Presenting the new, improved, contingent liabilities-laden Eurostat data release.
But first — an atrocious set of numbers on 2010’s EU government deficits and debt, with one name sticking out above all…
Eurostat confirmed its 2010 deficit reached 10.5 per cent of GDP. The government aimed for 9.4 per cent and was busy hooting it’d achieved as much in January. With debt to GDP fast approaching 150 per cent of GDP, an uncertain IMF debt sustainability review in June, and some sort of crisis summit in May, they’re really not hooting now.
In fairness, the Greek finance ministry is pointing out that the deficit’s fall of five percentage points was still huge, although it’s blaming the recession for the rest:
In summary, it is clear that the above-mentioned differences are mainly the result of the deeper than anticipated recession of the Greek economy that affected tax revenues and social security contributions. At the same time, they underline the difficulties in reducing the deficit in areas of the budget or of the public administration where more effort is necessary…
But we all know Greece is in a bad state, and we all knew that it would come in with a deficit over 10 per cent.
What’s really special about this Eurostat release is the coverage given to contingent liabilities, notably banking ones, on sovereign balance sheets all over Europe. It’s Eurostat versus the taxpayer put.
For a start, also stinking in the cold, hard light of Eurostat is the UK’s 10.4 per cent deficit as a portion of GDP. Bad — very bad — but also a fitting introduction to Eurostat’s new zeal.
Here for example are the UK data:
Plenty of fiscal car-crash to ogle there, but here’s a nice turgid Eurostat note explaining a little bit of the damage:
Eurostat has also amended the deficit and debt data notified by the United Kingdom for the years 2008 to 2010 (as well as for financial years 2008/2009 to 2010/2011), to ensure compliance with the Eurostat guidance note of 16 March 2011 on financial defeasance structures, with respect to Bradford & Bingley (B&B) and Northern Rock Asset Management (NRAM). This leads to an increase in government deficit by 360 mn GBP (0.03% of GDP) in 2008 (as well as in financial year 2008/2009), by 571 mn GBP (0.04% of GDP) in 2009 (as well as in financial year 2009/2010) and by 1 023 mn GBP (0.07% of GDP) in 2010 (as well as in financial year 2010/2011). The reported debt figures are increased by 32 374 mn GBP (2.24% of GDP) in 2008 (as well as in financial year 2008/2009), by 19 969 mn GBP (1.43% of GDP) in 2009 (as well as in financial year 2009/2010) and by 56 821 mn GBP (3.89% of GDP) in 2010 (as well as in financial year 2010/2011).
These ‘financial defeasance structures’ repay a closer look.
Beneath the jargon, all Eurostat means is government-backed purchases of assets ‘in excess of their long term market or fair value’, and then usually held in order to avoid fire sales.
The assets leave government with the risk of final loss, therefore they go on government accounts. Eurostat explains:
In this context, for various reasons the government puts itself in a position to bear the major risks attached to the assets and/or to ensure the long term management of such assets. In case of public units the government takes ownership of the entity (nationalisation) and intervenes, directly (capital injections for covering losses, loans etc.) or more indirectly, through the granting of guarantees, and sometimes through a public entity, owned directly or indirectly (through some public financial corporations) by government.
Sounds fairly simple but it’s weird where defeasance structures have been popping up, beyond the obvious case of Ireland.
To take a topical example: Portugal’s submission to Eurostat in March (pre-bailout) revised the 2010 deficit to 8.6 per cent, because of defeasance structures detailed in this chart:
They include assets from two lenders (Banco Português de Negócios and Banco Privado Portguês) which blew up in the financial crisis and now receive government guarantees, plus diverse refinancing liabilities from Portugal’s notorious public transport companies.
Funnily enough, Parvalorem, one of the vehicles responsible for impaired bank assets, appears to have spent late 2010 issuing bonds like there was no tomorrow. Seems odd, but no doubt we have gone far enough down the rabbit hole on Portuguese fiscal accounting already. (Even then, Eurostat went back and added some toll motorways backed by the government, bringing the deficit to 9.1 per cent.)
Suffice to say however that this is all being discussed by those arranging Portugal’s bailout, so it’s worth going into.
Indeed, to top it all off, this is the first proper release in which Eurostat has included loans to other governments as a contingent liability, jargon for the EFSF bailouts. (They warned about doing this.)
It all adds up given the generally rubbish fiscal state of Europe.
Eurostat gathers these numbers in order to test governments’ compliance with the Maastricht criteria, which limit deficits to 3 per cent of GDP. These criteria were at one time important for deciding euro membership.
On that criterion, only Luxembourg, Finland and Estonia would remain eligible to join as members today. Estonia joined in 2011.
This ‘eurozone’ thing… bit of a defeasance structure.
Portugal – prepare for more privatisation – FT Alphaville
A sudden rise in Britain’s debt-to-GDP figures? Blame the banks – FT Alphaville