By Wolfgang Reuter
As economic indicators have improved, concern about the financial crisis has abated. But the next big problem could be approaching. Greece's public deficit is skyrocketing and the country may become insolvent. The effect on Europe's common currency could be dire.
Josef Ackermann, the CEO of Deutsche Bank, has given the all-clear signal many times in the past. He has repeatedly said that the worst was over, only to see the financial crisis strengthen its grip on the world economy.
Last week, however, Ackermann was singing a completely different tune. Although many indicators are once again pointing skyward, he said at a Berlin summit on the economy, Chancellor Angela Merkel, the assembled cabinet ministers, corporate CEOs and union leaders should not to be deluded. He warned emphatically that the financial situation could deteriorate once again. "A few time bombs" are still ticking, Ackermann told his audience, noting that the growing problems of highly leveraged small countries could lead to new tremors. And then, almost casually, Ackermann mentioned the problem child of the European financial world by name: Greece.
Ackermann isn't alone in his opinion. Practically unnoticed by the public, an issue has returned to the forefront in recent weeks -- one that was a cause for great concern at the height of the financial crisis but then, as optimism about the economy began to grow, was eventually forgotten: the fear of a national bankruptcy in the euro zone. And the question as to whether such a bankruptcy, should it come about, could destroy the common European currency.
Greece was always at the very top of the list of countries at risk. But now the danger appears to be more acute than ever.
Insuring Against Default
The seismographs in the trading rooms at investment banks detected the initial tremors weeks ago. Today, when the code "Greece CDS 10Yr" appears on Bloomberg terminals, a curve at the bottom of the screen points sharply upward. It reflects the price that banks are now charging to insure 10-year Greek government bonds against default.
The price of these securities has jumped dramatically since Greek Finance Minister Giorgos Papakonstantinou announced three weeks ago that his country's budget deficit would reach 12.7 percent of gross domestic product this year, instead of the 6 percent originally forecast -- and well about the 3 percent limit foreseen by European Union rules.
A second curve is the mirror image of the first. It depicts the price of government bonds from the euro-zone country. It points sharply downward.
Greece already pays almost 2 percent more in interest on its debt than Germany. In other words, at a total debt of €270 billion ($402 billion), Greece will be paying €5 billion more in annual interest than it would if it were Germany. And, with rating agencies threatening to downgrade the country's already dismal credit rating, the situation is only likely to get worse.
The finance ministers and central bankers of the euro-zone member states are as alarmed as they are helpless. "The Greek problem," says a senior administration official in Berlin, "will be an acid test for the currency union."
No Buyers Can Be Found
Greece has already accumulated a mountain of debt that will be difficult if not impossible to pay off. The government has borrowed more than 110 percent of the country's economic output over the years, and if investors lose confidence in the bonds, a meltdown could happen as early as next year.
That's when the government borrowers in Athens will be required to refinance €25 billion worth of debt -- that is, repay what they owe using funds borrowed from the financial markets. But if no buyers can be found for its securities, Greece will have no choice but to declare insolvency -- just as Mexico, Ecuador, Russia and Argentina have done in past decades.
This puts Brussels in a predicament. European Union rules preclude the 27-member bloc from lending money to member states to plug holes in their budgets or bridge deficits.
And even if there were a way to circumvent this prohibition, the consequences could be disastrous. The lack of concern over budget discipline in countries like Spain, Italy and Ireland would spread like wildfire across the entire continent. The message would be clear: Why save, if others will eventually foot the bill?
A Domino Effect
On the other hand, if Brussels left the Greeks to their own devices, the consequences would also be dire. Confidence in the euro would be shattered, and the union would face a crucial test. What good is a common currency, many would ask, if some of the member states pay their debts while others do not?
Furthermore, there is a threat of a domino effect. If one euro member falls, speculators will test the stability of other potential bankruptcy candidates. This could destroy the currency union. Because of this systemic risk, say the economists at the Swiss bank UBS, "we believe that if a country is facing a problem with debt repayment or issuance, it will be supported.
A default of a euro-group country doesn't worry the monetary policy hawks at the Bundesbank, Germany's central bank. "So what if Greece stops paying its debts?" one of the executive board members asked at a recent banquet in Frankfurt. "The euro is strong enough to take it." The real threat, he says, is if Brussels comes to the Greeks' aid. "Then the currency union will turn into an inflation union."
But it remains to be seen whether politicians can maintain such an unbending approach. The prices for Greek government bonds plunged once in the past, until then German Finance Minister Peer Steinbrück, to the horror of the Bundesbank, publicly pledged to help the Greeks if necessary. There is much to be said for the government taking exactly the same position today.
Can Bankruptcy Be Prevented?
A national bankruptcy in Greece would have a serious impact on Germany, where many banks have invested heavily in the high-yield Greek treasury bonds -- after borrowing the money to buy the bonds from the European Central Bank (ECB) or other central banks at rates of 1-2 percent. Making money doesn't get much easier -- as long as the Greeks remain solvent.
But can a Greek bankruptcy even be prevented anymore? The answer, at least initially, depends heavily on the ECB. Will the custodian of the euro continue to accept Greek bonds as collateral for short-term liquidity assistance, or will it turn down the securities in the future? Another possibility is a compromise, under which the banks would pay additional interest when they submit Greek bonds.
The next meeting of the ECB takes place on Dec. 17. "The subject will be on the agenda," say officials in Frankfurt. Time is of the essence.
Central bankers in the euro zone are already speculating, behind closed doors, what would happen if the Greeks started printing euros without ECB approval. There is no answer to the question, and that makes central bankers from Lisbon to Dublin even more nervous than they are already.
Massaging Budget Figures
And more mistrustful. In 2004, it was discovered, completely by accident, that Greece had only managed to qualify for entry into the currency union by massaging its budget figures. The Greeks have only complied with the Maastricht criteria once since the introduction of the euro, in 2006.
Even those figures may have been doctored. At the time, the Greeks managed to increase their official gross national product by a hefty 25 percent, partly because they included the black market and prostitution in economic output. This brought down the deficit rate -- on paper, at any rate -- to 2.9 percent.
The figures representing Greece's budget deficit are constantly being revised upward. The most recent uptick, by close to 7 percent, is a record for Europe -- and it comes in a country that was relatively unaffected by the financial crisis. This year, the Greek economy will have shrunk by only 1.2 percent, say Greek economists. Next year they expect the economy to return to grown, albeit modest.
Particularly vexing to the remaining EU countries is the fact that Greece has profited from its EU membership for decades. Year after year, net transfers from Brussels have exceeded payments moving in the opposite direction by €3 billion to €6 billion. These numbers, too, have often been suspect. At times, the land area declared for agricultural subsidies was incorrect, and sometimes approval conditions were not met.
Resolute Words
Nevertheless, EU politicians find their hands tied. "The game is over," the chairman of the euro group, Jean-Claude Juncker, declared recently, only to turn around and assure the country of his solidarity. "I don't have the slightest suspicion that Greece could go bankrupt -- anyone speculating that this will happen is deluding himself," says Juncker.
His resolute words were directed at investment bankers in London, Frankfurt and New York. They know full well that Greece is indeed on the brink of bankruptcy, but they don't know whether the EU will, as Juncker insinuated, come to the aid of member state Greece. Juncker's message, in other words, was that those speculating on a bankruptcy could be left out in the cold.
The EU has now begun a tougher approach to Greece. Three weeks ago, the government in Athens received a rebuke from Brussels, followed by another one last week. So far, however, the Greek government has shown little inclination to take any significant steps. It does intend to reduce the deficit, but only to 9.1 percent next year. This is far too little for many European foreign ministers. As the new Greek finance minister, Giorgos Papakonstantinou, recently announced, the country will need at least four years to get its deficit under control "without jeopardizing the economic recovery."
But by then the government deficit will have reached about €400 billion, or about 150 percent of GDP. Servicing that amount of debt, even at current interest rates of about 5 percent, will make up at least one third of government spending.
A London investment banker is betting on the continued decline of prices for Greek bonds in the short term, while simultaneously waiting for the right time to start buying the securities again. He jokes: "If someone has €1,000 in debt, he has a problem. If someone has €10 million in debt, his bank has a problem. And the bank, in this case, is Europe."
Thursday, December 10, 2009
Turkey Is Considering Ban on Kurdish Party
By SEBNEM ARSU
ISTANBUL — The Turkish constitutional court in Ankara began hearing arguments on Tuesday in a case that could shut down the only pro-Kurdish party in Parliament and undermine the government’s efforts to end its long-running conflict with the country’s Kurdish minority.
If convicted, 219 members of the Democratic Society Party, including 8 members of Parliament, would face a five-year ban on political activity. Their party would become the latest in a series of Kurdish parties that have been closed down by the court since the 1990s. A verdict is not expected until Friday.
The charges, filed in 2007, accuse the party of undermining national stability by encouraging violence and of cooperating with the outlawed Kurdistan Workers’ Party, or P.K.K., which has been fighting for Kurdish autonomy in Turkey’s southeast for decades.
The conflict has cost more than 40,000 lives, and the P.K.K. has been labeled a terrorist organization by Turkey, the United States and the European Union, but the Democratic Society Party refuses to denounce the group.
With an eye to membership in the European Union, the governing Justice and Development Party has worked to normalize relations with the Kurds. Its proposals include unrestricted use of the Kurdish language in the media and in political campaigns and the restoration of Kurdish names to towns in the eastern Kurdish districts of the country. But the Democratic Society Party wants constitutional recognition of Kurds’ ethnic identity and amnesty for most P.K.K. members who want to return to Turkey.
Mithat Sancar, a law professor at Ankara University, said a decision to close down the Democratic Society Party “would only strengthen the hands of those within the P.K.K. who promote violent methods.” He added, “How can we persuade them to come down from the mountains to participate in politics if we close down political channels?”
When unidentified militants killed seven soldiers and wounded three on the outskirts of Tokat, a northern town, on Monday. suspicions were cast on the P.K.K.. But no group has claimed responsibility yet, and the government has made no accusations.
Ahmet Turk, chairman of the Democratic Society Party, condemned the assailants on Tuesday and called the attack an attempt to stir up anti-Kurdish sentiments.
ISTANBUL — The Turkish constitutional court in Ankara began hearing arguments on Tuesday in a case that could shut down the only pro-Kurdish party in Parliament and undermine the government’s efforts to end its long-running conflict with the country’s Kurdish minority.
If convicted, 219 members of the Democratic Society Party, including 8 members of Parliament, would face a five-year ban on political activity. Their party would become the latest in a series of Kurdish parties that have been closed down by the court since the 1990s. A verdict is not expected until Friday.
The charges, filed in 2007, accuse the party of undermining national stability by encouraging violence and of cooperating with the outlawed Kurdistan Workers’ Party, or P.K.K., which has been fighting for Kurdish autonomy in Turkey’s southeast for decades.
The conflict has cost more than 40,000 lives, and the P.K.K. has been labeled a terrorist organization by Turkey, the United States and the European Union, but the Democratic Society Party refuses to denounce the group.
With an eye to membership in the European Union, the governing Justice and Development Party has worked to normalize relations with the Kurds. Its proposals include unrestricted use of the Kurdish language in the media and in political campaigns and the restoration of Kurdish names to towns in the eastern Kurdish districts of the country. But the Democratic Society Party wants constitutional recognition of Kurds’ ethnic identity and amnesty for most P.K.K. members who want to return to Turkey.
Mithat Sancar, a law professor at Ankara University, said a decision to close down the Democratic Society Party “would only strengthen the hands of those within the P.K.K. who promote violent methods.” He added, “How can we persuade them to come down from the mountains to participate in politics if we close down political channels?”
When unidentified militants killed seven soldiers and wounded three on the outskirts of Tokat, a northern town, on Monday. suspicions were cast on the P.K.K.. But no group has claimed responsibility yet, and the government has made no accusations.
Ahmet Turk, chairman of the Democratic Society Party, condemned the assailants on Tuesday and called the attack an attempt to stir up anti-Kurdish sentiments.
Turkey Is Considering Ban on Kurdish Party
By SEBNEM ARSU
ISTANBUL — The Turkish constitutional court in Ankara began hearing arguments on Tuesday in a case that could shut down the only pro-Kurdish party in Parliament and undermine the government’s efforts to end its long-running conflict with the country’s Kurdish minority.
If convicted, 219 members of the Democratic Society Party, including 8 members of Parliament, would face a five-year ban on political activity. Their party would become the latest in a series of Kurdish parties that have been closed down by the court since the 1990s. A verdict is not expected until Friday.
The charges, filed in 2007, accuse the party of undermining national stability by encouraging violence and of cooperating with the outlawed Kurdistan Workers’ Party, or P.K.K., which has been fighting for Kurdish autonomy in Turkey’s southeast for decades.
The conflict has cost more than 40,000 lives, and the P.K.K. has been labeled a terrorist organization by Turkey, the United States and the European Union, but the Democratic Society Party refuses to denounce the group.
With an eye to membership in the European Union, the governing Justice and Development Party has worked to normalize relations with the Kurds. Its proposals include unrestricted use of the Kurdish language in the media and in political campaigns and the restoration of Kurdish names to towns in the eastern Kurdish districts of the country. But the Democratic Society Party wants constitutional recognition of Kurds’ ethnic identity and amnesty for most P.K.K. members who want to return to Turkey.
Mithat Sancar, a law professor at Ankara University, said a decision to close down the Democratic Society Party “would only strengthen the hands of those within the P.K.K. who promote violent methods.” He added, “How can we persuade them to come down from the mountains to participate in politics if we close down political channels?”
When unidentified militants killed seven soldiers and wounded three on the outskirts of Tokat, a northern town, on Monday. suspicions were cast on the P.K.K.. But no group has claimed responsibility yet, and the government has made no accusations.
Ahmet Turk, chairman of the Democratic Society Party, condemned the assailants on Tuesday and called the attack an attempt to stir up anti-Kurdish sentiments.
ISTANBUL — The Turkish constitutional court in Ankara began hearing arguments on Tuesday in a case that could shut down the only pro-Kurdish party in Parliament and undermine the government’s efforts to end its long-running conflict with the country’s Kurdish minority.
If convicted, 219 members of the Democratic Society Party, including 8 members of Parliament, would face a five-year ban on political activity. Their party would become the latest in a series of Kurdish parties that have been closed down by the court since the 1990s. A verdict is not expected until Friday.
The charges, filed in 2007, accuse the party of undermining national stability by encouraging violence and of cooperating with the outlawed Kurdistan Workers’ Party, or P.K.K., which has been fighting for Kurdish autonomy in Turkey’s southeast for decades.
The conflict has cost more than 40,000 lives, and the P.K.K. has been labeled a terrorist organization by Turkey, the United States and the European Union, but the Democratic Society Party refuses to denounce the group.
With an eye to membership in the European Union, the governing Justice and Development Party has worked to normalize relations with the Kurds. Its proposals include unrestricted use of the Kurdish language in the media and in political campaigns and the restoration of Kurdish names to towns in the eastern Kurdish districts of the country. But the Democratic Society Party wants constitutional recognition of Kurds’ ethnic identity and amnesty for most P.K.K. members who want to return to Turkey.
Mithat Sancar, a law professor at Ankara University, said a decision to close down the Democratic Society Party “would only strengthen the hands of those within the P.K.K. who promote violent methods.” He added, “How can we persuade them to come down from the mountains to participate in politics if we close down political channels?”
When unidentified militants killed seven soldiers and wounded three on the outskirts of Tokat, a northern town, on Monday. suspicions were cast on the P.K.K.. But no group has claimed responsibility yet, and the government has made no accusations.
Ahmet Turk, chairman of the Democratic Society Party, condemned the assailants on Tuesday and called the attack an attempt to stir up anti-Kurdish sentiments.
Cyprus adds obstacles to Turkey EU accession
By Tony Barber in Brussels and Delphine Strauss in Ankara
The Greek Cypriot-led government of Cyprus on Tuesday placed new obstacles in the way of Turkey’s efforts to join the European Union, declaring that it would not permit the start of accession talks in five policy areas unless Turkey changed its stance on the Cyprus dispute.
Although no other EU country supported them, the Greek Cypriots exercised their right under EU rules to announce that they would block talks over free movement of workers; the judiciary and fundamental rights; justice, freedom and security; education and culture; and foreign, security and defence policy.
Markos Kyprianou, foreign minister of Cyprus, described the measures as a “targeted response, not a complete freeze” to Turkey’s membership talks.
However, Turkey warned last week that its accession process could suffer irreparable damage if EU leaders introduced fresh sanctions in retaliation for Ankara’s refusal to open Turkish ports and airports to Greek Cypriot traffic.
After a two-day meeting that ended on Tuesday, EU foreign ministers decided against such sanctions after a majority concluded that discussions on a settlement among Greek Cypriot and Turkish Cypriot leaders were at a delicate stage .
The foreign ministers said they would maintain a freeze on negotiations in eight of the 35 policy areas that Turkey, an official candidate for EU membership since 2004, must complete before it can join the bloc.
Cyprus’s announcement went further, because the policy areas it listed are in addition to the eight where all EU countries agree talks should not proceed.
Turkey opened EU accession talks in 2005 in return for a promise to permit direct transport links with the Greek Cypriots. Turkey has refused to honour the accord, saying the EU has failed to fulfil its commitment to end the isolation of Turkish Cypriot-controlled northern Cyprus.
Suat Kiniklioglu, deputy chair of foreign relations of Turkey’s ruling AK party, said that if Cypriot threats were true, it would indicate “that the Greek Cypriot government’s position is continuing to poison Turkey’s relations with the European Union”.
EU governments are anxious to see progress in a new round of United Nations-sponsored talks on a Cyprus settlement that started in September 2008. With presidential elections in northern Cyprus scheduled for April and a nationalist candidate tipped to win, EU diplomats say the window for a deal is narrowing to between now and late February.
Copyright The Financial Times Limited 2009.
The Greek Cypriot-led government of Cyprus on Tuesday placed new obstacles in the way of Turkey’s efforts to join the European Union, declaring that it would not permit the start of accession talks in five policy areas unless Turkey changed its stance on the Cyprus dispute.
Although no other EU country supported them, the Greek Cypriots exercised their right under EU rules to announce that they would block talks over free movement of workers; the judiciary and fundamental rights; justice, freedom and security; education and culture; and foreign, security and defence policy.
Markos Kyprianou, foreign minister of Cyprus, described the measures as a “targeted response, not a complete freeze” to Turkey’s membership talks.
However, Turkey warned last week that its accession process could suffer irreparable damage if EU leaders introduced fresh sanctions in retaliation for Ankara’s refusal to open Turkish ports and airports to Greek Cypriot traffic.
After a two-day meeting that ended on Tuesday, EU foreign ministers decided against such sanctions after a majority concluded that discussions on a settlement among Greek Cypriot and Turkish Cypriot leaders were at a delicate stage .
The foreign ministers said they would maintain a freeze on negotiations in eight of the 35 policy areas that Turkey, an official candidate for EU membership since 2004, must complete before it can join the bloc.
Cyprus’s announcement went further, because the policy areas it listed are in addition to the eight where all EU countries agree talks should not proceed.
Turkey opened EU accession talks in 2005 in return for a promise to permit direct transport links with the Greek Cypriots. Turkey has refused to honour the accord, saying the EU has failed to fulfil its commitment to end the isolation of Turkish Cypriot-controlled northern Cyprus.
Suat Kiniklioglu, deputy chair of foreign relations of Turkey’s ruling AK party, said that if Cypriot threats were true, it would indicate “that the Greek Cypriot government’s position is continuing to poison Turkey’s relations with the European Union”.
EU governments are anxious to see progress in a new round of United Nations-sponsored talks on a Cyprus settlement that started in September 2008. With presidential elections in northern Cyprus scheduled for April and a nationalist candidate tipped to win, EU diplomats say the window for a deal is narrowing to between now and late February.
Copyright The Financial Times Limited 2009.
Tough words and and hard budgets for eurozone
By Ralph Atkins in Frankfurt
Greece has been warned by a top European Central Bank policymaker that it has a year to bring public finances back under control or risk having its bonds disqualified for use as collateral by banks borrowing ECB liquidity.
The comments by Axel Weber, Germany’s Bundesbank president, intensify the pressure on the new Socialist government in Athens following revelations that its budget is in a far worse shape than previously feared.
This further blow to the eurozone country came as some of its currency bloc partners, both large and small, felt the full force of the recession. Ireland unveiled its harshest budget in years to try and bring spending under control. Spain, one of the largest economies in the eurozone, had its ratings outlook changed to negative by Standard & Poor’s.
On Tuesday, Fitch cut its rating on Greek debt to BBB plus – the first time in 10 years that a leading ratings agency has rated Greece below the A grade. Standard & Poor’s has also warned that a downgrade is possible.
Prior to the global economic crisis an A minus grade was the minimum requirement for assets put up by eurozone banks when taking part in ECB liquidity boosting operations. The threshold was reduced to BBB minus after the collapse of Lehman Brothers last year threatened to paralyse financial markets, but so far the ECB has only said that the lower standard will apply until the end of 2010.
Speaking to the international club of business journalists in Frankfurt, Mr Weber noted the temporary arrangements “will run out” and added that “the Greek government and those who hold responsibility see the clear need to implement now concrete [fiscal] consolidation steps”.
Mr Weber, an ECB governing council member, was unclear, however, whether the ECB would ever make good any threat to exclude bonds from a eurozone government in its liquidity operations – a step which would be seen as highly-political. Mr Weber assumed Greece would act in response to the pressures being imposed by financial markets and ratings agencies. “The ball lies in Greece’s court,” he said.
European Union authorities are keen to keep up the pressure on Athens to step up efforts to reduce its deficit, which is expected to reach almost 13 per cent of gross domestic product this year.
In February, Germany’s finance ministry hinted that in the worst case, help could be made available to struggling eurozone countries. But that reassurance has not been repeated more recently, fuelling speculation that if Greece eventually faced the threat of default, it would be forced into the hands of the International Monetary Fund.
However, Mr Weber expressed confidence that the EU had the means to force the Greek government to bring its deficit back in line with the region’s “stability and growth pact” – which is supposed to compensate for the lack of a single fiscal authority in the 16-country eurozone. The pact sets a limit of a three percent for public sector deficits.
“Within the stability and growth pact there is no role for the IMF – rightly,” said Mr Weber.
European finance ministers have started proceedings that could eventually result in Greece facing sanctions for repeatedly flouting the stability and growth pact. Frustration with Greece escalated because of the unreliably of its statistics. Earlier this year, the European Commission expected a deficit for 2009 that was above the 3 per cent limit but in November, it had to revise its projections to show a deficit of 12.7 per cent. Greek government debt is expected this year to exceed 112 per cent of GDP.
Meanwhile, its current account deficit reached almost 15 per cent of GDP last year, although it is expected to fall below 9 per cent in 2009.
Copyright The Financial Times Limited 2009.
Greece has been warned by a top European Central Bank policymaker that it has a year to bring public finances back under control or risk having its bonds disqualified for use as collateral by banks borrowing ECB liquidity.
The comments by Axel Weber, Germany’s Bundesbank president, intensify the pressure on the new Socialist government in Athens following revelations that its budget is in a far worse shape than previously feared.
This further blow to the eurozone country came as some of its currency bloc partners, both large and small, felt the full force of the recession. Ireland unveiled its harshest budget in years to try and bring spending under control. Spain, one of the largest economies in the eurozone, had its ratings outlook changed to negative by Standard & Poor’s.
On Tuesday, Fitch cut its rating on Greek debt to BBB plus – the first time in 10 years that a leading ratings agency has rated Greece below the A grade. Standard & Poor’s has also warned that a downgrade is possible.
Prior to the global economic crisis an A minus grade was the minimum requirement for assets put up by eurozone banks when taking part in ECB liquidity boosting operations. The threshold was reduced to BBB minus after the collapse of Lehman Brothers last year threatened to paralyse financial markets, but so far the ECB has only said that the lower standard will apply until the end of 2010.
Speaking to the international club of business journalists in Frankfurt, Mr Weber noted the temporary arrangements “will run out” and added that “the Greek government and those who hold responsibility see the clear need to implement now concrete [fiscal] consolidation steps”.
Mr Weber, an ECB governing council member, was unclear, however, whether the ECB would ever make good any threat to exclude bonds from a eurozone government in its liquidity operations – a step which would be seen as highly-political. Mr Weber assumed Greece would act in response to the pressures being imposed by financial markets and ratings agencies. “The ball lies in Greece’s court,” he said.
European Union authorities are keen to keep up the pressure on Athens to step up efforts to reduce its deficit, which is expected to reach almost 13 per cent of gross domestic product this year.
In February, Germany’s finance ministry hinted that in the worst case, help could be made available to struggling eurozone countries. But that reassurance has not been repeated more recently, fuelling speculation that if Greece eventually faced the threat of default, it would be forced into the hands of the International Monetary Fund.
However, Mr Weber expressed confidence that the EU had the means to force the Greek government to bring its deficit back in line with the region’s “stability and growth pact” – which is supposed to compensate for the lack of a single fiscal authority in the 16-country eurozone. The pact sets a limit of a three percent for public sector deficits.
“Within the stability and growth pact there is no role for the IMF – rightly,” said Mr Weber.
European finance ministers have started proceedings that could eventually result in Greece facing sanctions for repeatedly flouting the stability and growth pact. Frustration with Greece escalated because of the unreliably of its statistics. Earlier this year, the European Commission expected a deficit for 2009 that was above the 3 per cent limit but in November, it had to revise its projections to show a deficit of 12.7 per cent. Greek government debt is expected this year to exceed 112 per cent of GDP.
Meanwhile, its current account deficit reached almost 15 per cent of GDP last year, although it is expected to fall below 9 per cent in 2009.
Copyright The Financial Times Limited 2009.
Greeks bearing economic burdens
By Kerin Hope in Athens and Ralph Atkins in Frankfurt
Sotiria rarely complains about her workload. At the office where the Greek public sector employee aged in her forties records value added tax payments, supervisors take a relaxed view of breaks for coffee and shopping, she says. If a family member falls sick, she stays home. “I don’t feel bad, because there are always plenty of other people around to cover for me,” she says. “Nobody here has too much to do.”
Stories of such insouciance in Greece’s bloated state sector are creating alarm across Europe. As the Continent emerges from the worst recession since the 1930s, the precarious and unsustainable state of Greek public finances is threatening a fresh crisis for the region’s 11-year-old monetary union.
Last week, the difference between the interest rates on Greek and German government bonds soared to a seven-month high as financial markets fretted about the possibility of default and the stability of Greece’s banks. If European Union leaders thought they had navigated the storms of the past two years, they could yet be proved wrong.
The EU helped shore up Latvia, Romania and Hungary. But unlike those countries, Greece is a member of the eurozone, Europe’s most successful experiment in financial integration. And for all its treaties, there are no clear rules on how to react. “The EU has elaborate crisis prevention measures; it doesn’t have a crisis management apparatus,” says Jean Pisani-Ferry from the Brussels-based Bruegel think-tank.
But the increasing frustration in Brussels, other capitals and at the European Central Bank in Frankfurt suggests at least a few policymakers might favour throwing the book at Greece. “This is a game of chicken and we don’t know who will lose their nerve first,” says Daniel Gros of the Centre for European Policy Studies, another Brussels research institute.
Is Greece really heading for nemesis? Around the world, governments abandoned fiscal restraint to combat crisis. But elsewhere, for instance in Ireland, governments are now acting to bring budgets back under control. Greece’s crisis has taken on a different dimension, largely because of the behaviour of the Athens government.
Most blatantly, Greece misled the world about the acuteness of its fiscal plight. Back in March, the situation looked bad – but manageable. The European Commission forecast that the Greek public sector deficit this year would be above the 3 per cent limit set under EU rules and “exceed 4 per cent in 2010”. At the time, officials were concerned the actual numbers would be higher. Nobody, however, was prepared for the shock unveiled by the Socialist government elected in October. Statistical revisions showed the public finances so much worse that the Commission changed its projections to a deficit of 12.7 per cent this year and 12.2 per cent in 2010.
Worries have been compounded by the new government’s apparent dithering. Brussels wants George Papaconstantinou, finance minister, to rewrite his 2010 budget, which relies heavily on curbing tax evasion rather than cutting spending. In a letter to the Financial Times published on Wednesday, he said Athens was “fully committed to . . . the necessary steps to restore our credibility and finances”. But his claims that a tax crackdown on wealthy Greeks will be decisive in cutting the deficit next year to 9.1 per cent ring hollow with many – especially as his new revenue collection team has yet to be appointed.
Last December, youth discontent fuelled by the economic situation led to rioting in Athens – and the Socialists are reluctant to reverse a campaign pledge to protect incomes and boost welfare payments.
Moreover, Greece’s economy looked sickly before the events of the past few weeks. Prior to the global slowdown, the country was growing at annual rates of 4 per cent or more, with consumption boosted by the low interest rates it enjoyed as a eurozone member. But Europe’s recession has exposed a massive loss of competitiveness. Unit labour costs have soared more than 40 per cent since Greece joined the eurozone in 2001, while in Germany they remained almost constant before edging up this year.
On almost every measure, Greeks have been living beyond their means. The current account deficit reached almost 15 per cent of gross domestic product last year, making the US deficit of 5 per cent look modest. External public debt now exceeds GDP.
With hindsight, it is clear that a lax fiscal policy was also pumping up an economy based largely on just two sectors – shipping and tourism. Now, “Greece’s mix of problems is unique in the eurozone – a large budget deficit, rising debt and an unsustainable pension system”, says George Pagoulatos, a professor at Athens Economics University.
Since joining the euro, Greece has regularly flouted the deficit and debt limits set in the zone’s “stability and growth pact” that is meant to correct for the lack of a single eurozone fiscal authority. Scant progress has been made in reforming the country’s public sector, which added 50,000 mostly low-skilled employees in 2004-09.
Public sector wages are again set to rise, by 5-7 per cent in 2010. “Wage cuts may not be needed, because the economy isn’t projected to shrink significantly next year, but there should be an immediate freeze on salaries and recruitment,” says Yiannis Stournaras, a former chief economic adviser at the finance ministry and now a professor at Athens University.
On pensions, expected big increases in expenditure relative to the size of its economy make Greece more vulnerable than other EU countries to an ageing population. “It’s the largest of the fiscal imbalances and the system will become unsustainable within a decade,” says Mr Stournaras.
Athens is launching a “dialogue” with trade unions on reducing the number of state pension funds from 13 to three and implementing a long-postponed plan to raise the retirement age for women to an equalised 65. The unions foiled previous pension reform efforts and are gearing up for strikes and street protests. “We’re going to war with the government,” says Aleka Papariga, leader of the still influential Greek Communist party.
What will happen next? European finance ministers on Wednesday issued a fresh reprimand to Greece, pressing ahead with a process that could lead to financial sanctions. One possibility would be for the Commission to withhold “cohesion funds” meant to help Greece catch up with richer countries.
Leaving the eurozone is not an option for Athens: the cost of servicing foreign debt would simply escalate. Beyond that, Greece’s fate will depend on the reaction in the markets and actions taken by Athens.
Nor is timing on its side. The eurozone has a “no bail-out” clause, which prevents collective liability for debts incurred by a member. In February – when the crisis was at its most intense – Peer Steinbrück, then Germany’s finance minister, admitted that in the worst case “we would have to take action”. That eased pressure on the weakest members, including Ireland. But Mr Steinbrück has since been replaced and his promise now carries little weight; in the eyes of conservative European policymakers, it increased the risk of “moral hazard” – rewarding bad behaviour.
“It is one thing if you are in the middle of a systemic crisis. Then you can’t allow anyone to fail and don’t worry about moral hazard,” says Mr Gros at Ceps in Brussels. “Now we are out of the woods and it may be a good time to reduce moral hazard.” In a research note last week, Deutsche Bank economists wrote that Greece’s continuing violation of the rules “may have changed the minds of EU authorities ... We believe that they may have to set an example for other countries in trouble”.
If the cost of servicing debt rose too high, Greece could have to turn to the International Monetary Fund. The rigorous conditionality attached to help given by the Fund could provide a framework to implement reform – and allow the government to deflect the responsibility for harsh but necessary measures.
But Mr Papaconstantinou says it is “out of the question” that Athens would turn to the IMF. “The new government is determined to put the economy back on a path of fiscal sustainability in the context of the EU rules.”
Greece’s small size – it accounts for less than 3 per cent of eurozone GDP – plays to its disadvantage. The Deutsche Bank note argues that the EU could ring-fence Greek debt, using a special fund to reduce the impact of a default beyond its borders.
Still, that is a scenario that EU policymakers would rather not contemplate. Even if containable, a Greek default would send worrying signals about the resilience of monetary union. Instead, the hope is that the markets force Athens to bring public finances under control. The stability pact is still regarded as “an anchor for policymakers”, says Erik Nielsen, economist at Goldman Sachs.
A comfort for EU authorities is that investors’ increased risk awareness means they are – at last – imposing discipline on governments. Prior to the economic crisis, Greece escaped punishment from financial markets. That is no longer the case. It may not be too long before even bored Greek public sector employees notice.
Copyright The Financial Times Limited 2009.
Sotiria rarely complains about her workload. At the office where the Greek public sector employee aged in her forties records value added tax payments, supervisors take a relaxed view of breaks for coffee and shopping, she says. If a family member falls sick, she stays home. “I don’t feel bad, because there are always plenty of other people around to cover for me,” she says. “Nobody here has too much to do.”
Stories of such insouciance in Greece’s bloated state sector are creating alarm across Europe. As the Continent emerges from the worst recession since the 1930s, the precarious and unsustainable state of Greek public finances is threatening a fresh crisis for the region’s 11-year-old monetary union.
Last week, the difference between the interest rates on Greek and German government bonds soared to a seven-month high as financial markets fretted about the possibility of default and the stability of Greece’s banks. If European Union leaders thought they had navigated the storms of the past two years, they could yet be proved wrong.
The EU helped shore up Latvia, Romania and Hungary. But unlike those countries, Greece is a member of the eurozone, Europe’s most successful experiment in financial integration. And for all its treaties, there are no clear rules on how to react. “The EU has elaborate crisis prevention measures; it doesn’t have a crisis management apparatus,” says Jean Pisani-Ferry from the Brussels-based Bruegel think-tank.
But the increasing frustration in Brussels, other capitals and at the European Central Bank in Frankfurt suggests at least a few policymakers might favour throwing the book at Greece. “This is a game of chicken and we don’t know who will lose their nerve first,” says Daniel Gros of the Centre for European Policy Studies, another Brussels research institute.
Is Greece really heading for nemesis? Around the world, governments abandoned fiscal restraint to combat crisis. But elsewhere, for instance in Ireland, governments are now acting to bring budgets back under control. Greece’s crisis has taken on a different dimension, largely because of the behaviour of the Athens government.
Most blatantly, Greece misled the world about the acuteness of its fiscal plight. Back in March, the situation looked bad – but manageable. The European Commission forecast that the Greek public sector deficit this year would be above the 3 per cent limit set under EU rules and “exceed 4 per cent in 2010”. At the time, officials were concerned the actual numbers would be higher. Nobody, however, was prepared for the shock unveiled by the Socialist government elected in October. Statistical revisions showed the public finances so much worse that the Commission changed its projections to a deficit of 12.7 per cent this year and 12.2 per cent in 2010.
Worries have been compounded by the new government’s apparent dithering. Brussels wants George Papaconstantinou, finance minister, to rewrite his 2010 budget, which relies heavily on curbing tax evasion rather than cutting spending. In a letter to the Financial Times published on Wednesday, he said Athens was “fully committed to . . . the necessary steps to restore our credibility and finances”. But his claims that a tax crackdown on wealthy Greeks will be decisive in cutting the deficit next year to 9.1 per cent ring hollow with many – especially as his new revenue collection team has yet to be appointed.
Last December, youth discontent fuelled by the economic situation led to rioting in Athens – and the Socialists are reluctant to reverse a campaign pledge to protect incomes and boost welfare payments.
Moreover, Greece’s economy looked sickly before the events of the past few weeks. Prior to the global slowdown, the country was growing at annual rates of 4 per cent or more, with consumption boosted by the low interest rates it enjoyed as a eurozone member. But Europe’s recession has exposed a massive loss of competitiveness. Unit labour costs have soared more than 40 per cent since Greece joined the eurozone in 2001, while in Germany they remained almost constant before edging up this year.
On almost every measure, Greeks have been living beyond their means. The current account deficit reached almost 15 per cent of gross domestic product last year, making the US deficit of 5 per cent look modest. External public debt now exceeds GDP.
With hindsight, it is clear that a lax fiscal policy was also pumping up an economy based largely on just two sectors – shipping and tourism. Now, “Greece’s mix of problems is unique in the eurozone – a large budget deficit, rising debt and an unsustainable pension system”, says George Pagoulatos, a professor at Athens Economics University.
Since joining the euro, Greece has regularly flouted the deficit and debt limits set in the zone’s “stability and growth pact” that is meant to correct for the lack of a single eurozone fiscal authority. Scant progress has been made in reforming the country’s public sector, which added 50,000 mostly low-skilled employees in 2004-09.
Public sector wages are again set to rise, by 5-7 per cent in 2010. “Wage cuts may not be needed, because the economy isn’t projected to shrink significantly next year, but there should be an immediate freeze on salaries and recruitment,” says Yiannis Stournaras, a former chief economic adviser at the finance ministry and now a professor at Athens University.
On pensions, expected big increases in expenditure relative to the size of its economy make Greece more vulnerable than other EU countries to an ageing population. “It’s the largest of the fiscal imbalances and the system will become unsustainable within a decade,” says Mr Stournaras.
Athens is launching a “dialogue” with trade unions on reducing the number of state pension funds from 13 to three and implementing a long-postponed plan to raise the retirement age for women to an equalised 65. The unions foiled previous pension reform efforts and are gearing up for strikes and street protests. “We’re going to war with the government,” says Aleka Papariga, leader of the still influential Greek Communist party.
What will happen next? European finance ministers on Wednesday issued a fresh reprimand to Greece, pressing ahead with a process that could lead to financial sanctions. One possibility would be for the Commission to withhold “cohesion funds” meant to help Greece catch up with richer countries.
Leaving the eurozone is not an option for Athens: the cost of servicing foreign debt would simply escalate. Beyond that, Greece’s fate will depend on the reaction in the markets and actions taken by Athens.
Nor is timing on its side. The eurozone has a “no bail-out” clause, which prevents collective liability for debts incurred by a member. In February – when the crisis was at its most intense – Peer Steinbrück, then Germany’s finance minister, admitted that in the worst case “we would have to take action”. That eased pressure on the weakest members, including Ireland. But Mr Steinbrück has since been replaced and his promise now carries little weight; in the eyes of conservative European policymakers, it increased the risk of “moral hazard” – rewarding bad behaviour.
“It is one thing if you are in the middle of a systemic crisis. Then you can’t allow anyone to fail and don’t worry about moral hazard,” says Mr Gros at Ceps in Brussels. “Now we are out of the woods and it may be a good time to reduce moral hazard.” In a research note last week, Deutsche Bank economists wrote that Greece’s continuing violation of the rules “may have changed the minds of EU authorities ... We believe that they may have to set an example for other countries in trouble”.
If the cost of servicing debt rose too high, Greece could have to turn to the International Monetary Fund. The rigorous conditionality attached to help given by the Fund could provide a framework to implement reform – and allow the government to deflect the responsibility for harsh but necessary measures.
But Mr Papaconstantinou says it is “out of the question” that Athens would turn to the IMF. “The new government is determined to put the economy back on a path of fiscal sustainability in the context of the EU rules.”
Greece’s small size – it accounts for less than 3 per cent of eurozone GDP – plays to its disadvantage. The Deutsche Bank note argues that the EU could ring-fence Greek debt, using a special fund to reduce the impact of a default beyond its borders.
Still, that is a scenario that EU policymakers would rather not contemplate. Even if containable, a Greek default would send worrying signals about the resilience of monetary union. Instead, the hope is that the markets force Athens to bring public finances under control. The stability pact is still regarded as “an anchor for policymakers”, says Erik Nielsen, economist at Goldman Sachs.
A comfort for EU authorities is that investors’ increased risk awareness means they are – at last – imposing discipline on governments. Prior to the economic crisis, Greece escaped punishment from financial markets. That is no longer the case. It may not be too long before even bored Greek public sector employees notice.
Copyright The Financial Times Limited 2009.
Turkey fights calls for greater Afghan role
By Delphine Strauss in Ankara
Turkey is “already doing what it can” in its dispatch of troops to Afghanistan, Recep Tayyip Erdogan, prime minister, said on Sunday, signalling he would resist US pressure to send a bigger contingent to back the American surge.
He spoke before flying to Washington on an official visit intended to dispel suspicions of an eastwards drift in Turkey’s foreign policy, and show its value as a partner in addressing regional challenges – from stabilising Iraq to ending frozen conflicts in the Caucasus or containing Iran’s nuclear ambitions.
Turkey, a long-standing Nato ally, insists its role in Afghanistan is humanitarian, and that its troops are non-combat. Barack Obama, US president, is likely to ask for more help at Monday’s meeting in the White House, but Mr Erdogan said Turkey, though it would continue training Afghan security forces, had already more than doubled its contingent to 1,750 and ruled out any further increase.
The decision may feed doubts in Washington that Turkey’s pursuit of closer ties with Muslim neighbours could dilute its support of western aims. Mr Erdogan’s visit comes soon after a crisis in Turkish-Israeli relations, and a defence of Iran’s nuclear programme as “peaceful and humanitarian”.
“The US side needs to impress diplomatically on [Mr Erdogan] how much his populist rhetoric in support of anti-western bugbears is damaging Turkey’s position with its key partners and ... in Washington and Brussels,” Hugh Pope, an author on Turkey, wrote in a paper for the Transatlantic Academy.
Despite the criticism, Mr Obama’s administration considers Ankara a vital partner in a difficult region. It supports Mr Erdogan’s drive to broaden rights for Turkey’s Kurdish minority, aiming to end a conflict that has deepened divisions within Turkey and also threatened stability in northern Iraq. The US shares intelligence with Turkey on Kurdish rebels operating from Iraq, and Mr Erdogan is accompanied on the trip by a senior general.
Mr Obama, who before his election promised to recognise Ottoman-era massacres of Armenians as genocide, is also likely to urge Mr Erdogan to speed ratification of a deal to normalise relations with Yerevan.
The agreement, signed after last-minute mediation by Hillary Clinton, US secretary of state, is one of Mr Obama’s few tangible successes in foreign policy, but he will face pressure from Armenian groups if it does not take effect before April.
The real test of what Mr Obama has called a “model partnership”, though, will be Iran. Turkish diplomats say they share western fears of Tehran gaining nuclear weapons, and differ only in their approach to preventing it.
But Turkey, which imports gas from Iran and wants to expand trade ties, is against any new sanctions and abstained in last month’s United Nations vote condemning Iran’s nuclear activities, even though China and Russia joined the censure.
Ian Lesser, in a paper for the German Marshall Fund, said Turkish foreign policy was “in the European mainstream” on most issues, but warned its position on Iran’s nuclear programme “holds the potential for a damaging departure”.
Copyright The Financial Times Limited 2009.
Turkey is “already doing what it can” in its dispatch of troops to Afghanistan, Recep Tayyip Erdogan, prime minister, said on Sunday, signalling he would resist US pressure to send a bigger contingent to back the American surge.
He spoke before flying to Washington on an official visit intended to dispel suspicions of an eastwards drift in Turkey’s foreign policy, and show its value as a partner in addressing regional challenges – from stabilising Iraq to ending frozen conflicts in the Caucasus or containing Iran’s nuclear ambitions.
Turkey, a long-standing Nato ally, insists its role in Afghanistan is humanitarian, and that its troops are non-combat. Barack Obama, US president, is likely to ask for more help at Monday’s meeting in the White House, but Mr Erdogan said Turkey, though it would continue training Afghan security forces, had already more than doubled its contingent to 1,750 and ruled out any further increase.
The decision may feed doubts in Washington that Turkey’s pursuit of closer ties with Muslim neighbours could dilute its support of western aims. Mr Erdogan’s visit comes soon after a crisis in Turkish-Israeli relations, and a defence of Iran’s nuclear programme as “peaceful and humanitarian”.
“The US side needs to impress diplomatically on [Mr Erdogan] how much his populist rhetoric in support of anti-western bugbears is damaging Turkey’s position with its key partners and ... in Washington and Brussels,” Hugh Pope, an author on Turkey, wrote in a paper for the Transatlantic Academy.
Despite the criticism, Mr Obama’s administration considers Ankara a vital partner in a difficult region. It supports Mr Erdogan’s drive to broaden rights for Turkey’s Kurdish minority, aiming to end a conflict that has deepened divisions within Turkey and also threatened stability in northern Iraq. The US shares intelligence with Turkey on Kurdish rebels operating from Iraq, and Mr Erdogan is accompanied on the trip by a senior general.
Mr Obama, who before his election promised to recognise Ottoman-era massacres of Armenians as genocide, is also likely to urge Mr Erdogan to speed ratification of a deal to normalise relations with Yerevan.
The agreement, signed after last-minute mediation by Hillary Clinton, US secretary of state, is one of Mr Obama’s few tangible successes in foreign policy, but he will face pressure from Armenian groups if it does not take effect before April.
The real test of what Mr Obama has called a “model partnership”, though, will be Iran. Turkish diplomats say they share western fears of Tehran gaining nuclear weapons, and differ only in their approach to preventing it.
But Turkey, which imports gas from Iran and wants to expand trade ties, is against any new sanctions and abstained in last month’s United Nations vote condemning Iran’s nuclear activities, even though China and Russia joined the censure.
Ian Lesser, in a paper for the German Marshall Fund, said Turkish foreign policy was “in the European mainstream” on most issues, but warned its position on Iran’s nuclear programme “holds the potential for a damaging departure”.
Copyright The Financial Times Limited 2009.
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