Budget cuts give Greece a break
March 7, 2010
For George Papandreou, the Greek prime minister, last week brought the first real signs of relief in a crisis that has dominated his short time in office. His €4.8 billion (£4.3 billion) austerity package, announced on Wednesday, was favourably received in the markets.
A €5 billion, 10-year bond issue on Thursday was three times oversubscribed, lending support to the view that, while the markets are determined to extract higher interest rates for taking on Greek official debt, the danger of default is not seen as so high as to make them avoid it at all costs.
Some 400 institutions bid a total of €16 billion for the €5 billion of bonds in an offering jointly led by Barclays Capital. Nearly 80% of the bonds were bought by non-Greek investors.
Papandreou, who held talks on Friday with Angela Merkel, the German chancellor, could also take comfort from other straws in the wind. Even Nana Mouskouri, the Greek singer with more than 300m album sales to her name, announced that she would make a sacrifice. The 75-year-old singer, who did a stint as a member of the European parliament, will contribute her €25,000-a-year Brussels pension towards helping her country out of its deep fiscal mess.
Perhaps more significantly, Jean-Claude Trichet, president of the European Central Bank (ECB), offered support. “I think it is very important that the Greek government has taken these courageous decisions. They were absolutely necessary,” he said.
The Greek prime minister is clear about his aim. “We do not want to be the Lehman Brothers of the EU,” Papandreou said in an interview with Frankfurter Allgemeine Zeitung. After his talks with Merkel, he insisted Greece had not asked its EU partners for money.
“The austerity measures show our credibility and determination,” he said. “They are tangible proof of credibility and they are what the international community was waiting to see.”
Merkel, for her part, said: “Greece has not asked for financial aid. The eurozone is stable at the moment. And therefore this question does not present itself.”
Less welcome for Papandreou was the latest outbreak of industrial unrest in response to his austerity measures. Police fired teargas and clashed with stone-throwing youths in front of the Athens parliament on Friday as politicians passed the emergency bill into law.
Much of the country’s public transport network was brought to a halt by a 24-hour strike. Teachers and local government employees also joined in. A general strike has been called for March 11 over cuts that Greece’s biggest public-sector unions have described as “anti-popular and barbaric”.
Public opposition is strong. The austerity measures include big cuts in so-called “extra months” for public-sector workers, who get paid 14 months’ salary a year, with the two extra coming from guaranteed bonuses at Christmas, Easter and in the summer.
Other proposals included a freeze on all pensions, a two percentage point rise in Vat to 21%, a 20% increase in alcohol and tobacco taxes, an 8-cent a litre increase in the price of petrol, a 45% rate of income tax on incomes above €100,000, a 1% levy on incomes backdated to last year and additional taxes on luxuries, including prestige cars, yachts, furs and expensive jewellery.
Even less welcome, as Papandreou visited Berlin, was a suggestion by two German parliamentarians, Josef Schlarmann and Frank Schaeffler, that Greece should sell some of its assets, including its islands, to cut its debt. Schlarmann is a senior member of Merkel’s Christian Democrats, while Schaeffler represents the Free Democrats, part of the Centre-Right coalition.
Nobody expects Greece to start selling off islands or other assets, though the intervention reaffirmed German reluctance to bail out the eurozone’s weakest member, other than under the strictest of conditions.
“Papandreou has said he doesn’t want one cent from Germany and we don’t want to give one cent either,” said Rainer Bruederle, Germany’s economics minister, on Friday. At the same time, the ECB and Europe’s finance ministers have said an International Monetary Fund rescue is not necessary, and that Greece’s problems will be resolved within the eurozone.
For the moment, however, Papandreou’s latest fiscal package, which finance minister George Papaconstantinou said would be enough if properly implemented, has bought much-needed time.
“There is no doubt that things have improved from where they were,” said Gavan Nolan at Markit, which provides independent data on credit derivative pricing. “But there’s still a lot of uncertainty about whether the implicit support Greece has received will be enough given the degree of refinancing needed over the next few months.”
One measure of market assessments of Greece’s ability to finance its debt is the spread on credit default swaps (CDS), the cost of insuring Greek debt against default. On Friday the CDS spread against German debt was 310 basis points, 3.1%, well below the peak of 425 hit at the height of the crisis on February 4. However, a measure of the strains still affecting Greece is the fact that as recently as early December, the CDS spread was less than 190.
For comparison, Portugal and Ireland currently have CDS spreads of 124, Spain 103, Italy 101 and Britain 77. Importantly, analysts think that, despite last week’s measures, Greece is not out of the woods.
“The Greek austerity package ticks all the boxes in terms of size and composition,” said Giada Giani, an economist with Citigroup. “It leaves a total planned fiscal effort for this year of about 6.5% of GDP — roughly similar to Ireland. While this may make the deficit target of 8.7% of GDP for 2010 achievable, it is not going to provide the short-term cash for the upcoming debt redemptions. Some form of help from the rest of Europe may still be required.”
While Greece has done enough to show the markets and other EU countries that it is prepared to bite the bullet, the country’s long-standing structural problems remain. After this week’s announcement, which takes Greece’s Vat rate towards the highest in the EU and perhaps close to the maximum squeeze that can be inflicted on public-sector employees, further tough measures will be harder to find.
“With the still-huge bulk of public debt and the recent shortening of its average maturity, Greece will continue to face strong refinancing needs over the next three to four years,” said Giani. “It may well be that Greece has just managed to deliver the first bit of its consolidating process this year but worse is yet to come in terms of more difficult — politically and economically — structural reforms as the only way to avoid sovereign default.”
For George Papandreou, the Greek prime minister, last week brought the first real signs of relief in a crisis that has dominated his short time in office. His €4.8 billion (£4.3 billion) austerity package, announced on Wednesday, was favourably received in the markets.
A €5 billion, 10-year bond issue on Thursday was three times oversubscribed, lending support to the view that, while the markets are determined to extract higher interest rates for taking on Greek official debt, the danger of default is not seen as so high as to make them avoid it at all costs.
Some 400 institutions bid a total of €16 billion for the €5 billion of bonds in an offering jointly led by Barclays Capital. Nearly 80% of the bonds were bought by non-Greek investors.
Papandreou, who held talks on Friday with Angela Merkel, the German chancellor, could also take comfort from other straws in the wind. Even Nana Mouskouri, the Greek singer with more than 300m album sales to her name, announced that she would make a sacrifice. The 75-year-old singer, who did a stint as a member of the European parliament, will contribute her €25,000-a-year Brussels pension towards helping her country out of its deep fiscal mess.
Perhaps more significantly, Jean-Claude Trichet, president of the European Central Bank (ECB), offered support. “I think it is very important that the Greek government has taken these courageous decisions. They were absolutely necessary,” he said.
The Greek prime minister is clear about his aim. “We do not want to be the Lehman Brothers of the EU,” Papandreou said in an interview with Frankfurter Allgemeine Zeitung. After his talks with Merkel, he insisted Greece had not asked its EU partners for money.
“The austerity measures show our credibility and determination,” he said. “They are tangible proof of credibility and they are what the international community was waiting to see.”
Merkel, for her part, said: “Greece has not asked for financial aid. The eurozone is stable at the moment. And therefore this question does not present itself.”
Less welcome for Papandreou was the latest outbreak of industrial unrest in response to his austerity measures. Police fired teargas and clashed with stone-throwing youths in front of the Athens parliament on Friday as politicians passed the emergency bill into law.
Much of the country’s public transport network was brought to a halt by a 24-hour strike. Teachers and local government employees also joined in. A general strike has been called for March 11 over cuts that Greece’s biggest public-sector unions have described as “anti-popular and barbaric”.
Public opposition is strong. The austerity measures include big cuts in so-called “extra months” for public-sector workers, who get paid 14 months’ salary a year, with the two extra coming from guaranteed bonuses at Christmas, Easter and in the summer.
Other proposals included a freeze on all pensions, a two percentage point rise in Vat to 21%, a 20% increase in alcohol and tobacco taxes, an 8-cent a litre increase in the price of petrol, a 45% rate of income tax on incomes above €100,000, a 1% levy on incomes backdated to last year and additional taxes on luxuries, including prestige cars, yachts, furs and expensive jewellery.
Even less welcome, as Papandreou visited Berlin, was a suggestion by two German parliamentarians, Josef Schlarmann and Frank Schaeffler, that Greece should sell some of its assets, including its islands, to cut its debt. Schlarmann is a senior member of Merkel’s Christian Democrats, while Schaeffler represents the Free Democrats, part of the Centre-Right coalition.
Nobody expects Greece to start selling off islands or other assets, though the intervention reaffirmed German reluctance to bail out the eurozone’s weakest member, other than under the strictest of conditions.
“Papandreou has said he doesn’t want one cent from Germany and we don’t want to give one cent either,” said Rainer Bruederle, Germany’s economics minister, on Friday. At the same time, the ECB and Europe’s finance ministers have said an International Monetary Fund rescue is not necessary, and that Greece’s problems will be resolved within the eurozone.
For the moment, however, Papandreou’s latest fiscal package, which finance minister George Papaconstantinou said would be enough if properly implemented, has bought much-needed time.
“There is no doubt that things have improved from where they were,” said Gavan Nolan at Markit, which provides independent data on credit derivative pricing. “But there’s still a lot of uncertainty about whether the implicit support Greece has received will be enough given the degree of refinancing needed over the next few months.”
One measure of market assessments of Greece’s ability to finance its debt is the spread on credit default swaps (CDS), the cost of insuring Greek debt against default. On Friday the CDS spread against German debt was 310 basis points, 3.1%, well below the peak of 425 hit at the height of the crisis on February 4. However, a measure of the strains still affecting Greece is the fact that as recently as early December, the CDS spread was less than 190.
For comparison, Portugal and Ireland currently have CDS spreads of 124, Spain 103, Italy 101 and Britain 77. Importantly, analysts think that, despite last week’s measures, Greece is not out of the woods.
“The Greek austerity package ticks all the boxes in terms of size and composition,” said Giada Giani, an economist with Citigroup. “It leaves a total planned fiscal effort for this year of about 6.5% of GDP — roughly similar to Ireland. While this may make the deficit target of 8.7% of GDP for 2010 achievable, it is not going to provide the short-term cash for the upcoming debt redemptions. Some form of help from the rest of Europe may still be required.”
While Greece has done enough to show the markets and other EU countries that it is prepared to bite the bullet, the country’s long-standing structural problems remain. After this week’s announcement, which takes Greece’s Vat rate towards the highest in the EU and perhaps close to the maximum squeeze that can be inflicted on public-sector employees, further tough measures will be harder to find.
“With the still-huge bulk of public debt and the recent shortening of its average maturity, Greece will continue to face strong refinancing needs over the next three to four years,” said Giani. “It may well be that Greece has just managed to deliver the first bit of its consolidating process this year but worse is yet to come in terms of more difficult — politically and economically — structural reforms as the only way to avoid sovereign default.”
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