The Greek government's
base case scenario builds in GDP growth of -0.3% and 1.5% in 2010 and
2011,
respectively, which is simply unrealistic vis-à-vis analyst
expectations. A
recent Reuters poll revealed consensus estimates for GDP growth of -1.5%
and
0.5% in 2010 and 2011, respectively. Local subject matter experts such Gikas
Hardouvelis, Chief Economist at EFG
Eurobank and professor of economics at the University of Piraeus are
expecting
a deeper recession with GDP declining 2.8% in 2010. Deeper
recession and
delayed recovery is expected primarily on the back of reduced private
and
public consumption as a result of the government's austerity measures. Economic
performance
lower than the government's estimates will result in lower tax base
and lower tax revenues, and shall consequently offset the projected
impact of
the revenue measures like increase in tax rates. Evidence of
this is
already apparent in the ability of Greek labor unions to shot down much
of
Greece during 24 hour strikes which effectively eliminate large swaths
of
revenue and productivity for the day. Tax collectors, customs
inspectors, the
police, doctors, teachers... The striking populace apparently
encompasses a very
broad swath. This has happened several times in the last month and
several
future strikes are planned as well.
The Greek government's
macroeconomic assumptions also
seem overstated when compared with EU estimates.
Revenue Generation Measures? It appears more like hoping one can change the centuries worth of behavior by the end of the year...
The Greek government
has so far announced revenue measures with budgeted impact of nearly € 10.7
billion, or 4.4% of GDP. The announced revenue measures range across an increase
in VAT rates, excise rates, fuel tax, property tax; unique taxation scale and
elimination of tax exemptions; and reduction in tax evasion.
However, there are very serious
concerns to be raised concerning the successful implementation of these measures and
meeting the targets. The perception of performance of these measures (largely consisting of an increase in tax
rates and reduction in tax evasion) in Greece is seriously undermined (at
least in the eyes of the prudent practitioner) by the lengthy history of high tax
evasion in the country. Over the years, the authorities have failed to crack
down on the rampant tax evasion and there is no evidence to suggest that this will
change, particularly amidst the current environment of declining income levels
and higher tax rates.
1. Friedrich Schneider,
chairman of the department of economics at the Johannes Kepler University. - Greece's
unreported -- and untaxed -- shadow economy is one of the largest and equals
about one-quarter of GDP. That compares with 22% of GDP in Italy (keep in mind that this is inclusive of the evasion performed by the
famed La Cosa Nostra as well as the lesser known Camorra, the 'Ndrangheta or the Sacra Corona Unita,
as well as foreign organized groups) and 20% in Spain and
Portugal, according to his estimates.
2. Bloomberg - Prime Minister Papandreou
says that the Greek workers and companies have skirted tax worth € 31 billion,
more than 10% of GDP. According to EU statistics, Greece's revenue from income
tax was 4.7% of GDP in 2007, compared with an EU average of 8%. Tax revenue
fell 2.5 percentage points of GDP between 2000 and 2007 to a Euro region-low of
32% even as economic growth averaged 4.1% a year.
3. Analyst Ed Sollbach,
Desjardins Securities - Tax evasion in Greece is a huge problem. Nearly 94%
of personal income declared relates to annual incomes of less than € 30,000.
4. Matsaganis, Hellenic
Observatory, The European Institute - Under-reporting of income in Greece is estimated at
10%, resulting in a 26% shortfall in tax receipts.
EXPENDITURE MEASURES
Announced expenditure
measures are expected to cut the government's expenditure by nearly € 8.1
billion or 3.3% of GDP. Expenditure measures include salary cuts, freeze in
hiring and salary hikes, as well as cuts to other public sector expenditures.
The biggest risk
factor in the implementation of these measures is the growing social unrest,
which is likely to put political pressure on the government to roll back some
of the planned actions. The newly elected socialist government is facing strong
resistance against the announced austerity measures in the form of nation-wide
strikes, clashes by thousands of people, and growing public fury may force the
government to cut certain targets for salary reductions, pay and hiring freeze,
etc.
PROCEEDS FROM PRIVITIZATION
The government is planning
to procure funds by offloading stakes in some of the government owned entities,
and plans to raise € 5.6 billion or 2.3% of GDP over the next three years, with
€ 2.5 billion planned to be raised in 2010. In the Stability and Growth
Program, the government has outlined a list of companies in which the government
owns equity, and gave estimates of values of the government's equity stakes. We
back-calculated the government's estimates for total equity of the companies
and compared the same with the current market values (market cap) of the total
equity of the companies and observed that in most of the cases the government's
estimates were overstated (and in some cases, drastically) when compared with
the current market value.
It can be argued that
the Greek government is factoring in a control premium for their majority
holdings. Theoretically this is acceptable, but realistically this will be very
difficult to translate into cash. The government would have to find large
buyers who are willing,to purchase the entire stake at the premium
suggested, from a seller who is in obvious and globally publicized distress -
and the Greek government will have to do this several times over, all within a
period of less than 8 months to meet the 2010 deadline. We find this to be
highly unlikely. It has been our experience that distressed seller's often take
DISCOUNTS to the market value of
their assets, not PREMIUMS!
1. Since the Greek
government is seen as a distressed seller, it will have to take a discount from
any prudent buyer
2. If the government sells
directly into the equity market (the most expedient and likely scenario), the
control premium is not applicable.
3. It will take time to
market the properties, negotiate the terms and close on the large deals to capture
the control premium, if one is actually attainable. This is not going to happen
for all of the properties slated for sale in 2010.
4. If the government is
being aggressive in valuation of public properties, it is most likely to be even
more aggressive with non-public properties, where pricing is considerably more
opaque.
Below, you can find a sample from the
pdf
Projections" width="16" height="16" /> Greece Public Finances
Projections
2010-03-15 11:33:27 694.35 Kb/
report that should visually drive the point of overvaluation home. Ironically, mismarkng the value of its assets is what contributed to Lehman Brothers downfall.
Click image to enlarge
PROCEEDS FROM PAYBACK OF FINANCIAL ASSISTANCE PROVIDED
TO THE GREEK BANKS
The Greek government is expecting payback of the
financial aid provided to the ailing Greek banks, and has built in total proceeds
of € 3.8 billion in the coming years in its public finance projections. However,
the Greek banks are still struggling under the current financial and economic
crisis gripping the country with added (and quite material) pressures coming
from the drastic austerity measures. The
deep recession expected in 2010, with only mild recovery in 2011, will not only
see sharp declines in public and private consumption that will inhibit credit
growth, but will also result in deterioration (rising NPAs) in the credit
quality of their consumer and commercial loans portfolio. Thus, the banks are
far from reaching a stage where they can generate incremental operational cash
flows or raise equity from the market to pay back the capital injections from
the government, or at least do so on a
prudent basis. Consequently, financial assistance is expected to stay, with the
possibility (probability?) of some additional assistance being injected (or at
least needed) into the banks in the coming years. Subscribers should download
our overview of key Greek banks here: Greek Banking Fundamental Tear Sheet.
GOVERNMENT DEBT AND INTEREST EXPENDITURE
The Greek government has accumulated significant debt
over the years to finance its annual fiscal deficits. The government debt has
risen from 97.1% of GDP in 2006 to 113.4% of GDP in 2009. The implications of
this massive debt are reflected in its overwhelming interest burden which has
precipitated its current weakened fiscal situation - all of which culminates
into high sovereign risk. This creates a feedback loop, and self-devouring
cycle that increases the interest costs on debt roll-over and new issuance in
the market which again adds additional burden to the weakened Greek fiscal
situation that requires additional funding at ever higher interest rates. The Greek
government is trapped in a vicious circle where the interest expense as well
the primary deficits are adding to the debt levels which itself goes on to
increase the interest expense. While the government is aiming to reduce its debt
in the coming years by generating primary surplus (through austerity measures)
as well as by collecting funds from the privatization and payback of financial
assistance package, this is expected (by us) to yield much lower proceeds than
budgeted, in light of the observations mentioned above.
An immediate and much larger concern is an increase in
interest cost owing to refinancing of the maturing debt as well as raising new
debt (to finance the fiscal deficits) under distressed credit conditions for
the government. Nearly 55% of the total debt is maturing over the next five
years, with nearly 10% maturing in 2010. Additionally, new borrowing will be required
to finance the fiscal deficits of the coming years.
Interest cost on government debt is on the rise as
reflected by the yield on Greek government 10yr bonds, which has risen to 6.2%
in March, 2010 from 5.7%, a year ago.
Given the higher borrowing cost for the Greek government
and the large debt roll-over and new issuance lined up, the average interest
cost is expected to increase or remain the same rather than decline. However, while making projections for 2010 and later
years, the Greek government is assuming a decline in the average interest rate
on the government debt, which would underestimate the interest expense
projected in the coming years.
GREEK PUBLIC FINANCES PROJECTIONS
While the government outlined complete projections of
revenues and expenditure along with a change in government debt in its Stability
and Growth Program, January 2010, it subsequently announced additional measures
with impact of nearly € 1.2 billion or 0.5% of GDP and € 4.8 billion or 2% of
GDP in February and March, respectively. We have built in the announced impact
of additional measures in the government projections, and based on new
projections, the government is expecting a primary deficit of 1.0% and fiscal
deficit of 6.2% in 2010, against primary deficit of 7.7% and fiscal deficit of
12.7% in 2009.
However, in light of the observations discussed in the
earlier sections, there is a strong possibility of deviation from the targeted
performance. We have therefore built three scenarios, each with a set of
assumptions about the variation from the budgeted impact of the various revenue
and expenditure measures as well as variation in the budgeted proceeds from
privatization and payback of financial assistance by Greek banks.
Over the next week or two I will comment on several other European nations whom I feel have very little practical chance of accomplishing what they have stated in public and the likely consequnces of their failure to accomplish such. I will also be releasing my pan-European stress model to subscribers, along with a public excerpt by the end of the week. In the meantime, anybody who has not caught up on my Pan-European Sovereign Debt Crisis series should click the links below.
Earlier installments of the Reggie Middleton's Pan-European Sovereign
Debt Crisis
- The
Coming Pan-European Sovereign Debt Crisis - introduces the
crisis
and identified it as a pan-European problem, not a localized one. - What
Country is Next in the Coming Pan-European Sovereign Debt Crisis? -
illustrates the potential for the domino effect - The
Pan-European Sovereign Debt Crisis: If I Were to Short Any Country,
What Country Would That Be.. - attempts to illustrate the highly
interdependent weaknesses in Europe's sovereign nations can effect
even
the perceived "stronger" nations. - The
Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to
Western
European Countries -
The
Depression is Already Here for Some Members of Europe, and It Just
Might Be Contagious! -
I
Think It's Confirmed, Greece Will Be the First Domino to Fall
-
Smoking
Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
Beware! - Financial
Contagion vs. Economic Contagion: Does the Market Underestimate the
Effects of the Latter?
