PIGging Out in Portugal, Ireland, and Greece

♠ Posted by Emmanuel in , at 11/16/2010 12:28:00 AM
Let's just say this ain't hog heaven. The Eurozone is again in one of its now-habitual periods of convulsion when peripheral member states display revulsion towards each other and the markets, too. The latest fashion is to blame common EU membership for contagion-like effects evident in the market for these countries' sovereign debt issues. Let's catalogue this tale of ill-advised and very public PIGging out in the appropriate acronymological order. (Merriam & Webster, I just devised the term "acronymological" by the way.)

First, Portugal claims it does not have to return to the capital markets in the immediate future to fund its budget deficit. However, there are noises emanating from it and the others that indicate discontent over Germany showing who's boss around the EU (as if we didn't know already). Portugal's beef [pork?] with Germany revolves around the revocation of the European Financial and Stability Fund's (EFSF) guarantees against giving private creditors a haircut or loss on face value by 2013.
The risk that Portugal will have to turn to the international community for emergency financial assistance is high because of the growing dangers of contagion through financial markets that fear the eurozone debt crisis will spread, the country’s finance minister warned on Monday. “The risk is high because we are not facing only a national or country problem. It is the problems of Greece, Portugal and Ireland. This is not a problem of only this country,” said Fernando Teixeira dos Santos, referring to the possibility that Lisbon will need a financial bail-out...

“This has to do with the eurozone and the stability of the eurozone, and that is why contagion in this framework is more likely. It is not because markets consider we have similar situations. They are only similar in what concerns markets, but as I said they are very different...[m]arkets look at these economies together because we are all in this together in the eurozone, but probably they could look different if we were not in the eurozone. Suppose we were not in the eurozone, the risk of the contagion could be lower...”

The finance minister also stressed that European policymakers needed to improve their communication to markets and investors to prevent undermining sentiment and sparking sharp sell-offs. “Our budget proposals were positively received by the markets, then things were reversed because of the uncertainty around the permanent mechanism for dealing with bail-outs,” he said, referring to the European summit on October 29, when plans for a rescue mechanism to succeed the existing European Financial Stability Facility were outlined in a Franco-German initiative.

“We were like the soccer player running to the goal and ready to kick for the goal, and then someone fouls us...but this time there was no penalty.” He added: “Information is the air that you breathe in the markets. We need that air to be as clean as possible. When it is not clear, the markets get intoxicated.”

The peripheral bond markets fell sharply in the wake of the statement at the [EU] summit because investors feared they would be hit with haircuts, or losses, on their existing bonds. This was in spite of the fact that policymakers had made clear the existing EFSF rescue mechanism, which does not affect bondholders, would remain in place until 2013.
Next, the Irish are more obviously in clear and present danger. The situation in Ireland was compounded by it guaranteeing the viability of its financial institutions without really fully being aware of the ultimate cost of providing such a guarantee. Hence, it's on the hook for, what, a fiscal deficit that's 32% of GDP this year. Ireland has also found attempts to replace EFSF with something more sustainable in the long term difficult as many market participants feared that Ireland would be in a mood to give bondholders haircuts if the EU didn't come to the rescue. We also have to see if the Irish are foolhardy in forswearing EU support in dealing with its woes (for now):
Irish officials insisted on Sunday that they did not need fiscal assistance from the European Union, even as pressure mounted on Dublin to accept aid and present plans to restructure its banking system. Senior European officials held informal deliberations late into the evening to decide whether Ireland needed an aid package before the markets opened, in order to reverse a two-week-old bond market collapse that was briefly halted on Friday. Those discussions broke up, however, without any action taken.

A statement late on Sunday from the Irish department for finance confirmed for the first time that contacts continued “at official level with international colleagues” which was interpreted as a reference to both the European Commission, the European Central Bank and the International Monetary Fund.

However the statement repeated that Ireland was ”fully funded until well into 2011” and it “has made no application for external support.” Although Irish leaders have said the country needs no new cash until June, concerns about its finances have spread to other so-called “peripheral” EU economies, driving up yields on their government bonds.
And last we have Greece. A few months ago, I discussed former Greek Finance Minister Yiannos Papantoniou giving a talk here at the LSE where he was at the receiving end of a tirade from an audience member over his use of currency swaps to temporarily hide the extent of Greek obligations as it tried to enter the Eurozone. In effect, previous Greek administrations have always taken the "everyone else does it, so why can't we?" line of defence. However, we now see that the distortions introduced by the Greeks are of a magnitude greater than a lot of the others. So, officials descended upon Athens to ensure they would no longer be bamboozled by heavily massaged reportage. End result of their investigations? Fiscal adjustments including the recognition of the aforementioned swaps mean this year's fiscal deficit is (surprise!) larger than previously thought:
Greece promised on Monday to stick to its deficit cutting plan while its prime minister said Germany’s tough stance may push debt-laden European nations such as Portugal and Ireland to bankruptcy. George Papandreou, Greek prime minister, said Germany’s insistence on a future mechanism for banks and bond markets to share the pain of any eurozone sovereign debt default from 2013 could break some European Union economies.

“This could break backs. This could force economies towards bankruptcy,” Mr Papandreou said during a visit to Paris. It created a spiral of higher interest rates for countries that seemed to be in a difficult position, such as Ireland or Portugal,” Mr Papandreou said. “This could create a self-fulfilling prophecy.”

On Monday, Eurostat, the EU’s statistical agency said Greece’s 2010 budget deficit and public debt would be significantly higher than forecast, following upward revisions of data for previous years. The budget deficit is projected to reach 9.4 per cent of gross domestic product, missing the government’s current target of 7.8 per of GDP by a wide margin.

In spite of the revisions, announced on Monday, Greece would still achieve “a deficit reduction larger than initially targeted – 6 percentage points of GDP”, the country’s finance ministry said. The public debt is projected to rise from 126.8 per cent to 144 per cent of GDP – the highest in the eurozone as a percentage of GDP.

The increase resulted from the reclassification as general government debt of €18.2bn of accumulated debt owed by public sector corporations and from a €5.3bn adjustment for off-market swaps carried out before such transactions were banned by EU regulations. “The revisions were broadly in line with market expectations ...it’s positive that the after-risks from past fiscal data have been removed,” said Platon Monokroussos, head of financial markets research at EFG Eurobank.

The 2011 budget, due to be announced on Thursday, will be based on the updated data, the finance ministry said. The revisions were the result of a months-long investigation by Eurostat into fiscal data for the years 2006-2009 in co-operation with Elstat, the newly independent Greek statistical agency.

The finance ministry said the outcome marked “a major step to restore transparency in fiscal management and to eliminate controversies over the quality and accuracy of Greek statistics”. The poor quality of Greek statistics reduced the country’s credibility with its EU partners, as previous governments were suspected of massaging data to bring excessive budget deficits closer to the 3 per cent of GDP limit for eurozone member states.

The swap arrangements, criticised because of the high transaction costs involved, were aimed at reducing the cost of financing the public debt. The revisions were flagged as “final” by the finance ministry, but some analysts voiced doubts about projections for the 2010 budget on the grounds that government accounting systems still lag eurozone standards.

International auditors hired by the finance ministry this year are still working on current data from state hospitals, social security funds and local government authorities. “The revised data are a step in the right direction but until the quality of accounting improves, Greek statistics will be open to question,” said Stefanos Manos, a former finance minister and president of Drasi, a think-tank
Some points from me before I end:
  • Portugal is mouthing off but its woes are comparatively less dire than the other two's;
  • Unlike Krugman, I do not think premature austerity is to blame for Ireland's woes. After all, what's so "austere" about running a fiscal deficit that's 32% of GDP to bail out troubled lenders? The trouble, instead, is its overcommitment to bailing out its ailing financial sector come hell or high water without understanding the true cost of that commitment;
  • These accounting purges being undertaken in Greece to bring it up to modern national accounting standards have made it look worse in the short run by adding to its reported deficit, but it will benefit it in the long run by clearing up systems of monitoring and reporting as well as making it less tempting to do some Enron-inspired bookkeeping.