Greece will overshoot its 2011 budget deficit target by at least one percentage point and its privatization plan, the second key requirement of an EU/IMF bailout plan, is seriously in doubt, a source close to Athens’ international lenders said on Thursday. IMF, EU and ECB inspectors started combing through Greece’s books and laws on Monday to decide whether it has made enough progress to receive a new tranche of the bailout that has staved off Greek bankruptcy in a crisis that has shaken markets worldwide. The official close to the inspectors said it was much too early to say if the 8 billion euro ($11 billion) tranche of aid was at risk in any way as Greece struggled with a deeper-than-expected recession. Analysts believe Greece will get the aid tranche but it may come with a stark warning over the need to step up reforms.
Best guess is that’s right, but this news will likely rile the politics of the contributing nations still further. Greece, I reckon, can live with the “stark warning.”
The Greek authorities are blaming the country’s steeper than expected recession, and it’s hard to blame them. Crushing domestic demand is hardly the best way to stimulate growth (and thus tax revenues) in a profoundly uncompetitive economy, particularly when that lack of competitiveness has been made worse by a currency for which that economy is, to say the least, unsuited (by contrast, there have recently been a few flickers of hope in Ireland, a country where the underlying structure of the economy is healthier, even if the currency still does not “fit”).
The IMF and EU obviously understand that the recession has made a major contribution to Greece’s mounting woes, but point to other failings, notably that the privatization program is running behind schedule. Fair enough, but if the problem is finding buyers (I assume that’s part of it) for Greek assets (as well as bureaucratic foot-dragging), that can hardly be a surprise. Greece hardly represents the most attractive of investment opportunities at the moment.
But, wait, there’s less:
Underlining the relentless decline of the Greek economy, the Markit Manufacturing Purchasing Managers’ Index (PMI)showed on Thursday that manufacturing sector activity shrank for the 24th month running in August, with weak domestic demand outweighing a sharp rise in export orders. The PMI survey showed manufacturers continued to lay off staff steadily in August. The country’s official jobless rate jumped to a record 16.6 percent in May, fueling widespread popular discontent over austerity policies.
One brighter note is that “sharp rise in export orders.” Could that be the first sign that Greece’s “internal devaluation” is beginning to bear some fruit? One can only hope.
In not entirely unrelated news, Spanish bond spreads widened over German bunds to a level unseen since the European Central Bank started buying Spanish bonds some weeks ago, and Italian ten-year bonds dropped in price for the tenth successive day.
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