Tuesday, 1 March 2011

What's next...?

The EU/IMF block is applying pressure to the Greek government for further and admittedly, sizable reductions in state wages and pensions. Furthermore, at the same time, we are constantly being brainstormed by various sources that the state payment plans underwent a huge slashing. But is this true?

source: Hellenic Ministry of Finance

The overall funds channeled at wages and pension payments were indeed cut, as you can see from the chart above. But, the imposed cuts were not that huge. Maybe, they were not optimally distributed between low-income and high-income workers and pensioners, but I am no expert to judge that. I cannot go into that much detail here, since I lack relevant data. But if we want to stand a chance at achieving at least a primary surplus, then more (and unfortunately much larger) cuts are needed.

When the projected reduction in overall payments for wages and pensions was just 2,06% (if we take figures published into the 2011 state budget) in 2011, maybe we get a whiff of the reason that the “Troika” is asking for more cuts.

I have to say that the way that the state budget is calculated underwent a radical change and comparisons between figures before and after the adjustment are difficult (at least for me). End of the parenthesis.

source: Hellenic Ministry of Finance

Some figures though remain easy to compare. An important ratio for sovereign budgets is interest paid / revenues. The rise of the said ratio above some (not so certain) threshold makes the servicing of the sovereign debt impossible. For Greece that particular ratio is already pretty elevated but the said threshold would have been surpassed long ago (I think that it already has been surpassed), if Greece wasn't able to borrow on unreasonably narrow spreads over Germany (Bunds are considered to be the benchmark bonds for Europe) for the whole past decade, due to the excess liquidity floating around back then (I am not buying the convergence argument). 

source: Hellenic Ministry of Finance

Another ratio closely watched should be wages and pensions payments / revenues. This should be considered important since it displays the government's ability to continue paying wages and pensions if it goes bankrupt, something that can help avert various unfortunate situations.

source:Hellenic Ministry of Finance

As we can see, the already undertaken wage-slashing has helped improve the ratio, but is this sustainable? Well, no, since this isn't the whole story. A large part of the adjustment is due to the excess taxing of both the household and the corporate sector, I suspect that the "Troika" would lke the adjustment to stem from reductions in public spending.

On the other hand, it is obvious that the Troika’s representatives display a severe lack of political skills and understanding of the Greek culture and the Greek people psyche, something that makes things more difficult.

It is obvious that right now, there are no esy solutions for Greece. Headroom for more adjustment through taxation has run out, as I had indicated in an older post. The only way forward, should the government want to go on with the fiscal adjustment is to make spending cuts, which means either more wage cuts or lay-offs or most likely both.

Certain international factors complicate things even further:

The fact that there are disruptions in oil supplies from riots (or civil war if you prefer) in Libya and the coming inflationary pressures, that will go some way into deepening the Greek depression, could make EU/IMF officers a bit more flexible and understanding. Now, shouldn’t it?

Also, the fact that contagion from Arabic countries could spread to Greece, which surely has a pretty colorful past, as far as civil unrest is concerned. Of course, there was nothing like what is going in the Arabic countries presently, but then the current situation in Greece has nothing to do with we had the last 30+ years.

Last but not least, Mrs. Merkel's party defeat at Hamburg's local elections makes things even harder and the chances of Greece piggybacking on Ireland to achieve more favorable terms in the IMF / EU loan package, are pretty slim, since the EU / IMF block know that they would be setting a precedent.

Things can get pretty messy and some really delicate political and economic balancing is needed, something that the Europeans have not displayed a talent for since the start of the sovereign debt crisis…

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