Greece Risks Financial Armageddon While Ireland Makes Cuts

The Irish government announced draconian spending cuts of 6 billion Euros in order to stave off a debt crisis in the worst modern-day downturn in the nation’s history.  Even so, Irish government bond yields have been rising relative to German government bond yields, the benchmark for the Eurozone.  Over the past five years the spread had averaged about 40bps. Now it is 170bps. But, the Irish seem to be making the necessary cuts forced on them by lower tax receipts and currency union.

The Greek government, on the other hand, is not taking the same tack. Witness comments by the country’s Premier as reported in the Telegraph by Ambrose Evans-Pritchard:

Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state.

Nice sentiment. But what does that mean in practice?  I see this as asking for trouble.  The only way to interpret this statement is as a vow not to take the same draconian up to ten percent pay cut measures the Irish are now taking – ones that are likely to lead to strikes and social unrest. But, the reality is the Greeks have no other choice.  Either make the cuts or face national bankruptcy. It’s as simple as that.

To be clear, these cuts will mean depression in Greece as similar measures in Latvia have done.  Evans-Pritchard says:

Mr Papandreou has good reason to throw the gauntlet at Europe’s feet. Greece is being told to adopt an IMF-style austerity package, without the devaluation so central to IMF2_bing.gif plans. The prescription is ruinous and patently self-defeating. Public debt is already 113pc of GDP. The Commission says it will reach 125pc by late 2010. It may top 140pc by 2012.

If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower state workers, rising to 20pc for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral.

Indeed, as I indicated in a recent post, market participants are talking openly of a bust-up in the Eurozone because of what is happening in Greece and Ireland. The thinking is that the stress of the tie to the Euro would cause the countries to leave the Eurozone and start printing money to cover their deficits.  I see this as unlikely.  After all, even Latvia is now risking depression to escape the volatility of small-country monetary independence. Moreover, the U.K and the U.S. are hearing the same deficit hawk voices despite monetary independence.

But, the situation in Greece is worse than it is in Ireland. The debt levels are higher. The spread to German bunds (214bps) is higher, and the budget cuts are not yet forthcoming.  For signs of stress, I look to Greece before I look to Ireland.


Greece defies Europe as EMU crisis turns deadly serious – Telegraph

Greece warned to act over default risk – FT

Note: The Guardian takes a different tack, leading its story on Greece with the statement:

Greece will attempt today to claw back some of its lost credibility with the EU and other international financial institutions by outlining drastic cost-cutting measures to reduce its runaway deficit.

See the article Greece fights to regain international confidence.

Originally published at Credit Writedowns and reproduced here with the author’s permission.

2 Responses to "Greece Risks Financial Armageddon While Ireland Makes Cuts"

  1. Regan   December 14, 2009 at 11:07 am

    With Greece’s attitude, market will come around and realize the Greek government is not going to do anything. There will be further selling of government bond. In the coming new government debt issue, Greece would need to hike interest rate to induce more lending.

  2. AE   December 14, 2009 at 11:13 am

    Regarding Ireland’s spending cuts, it is interesting to point out that it is leading to signficant internal strife, as up to 65,000 teachers plan to join a strike against the threat of pay cuts in next month’s government budget.The Irish government is insistent on saving 4 billion euros in the budget for 2010, to bring the level to 12% of GDP. However this is already 4x the level allowed by the EU. $1.3 billion of the cuts will come from public sector pay, which is stirring strong anger among the public sector workers who feel they are being unjustly punished for causing the public finance crisis.The European Commission gave Dublin on Wednesday an extra year until 2014 to cut its deficit to 3 percent of GDPIreland is currently in involved in one of the deepest recessions in the west and the status quo among economists is that their deficit must be addressed in order to find a way out of it. The government’s fiscal situation is such that spending cuts are absolutely necessary and unavoidable.The parallel between Greece is interesting as it has historically been known as one of the most notorious of overspenders in Europe. Some Greek officials intend on not cutting social spending for the common people but instead increasing taxes on the rich, as well as cracking down on the notorious problem of tax evasion. Despite an expected decline in GDP for 2010, some groups like PASOK are forecasting a 9 percent gain in revenues.The outlook for Greece is not very positive. If they slash their government spending by over half, that would send unemployment above 20 % for a while, and lead to significant internal strife.On the possibility of Greece leaving the Eurozone and allowing it to print currency to pay off its debt, such a move would also devalue the Greek currency, possibly giving Greece a trade advantage globally. However, this would cut off Greece from the international capital markets, so this is highly unlikely.Some sort of external or internal assistance is a more likely scenario that wouldn’t surprise me.