ANALYSIS:Lack of trust in Greek fiscal data has drawn Europe into a dangerous game of brinkmanship, writes PAT McARDLE
IN ATHENS, they refer to it as a Greek tragedy but it could turn into a horror story. Suspicions about Greek accounting practices were highlighted last October when the new Greek government transmitted revised budget data to Eurostat, the EU’s statistical office.
The 2008 deficit was revised from 5 per cent to 7.7 per cent of GDP and the planned ratio for 2009 upped from 3.7 per cent (the figure reported in April 2009) to 12.5 per cent. The Greeks appeared nonplussed by the furore this caused; after all, they had made several revisions over the years with little consequence.
The problems with Greek fiscal data are deeply ingrained and multifaceted. In broad terms, they involve incompetence, lack of transparency, lack of accountability and political interference. Various action plans to address these issues were drawn up but never implemented. In January the European Commission noted devastatingly that even full compliance by the Greek authorities with the latest plan “would not have prevented the deliberate misreporting of figures by the Greek authorities in 2009”.
Institutional responsibility is spread widely involving Greece’s National Statistical Service, its ministry of finance and the Bank of Greece. Disturbingly, the latter is responsible for the overall correctness of the data.
Against this background, the scepticism of the markets is understandable. After considerable toing and froing, the Greek authorities proposed a revised stability programme in mid-January. This involved a four-percentage-point reduction in the 2010 deficit, split roughly equally between higher tax revenue and lower spending. Following pressure from Europe, this was supplemented on February 2nd by further measures: a public sector wage freeze, an increase in the retirement age, measures to reduce widespread early retirement and a fuel tax. The commission approved the plans the next day but formal acceptance was deferred to the Ecofin ministers’ meeting this week.
The ministers, and the heads of state who met last week, adopted a much tougher stance, refusing to give the nod until there is clearer evidence that the Greeks are serious but at the same time seeking to limit the downside as far as the markets are concerned by emphasising that Greece would not be allowed go under, despite the no-bailout clause in the Lisbon Treaty.
There are at least two problems with the Greek stability plan. First, the economic assumptions on which it is based are widely regarded as too optimistic; therefore, the measures proposed to lower the 2010 budget deficit from 12.7 to 8.7 per cent may not be sufficient. Even the downside scenario may not be sufficient as it envisages a peak-to-trough fall in GDP of only 1.5 per cent, about a tenth of the Irish contraction.
Second, a four-point move in one year is an enormous task – our recent budget, for example, lowered the deficit by less than two percentage points, though the reduction in 2009 was greater. The Greeks are, moreover, faced with a similar challenge next year, penance for the sins of the past.
The announcement early this month that the commission regarded the stability programme targets as stretching but achievable took the focus off Greece, leading to an improvement in borrowing costs as reflected in the spread over German 10-year bonds. Instead, the attention shifted to Portugal and Spain which were seen as the next weakest in the contagion stakes.
Then came the leaks from the German finance ministry that measures to bail out Greece were being considered. It is not clear whether this was deliberate or accidental, and the Germans seemed immediately to row back, but the impact was to up the pressure on all concerned.
Consequently, expectations of a detailed announcement of support measures from last week’s summit were high. Instead, all we got was a statement of intent and a promise of more to come from this week’s Ecofin.
ECB president Jean-Claude Trichet sought to paper over the cracks, saying that when Nicolas Sarkozy, Angela Merkel, Silvio Berlusconi and Spain’s José Luis Zapatero, in his capacity as president of the European Union, sign the same document, “it’s serious”.
The Ecofin emphasised three things:
- the Greeks need to solve their own problems;
- if the euro group is unconvinced of progress by March 16th, it will ask the Greeks to do more;
- euro zone member states will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro zone as a whole.
The bottom line seems to be that financial support by the euro group would be triggered if Greece fails to change the “course of the Titanic” and/or financial markets bar Greece from raising funds despite its implementation of the fiscal programme.
In essence Europe is trying to emulate the Irish experience, albeit in much more difficult circumstances. Then, general expressions of support, supplemented by strong domestic action, were sufficient to quell the tide of speculation.
The euro group is less trusting and more suspicious of Greece. Therefore, it wants to see not just plans but action. While it is prepared to take action if necessary, this is very much a last resort.
In fact, a successful outcome for the euro group would be Greek action on a scale that made outside assistance unnecessary – as was the case with Ireland.
This is a dangerous game of brinkmanship that is unlikely to satisfy the markets. Until now, Greek bonds have broadly held on to their recent gains but the euro has been weakish. It has fallen by 10 per cent against the dollar and 8 per cent on sterling since October.
The uncertainty will continue for another month at least. Markets hate uncertainty, so the euro is likely to remain weak. The only thing in its favour is the fact that bets against it are at all-time highs so any change in sentiment could trigger a reversal.
Meanwhile, Irish exporters to the UK have an unexpected bonus in the form of a weaker euro.
Pat McArdle is an economic commentator and a former economic adviser to Ulster Bank