RUNNING OUT OF MONEY - NOT AS SIMPLE AS IT LOOKS

When will the Greek government run out of money? It's hard to know how to begin answering the question, but this has not stopped anyone from trying to guess over the last two months.

First, Bloomberg ran with February 25th; then Reuters ran with April the 9th; then Reuters ran with the 20th of April and Bloomberg ran with April 24th. The Beeb have their sights on the 12th of May, when the IMF needs to be repaid. Bruegel did the math on our financial assets here and found that Greece could stay afloat till the summer. The WSJ narrowed this down to July 20th, when a large amount of ECB debt becomes due, on the back of a major round of T-bill repayments. The Guardian seems to agree.

This speculation is sometimes driven by statements by Greek officials (typically unsourced and subsequently denied), but mostly by analysts poring over our schedule of repayments to the EU, the ECB and the IMF and trying to work out whether we'll have scraped enough money together from our tiny surpluses, predicted to come in at EUR200m-300m per month in the second half of the year, and T-bill auctions (which our own banks can no longer be forced to absorb due to the ECB) to pay these off. The speculation suits both sides, and is part of their negotiation tactics; since neither side wants Greece to default, underlining just how close the country is to default is important for both. There are reports of cautiousness and fatigue around such estimates, but they just keep coming.

You can compare and contrast the main repayment timelines here, here and here. You can also see the Economist's very recent and complete estimates of pending payments below, and contrast them with Greece's recent record of monthly surpluses. The reason why March, April and May were such popular targets for default theorists is partly that a very substantial amount of debt came due in March and partly that the three months are persistently cash negative for the Greek government, and there's three of  them in a row. Even Greece's original bailout request came in April 2010. But the barrage of large repayments in the summer is even more compelling.

If you ask me, this method of comparing payments due with monthly surpluses is a little misguided. It works well for people used to commenting on highly leveraged organisations such as major banks. Instead, Greece is far more likely to run out of  money the way a medium-sized business would - in denial, tapping suppliers for credit, leaving staff unpaid and dodging debt collectors. This kind of default is messy - suppliers will down tools and refuse to provide further goods and services; staff will do likewise, e.g. through industrial action; and creditors will use their influence to cause difficulty and embarrassment. As a rule, messy defaults tend to amplify the original cash shortfall, as planned revenues remain unrealised or uncollected and expensive patches are needed to deal with interruptions in vital services.

The first sign of a messy default was the Greek Government's preparations to seize the surpluses and/or reserves of General Government entities. You can see these cash positions (currently up to Q3 2014, which isn't helpful) here, or check out the Bruegel article cited earlier. The Greek Government is already working in this direction, e.g. passing a law allowing it to force pension funds to buy T-bills, and mulling raids on the cash reserves of state enterprises. and other entities. But it's not just suppliers that can be tapped for credit - it's workers, too.

What might surprise outsiders is that Greece had a tradition of leaving general government contractors unpaid for a long time even in the good days - especially when their programmes had complex funding structures. But pockets of unpaid labour have started to spring up in recent months, including hospital doctors, auxiliary doctors, and general practitioners tied to the health service, local authority tourism staff, social workers, local authority staff on disability inclusion programmes, psychologists working for immigrant detention facilities, archaeologists, or exam invigilators.  Most, though not all, of these have been unpaid since before Syriza came to power.

This is horrible news for the people involved, but good news for the Greek Finmin: it is much harder for him (us!) to run out of money than people expect. Once a sovereign enters this cynical looking-glass world, and learns to view their own staff and suppliers as a source of finance, all expenses become opportunities to raise cheap funding - by paying late.

Here are the payroll and procurement expenditures of the Greek government from early 2006 to Q3 2014. I use intermediate consumption as a close proxy for procurement, for which figures are not released with this frequency. The sum comes up to a cosy EUR7.3bn per quarter.

How much of this are we already tapping? In our quarterly financial accounts, you can find both the stocks and flows on a quarterly basis under 'other accounts payable' (see here for the figures*, and here for definitions). The figures show that, for the first time since at least 2006, the Greek state was net paying off creditors throughout 2014, to the tune of around EUR1bn per quarter - a shift in policy that was equivalent, in cash terms, to a small fiscal stimulus.

Unfortunately, we don't have recent figures beyond Q3 2014, but at least we can establish the orders of magnitude involved. The Greek state has never been able, post-crisis, to get away with borrowing more than a tenth of its procurement and payroll expenditure from staff and trade creditors. If it were to go back to this level now, it could count on about EUR1.8bn per quarter, albeit only for a very short period of time. It was only able to squeeze that much out of creditors back when its was creditworthy after all. Additionally, government agencies are now bound by the Late Payment Directive, which limits the terms of credit they can demand to 30 days (60 for hospitals).  A more realistic target would be to simply get back to being cash neutral, which is still a stretch and would yield closer to EUR1.1bn. That would be enough to cover our summertime debt payments, and see us through to the traditionally cash-positive second half of the year.



But here's the deal. If Greece is to use this tactic to pay off the debt coming due in June and July, it needs to start delaying payments right now - and Syriza's populist government cannot afford a buildup of many months' worth of selective defaults on its own people. Generally speaking, this kind of internal borrowing is hair-raisingly risky, and cannot be sustained for long without risking total collapse.

So the bottom line is, behind the scenes the Greek government should be drawing up a list of the people it can afford to piss off for a couple of months, and who can afford to wait. If it manages to draw on suppliers and state employees for the credit to see it through July, and if it manages to control spending thereafter despite its pre-election promises, it just might scrape by the rest of the year, after which our repayments schedule becomes quite uneventful (see below, from here). It could work, but it's fraught with threats to the economy and to social cohesion.

*I notice that, bizarrely, the stock and flow numbers don't reconcile after Q2 2014 - i.e., there are changes to the stock of trade creditors that cannot be accounted by transactions, i.e. by the state paying off its debts to suppliers. I have no idea what this means but it looks odd.

THIS! IS! NOT! ARGENTINA! (UPDATE)

The other day, I got an email from Dan Beeton, the International Comms Co-ordinator at the CEPR. As veteran readers will recall, Dan and I have occasionally worked together on debunking the Weisbrot hoax. Dan is a colleague of Mark Weisbrot, so he has an interest in this.

Dan shared with me the latest CEPR paper which draws some compelling comparisons between Greece and Argentina and uses these to make the case against further austerity and in favour of Greece defaulting and leaving the Euro. I’ve promised to help disseminate this paper both on Twitter and on this blog. Not because I agree with it, but because I believe that since a Greek default is desired by a great deal of the population and ultimately inevitable, it is important for its advocates of default to become more rigorous in their argument.  

For the record, as you will know, I’m all for defaulting once we’re running a primary surplus, though I would caution that this will not in itself make Greece’s finances sustainable.

That said, as much as I respect Weisbrot and his colleagues at the CEPR, I’m sick to the back teeth of comparisons between Greece and Argentina. They are just too simple. Argentina was on a foreign currency peg; Greece is in a monetary union, which is like a foreign currency peg. Argentina had an IMF intervention, Greece had an IMF intervention. Argentina defaulted; Greece is expected to default. Hey presto, Greece is Argentina. What worked for one, must surely work for the other. It’s so easy to predict the future when you already know what you want it to look like. So I thought I’d talk you through some of the main ways in which Argentina in 2002 was not like Greece in 2011. I know it won’t convince the defaultniks but at least I’ll get this stuff off my chest. 

First, it’s important to appreciate how big the Argentine budget deficit was when that country defaulted. As I’ve said on this blog ad nauseam, a country with a primary surplus can default anytime – it can still pay its way regardless of what creditors do. A country with a primary deficit has a problem. Argentina’s budget deficit in 2001 was a paltry 3%. At the time, Argentina was paying 3.58% of GDP in interest (same source), so in fact they were running a primary surplus of 0.8%, courtesy of the IMF’s bitter medicine, compared to our projected 2011 primary deficit of 2.3%, which may yet turn out to be much higher, but is only at this non-eye-watering level courtesy of the IMF too. Search the latest CEPR paper for references to Argentina’s primary surplus. Not one. Yeah, I thought so. Even rigorous-minded Keynesians don’t believe deficits matter. You know why? Because cool guys don’t look at explosions.

Similarly, the CEPR paper makes the point that Greece’s exports are much higher as a share of GDP than Argentina’s back when it defaulted, and therefore better placed to drive growth. First, I would point out that Greek exports have grown, by nearly 10% in 2011. Second I need to explain that the share of exports on GDP is not the only thing that determines the sustainability of falling off a currency peg.

In early 2002, Argentina’s current account was nearly balanced, with a deficit of 1.4% of GDP in January. Nearly all gains in competitiveness went into growth. Greece is a different story: we’ve got a current account deficit of over 10% of GDP. Hence, while Argentina was able to grow at the very substantial rate it did using a devaluation of about 65% between 2001 and 2005, it would take a much greater devaluation to replicate this effect in Greece. Remember, even with massive inflation, you can’t devalue by more than 100%, although Keynesians will no doubt find a way (perhaps a tax on holding the national currency?). But even with their ‘modest adjustment’, the Argentines paid dearly for this strategy. You can check here what happened to inflation in the aftermath. It topped 25% in the first year, and was almost 15% the year after that, and has since never recovered to pre-default levels. In fact, Argentina is still blatantly manipulating inflation figures to keep up appearances – so much so that they have to threaten and fine anyone who dares publish more accurate figures (unless they are a union, and then only if they keep their estimates of real inflation for the negotiating table only).

If you are advocating foreign-currency default but don’t know why inflation is bad for a country, I’m tempted to suggest that you deserve to have its massive double-digit slapped across your face. But let me explain nonetheless: inflation means your money is worth less in relative terms and is harder to store, i.e. convert into wealth such as savings or a house. Inflation is a tax on everyone who earns a wage or benefits but has little negotiating power with the government, as well as everyone who saves money in a bank or owns a cash-poor business. It is, on the other hand, a subsidy to anyone whose income comes from investment, anyone who owns gold, anyone who owes money in the national currency, anyone who has the political connections to negotiate higher salaries, and any business able to borrow cheaply.

Think really hard of which of the two sides you’re on and you’ll know whether it’s good for you. Rich people and banks are typically winners from massive inflation. The working poor are typically losers. That’s partly the reason why, despite Argentina’s success in battling income inequality, wealth inequality (as measured by the wealth Gini coefficient) has not only failed to come down, but actually increased since the default, from 74% in 2000 to about 75% in 2010, and is in fact way higher than Greece’s.

That’s one point. On to the second. Whatever the fiscal and current account deficit figures, we need to get one thing clear: the Greek state is much, much bigger than Argentina’s was when it defaulted. More than double in size in fact. Even without paying any interest, the Greek state would still be leeching much more money out of its economy than Argentina’s ever did, either pre- or post- default. Hence the potential for growth post-default would be much smaller without, you guessed it, more austerity! Don’t forget, unlike government investment, government consumption does slow down growth.

I can sense your disbelief at this point. The assumption among most commentators is that anyone who flicks the finger at the IMF must be a socialist who believes in an all-encompassing state. But in fact, by 2001, the last full year before it defaulted, Argentina was spending just 18% of GDP in primary government expenditures. Contrast this to Greece’s projected primary spending of 42.7% of GDP in 2011 (which, again, could turn out to be higher). Remember, I’m using the primary spending figure because clearly in a default(nik) scenario we wouldn’t be paying interest at all.

This comparison, incidentally, tells you a little bit about why Argentina grew so fast post-default.

If Greece were to default and revert to spending, minus interest, what Argentina did as a share of GDP in 2001, just before it defaulted, we’d save 24.7% of GDP and, in my preferred scenario, return it to the taxpayer through tax cuts. And according to the IMF’s calculations, a tax cut of that monumental size would boost the Greek economy’s output by 1.3x24.7%=31.1% within 2 years (or anyway that’s how much an equivalent increase in taxes would shave off our output). Libertarians would of course love this, and provided we could find that extra 2.3% of GDP through some other revenue (such as privatisations) it would actually be possible, but defaultniks would typically hate both small states and privatisations, so I don’t expect them to come out in support of us becoming like Argentina in this regard.

Not that we could do that, either. Too much of our primary spending is locked in. The second major difference, you see, between Greece and Argentina is demographics. Greece has for many years been a much older society than Argentina. In 2002, Argentina’s old-age dependency ratio was a mere 16%, while Greece’s ratio for 2011 is just over 28%. You can check this for yourselves here (select ‘detailed indicators’ on the right).

Now by looking at the correlation of health, survivor, sickness and disability spending with old age spending, it is possible to approximate the total impact of ageing: it adds up to about 17% of GDP per annum (if you don’t like my estimate, try your own using the COFOG government spending data provided by Eurostat). Remember I’m only adding to age-related spending the additional spending on other things attributable to ageing.

Now, if our old-age dependency ratio were the same today as Argentina’s back in 2000, it’s only a matter of simple math (and an assumption of linearity which I admit may be wrong) to deduce that we would be spending 7.1% of GDP less on our aged and see a primary spending figure of 38.1%. Still more than twice what Argentina was spending when it defaulted.  Although that would, in theory, put paid to Greece’s primary deficit, cutting that much off pension and health spending would have disastrous effects on Greek society.  In fact, let’s go balls-deep in the defaultnik scenario and assume that Greece cut all of its toxic public procurement budget as well – no new roads, no new arms spending, no nothing – that would save us 13% of GDP at most. We’d still only get down to 25% of GDP, which is still way higher than what Argentina used to spend when it defaulted.  

Note by the way that Argentina didn’t have to worry about destroying its pension system when it defaulted, because by the time it defaulted it had privatised its pensions system, courtesy of the same hideous reforms that defaultniks hate so much. In an earlier paper, the CEPR credits this with losing Argentina about 1% of GDP in government income annually (presumably, of course that was meant to be the people’s money, not the Government’s, but hey let’s humour them), but they forget to mention that it is precisely this that made it possible for Argentina to default without destroying or confiscating the pensions income of its own citizens.

But in any case, this little exercise suggests that, even if our population was currently as young as Argentina’s when it defaulted, we’d still be in a far worse position to default than they were. But at least we would be able to default.

Remember, ageing is not reversible. Pre-austerity, it used to add a significant 0.46% of GDP to our primary spending per year. At this rate, if we were to balance the 2011 books in one fell swoop, by 2020 we would be running a 4.6% primary deficit once again. Unless we cut pensions and benefits savagely, of course. Which we have, to the towering rage of defaultniks everywhere.

Why is pensions income so important? Well because they are a huge part of the Greek household income. Now there’s no actual calculation available of this, so I’ve had to come up with my own. I can only offer a mix of 2011 and 2010 figures, but that’s a start. Greece’s pensions funds paid out EUR25.6bn on pensions in 2011 (pg. 95 here), against total household consumption of EUR165.8bn in 2010. Household consumption has probably fallen since, so that resulting ratio of 15.4% is definitely an underestimate. So basically, destroying pension funds via default would eat into private consumption in a massive way (it already has). Another big handbrake on growth, I think.


Defaultniks often point out how investment would supposedly soar in a country freed from the burden of debt. but age once again reaches for the handbrake. Without the ability to tap global capital markets, only domestic savings will be left to finance investment and that will not be nearly enough in countries like Greece (discussion here). Savings rates don't typically go up as a country ages; past a certain point they go down: people reach their maximum savings rate at a certain age and then start eating into their savings to pay for the kids' school fees, for healthcare, for whatever have you. Pensioners are, in fact, de facto negative savers. Have a look at the graph below if you don't believe me (source):

If you're feeling really gloomy right now, you've got my gist. The last decade was actually Greece's golden age of age-related saving propensity, if there is such a term. It was the time in our near history when we were most disposed towards saving, and our governments made sure we didn't. Game over.

The difference in household savings rates between 2011 Greece and 2002 Argentina implied by the above graph is about 8% of GDP. That's 8% of GDP less that we Greeks will be able to put into investment, post-default, than Argentina was able to. That's twice our 2010 gross national savings, bottled up for the foreseeable future by the irresistible force of human destiny. It's also more, by the way, than what we're currently paying in interest.

Here’s one final comparator that people often forget, and it’s related to all of the above. 2002 Argentina was way more entrepreneurial than 2010 Greece:  the average Argentine adult is almost three times as likely as the average Greek to be in the process of starting a business as the average Greek adult, even though entrepreneurial activity fell by half post-default: as growth returned, the appetite for enterprise fell quickly. Entrepreneurs are important to growth because they help convert all of that free post-default cash into sustainable wealth. One reason why we’ve got so many fewer of them is, once again, age: it’s easier to take a huge gamble with bankruptcy when you’re 28 (the median age in 2002 Argentina) than when you’re 41 going on 42 (the median age in 2011 Greece), and who would blame you?

The result is that even if Greece could somehow pump all of that money we spend on interest into the economy, it’s doubtful whether it would ever turn into growth of the sort the CEPR and our local defaultniks are hoping for without an exogenous boost to entrepreneurship. Don’t be quick to blame the Euro; Argentina had a currency peg too pre-2002, remember? That’s the whole point. In fact, I think the difference here is largely down to demographics and the size of the state, but it’s harder to prove this, so let’s park it for now.

This is not the end of the long list of differences between 2002 Argentina and 2011 Greece. It’s just all the stuff I could come up with at relatively short notice. But I hope it helps clarify how tenuous and wishful the Greece-Argentina analogies are.


UPDATE: 


Demetri Kofinas, aka @CoveringDelta, has paid me a tremendous compliment by inserting a reference to this analysis on the very successful show he produces on Russia Today - check it out here. Thank you Demetri!

ABOUT THAT "ODIOUS" DEBT ... A FURTHER CRITIQUE OF #DEBTOCRACY

Note 1: I am incredibly grateful to Aristos Doxiadis for citing this article in his excellent book, Το Αόρατο Ρήγμα.

Note 2: This blog was updated on 5 Dec 2014 to reflect new data on the size of bribes

Veteran readers will remember my epic slugfest with our new wave of defaultniks, a propos of the release of #Debtocracy. A central bone of contention was the defaultniks’ claim that much of the Greek debt was not attributable to the will of the people and was in fact odious. The defaultniks purposefully refused to offer even an approximation of what percentage of the debt they considered to be ‘odious’ in this way but pointed to excesses in public procurement and public investment costs as indirect evidence. When pressed on the matter of how much of the debt is odious, they flitted from ‘all of it’ to ‘some of it, surely we deserve to know how much!’ depending on their audience in any given moment. 

I argued, on the other hand, that with nearly two thirds of all spending going directly to the people in the form of direct transfers, pensions and public sector wages, it is very unlikely that most of the public sector’s debt in Greece was odious. Still, I acknowledged that someof it probably is.

The months have rolled past and the defaultniks are by now so convinced of their moral and intellectual superiority (or at least the physical muscle they can command) that they see no point in following up on this argument. If they've managed to put together a self-styled Debt Audit Committee, answerable to no one and selected by buddy-up, it has made no attempt at a figure and will likely not attempt one until after La Revolucion. Yawn.

Government, of course, has no interest in such calculations so I can’t count on them. 

So screw everyone. I have to do this myself. Like the defaultniks themselves, I will start with procurement because that's where the bodies are chiefly buried. 

First, I need an estimate of the actual procurement spending of the Greek government, going back as far as possible. Eurostat provides this (if you bother to divide % of GDP by % of total contracts) from 1995 to 2009, and you can find a link to this and other interesting datasets here.

The result – about 9 to 13% of GDP (about a fifth to a quarter of all government spending) went on public procurement annually. On a typical year, roughly 60% of this was under the radar spending that was never published in the official procurement journal of the EU because the contracts were (whether really or artificially) too small. The estimated amounts spent on everything, from the Rion-Antirrhion bridge to felt tip pens, are as follows:

Now we need an estimate of the percentage of this that went on bribes. The World Bank generally calculates that 3.7% of all procurement spending globally is spent on bribes, but I prefer to use the percentage admitted to by Siemens, whose executives have had their own run-ins with the greasy outstretched palm of the Greek government official. The typical Siemens bribe is 5-6% of the contract value. Let’s take 6% just to be on the safe side. According to this ratio, the Greek state must have paid between EUR1.5bn and EUR2.2bn per year on bribes. 

But of course bribery isn’t just about paying the actual bribe, it’s also about buying inferior services or paying over the odds. The bribe is meant to convince officials to allow this. These additional economic ‘capture’ costs come up to anything from 20% to 188% of the bribe itself.  Combining this calculation with the estimates on bribes it is possible to estimate an upper and lower bound for the cost of bribery and corruption in public tenders for Greece.

Now I realise that in applying these rules to all public tenders I am making a heroic assumption – some contracts will have been pimped to death, with contractors making incredible capture rents, and others will have been done by the book. I am also assuming that bribery and capture costs remained constant as a percentage of procurement spend every year, which can’t be true as there have been procurement bonanzas that will have been milked to death during this time, as well as some years when rents from bribery were low. 

I can’t help this miscalculation given the tools at my disposal. It’s just the best estimate I have. And it looks as follows. The total costs of capture (bribes and mispricing) ran up to anything from EUR900m to EUR5bn per year.

Now, in determining the extent to which these rents contributed to Greek Government debt, I must make some assumptions about their financing. To ensure I cannot be accused of bias I will make the most defaultnik-friendly assumptions possible, in the understanding that they may be biased in favour of overestimating the odiousness of the stock of Greek debt.

First, I will assume that all of this money came from the Greek public coffers. This is patently not true as EU money flooded into the country from 1995 to 2009 and much of it went towards procurement.

Then I will assume that all of this money came from excess borrowing and thus a) we are still saddled with the interest to this date and b) this debt is indeed odious. This is a very strong assumption and one that is moreover heavily biased towards the defaultnik case.

This means I need to calculate an acceptable interest rate for the excess borrowing. Given that Greece never paid down any debt but simply refinanced existing obligations throughout this period, I feel justified in calculating our effective interest rate by dividing the total stock of debt for each period with the total interest expenditure for each period. Both can be found here. I assume that costs before 2000 (when the Eurostat series begins) were constant at the same level as 2000, i.e. 7.2%. (Note: they were actually higher).

Now all that remains is to calculate compounding coefficients for each year based on the product of the (interest rate+1) for that year and all following years. They look as follows:

Now all that remains is to add up the up-to-date figures. The Grand Total comes up to a range of EUR29.8bn to EUR71.6bn, or alternatively 9.1% to 21.8% of our total stock of debt as of end 2010. 

 

Remember, these are very generous figures, and yet even on these assumptions, the amount of potentially odious debt is almost certainly less than the nominal 21% haircut agreed in July.

With procurement out of the way only straightforward graft and over-compensation of officials remain as possible avenues for the creation of odious debt. However, I believe that the contribution of these two is negligible compared to that of public procurement as indeed it is in almost any country not run by warlords.  

UPDATE: I realise in defending these estimates that there's just no pleasing some people. If you're not happy with my figures or my assumptions, let's at least agree on this: That it is possible, in theory if not in practice, to come up with a good estimate of the amount of debt attributable to things other than the will of the people; that carrying out such estimates is desirable; and that the extent to which Greece's debt is odious is a matter of fact, not politics. My assumptions are no doubt flawed but they are transparent, they come with some justification, and they are there for all to evaluate. In fact, you can just plug in your own assumptions and try to get an estimate that works for you.

2013 UPDATE: How fair is @talws' objection in the comments below? I explore the topic here.

2014 UPDATE: How accurate was my 6% assumption on the size of bribes, on which so much of this exercise depends? There is a new dataset for the researcher to draw upon: the recently released OECD estimates on the size of bribes as a % of contracts, based on records from 55 actual cases brought to justice between February 1999 and June 2014.

The average OECD estimate is 10.9%, which is significantly higher than my assumption. Bribes, of course, range widely by sector, from 14% for health- related spending (one of my Big Five deficit-drivers) and 17% for admin services, to 6% for scientific and technical consultancy, and 4% for construction. Ironically, the types of projects most commonly cited by defaultniks back in 2010 (Olympic construction for instance) attract relatively small bribes (less than my original estimate), while services- and consultancy-based projects are much worse. Anyway, please note these figures are based on a vanishingly small sample, involve foreign bribery only and do not seem to include any cases involving Greece. Still, if this estimate is accurate, then my estimate of our odious debt should grow by 81% to roughly 16.5% to 39.5% of Greece's 2010 debt. The mid-point of this range is now above our original creditors' haircut, but nowhere near the total debt jubilee defaultniks were after.

Once again, the facts simply don't bear out the Debtocracy story. They do reveal a good amount of debt we could have done without; and I wouldn't mind defaulting on that even now. But at least we would be seen as credible and honest, as opposed to opportunistic and hypocritical.

ALL UR BAILOUTZ ARE BELONG TO GREECE!

*** IMPORTANT UPDATES COMING UP. PLEASE CHECK BACK FOR MORE LULZ***

Readers will have noted that I have refused to write anything on Thursday's Summit outcomes and the new Greek bailout. The fact of the matter is that the amount of information in the public domain is pitifully inadequate - and that's not just me saying this. I will try to update this post as new information comes out.

Greek readers can, for now, consider the very competent if politically charged discussion by Techie Chan on this matter. The gist of it, with which I completely agree, is that private creditors have taken far smaller losses than the 21% trumpeted by European leaders, and in fact will in some cases make a reasonable profit from this deal, that Greek debt is still unsustainably high, and that a large transfer of risk has taken place from Europe's banks to the European taxpayer. Stay tuned for my own discussion of this.

I am particularly disturbed by the triumphalism with which some news outlets aligned to the Greek government were reporting on the deal late last week, essentially calling doubters and naysayers out on their sour-faced skeptical remarks. They'd be shouting 'IN YOUR FAAAACE! IIIIN YOUR FACE!' if they could get away with it. Cue of course, a chorus of world-weary defaultniks lamenting the continued loss of sovereignty, decrying Shock Doctrine tactics (Naomi Klein's tedious political version of the Philosopher's Stone, which explains everything under the sun), denouncing the new interest rate as usurious and the like. Let them all talk.

I'd rather focus for now on a topic that fewer commentators are talking about back in Greece and for which the facts are actually out. This is the CDS market - remember the evil specuLOLtors that were supposedly betting on Greece going bust (some of whom were in fact Greek banks themselves)? Well they're pretty fxed now.

You see, the most important implication of Thursday's grand bargain was no outcome of the Summit talks themselves, but the earlier announcement by ISDA that such a deal would not constitute a credit event triggering CDS payouts. By confirming that politicians will use this loophole to its fullest extent, Thursday's announcements mean that CDS are now virtually a non-asset-class: they only ever pay out if Greece sticks two fingers up to our creditors a la #Debtocracy, or if some suit at the IMF forgets to put our welfare check in the mail. Neither of which will ever happen. Some back home may be cheering that CDS spreads are down but that's because the actual value of the CDS as a hedge is down, not because Greek debt is any safer. It's like police procurement chiefs cheering the savings created by the falling price of bulletproof vests, following test results that prove they can't stop bullets.

You may think this is something for teh EVIL specuLOLtors to sort out among themselves, but what it actually means is that Greek bonds are now going to become much more illiquid (and that's saying something considering how illiquid they are now), because investors can't hedge against losses. The same goes for Greek bank stocks: in the past, people might use a Greek bank + CDS combo to replicate a European bank portfolio and skim some of the arbitrage out of the market or use Greek CDS to hedge exposures in the Balkans and Eastern Europe. But worse, far worse, the same goes for other PIIG and European bonds, and their banks. The entire Eurozone's financial system has become less liquid overnight. Surely that can't be a good thing?

UPDATE: only a few hours after I wrote the few lines above, this happened. QED.

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KILL MEEE... KILL MEEEEE... PART 4

BACKGROUND:

Kill me no. 4 is the sequel to the original 'Kill Me' post available here, which in turn is the sequel the Dog Ate my homework v. 2 post and of course the original 'Dog Ate my Homework' post. All of these posts are reactions to the IMF staff reviews of Greece's standby arrangement and the subsequent letters of intent from the Greek Government. 

Together the two sets of documents could explain how the Greek Government is from Venus and the IMF is from Mars, except of course everyone knows where the Greeks are originally from. 

Anyway dear readers, I know you've been waiting for this so here goes. 


Here are the quickest possible highlights of the Fourth Review by the IMF with only a little play by play from me.

Open discussions of Greece’s financing challenge and euro-zone countries’ insistence on private sector involvement to resolve this have convinced markets that Greece will restructure its debt (pg. 4)

[Translation: The market expects a default.]

The fiscal position has stalled (pg. 6)

[Translation: Current austerity measures aren’t working]

Wholesale funding markets remain closed, and exceptional ECB liquidity support has grown (pg. 5)

Banks’ combined market value of €13 billion falls well-short of their reported Tier I capital of €30 billion (pg. 6).

[Translation: The market says that the stuff regulators say your banks are OK to hold as capital is actually crap. Nice job everyone.]

First quarter 2011 targets were met, with the help of temporary factors (pg. 7)

[Translation: Q1 2011 targets were ONLY met with the help of temporary factors. Your coach is about to turn into a pumpkin]

GDP is now projected to contract by 3¾ instead of 3 percent in 2011 (an outlook broadly in line with that of other forecasters). (pg. 9)

[Translation: Everyone else’s forecasts haven’t changed; we should have listened to them]

Risks remain skewed to the downside in the near term (p.g. 9)

[Translation: You are more likely to miss your targets than meet them for the next few quarters]

The scope for shortfalls in policy implementation or in macroeconomic outcomes is limited […] stress testing shows that full and timely program implementation is absolutely critical: incomplete fiscal adjustment, privatization shortfalls, or delays in structural reform implementation (producing a considerably slower economic recovery and fiscal adjustment) would see debt remain at very high and likely unsustainable levels through 2020 (p.g. 10)

[This point is repeated in various different ways throughout the report. Translation: You mess this up one more time and it’s Good Morning Harare!]

The discussions focused on Greece’s deeper medium-term policy needs and identifying ways to replace the expected market financing that is now likely no longer available (pg. 10)

[Translation: you can’t borrow from the markets anytime soon.]

At the end point, Greece would be targeting a primary surplus in the range of 6½ percent of GDP (pg. 11)

[Translation: The adjustment programme only works if you achieve an impossible primary deficit target]

there is a good motivation to switch the headline program targets to focus on primary balances, namely to insulate the fiscal assessment from the potential variability in interest payments (pg. 11)

[Translation: In addition to the markets we also expect a default, which is why we’re not counting interest payments anymore]

The government has prepared a medium-term fiscal strategy (MTFS), which would […] reduce the size of the Greek state: overall spending would decline from 49.5 in 2010 to 43.1 percent of GDP by 2015 (pg. 12)

[Translation: The nightmarish small state we have in mind for you is the same size as Canada’s.]

All administratively complex programmes are massively back-loaded (this is not verbatim, but see Pg. 13)

[Translation: We’ve given up on administrative reform]

[T]o begin implementing the strategic plan for medium-term reforms, the authorities will begin […] a number of major institutional changes (creating a central directorate for debt collection, a large taxpayers unit, as well closing and merging several uneconomic and inefficient local tax offices). (pg. 14)

[Translation: You don’t have a large taxpayers’ unit or a debt recovery unit? WTF?!]

[T]he system will remain heavily reliant on ECB support […] peak support could top €130 billion. Greek banks cannot by themselves rapidly reduce their existing level of ECB exposure (pg. 16)

The authorities also committed to encourage banks to seek foreign merger partners (pg. 17)

[Translation: Someone has to bail out your banks. We’d rather it was other banks from abroad.]

The BoG […] may appoint a commissioner with managerial powers to run a troubled bank; it may withdraw a bank license and then put the bank into liquidation; and it can impose a moratorium on a bank's claims. However, the Greek legal framework lacks specific bank resolution tools towards lowering the cost of resolving banks. [T]here are no techniques to allow the continuity of banking operations, including sustained depositor access (pg. 18)

Reforms are also needed to ensure that the deposit insurance fund can be used to fund such techniques, and to establish depositor preference over unsecured creditors. (pg. 18)

[Translation: If you default before you fix this shit, your citizens will not be able to get their deposits back.]

[UPDATE: Since people are asking, this doesn't mean people will lose the deposits necessarily, and it could just be a scare tactic. But what it does mean is that in the event of a default, restoring people's access to their deposits will take time and the Greek government will have to negotiate the status of depositors' claims. Unless of course we sort out the legal framework first.]

The supervisor has thus requested that undercapitalized banks meet regulatory requirements or find appropriate merger partners by end-September. (pg. 18)

[Translation: Your banks need to put a fire sale together pronto.]

Still, for the timetable to hold, market demand must exist. This is a significant risk which the authorities can manage by ensuring that foreign investors can participate, and by establishing a track record of even-handed and timely execution of transactions (to demonstrate to bidders they have a real chance to acquire the assets). (pg. 20)

[Translation: Even if you hold a fire sale, who is going to buy this crap? They don’t even trust you to honour your end of the bargain]

firm-level collective agreements, introduced in late 2010, would allow for wage reductions below sectoral minima (to the nationally-agreed floor) within the formal bargaining framework, thus overcoming this rigidity, but had been used little to date. (pg. 23)

[Translation: Businesses aren’t using the one good labour market reform you managed to push through. Someone isn’t playing ball.]

the end-March indicative target on the accumulation of new domestic arrears by the general government was again missed in March. A waiver of applicability is being requested for end-June performance criteria (except concerning external arrears). (pg. 27)

[Translation: you’ve missed your targets but we’ll look the other way.]

A tailored downside scenario exposes additional vulnerabilities. Debt would peak at 186

percent of GDP in 2015 and remain above 178 percent of GDP in 2020, a situation highly unlikely to allow continued market access. (pg. 70)

[Translation: You know how you keep missing targets? Well if you stay on that path you’re on track to owe fuckloads forever.]

ARE WE THERE YET? (UPDATE)

Apologies for the radio silence, dear readers - it's been a busy week.

Now that I've caught up with my sleep and the in-tray for the day job I feel ready for another post, and predictably it is a new batch of statporn, though I promise you haven't seen this before - not from me anyway.

I have strong but mixed feelings about Debt Clocks - here's one of ours, courtesy of the awkwardly transliterated Xrimanews.gr. In countries where government debt is not the number one issue on the agenda, a good deal of the population tends not to know just how much debt the state has picked up in their name. This is not too dissimilar to what individuals in too much debt do (a more academic treatment here and here) and the behavioural results are similar too. Such tools can give the people a sense of proportion. But while being able to visualise debt in this way tends to make people think, in practice it is not very actionable. By the time a country has a Debt clock built for itself, it is usually in too much debt already.

I was wondering, on the other hand, what kinds of clocks we could build for Greece that would mean something to the Greek people. If we're counting down to anything these days, it is surely D-Day, the day we get to default. And this is not a matter of time but of fiscal dynamics. Converting these into time variables is not straightforward.

As it happens, there are three sets of figures we can use that do sort of suggest timings.

PART 1: JUMPING

The first is the primary deficit, which counts down the distance left to run until we can secure an orderly default. I should point out that, unlike the Greek ministry of finance and some defaultniks, I'm counting public investment against the primary deficit. The reason is simple: public investment is the most productive part of government spending, as we've discussed here, here and in Greek here. In the event of default, it should be among the last budget items to go.

So how is that primary deficit coming along? Below is a graph of our monthly primary deficits, collated by yours truly from the monthly budget execution bulletins available here. Please note this is the Central Government budget as opposed to the General Government budget, where the data take much longer to produce and are much less reliable. Even with these caveats, I can only go as far back as Jan 2009 and can only follow the data up to May 2011 - but I will update as more data come in.

[Correction: The Y axis on this graph previously read 'surplus'. This was of course wrong. Many thanks to @ggementzis for spotting this. The hollow datapoints are my own naive forecasts, read on for details on how these were calculated.]

The bottom line here is that the 2011 budget isn't really working out. While 2010 was an improvement over 2009 in nearly every month, 2011 hasn't been an outright improvement on 2010 so far - only two out of five months have returned a smaller deficit or larger surplus. If the above graph doesn't really speak to you, maybe this one does: it would suggest austerity as currently pursued depends hugely on political timing and is producing diminishing returns.

Actually, this graph is a little scarier than that, because it's actually very easy to describe the trend involved. It's essentially a negative sine with a linear trend thrown in, or at least that's what it behaves like. Crucially, the trend points upwards.

[UPDATE] My longtime reader Chris Voltaire has pointed out over Twitter that running a regression with 15 observations is risky. He is too kind, of course. It is stupid and pointless. However, my purpose is not really to derive a forecast (even though I do). I only want to show what the trend has been so far and because of the seasonal variation involved I can only do this by deriving a forecast of sorts. Apologies.

If you run these figures forward, the forecast is for a primary deficit of EUR5.893bn, against EUR6.231bn last year. So we're only really on track to shave EUR338m off the primary deficit this year and at this rate it will take us 17 years to be able to default. Not good. It is probably this realisation that underlies our latest batch of austerity measures, which I've seen fellow libertarians criticise quite strongly. I will return with more commentary there. For now I should point out that there's more than one way of delivering a primary surplus, and I'm on the record as saying that taxation isn't a very effective one, for reasons to do with administration and equality.

Chris also points out that the Greek state is looking forward to some extraordinary income from property tax arrears in 2011, which readers would do well to take note of. Now in my days of trying to scrape by on £5 a day in London so I could afford my rent and the occasional drink, I used to have a rule: there is no truly extraordinary income and no extraordinary expenses. Better to assume that every month £100 will get spent that you can't plan for, and £20 will come in that you don't expect. It's a similar case here. The Greek state had extraordinary revenue in 2010 from the 2009 business levy, then more extraordinary revenue with the tax amnesty, and probably more that I can't keep track of. My point is that these 'extraordinary' income drives are driven by cyclical revenue figures rather than vice versa, so in one sense it doesn't really matter what income we're looking forward to.

But this is dodging Chris' argument. The real answer is that I can only keep monitoring the data - when that money comes in, I'll check again to see whether it's shifted the trend. That's all anyone can do really. For instance, just today (11 July) the preliminary figures for June came in - indicating a primary deficit of EUR1.356bn for the month. This in turn is consistent with a EUR7.1bn primary deficit for the year, taking us way off course.

Incidentally, the first graph I've presented here also reveals one more useful thing: that the most fiscally positive months for Greece are January, July and October in that order. This will be important to anyone trying to time a Greek default while we're still still running a primary deficit.

PART 2: BEING PUSHED

The second way of timing a default is to look at the exposure of European (in particular French and German) banks to Greece, particularly the Greek sovereign and Greek banks. The only reason we are in this state of suspended animation, from a foreigner's point of view, is in order to prevent massive losses to European banks and the associated contagion. If they could magically remove their exposure to Greece overnight, we would be forced to default at once, whether we liked it or not. This begs the question of how far along they are in dumping Greek assets.

I should note at this point that the markets for most Greek assets are currently very illiquid, so banks are very worried about dumping them as they are unlikely to get a good price. Moreover, when they sell banks have to record losses, whereas a rapidly depreciating bond can be held to maturity without showing a loss. All of this makes it difficult for foreign banks to dump Greek bonds.

You can review the latest data on exposures to Greece with commentary from yours truly here. But what is the trend? Well here we have a problem because the Bank of International Settlements (BIS), the source of all such statistics, has only started providing data with a sector x country breakdown in Q4 2010. Further back, we can only look at aggregates, which are much less useful. But let's see what we can find. The graph below outlines the exposure of banks in Europe, France and Germany to Greece (that's total exposure, including the Greek sovereign, Greek banks and the Greek non-bank private sector:

These data suggest that since the Greek crisis began in late 2009, French and German bank exposure is falling at a rate of 2% every month, or about EUR2bn per month. At this rate, it will take 44 months, or until August 2014, for them to reduce their exposure to zero.

Realistically, French and German banks will never manage this, and even if they could or wanted to, they don't need to wait that long, as they only need to cut their exposure enough so that they can remain capitalised when we default. Also recall that this is total exposure to the country, and although it makes sense to dump Greek banks alongside Greek bonds, it probably doesn't make sense to dump all Greek assets altogether.

But this is the general direction of travel.The query in question can be replicated by trying this link.

More to come, as I've still got data to crunch. For now the verdict is that we're more likely to be pushed than to jump unless we can come up with a real show-stopper. Somehow I doubt we will.

PART 3: GOING APESHIT

There is of course a third clock ticking away. Every quarter I watch the labour market statistics for clues of rising stress. My favourite index is of course the share of the unemployed that turned down job offers in the last quarter; the rationale is that once the fat has gone out of the land and people are forced to take whatever crappy job comes along or drop out of the labour force altogether the result is very angry people in the workplace or on the streets. Regular readers should not need any reminder but the graph as of Q1 2011 is as follows:

A naive extrapolation suggests that we will run out of unemployed people turning down  job offers by Q4 2013. This suggests to me that the apeshit scenario is approaching us faster even than the being pushed scenario. Everyone buckle up.