SocGen’s Dylan Grice is one person not bored with Greece. In fact, he believes it is the beginning of a wave of government funding crises, not the end.
The reason? The colossal amount of government debt that needs to be issued.
I’m not a bond strategist and I’ve not done anything sophisticated or clever, but by taking Bloomberg’s data for existing debt maturity for each government (red) and using the OECD’s projected 2010 deficits as a proxy for net new issuance (grey) my numbers shouldn’t be too far out. But if my numbers are even roughly right and issuance is the problem, Greece should have had almost the least to worry about!
This concerns Grice because of the unavoidable arithmetic behind debt sustainability, namely; the interest a country pays on its debt must equal the nominal growth rate of that country.
If it does, the incremental government revenue generated by the economic growth will pay for the coupons on the debt. If it doesn’t, a shortfall develops between incremental revenues and incremental coupon payments and in the absence of further austerity, more debt is required to finance the deficit.
This might sound abstract, but it’s exactly what happened in Greece. When the first austerity plan was presented, Greece cut public sector wages by a painful 10% causing angry protest and social unrest, although it saved the government EUR650m. But the same austerity plan assumed Greece’s interest cost would be 4.7% and by late February it was paying 6.25%. According to the WSJ, this has blown a EUR700m hole in its budget, more than offsetting the savage public sector wage cuts already enacted.
Given that everyone is subject to these iron-clad laws of budget sustainability then everyone is vulnerable to a reassessment of sovereign risk by the market, says Grice.
And if you thought Greece was somehow different from the UK, US et al think again, says Grice.
But it’s not just about getting this year out of the way. If it can happen in Greece, it can happen everywhere else too, because Greece just isn’t that different.
OK, so it misrepresented the size of its liabilities but so too do most other governments; its real fiscal problems are hidden off-balance sheet in the enormous welfare obligations it can’t afford to pay and so are most other governments; its debt maturity isn’t notably different from the rest of the OECD’s (at about eight years it’s actually longer than those of the US and of Japan); and its projected budget deficit is lower than those projected in the UK and the US (third chart inside).
So there you have it – if can happen in Athens if can happen anywhere.
The Greek tragedy of being unable to pay for the debt built up during the years of unprecedented low yields reads across to the rest of our governments all too well. The fact is most of us are living on the same knife edge.
Although it is of some comfort that the UK’s debt maturity profile – by luck or accident – does not look that bad.
Related links:
When to sell gold? – FT Alphaville
‘Japan’s brewing fiasco’ – FT Alphaville
‘Some useful things I’ve learned about Germany’s hyperinflation’ – FT Alphaville