Monday, 4 July 2011

Greece will bite the hand that feeds it

Robert Peston has some good analysis over on his blog.

The question he asks and then answers is: why haven't the Greeks already defaulted on their debt?

It seems they have very little to lose by doing so. It's not like anyone is going come around and repossess the car and the TV. Bond holders would be left high and dry if the Greeks just said: can't pay, won't pay. Like an American handing back the keys to his house, all that would be affected is the credit rating.

The Greek problem is they have a "primary deficit". This means they need new loans to pay their day-to-day running costs, so they cannot afford to tell the banks of the world to get knotted.

If the Greeks ever managed to impose such austerity that they could survive day-to-day with no new borrowing (disregarding the cost of servicing their existing loans) then they would have every incentive to default on their debt.

The Greek government's annual balance sheet looks (pre-austerity) like this:

Total revenue.....................: €90bn
Total expenditure.................: €114bn

Requiring borrowing of............: €24bn
   of which debt servicing costs..: €12bn

These numbers are of course rather approximate; the Greeks have perfected the art of off-balance sheet accounting. However it should be pretty clear that if they can shave €12bn off their €90bn spending they can safely forget about servicing their national debt which is the other half of their borrowing.

So, Peston concludes, although not in so many words, Greece will bite the hand that feeds it as soon as it doesn't need the food anymore.

As this blog has pointed out before - this would probably be the right thing for them to do. Their economy is based on selling their primary assets: sun, sand, sea and culture, all of which will still be there after a default.

(And a last little observation: don't those numbers look small compared to the UK's situation?)

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