The Corner

23 Percent . . .

Via Bloomberg:

Greece’s budget deficit [has] exceeded goverment estimates….Greece’s shortfall was 10.5 percent of gross domestic product in 2010, higher than a 9.4 percent estimate made by the Greek government in February, official European Union figures showed today. Greek bond yields surged, rekindling speculation that a debt write-off or extension of the country’s repayment timelines will be the only way out of the fiscal trap. “I don’t think that Greece will succeed in this consolidation strategy without any restructuring in the future, or perhaps also in the near future,” Lars Feld, a member of the German government’s council of economic advisers, told Bloomberg Television’s Nicole Itano in Frankfurt. “Greece should restructure sooner than later.”

Two-year Greek yields rose as much as 64 basis points to 23.65 percent, before slipping back to 23.41 percent as of 11:13 a.m. in London. Ten-year yields reached 15.26 percent. Portugal’s two-year note yields touched 11.62 percent, before easing to 11.53 percent…….Greek Prime Minister George Papandreou’s government has ruled out a restructuring, saying it would devastate domestic banks and hammer an economy that shrank 4.5 percent last year. Today’s data brought the debt crisis back to where it started. Greece last year obtained a 110 billion-euro lifeline from European governments and the International Monetary Fund. Ireland followed with a 67.5 billion-euro package and Portugal is now negotiating for 80 billion euros in aid.

A big part of the problem? The combination of demand-crushing domestic austerity and being stuck with a ‘one size fits all’ currency that does not reflect its own economic situation means that it is almost impossible to imagine that Greece can grow itself out of this mess. It’s hard not to think that the question remains not whether there will be a restructuring (i.e. a default), but when.

Writing in the FT yesterday, Wolfgang Munchau attackeds both the eurozone’s political leadership (without seeming to recognize the way that the ‘democratic deficit’ at the heart of the single currency project circumscribes polticians’ ability to act) and the idea of an immediate Greek restructuring. Both those positions can be challenged, but Munchau’s list of some of the hazards ahead is indisputably troubling. These include:

. . . the failure by the EU and Portugal to agree a rescue package in time; or an escalation in the EU’s dispute with Ireland over corporate taxes; or a ratification failure of the ESM [The European Stability Mechanism: the ‘permanent’ bailout system] in the German, Finnish or Dutch parliaments; or a German veto for a top-up loan for Greece in 2012; or the refusal by the Greek parliament to accept the new austerity measures; or a realisation that the Spanish cajas [savings banks] are in much worse shape than recognised, and that Spain cannot raise sufficient capital.

Then there is the downgrade threat for French sovereign bonds. I recall asking a French official about this, and getting the smug answer that the rating agencies could hardly downgrade France if they maintained a triple A rating for the US. That was before last week. By extension, France must also now be in danger. A downgrade would destroy the logic of the European financial stability facility. It is built on guarantees by the triple-A countries. Without France, the lending ceiling of the EFSF [ the European Financial Stabilization Mechanism: the current bailout machinery] would melt down further.

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