Does Greece really deserve such a market pummelling?
So there’s no question Greece has work to do to improve its bookkeeping.
Not only must it get spending in check, but it needs to be a bit more honest about where its finances stand in the first place. After all, it’s not often an EU country says one month that its budget deficit is a little over three percent of GDP and admits a few weeks later that, oh dear, it’s actually nearer 13 percent.
Yet it’s hard not to have a little sympathy for Greece at the same time.
Its government bonds have been hammered and the price it has to pay to finance its debt has soared as financial markets have relentlessly taken it to task over the past six weeks for its profligacy.
The yield on 10-year Greek government bonds over dependable German Bunds (the spread) rose to more than 400 basis points — a euro-era record — at one point last week, meaning Greece had to offer a 4-percentage-point premium over Germany to entice people to buy its debt, offering a yield of more than 7 percent. That obviously increases its debt financing costs and leaves it even more in a fiscal hole than it needs to be at a time when it’s trying to raise more than 50 billion euros to finance the budget — and when finances are already under pressure following the economic crisis.
Undoubtedly some of that 400-point spread was justified. It’s clear that Greece is not Germany when it comes to the administration of public finances.
But when it comes to absolute risk — the real possibility of Greece defaulting on its debt — it’s questionable that Greece is really as much of a liability as that. Not only is it a developed, European sovereign debt issuer, but it shares a currency with 15 other countries in the euro zone. Their stability depends greatly on Greece’s stability and so in effect it has 15 backers — call them lenders of last resort if you like – standing by ready to help out if things really get to breaking point.
Nobel laureate and economist Joseph Stiglitz regards the threat of Greece going bust as irrational.
The very fact that Greek-Bund spreads have narrowed to around 330 basis point since last Thursday — on the basis of supportive words from the European Commission rather than any change in Greek fundamentals — suggests that a decent portion of the spread has been driven by speculation.
That’s certainly the feeling in Greece, whose Prime Minister George Papandreou has hinted darkly at the meddling of financial market speculators — hedge funds and programme traders – in his country’s plight. And it’s true that what are known as “real money accounts” — pension funds, investment trusts, mainstream portfolio managers — have steered clear of Greek debt because speculation has made the market so volatile, effectively confirming that hedge funds are driving the swings.
Greece still has a mountain to climb to get its financial house in order. It has to cut the public sector wage bill, tackle corruption and tax evasion, trim waste and make long-term financial planning on the basis of transparent and credible economic statistics. That could take many years, although it’s promising to get its budget deficit back below 3 percent of GDP by the end of 2012. Whether Greece manages that — and does it without inciting public unrest and strikes — remains to be seen. But it seems unlikely that the spread on its debt will remain so large for all of that time.