The pain is falling on Spain (in the main), but the week’s stock market panic started with fears that the IMF-led austerity plan buttressing Greece’s bailout won’t work.
Apt fears.
For as Barclays Capital’s Laurence Boone and Julian Callow point out on Wednesday, the fiscal maths behind the Economic Policy Programme is looking ever more heroic, never mind the ongoing strikes against passing the programme in the first place.
As they explain, this is what Greece has set out to do on healing its debt/GDP ratio:
The presentation of the main economic arithmetic behind the Greek Economic Policy Programme (EPP), as agreed with the IMF, EC and ECB, reveals the enormity of the task ahead. The programme envisages that the general government deficit will be cut from 13.6% of GDP in 2009 (which could be revised to about 14%) to 8.1% of GDP this year, 7.6% in 2011, 6.5% in 2012, 4.9% in 2013 and 2.6% in 2014. Assuming Greek real GDP expansion is about 2.1% by 2013-14, this implies the debt/GDP ratio would peak at 149% in 2013 (note that the authorities seem to be including an assumption that the public debt/GDP ratio will be revised up 7pp, which would take the 2009 ratio to 122%).
But…
BarCap predicts the debt/GDP ratio will instead squeak to a peak of 151 per cent some time in 2014 or 2015. BarCap also believes that Greek GDP expansion might well disappoint compared to the bailout-makers’ calculations.
And it’s GDP which should surely be of some concern.
After all, as the note continues, far lesser feats of austerity than Greece’s have often depended on a healthy GDP kick (emphasis ours):
Greece is attempting to adjust its primary balance by a magnitude that has seldom been achieved historically in western Europe (Figure 7). [Chart below, click to enlarge:]
While the details of the planned primary balance path under the EPP have not yet been published, we estimate the ratio is likely to be projected to be about 4-6% of GDP by 2014. In turn, this implies an improvement in the primary balance/GDP ratio of 13.5pp. Such an episode of fiscal tightening, if achieved, would constitute a near-record.
Yet such fiscal tightening would be different from other episodes because in the most of the other examples listed, nominal GDP expansion had been boosted by substantial declines in short-term interest rates, while in many cases the real trade weighted exchange rate had depreciated significantly as well. In all cases shown in Figure 7, nominal GDP grew strongly, which helped the deficit itself (via stronger receipts) as well as the denominator. However, it is hard for us to envisage that Greece will be able to generate much expansion in nominal GDP in the current circumstances, given that it is within the monetary union and is also faced with the need for significant competitive adjustment against Germany, which could prove deflationary.
Which lends a bit of weight to Martin Wolf’s and Paul Krugman’s calls for Greek debt restructuring to be put back on the table — despite the protests of Germany’s finance minister, who has said it’s not in prospect.
Oh dear. Restructuring itself would be a mathematical headache and a half in terms of helping Greek solvency, of course. Looks like a job for Archimedes. (Or Pythagoras, or Thales, or Euclid…)
Full BarCap note in the usual place.
Related links:
Breaking down the bailout – FT Money Supply
Go Greece tightening… – FT Alphaville
Greece faces a Herculean adjustment task – FT Alphaville