Sunday, May 2, 2010

The Greek Bailout Patch Job

Goldman analyst Erik Nielsen breaks it down:
It is now clear that the total financing package will be “only” EUR110bn (as opposed to the EUR135bn that I had expected following the rumours on Thursday) with EUR80bn coming from the 15 Euro-zone countries and EUR30bn from the IMF. I maintain my estimate that the total financing requirement will be about EUR150bn over the next three years, so this means that the program will not be fully financed throughout, and that the IMF and EU expect them to regain access to commercial financing probably towards the end of the second year of the program. The program is surely fully financed for the next 12 months.
Nielsen's numbers have a built in assumption that the IMF demanded "austerity program" is for the most part successfully imposed by the Greek government on the Greek people. As Aerosmith might say, dream on. Here's Nielsen again on what the IMF austerity program calls for:
In terms of fiscal policies, the famous 13th and 14th month salaries for public employees will be eliminated for those earning over EUR3,000 a month and capped at EUR1,000 for those earning less.

In addition, all public sector salaries will be frozen until 2014 and allowances (another income stream for public employees) will be chopped by another 8% (on top of the 12% cut already announced.)

On the revenue side, the VAT rate will increase by an additional 2% (to 23%) on top of the increase announced in March of 2% to 21% and excise taxes on fuel, tobacco and alcohol will increase by another 10%.

In addition, there’ll be new taxes on properties and the gaming industries; all topped off with a one-off tax on what’s been reported as “highly profitable” businesses.

All in all, these measures are estimated to cut the budget deficit from 13.6% of GDP last year to 8.1% of GDP this year, to 7.6% in 2011, to 6.5% in 2012, 4.9% in 2013 and to 2.6% by 2014; all under the assumption that GDP will contract by 4.0% this year, followed by -2.6% next year, and then stage positive growth of +1.1% in 2012 and +2.1% in each of 2013 and 2014. If so, public debt to GDP will peak in 2013 at 149.1%, and decline to 144.3% in 2014.
I can't see the Greek government getting any of these items passed, much less all of them, so the problem starts in the here and now. There is no way that the budget deficit drops from 13.6% of GDP to 8.1% this year.

Announcing the deal with the IMF on nationwide television, Greek prime minister George Papandreou said: "I have done and will do everything not to let the country go bankrupt...With our decision today our citizens will have to make big sacrifices."

The response from the citizenry was immediate. A bomb exploded at a branch of HSBC bank in Athens.

Papandreou said the size of the bailout was "without precedent" in the world.That's true, but the record is likely to be surpassed within months as Spain enters stage left.

Bottom line: This patch job allows for a further bailout of banksters, who are hoping to fully get out of Greece before this patch job blows.

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