Well, the Greeks have a budget now…
ATHENS (Reuters) – Greece will borrow about 54 billion euros ($77 billion) next year to plug fiscal shortfalls and refinance debt, the country’s deputy finance minister said on Thursday.
“Borrowing needs in 2010 will be lower than those in 2009 and will reach about 54 billion euros,” Deputy Finance Minister Philippos Sachinidis told Imerisia financial newspaper in an interview.
But the question is will it be good enough. From another Reuters article, we find out the new budget is looking to cut borrowing from 12.7% of GDP to 9.1% of GDP. A 360bp cut in the deficit is pretty sizable in one year. But I wonder what they expect GDP to be in the new year. In any event, here’s what they assume about government spending and revenues:
Despite an economic slump, the government expects ordinary budget revenues to increase by 9 percent next year. Spending before debt service payments is seen shrinking by 3.8 percent.
Many analysts believe the budget targets are attainable but provide no guarantee for fiscal restraint in subsequent years as they rely on one-off measures such as a windfall corporate tax and a crackdown on tax evasion.
Frankly, this is unrealistic. This tells me the government has an upward bias in their GDP projections because revenues (i.e. taxes) are projected to increase. The one-time windfall tax and increased tax receipts via tax evasion crackdowns will, in all likelihood, yield worse results than they expect. So aside from a lot of fresh revenue via these two programs, there are only two ways their projected revenues can increase: 1) lower tax rates or leave them as they are and assume the increase in GDP in other sectors of the economy lift government revenues (rising tides lifting all boats), or 2) you raise the tax rate in a falling economy. I don’t know for sure what their approach was, but if I was a politician trying to keep votes and assuage the concerns of outsiders that we had our debt under control, I’d project GDP growth would be strong enough to make those forecasts.
Now having said that, I’ll bet dollars to donuts if you back tested the forecasts in years past to actual experience, you’d see the projections they probably baked into the budget were, well, half-baked at best. I’m not going to accuse them of putting out faulty forecasts and telling people what they want to hear rather than what they need to hear, it’s already been admitted by the government that they have a corruption problem and numbers they produced before were faulty.
But let’s get back to their projections. Given that I suspect the GDP and budget numbers are too rosy, I suspect the Greeks will be playing a game of catch-up this coming year. As GDP, in all likelihood, gets revised lower, the government will have to ratchet down spending to meet their estimates and stay on budget. Because as I see it, this has the potential to become a fiscal death spiral. The Greek government, in an effort to keep their sovereign debt rating in the investment grade space, cutting back on government spending, chasing lower GDP figures the entire way down. Because at this point, if they want nations and other to buy their debt they need to defend the country’s debt rating and they may have reached the point where their backs are against the wall.
Intervention via Berlin and Brussels would look bad. Defaulting would look bad. Fiscal restraint by the Greek government probably provides the best option, but it’s not pain-free.
But as far as the markets, Brussels, the ECB and others on the continent are concerned, we’re beyond pain-free options at this point.