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1/27/10

Does anyone Really Know the Size of The Greek 2009 Deficit? - by Edward Hugh

Greece: According to the report which Kathimerini had sight of, Greece’s public sector debt could be over the officially reported one by some 300 billion euros. The report, which was requisitioned by the Finance Ministry from an independent committee of six widely respected experts, found that outstanding obligations relating to areas like unpaid arrears to public sector suppliers, interest rate swaps with commercial banks, and debt guarantees for public sector companies have all been excluded from the official data. "Beyond the officially declared 300 billion euros, fiscal chaos is covering up a public debt of many billions of euros" according to Kathimerini. "The Committee recorded in detail all manner of distortions and misunderstandings in the system used to collect and monitor data. But the ingredient that can lead to the conclusion that this is a report to catapult the country's fiscal problems into the limelight are those concerning the manner of recording or not recording of public debt". Some of the comments the experts make on these topics are:

1. Debt as currently recorded has been reduced through a number of "interest rate swaps. One such trade involves the use of Greek banks. The government owes, for example, the National Bank of Greece about 5.5 billion, which is not recorded in outstanding debt. The agreement was originally with Goldman Sachs and it was then passed to National Bank of Greece. The 5.5 billion euros involved is effectively a 30 year loan, and during this time both parties pay interest to each other, with the difference that the State pays a much higher interest to NBG than the NBG pays to the state. That is, the debt is paid off through higher interest payments rather than via the normal amortization process.

2. Credit providers: The European System of National Accounts (ESA) does not take such provision into account because government debts must normally be paid within 60 days. Greece, however, does not comply with the normal condition of early repayment, thereby releasing billions of euros in extra debt, debt which is later recognised and produces a subsequent revision of deficit and debt numbers for the year in question. The most widely quoted case of this is that of public hospitals, which by September 30, 2009 owed suppliers (for the period 2005 - September 2009) 6.3 billion euros. It was the recent addition of these obligations (21 October 2009) which led to the increase in the general government deficit for 2008 and 2009 and the corresponding increase in debt. In addition to the debts of hospital debt, the Committee estimated that there are still further outstanding government obligations of around 6.0 billion euros. Once these liabilities have been paid (or recorded in official figures) the debt will be naturally revised upwards.

3. The debt balance also includes the debt of various public bodies which are guaranteed by the state. Debt guaranteed by the Government at the end of 2009 tamounted o 26.2 billion (or 10.9% of GDP) up from 6.2% of GDP in 2002. About 40% of that debt is owed by the OSE (Greek Railways) and is body is unable to repay (shades of the Hungarian situation here).

4. Much of the above is possible due to the following practice: in order not to increase the budget deficit and debt, public bodies are encouraged to open bank loans guaranteed by the government (but not recorded as outright debt), usually with a higher rate of interest than if the government borrowed the directly and then subsidized the organisations directly. When these obligations are eventually formally assumed by the State, there is then a sudden increase in debt.

As former IMF Executive Board Member for Southern Europe said in a Bloomberg interview yesterday, “In Ireland, it was the banking sector that was the undoing of fiscal management. In Greece it’s the opposite, it’s the country’s fiscal management that is the undoing of the banking system.”
For more: Global Economy Matters: Does Anyone Really Know The Size Of The Greek 2009 Deficit?


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