Greece – There Is Another Solution

Thursday, May 6, 2010

Greece’s financial management has been weak for years. As shown in yesterday’s currency exchange graph, the Greek drachma (pre-Euro) lost over 80% of its value in the 20 years preceding switching to the Euro. Since then, Greece’s finances have deteriorated further due to overspending. In addition, the true financial picture has been obscured by data problems and falsification.

While a bailout of sorts has been in the works, a second solution may be chosen: Cutting Greek lose.

Greece qualified for the Euro in 2001 by meeting the 3% deficit-to-GDP requirement. Or, so it was thought. In 2004, the European Commission issued a report showing the deficit numbers had been falsified. Here were the changes:

  • 2000 – Deficit rose from 2.0% reported to 4.1%
  • 2001 – From 1.4% to 3.7%
  • 2002 – From 1.4% to 3.7%
  • 2003 – From 1.7% to 4.6%

BBC’s report at the time:

“Greece has admitted it joined the euro in 2001 on the basis of figures that showed its budget deficit to be much lower than it really was. (“Greece admits fudging euro entry”; November 15, 2004)

Now, from the January, 2010, European Commission’s report:

“The reliability of Greek government deficit and debt statistics has been the subject of continuous attention for several years. The Greek general government data reported by the authorities have been persistently contested by Eurostat, far more frequently than for any other Member State.”

“Revisions of this magnitude in the estimated past government deficit ratios have been extremely rare in other EU Member States, but have taken place for Greece on several occasions.” (“Report on Greek Government Deficit and Debt Statistics”, European Commission, January 2010)

So, Greece has spent freely without adverse currency/inflation effects by being under the Euro umbrella. Understating (falsifying) deficit and debt data helped prevent being found out and incurring restrictions.

What’s to be done? The other Euro countries have been working together to create a financial solution – a bailout of sorts. From the European Commission’s standpoint, their plan is the following:

“The Commission is fully committed to continue cooperating with the Greek authorities with a view to supporting their efforts to improve the collection and processing of government statistics in order to address the recurrent shortcomings and restore the confidence in Greek statistics.” (“Report on Greek Government Deficit and Debt Statistics”; European Commission; January 11, 2010)

However, because Greece has produced misleading data for many years, restoring confidence will be a difficult and multiyear challenge. For example, on April 29, Moody’s announced “Multi-notch downgrade likely” for Greek debt, the severity of which will be based on the extent of any multi-year (not short-term) financial plan.

Recent articles reporting the “latest” 2009 deficit numbers, each worse than the last, are an example. And the latest numbers look terrible.

From “UPDATE: EU: Greece 2010 GDP Seen At -3%, Budget Deficit At 10%” (The Wall Street Journal, by Nick Skrekas, May 5):

Euro requirement: Deficit/GDP = 3%

  • 2009 = 13.6% (Greece’s forecast last spring was 3.7%)
  • 2010 (projected) = 9.3%
  • 2011 (projected) = 9.9%

Euro requirement: Total debt/GDP = 60%

  • 2009 = 115%
  • 2010 (projected) = 125%
  • 2011 (projected) = 134%

European stomachs are churning, especially when Germany talks about buying Greek junk bonds to tide Greece over until next year.

Therefore, a more radical solution might occur: Cut Greece out of the Euro, thereby putting it back into its own currency and exchange rate. Doing so not only would separate out the problem, but also would help remove the potential “moral hazard” from bailing out Greece (i.e., the expectation that any Euro country would be bailed out). This latter consideration is important because Greece is in its special box due to misreporting/falsification actions it has taken for years – not just the economic downturn.

So… As investors, we should not worry about Greece’s bailout problems dragging down Europe, much less the rest of the world. There is another option.


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