It turns out that the massive credit spreads that Greece is currently experiencing (300+ bps over Germany and what not) have nothing to do with CDS speculators and other scapegoats, and all to do with the administration’s complete avoidance of warnings issued a year earlier by the Bank Of Greece which previously said in its 2008-2009 Monetary Policy Report that it “warned about everything that is happening today – stressing, in particular, the possibility of a rise in the cost of borrowing. As that Report stated, ‘a widening of the yield spread would increase the future burden on taxpayers‘.” Furthermore, in the just released Monetary Policy Report for 2009-2010, the Bank of Greece is warning that things in Greece are about to get much worse once again, and is debunking the administration’s still overly optimistic and rosy expectations. “In 2009, as the Bank of Greece had warned, the general government deficit reached 12.9% of GDP and public debt stood at 115% of GDP.” Keep in mind that the G-Pap administration noted the deficit would be “just” 12.7% of GDP in 2009. Surely this is just another thing to blame the speculators for. What’s worse, the BofG now says the GDP decline in 2010 will be -2%, also more dire than the government’s rosy -1.7%. The conclusion which nobody will heed again until it is too late: “The Greek economy has fallen into a vicious circle with only one way out: the drastic reduction of the deficit and debt.” Most damning is the proposed (lack of) way out: “Because of the low level of private savings in Greece, the public debt cannot be financed from domestic sources, resulting in a widening current account deficit and a rising external debt.” Oddly, blaming CDS speculators for the earth’s roundness was nowhere in the Bank’s report, and instead it notes that it is “most important, (that) Greece must eradicate the patterns of behaviour, attitudes and policies that have brought us to the present crisis situation.” Once again, we hope that the BofG does not expect anyone to read this 2009-2010 100 page + report, once it is released, cause that would mean the government would have to do the right thing for once.
The report is submitted at a particularly difficult time. The Greek economy is in the midst of a deep crisis, characterised mainly by a large fiscal deficit, huge debt and the continued erosion of its competitive position. These problems arose before the international crisis of 2008 and it was inevitable that, in the absence of bold and decisive actions, they would lead to an impasse. There were no such actions, the situation deteriorated markedly, culminating in the derailment of public finances in 2008 and 2009. The international crisis amplified the cumulated negative effects of those chronic weaknesses and accelerated the downturn of the economy.
The Bank of Greece had issued timely warnings concerning the gravity of the situation:
- In October 2008, i.e. about a year and a half ago, the Bank of Greece stressed in its Monetary Policy Interim Report that the Greek economy was at a crucial juncture and that, as the global economic situation worsened, the macroeconomic imbalances and structural weaknesses of the domestic economy would become more severe and more difficult to address.
- In the Monetary Policy Report that followed in February 2009, the Bank of Greece warned about everything that is happening today – stressing, in particular, the possibility of a rise in the cost of borrowing. As that Report stated, “a widening of the yield spread would increase the future burden on taxpayers”.