Greece has announced that the 2011 deficit is projected to be 8.5% of GDP, down from its previous 10.5% but still short of the 7.6% target set by both the EU and IMF.
Blaming the shortfall on the deepening recession, the admission has brought the specter of a debt default closer and will weigh on talks among Euro-zone finance ministers in Luxembourg today on the next steps to attempt to resolve the currency area’s sovereign debt crisis. In response, European stock markets have fallen. The FTSE 100 fell 2%, France’s Cac has lost 3% and Germany’s DAX has fallen 2.5% so far. To make matters worse, the news bodes ill for many Western banks that have invested so deeply in Greek bonds at the heed of their governments. Franco-Belgium bank Dexia fell as much as 14% after the rating agency Moody said it could possibly downgrade the firm because of its exposure to the Greek crisis. Moreover, France’s Societ Generale was down 5.6%, BNP Paribas fell 6& and Credit Agricole dropped 4.5%. Clearly, the concerns over Greece has caused the baking stocks to be amongst the biggest fallers in Europe.
“Greece s bankrupt. Probably there is no other way for us other than to accept at least 50% forgiveness of its debts.” – Michael Fuchs, deputy parliamentary leader in Chancellor Merkel’s Christian Democrats
In an attempt to restore some amount of faith in the tactics of Greece, the Finance Minister, Evangelos Venizelos, stated that the 2012 fiscal targets of 6.5% would be met in absolute terms and Greece would have a primary surplus before the debt service for the first time in many years. The optimistic rhetoric has done little to stand against the statistical projections that have published next year’s deficit to be 6.8% of GDP, higher than the 6.5% EU and IMF goal. The deepening recession means that public debt will be equivalent to 161.8% of GDP this year, raising to 172.7% next year, making it by far the highest ratio in Europe. Nevertheless, the EU and IMF talks with Greece over its 8 billion euro installment have supposedly concluded with Greece receiving the crucial funds to ensure the “smooth” functioning of its government.
“I don’t think Greece will be allowed to default, but concerns about the situation in Europe are causing us to pull back now as there’s still so much uncertainty about what could happen. It’s pretty hard to be optimistic right now.” – Dave Hinnenkamp, chief executive officer of KDV Wealth Management in Minneapolis
The Council of Ministers are set to meet Monday, but a special meeting is scheduled for October 13th to address the likelihood that Greece’s funding needs next year will be greater than forecast when a second 109 billion euro rescue package was agreed in principle in July. The investment in Greece to shore up its bonds has reopened a fraught battle over who should pay, the taxpayers or financiers. Private bondholders had agreed to a 21% mark-down on their Greek debt holdings but the EU and German officials have suggested the mark-down may have to be increased due to the new funding shortfall and changed market conditions. The head of the International Institute of Finance, Josef Achermann, negotiated the voluntary bond-swap by investors as part of the bailout plan but is now warning against changing terms now. According to the Deutsche Bank chairman, reopening negotiations will cost the Euro-zone precious time and quite possibly private investor support. Uncertainty over the extent of damage to the already fragile European baking sector from a possible Greek default has been driving investors to take refuge in safe assets. The yields on both Spanish and Italian bonds have risen and the cost of insuring their debt against default, the main concern for the Euro-zone due to the size of their economies, has spiked. The Euro-zone ministers were expected to discuss ways to leverage their EFSF bailout fund and to put more pressure on Greece to implement agreed structural reforms and privatizations to try to get its economy growing again, but no conclusions were made. Evidently, the debt and GDP projections illustrate how Greece has fallen into chronic spasms of recessions, falling revenues, soaring unemployment and declining consumer purchasing power.
“The markets continue to conclude that a default for Greece is an inevitability and a question of when rather than if.” – Nick Stamenkovic, strategist at RIA Capital Markets
Nonetheless, officials expect the next rescue package to be paid, because the Euro-zone will not be ready to cope with the fallout of a Greek default until its bailout fund, the EFSF, gets its new power to market intervention ratified in the next two weeks. However, the 440 billion euro fund will be able to buy government bonds from the market, recapitalize banks and extend precautionary credit to sovereigns, it may not have enough power and funding to cope with all the financial needs of the debt crisis. The leveraging idea, suggested by US Secretary of Treasury Timothy Geithner, has opponents in north European countries, such as Germany, who fear it could lead to bigger liabilities beyond the 780 billion euros in current EFSF guarantees, or credit rating downgrades for either the AAA-rated rescue fund or its AAA-rated guarantors. Some ideas under consideration to serve as a resolution involve allowing the EFSF to refinance itself at the ECB’s liquidity operations for banks. The EFSF could also guarantee to cover a percentage of potential losses investors incur in case of a highly likely sovereign default.
In retrospect, any solution should not require another ratification as policymakers have come to realize the time-consuming and difficult nature of the process, given the growing opposition to bailouts in many Euro-zone countries.