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Sourse:Greek Salad Recipe
Amid the clamour over the Greek debt crisis, a far more perilous threat to the global economy is becoming increasingly apparent. The global economic and financial crisis has wreaked havoc on the United Kingdom's public finances, with no clear path to salvation.
Consider the following statistics. Greece has a GDP of approximately $350 billion, compared with $2.2 trillion for the UK. In other words, the Greek economy is only 16% the aggregate size of Great Britain's. The proportion of Greece's annual deficit to GDP is 12.5%, a figure that has triggered the current Greek sovereign debt crisis and panic search for a bailout formula within the Eurozone. Yet, in the much larger UK economy, the deficit to GDP ratio has reached 13%, an even higher level than for Greece, which has aroused so much fear among global investors and policymakers. Furthermore, while the UK's official public national debt comprises 68% of GDP, a figure lower than America's and much lower than with Greece, that level of indebtedness is accelerating at a rapid rate. It must be recalled that only three years ago the UK national debt to GDP ratio was only 38%, and with double digit deficits now an inescapable fiscal reality in the United Kingdom, it seems almost certain that the nation's public debt will exceed 100% of GDP within the next three years. Furthermore, it is widely believed by analysts and investors that off balance sheet public debts (as was similarly revealed in relation to Greece's current debt crisis) and unfunded contingent liabilities significantly add to the official figures.
What do these dismal statistics tell us about the future trajectory of the UK's profound sovereign debt and economic crisis? Consider what Kornelius Purps, fixed income director at UniCredit, Europe's 2nd largest bank, told the British newspaper,The Daily Telegraph; “Britain's AAA-rating is highly at risk. The budget deficit is huge at 13% of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that.”
In effect, the UK economy is at a dangerous tipping point. Massive public indebtedness occurred as a result of the government's bailout of its banks, yet businesses remain afflicted by a severe credit crunch. Massive stimulus spending has added enormously to the deficit, but the only result has been suspect figures that, if interpreted most optimistically, show that the UK's economy has essentially flatlined after incurring a sharp contraction in economic output during the height of the global financial crisis.
The predictable outcome, as alluded to by Kornelius Purps, is that in the future the UK's treasury gilts will be unable to finance the nation's prodigious borrowing needs with historically low interest rates. At some point, perhaps sooner than many realize, interest rates on the UK's debt instruments will rise precipitously. This will occur while GDP growth is at best sluggish. Sharp reductions in public spending will almost certainly tip the economy back into deep recession, further constricting revenue and maintaining London's fiscal imbalance. However, the alternative is even more unpalatable. The sovereign bond market will demand increasingly higher yields, leading to a fiscal reality that is unsustainable. Ultimately, the United Kingdom will face the real prospect of national insolvency, with all the predictable dire consequences.
This grim trajectory has an even darker meaning for the United States. As bad as the UK's fiscal situation is, America's is far worse. Its annual deficit to GDP ratio is only marginally lower than Great Britain's. Furthermore, its national debt to GDP correlation is significantly higher. More importantly, the average period of turnover on the United Kingdom's debt is 14 years, compared with a mere four years on U.S. Treasuries. Once bond yields start to rise, the short term structure of America's national debt will incur a vast increase in annual interest payments.
It seems to this observer that it is only a matter of time before the UK sinks into an irreversible sovereign debt cataclysm, with the United States not far behind. Anyone who believes that the same political establishment and financial elites that have led both nations to this hellish fiscal precipice can now lead us to a sustainable solution is, in all probability, being excessively hopeful.
Greece has a E8.22 billion redemption due on April 20 and another E8.086 billion payment on May 19, which must be refinanced. It also has sizeable coupon payments in coming months, which total E3.923 billion.
Greece has so far raised E8.0 billion with a new five-year benchmark bond issued via syndication on January 26. It has also raised E2.0 billion in a private placement conducted in December, which was seen as pre-funding for 2010.
In addition, the debt agency has raised E2.8 billion through sales of T-bills with 13-week, 26-week and 52-week maturities, in part to cover a T-bill redemption of E1.51 billion that was due on January 15 and of E1.95 billion redeemed on January 22.
Greece's borrowing programme for 2010 is estimated at E54 billion, considerably less than last year's E66.0 billion.
In the meantime, while both Moody's and Fitch have affirmed their negative outlooks on Greece, both rating agencies can't find enough praise just how wonderful yet more actionless yapping out of Ellada is. And now add the IMF to that list, after the Currency Board expert said that it “welcomes substantial measures by Greece today” and “stands ready to support implementation of the Greek plan (with TECHNICAL assistance).” Whether this means that the IMF's 191 tons of gold (for ~$7 billion) will be sold tomorrow is unclear.
The only voice of reason here seems a little line in the Fitch report which notes that the “debt market access window is closing quite rapidly.”
Full Moody's report below, which is preparing its brand new AAAA rating, especially for Greece. Somehow merely talking about austerity measures is now considered sufficient. We fully expect Arnie to come out and say that California will adopt the same austerity as Greece… in 3049. And Moody's VP Sarah Carlson will be first in line to believe any and all promises. Former Moody's employee Deep Shah had no comment as of the time of this posting.
Moody's: Greece's New Austerity Measures Lend Credibility to Fiscal Adjustment Plan
London, 03 March 2010 — Moody's Investors Service today said that the additional fiscal
measures announced by the Greek government are consistent with Moody's
current A2 rating, with a negative outlook, for Greece's
government bonds. Today Moody's also published an Issuer
Comment, entitled “A Ten-Point Analysis of Greece's
A2 (Neg) Rating”, which reiterates the rating agency's
rationale behind Greece's rating and the conditions under which
that rating could change.
“These new measures are a clear manifestation of the government's
resolve to regain control of public finances,” says Sarah
Carlson, VP-Senior Analyst in Moody's Sovereign Risk
Group and lead analyst for Greece. In an economic and market environment
that has become increasingly challenging, these measures increase
the probability of debt stabilization provided that they, and the
previously announced policy measures, are fully implemented.
“The onus is on the government to demonstrate that it does not merely
announce ambitious plans, but is also able to deliver on these commitments,”
says Ms. Carlson. “However, Moody's does
not expect Greek public finances to be turned around in a fortnight,”
adds Ms. Carlson, insisting that the Greek government needs
to be given time to allow it to follow through on its plan.
As repeatedly stated by the rating agency, Greece's current
A2 (Neg) rating balances two factors: on the one hand, Moody's
assessment that the government faces limited short-term liquidity
risk; on the other, Moody's concern about the long-term
erosion in Greece's creditworthiness given its need to deleverage
the economy (starting with the public sector) in a context of weak competitiveness
and slow regional growth.
Going forward, maintaining the government bond rating at A2 will,
according to Moody's, be contingent upon the government executing
its fiscal austerity programme and delivering the quantum of deficit reduction
that has been promised. Signs that deficit reductions will fall
short of what has been promised would likely lead to downgrades —
as suggested by the negative outlook — in proportion with the shortfall.
Moody's last rating action on Greece was implemented on 22 December
2009, when the rating agency downgraded Greece's government
bond ratings to A2 from A1, with a negative outlook.
The principal methodology used in rating the government of Greece is Moody's
Sovereign Bond Methodology, published in September 2008, which
can be found at www.moodys.com in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on the Moody's website.
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