Sunday, 04 April 2010 00:00

How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight

The IMF has recently released the results of their staff consultations with Greece. Some may find it interesting, particularly where it intersects with relevant BoomBustBlog research. Let's not mince words here. Greece is going to effectively default on its debt, one way or another, and it is probably going to do it relatively soon. Shall we walk through the IMF findings from LAST YEAR and how they are actually optimistic compared to the facts that my team and I have dug up?

IMF Consultation: Greece (2009)
Context:

· After joining the EU, the income gap between Greece and the Eurozone fell on lower interest rates and the resulting “demand boom”
· Through the boom, fiscal deficits stayed at >95% of GDP, fiscal condition continues to aggravate 10 year spreads & contributes to credit downgrades (arguably a lagging indicator)
· Private Greek debt is below the Eurozone average, as is the case for non-financial corporations (governments and financial services therefore must be the source of Greek leveraging)
· Even as output has dropped, Greek wages have remained comparably high, and saw a 12% nominal increases in from 2008 - 2009
· Quality of assets on Grecian balance sheets continues to erode with end of credit based consumption in Southeastern Europe (SEE)
· Household and corporate credit growth has slowed, probably due to rising interest rates causing the opportunity cost of taking on new debt to be unmanageable (directly causing revenue shortfall at the government level)

Projections:
· IMF forecasted uncertain, and potentially negative growth from 2009 through 2010 on stagnant trade and policy based mistakes
· The EU had a much rosier forecast, citing a rise in tourism, lower dependency on trade, and government based infrastructure projects (that are paid in money taken from bond offerings and paid to construction workers at far greater than average Eurozone wages)

I have sourced the accuracy of both the IMF and the EU's forecasting in "Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!. If your well being relies on this stuff, you would be well served to subscribe to our research services. Let's take a visual perusal of what I am talking about in regards to Grecian GDP, the IMF and the EU.

image005.png

The EU/EC has proven to be no better, and if anything is arguably worse!

image031.png

Here are our considerably more realistic forecasts (premiums content: Greece Public Finances Projections).

Buyer Beware:
· Greek banks have huge exposure to SEE nations, and as credit
quality begins to erode, expect loan loss provisions to rise and ratings
downgrades to ensue (Greek bank branches in SEE have high loan:deposit
ratios)

We have went through this in exquisite detail, both in the public
sections of the blog and particularly in the subscriber-only content.
See The
Depression is Already Here for Some Members of Europe, and It Just
Might Be Contagious!

Click to Enlarge...

cee_risk_map.png

Professional and institutional subscribers should carefully reference "Banks
Exposed to CEE & SEE
" while all paying subscribers should
review the "Greek
Banking Industry Tear Sheet
".

· Greece’s external debt is 147% of GDP (think Domino effect) and
66% of that is public sector debt
· Given most of the issues facing Greece involve public sector
generosity, solutions must come from the public sector in the form of
more revenue, less expenditures, or both
· Banks have become increasingly reliant on ECB for short term
liquidity

Bank Support Measures (as of May 2009):
· Deposit insurance is now €100,000 from £20,000
· Liquidity assistance of €8 billion in zero coupon bonds eligible
for collateral with ECB
· Guarantees of loans up to £15 billion to fight rising borrowing
costs

Banking Stress Tests:
· Assumed 3% decline in GDP over 2 years, unemployment @ 12%
· 30% movement in EUR vs other developed currency pairs, as well as
40% decline in equity prices
· 10% withdrawal in deposits
Strengthening the Fiscal Position:
· With ECB setting interest rates, and higher than average
inflation, loans in Greece have tended toward being accommodative
· As conditions begin to hit downward trend, Greece wasted any
chances to pay down debt and may now add to its debt during a
deflationary spiral
· Current accommodative measures only help to the tune of 1% of GDP,
as debt payments and other expenditures are about to spike

Note from BoomBustBlog contributor: Economists and other market
researchers have stated Greece’s only hope lies in cutting expenditures
and increased revenue accountability for years, and for years we have
seen half assed “high-wage friendly” measures taken that support
government workers. No one is willing to take a wage cut during a
deflationary cycle, and that is merely one reason why a debt-deflation
collapse of Greece is seemingly imminent.

More related editorial from Reggie Middleton:

Long-Term:
· As the working age population begins to decline in 2010, debt will
continue to rise, even as worker output falls (IMF projects long term
GDP growth will settle at 1.5% YoY)

Competitiveness (or lack thereof):
· Greek wages are so high that they are among the least attractive
for business operations in the Eurozone
· The biggest way to correct this inefficiency is intense
liberalization of various public sector jobs
· While some advances have been made in high-tech industry, Greece
continues to lose private sector market share and is one of the most
difficult places to do business in the developed world
· Public sector unions are the biggest roadblock in easing business
restrictions and restricting outflow of government expenditures

Statistics:
· A good cliché for describing export growth is, “fallen down the
basement stairs, and is still laying on the ground concussed”
· Even as private non-financial services deleveraged, public
consumption and wages still saw positive growth through the crisis
· Public finances make up 40% of GDP
· IMF sees private credit increasing in this decade (but how?)

Banking Sector:
· Tier 1:Risk Capital ratios have deteriorated throughout the
previous decade
· Total debt to equity has nearly doubled over the past decade, even
as returns on equity have crumbled
Public Sector Balance Sheet:
· Financial liabilities are greater than total assets, with
projections seeing the Greek government deepening its hole into 2014
· Liabilities throughout the coming decade will exceed 500% of GDP
· External debt is surpassing the upper ranges of sustainability

Related Subscriber Content:
Banks
Exposed to CEE & SEE
(Professional and Institutional
subscribers)
Greek
Public Finance Projections

Greek
Banking Industry Tear Sheet

For the complete Pan-European Sovereign Debt Crisis series, see:

1. The
Coming Pan-European Sovereign Debt Crisis
- introduces the crisis
and identified it as a pan-European problem, not a localized one.

2. What
Country is Next in the Coming Pan-European Sovereign Debt Crisis?
-
illustrates the potential for the domino effect

3. 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.

4. The
Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western
European Countries

5. The
Depression is Already Here for Some Members of Europe, and It Just
Might Be Contagious!

6. The
Beginning of the Endgame is Coming???

7. I
Think It's Confirmed, Greece Will Be the First Domino to Fall

8. Smoking
Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer
Beware!

9. Financial
Contagion vs. Economic Contagion: Does the Market Underestimate the
Effects of the Latter?

10. "Greek
Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on
Fire!

11. Germany
Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort
of...

12. The
Greece and the Greek Banks Get the Word "First" Etched on the Side of
Their Domino

13. As
I Warned Earlier, Latvian Government Collapses Exacerbating Financial
Crisis

14. Once
You Catch a Few EU Countries "Stretching the Truth", Why Should You
Trust the Rest?

15. Lies,
Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

16. Ovebanked,
Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

17. Moody's
Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks

The
EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

Premium Subscription research for the following sovereign states and
their respective domiciled banks at risk are available for immediate
download.

LATEST SOVEREIGN DEBT CRISIS SUBSCRIPTION CONTENT

Last modified on Sunday, 04 April 2010 00:00