Greece Once Again Misses Its Deficit Target

Greece's situation becomes ever more untenable. The so-called 'troika' of EU/IMF/ECB is in Athens, perfunctorily checking the government's books and controlling its progress in lowering its budget deficit (or rather, the lack of such progress), while a mob of justifiably angry protesters is thronging the streets of the city, demanding an end to the government's austerity measures. The visit is supposed to conclude on Wednesday.

It has now turned out that Greece will once again miss the deficit target imposed by the bailout lenders, as its economy continues to circle the drain, contracting much faster than originally anticipated. This should be no surprise, as the Greek government has gone about its austerity plans in the worst manner possible. The canard that 'austerity just doesn't work' is of course utter nonsense. If that were true, then Ireland would not be on the verge of succeeding with its program. The problem is that the PASOK-led Greek government is scared to tackle the bloated public sector, as that is where its support base is entrenched. At the same time, it has been dragging its feet over privatization plans for exactly the same reason. The radical leftist unions that populate the firms that should be privatized stand in the way: no-one wants to surrender his 'free lunch' and there were, and presumably still are, plenty of free lunches in Greece (just as a reminder, there is a state-owned hospital in Athens that employs 45 gardeners – alas, it has no garden. This example describes better than any other what is wrong with Greece).

As we mentioned on a previous occasion, even the Greek tax collectors are on strike. They are striking even during those times when they are not officially striking. They just 'go slow', which in Greece means they do nothing at all.

The government has attempted to improve tax collection to no avail. It then set about meeting its austerity goals by raising the very taxes it generally fails to collect. Even the trick to attach the new property tax to electricity bills is about to fail due to the iron grip of the unions on the main state-owned electrical utility. Every honest tax payer in Greece must feel like a complete idiot by now.

If a government tries to lower its deficit during an economic contraction primarily by raising taxes instead of cutting spending, it will invariably create a debt trap from whence it is impossible to escape. The proper way of dealing with economic contraction is to lower the burden of government on the economy. By relying primarily on tax hikes, Greece's government has done the opposite. There is talk about firing a certain number of bureaucrats to lower the government's expenses. Alas, it has turned out that this plan was a complete sham from the outset (see further below).

Meanwhile rumors are beginning to circulate that prime minister Papandreou is 'tired' and wants to step down (officially denied in the meantime). This would result in new elections which PASOK would lose, no doubt a salutary event if it were to happen. Alas, from the point of view of financial markets, the timing couldn't possibly be worse, as it is well known that the opposition party's leader Antonis Samaras wants to renegotiate the terms of the bailout. However, , Samaras has the right ideas, as he is advocating a 'smaller state and lower taxes'. As he says, it is clear that sacrifices must be made, but there must be at least some prospect of a light at the end of the tunnel.

Regarding the missed deficit target Reuters reports:

The 2012 draft budget approved by cabinet on Sunday predicts a deficit of 8.5 percent of gross domestic product (GDP) for 2011, well short of the 7.6 percent target.

The 2012 deficit is set to meet a nominal target of 14.6 billion euros, but at 6.8 percent of GDP it falls short of a target of 6.5 percent, because the economy will shrink further.

"Three critical months remain to finish 2011, and the final estimate of 8.5 percent of GDP deficit can be achieved if the state mechanism and citizens respond accordingly," the Finance Ministry said in a statement. ['can be achieved' means it is not certain that it will be achieved, ed.]

European officials are scrambling to avert an abrupt Greek bankruptcy, which would wreck the balance sheets of European banks, jeopardise the future of the single currency and potentially plunge the world into a new global financial crisis.

European Union officials say the troika's assessment of Greece's future prospects could determine whether it needs to demand more debt relief from private creditors, a measure that could effectively amount to default.

In Sunday's documents, GDP is predicted to fall by 5.5 percent this year. Government sources said it was expected to shrink 2-2.5 percent next year. Those numbers are in line with recent forecasts by the IMF, but much worse than predictions used to calculate a 109 billion euro ($146 billion) bailout in July, which anticipated Greece posting 0.6 percent growth next year.

The shortfall in the 2011 deficit target means Greece would need almost 2 billion extra euros just to finance its expenses for this year. It also means additional emergency tax hikes and wage cuts announced in the past two months to hit the target have not been enough to put Greece's finances back on track.

"The vicious circle continues for the government," said Yannis Varoufakis, economic professor at Athens University. "We have disappointing revenues, missed targets and this will bring new measures and new austerity."

On the plans regarding cutting down the bloated civil service to a size commensurate with what Greece can perhaps one day afford, the same article reports:

To persuade the troika to release the next tranche of loans, Greece has promised to raise taxes, cut state wages and speed up plans to reduce the number of public sector workers by a fifth by 2015.

The cabinet approved a particularly contentious part of the plan on Sunday, creating a measure to reduce the number of state workers, a legal and political minefield in a country where government jobs are explicitly protected by the constitution.

The measure adopted by the cabinet on Sunday creates a "labor reserve" allowing 30,000 state workers to be placed on 60 percent pay and be dismissed after a year.

But the government softened the blow — and saved less money than troika inspectors initially sought — because about two-thirds of the workers would be near pension age and due to retire soon anyway. The rest would be from state firms that would merge or shut down.”


The austerity measures are deeply unpopular, and public sector unions hope a campaign of strikes and demonstrations can wreck the Socialist government's resolve to enact them. Striking civil servants have disrupted the talks with the troika over the past days by blockading ministries.


(emphasis added)

Moreover, we want to remind readers that there is a great human tragedy associated with all these numbers. Unemployment is for instance expected to reach 16.4% next year, an estimate that could prove optimistic. Meanwhile, the total public debt-to-GDP ratio will clock in at nearly 173% in 2012.

It should be clear from this that the recent talks about a 'bigger private creditor haircut' being required are not just idle chit-chat. It will eventually become a necessity – alas, once again the timing is ill-chosen.

The method of the eurocrats thus far is to enact measures that by the time they are implemented are considered 'too little too late' by the markets. Then a market panic ensues, new emergency meetings are held and another batch of ad hoc measures is promised amidst a cacophony of squabbling and bickering. By the time these new measures are finally enacted, the crisis has already moved on to its next phase, and once again the measures are seen as too little too late by the markets. This seems bound to continue until something really breaks.



Shortly after this article was written, it became known the EU's finance ministers will delay payment of the bailout tranche to Greece to mid November. This means that Greece is almost certainly effectively bankrupt and a 'hard default' becomes highly likely. Recent reports indicated that the government will run out of funds by mid October, which means it won't be able to continue to function beyond that point, although JC Juncker of the eurogroup inists that Greece will be able to continue to pay civil servants until mid November.

Regardless, this decision is certain to worsen the panic in financial markets and could well precipitate the awaited banking crisis in Europe.


Greek prime minister Papandreou – reportedly he is 'tired' and wishes to step down. We can't fault him for that.

(Photo via London Evening Post )



Meanwhile, even the at one time strongly pro-euro Financial Times (at the time of the euro's introduction, the paper agitated for the UK to join) now thinks that 'Greece is a lost cause'.

US and European Banks Under Pressure

As we have mentioned yesterday, US banks and investment banks have suddenly come under a great deal of pressure, essentially mimicking their brethren in Europe. Needless to say, euro area banks have resumed their trek South on Monday after a brief respite last week when their shares briefly rebounded.

As reported at 'Fierce Finance', the 'comprehensive state mortgage settlement is dead', following the decision of California's attorney general to join New York and pull out of the settlement talks with the banking industry.

As Reuters reports, the remaining states are still resolved to continue the discussions, but there can be no doubt that this has dealt a severe blow to the process, as California is home to an enormous amount of mortgage delinquencies and foreclosures. The bubble was especially pronounced in California and this means that Bank of America must brace for its associated liabilities to soar, a legacy of its ill-advised takeovers of Countrywide and Merrill Lynch.

Not surprisingly, BAC has plunged to new bear market lows and with it the banking index and the S&P 500 index, all of which closed at new lows for the year on Monday, in the process breaking the important support levels established in August. As we have noted, the more often such support levels are 'tested', the more likely they are to break and this has now indeed happened.



Shares of Bank of America – first they surrendered the 'Buffett hopium bounce' and now they have crashed to new lows. We will possibly soon find out if the bank is still considered 'too big to fail' – click for higher resolution.



The Philly bank index (BKX) – the new mother of all ugly charts is plumbing new depths – click for higher resolution.


The S&P 500 index – a convincing break to new lows on rising volume – click for higher resolution.

The markets also continue to be especially worried about investment bank Morgan Stanley. Its stock has been mercilessly hammered and as you will see further below, CDS on its debt continue to blow out sharply.


The stock of Morgan Stanley (MS) continues to get hammered on soaring trading volume – click for higher resolution.



Meanwhile in Europe, the eternal problem child of the banking scene, Belgian bank Dexia, has elicited promises of government support from Belgium and France this morning, following a crash of its already minuscule share price on Monday as concerns over its solvency mount.



Shares of Dexia crash on Monday amidst growing worries over the bank's solvency – click for higher resolution.



As Reuters reports:

France and Belgium will guarantee the financing of stricken bank Dexia , finance ministers pledged on Tuesday as officials prepared a rescue designed to stop its troubles from worsening the euro zone crisis.

"We are going to take action concerning our banks, and the decision taken so far is to act with a guarantee," Belgian Finance Minister Didier Reynders said after a joint government statement that followed a 38 percent drop in the banks share price in early trading.

Brought low in recent weeks by the bank's exposure to the euro zone's weakest country, Greece, shares in Dexia recovered some ground after the pledge, but still stood 17 percent lower at 1050 GMT.

That valued its equity at around 2.5 billion euros ($3.3 billion) according to Reuters data — in contrast with a holding of 3.8 billion euros of Greek sovereign bonds and the bank's total credit risk exposure to the country of 4.8 billion euros, one of the largest among non-Greek lenders.

Dexia stands to lose more still if European finance ministers decide to make banks take bigger losses on Greek debt than they have already agreed to accept. Ministers were discussing exactly that on Tuesday.

Its troubles also date back to 2008, when short-term credit dried up because a large proportion of its long-term lending to public authorities was financed by short-term borrowing. Bank-to-bank lending was once again under pressure on Tuesday with rates at their highest in over a month.

Dexia's overall credit risk exposure is 511 billion euros, of which 59 billion is in the United States. So its exposure to the multi-trillion dollar U.S. municipal debt market has the potential to reverberate across the Atlantic too.


(emphasis added)

So France and Belgium will guarantee Dexia's debt, but where will it all end? After all, Dexia is merely the weakest link in what is a very big chain indeed. Here we see a prime example of how the timing of Greece's always inevitable default couldn't have come at a worse time. Once again we are reminded that the crisis is at its core a crisis of the fractionally reserved banking system. The only thing that is different from before is that people have finally noticed how big the systemic risks are.

Euro Area and US Credit Market Charts

Below is our usual collection of charts of CDS spreads, bond yields, euro basis swaps and a number of other charts. Prices in basis points, with both prices and price scales color-coded where applicable. All prices are as of Monday's close. Some of the sovereign CDS in Europe dipped a tiny little bit on Monday, but CDS on US and Australian banks continued their relentless march higher. CDS on Japan's sovereign debt and that of CEE nations also keep climbing. Risk remains extremely high.

5 year CDS on Portugal, Italy, Greece and Spain – click for higher resolution.

5 year CDS on Ireland, France, Belgium and Japan – Ireland keeps improving, but the rest continued to climb on Monday – click for higher resolution.


5 year CDS on Bulgaria, Croatia, Hungary and Austria – these all keep rising – click for higher resolution.


5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – also rising further – click for higher resolution.


5 year CDS on Romania, Poland, Slovakia and Estonia – most pushing higher again. Note that several CEE nations are relying on credit from Greek bank subsidiaries. A Greek default is going to redound on them, and in turn on other lenders to the region – click for higher resolution.


5 year CDS on Saudi Arabia, Bahrain, Morocco and Turkey – no let-up either in this group – click for higher resolution.

10 year government bond yields of Ireland, Greece, Portugal and Spain – all bouncing a little on Monday – click for higher resolution.


10 year government bond yields of Italy and Austria, UK Gilts and the Greek 2 year note. Once again the 'safe haven' debt instruments are catching a bid – click for higher resolution.


Inflation-adjusted yields have bounced a little bit of late, which constitutes a small divergence relative to the relentless selling in stocks – click for higher resolution.



Three month, one year and five year euro basis swaps – going further into negative territory on Monday – click for higher resolution.

Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – it continued to rise on Monday – click for higher resolution.



A long term chart of 5-year CDS on Citigroup – once again jumping on Monday by a big 34 basis points – click for higher resolution.


A long term chart of 5 year CDS on 'derivative king' JP Morgan. – tacking on more than 17 basis points on Monday – click for higher resolution.



5 year CDS on Morgan Stanley (MS), short term – up by a huge 92 basis points on Monday. This is beginning to look extremely worrisome – click for higher resolution.

5 year CDS on MS, long term – we're far from the 2009 highs, but this is little comfort – click for higher resolution.


5 year CDS on Australia's 'Big Four' banks hit a new high as well. We can imagine that a few bank CEO's down under probably have sleepless nights by now. In this context, a reader recently mailed the following links to stories about the ever more wobbly looking housing bubble to us: 'House prices continue to fall' and 'More Aussies Failing Mortgage Repayments'. It is beginning to look grim for Australia – click for higher resolution.




Charts by: Bloomberg,,



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