial chunk of revenues for individuals, which these countries will drastically
reduce to get their finance in order. To regain competitiveness, salaries/social transfers are to
decrease by 15-35% - depending on countries - multiplied by the productivity differential with
the main exporting countries. The euro is indeed a kind of gold standard where
individual countries can no longer devalue their currency to adjust their lack of
competitiveness and boost exports.
None of the European political sphere is addressing what is at the core of a flawed eurozone
construction.
The table below provides the effort required to get Greece’s finances back under control: this is
unsustainable since I do not believe official figures of a EUR 50 bn privatization plan, and will
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lead to social unrest to a scale not seen so far, the more so that the OCDE announced that the
situation is worse in the tune of EUR 15 bn and the EFSF/ESM is not large enough:
“The current EFSF/ESM resources of € 500bn are not enough. Furthermore, the EFSF/ESM has not
found it easy to raise funds at low yields even with guarantees.”…
Source:
Hellenic Republic - Ministry of Finance: various publications
http://www.minfin.gr/portal/en
The Telegraph: Eurozone bail-out funds not enough, warns OECD
http://www.telegraph.co.uk/finance/financialcrisis/9057597/Eurozone-bail-out-funds-not-
enough-warns-OECD.html
OECD: Solving the Financial and Sovereign Debt Crisis in Europe
w.oecd.org/dataoecd/14/25/49481502.pdf
Markets & Beyond: European rescue package: truth and fallacy
http://marketsandbeyond.blogspot.com/2011/11/v-behaviorurldefaultvmlo.html
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