By Bondtrader, exclusively for www.olympia.gr The greek minister announced today certain measures for the economy. I can not understand what is the goal of this exercise?
Definitely those measures will do nothing for the markets. Yes there will be a bit of euphoria that something is being done but after when the dust settles the numbers will talk again.
What they will say is that what is being proposed is not well thought out and is a product of do something. Anything. We have done the analysis which we will share with you and we would love it if someone can prove us wrong.
In 2009 Greece had a 12.5% deficit on its GNP of 225 billion or 28 billion.. Now for 2010 the GDP forecast is to be between 2- 4% lower due to the recession that the measures will certainly bring. Assuming a 3% drop in GDP the 2010 GDP will be 218 billion. To arrive at an 8% deficit for 2010 the government deficit should be 17 billion. On a simple ratio basis and assuming all other factors remain the same the government needs to cut costs by 11 billion.
Now it is well known that government revenues drop during recession. We will assume that in 2010 revenues will be 5 billion less. In addition the government will need to pay higher interest rates for the 50 billion it is refinancing this year of about 3.5% . That is an additional 1.8 billion of extra cost.
Therefore in 2010 the government must find a total of 17.5 billion. The measures to date do not amount to this amount. Therefore the deficit will be higher. BUT THIS IS NOT THE POINT
Our point is what it will cut next year and the year after to meet the targets. And it will need to cut costs because in our opinion the tax evasion issue has been blown out of proportion as far the magnitude is concerned. It is not the answer. Lots of mom and pops stores actually do not pay taxes or owe their VAT. But that is the only way to survive. Taking the taxes will fill the coffer for a month but the unemployment will balloon as they all go out of business.
What is missing is creativity, out of the box thinking and intelligent market communication. A bond holder can understand a tough situation for one two years but he can not accept to stay in a situation where the tomorrow is a black hole. Is it too much too ask for a plan forward.? This government had said they had a plan and the markets believed it. It looks like this is no longer the case.