greece economic update 09.2012

Greece Economic Update September 2012

Navigator Consulting Group www.navigator-consulting.com

2008 2009 2010 2011 2012 7 mo 2012 Net Revenue – Target* 54,140 59,287 55,124 54,042 51,409 30,438 Net Revenue – Actual* 51,660 38,368 51,187 50,091 27,637

Net Expenditure - Target* 60,456 65,978 69,796 70,225 62,998 45,267 Net Expenditure - Actual* 60,925 71,802 66,432 70,135 40,852

Interest - Target 11,300 12,000 13,017 16,002 13,050 10,293 Interest - Actual 11,210 12,325 13,223 16,348 10,133

Total Deficit - Target -10,836 -11,791 -18,691 -19,808 -13,215 -4,563 Total Deficit - Actual -13,911 -40,981 -20,620 -22,882 -3,083

Primary Deficit - Target 464 209 -5,674 -3,806 -1,089 -4,536 Primary Deficit - Actual -2,701 -28,656 -7,397 -6,534 -3,083

PIB Expenditure - Target 9,650 8,800 9,200 7,550 7,300 4,259 PIB Expenditure - Actual 9,624 9,588 8,447 6,608 2,282

Actual Expenditure 2008 2009 2010 2011 2012 7 mo 2012 Central Govnt Operations 49,715 59,477 53,209 53,787 30,719 Interest 11,210 12,325 13,223 16,348 10,133 PIB Expenditure (Investment) 9,624 9,588 8,447 6,608 2,282 Total 70,549 81,390 74,879 76,743 43,134

Central Government Budget Indicators: 2008-2012

Source: Hellenic Ministry of Finance Monthly Budget Execution Updates and Monthly Public Debt Records

* Targets refer to: 2008-2009: Stability and Growth Agreements; 2010: Initial MOU; 2011: Mid-Term Fiscal Consolidation

© Navigator Consulting Group, 2012 www.navigator-consulting.com

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Central Govnt Operations Interest PIB Expenditure (Investment)

Central Government Expenditure: 2008-2011

Central government operating expenditure rose from EUR 49.7 bln in 2008 to EUR 53.8 bln in 2011. The main increase has been payments to hospitals and social security organisations, contributions to the Hellenic Financial Stability Fund, and provision of guarantees. The Public Investment Budget fell from EUR 9.6 bln to 6.6 bln in 2011. Interest costs rose from EUR 11.2 bln in 2008 to EUR 16.4 bln in 2011. These figures do not include spending by state pension funds, public hospitals and semi-governmental organisations, which add another EUR 40 billion to total public expenditure.

Expenditure, EUR mln


Source: Hellenic Ministry of Finance Monthly Budget Execution Updates and Monthly Public Debt Records

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GDP, Current Prices (Eurostat) Public Debt, Year-end (ELSTAT)

Greek Debt and GDP Growth, 2002-2011

Source: Hellenic Statistics Authority (ELSTAT) Eurostat, Navigator Consulting Group

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 GDP, Current Prices (Eurostat) 156,615 172,431 185,266 193,050 208,893 222,771 232,920 231,642 227,318 215,088 GDP Change 10% 7% 4% 8% 7% 5% -0.5% -1.9% -5.4% Public Debt, Year-end (ELSTAT) 166,117 177,812 201,244 215,416 226,218 239,658 262,071 298,524 340,286 367,978 Debt:GDP 106% 103% 109% 112% 108% 108% 113% 129% 150% 171%

Greece has been in recession since 2009. GDP is forecast to contract by a further 6% in 2012, and 3-4% in 2013. It is highly likely that the GDP decline will reach 20% between peak and trough before stabilising and growing. Public debt has increased from 106% of GDP in 2002 to 171% of (current price) GDP in 2011. Unlike other countries, Greece now has a fully-consolidated public debt figure, including central and national governments, semi-governmental organisations and other public entities. The same cannot be said of Spain, Italy, the United States and other countries.

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Greek Public Debt Stock, 12/2007-06/2012

Date EUR mln 31.12.07 239,658 31.03.08 247,434 30.06.08 251,946 30.09.08 257,203 31.12.08 262,071 31.03.09 282,071 30.06.09 292,306 30.09.09 297,921 31.12.09 298,524 31.03.10 310,384 30.06.10 316,955 30.09.10 336,807 31.12.10 340,286 31.03.11 354,541 30.06.11 353,693 30.09.11 360,379 31.12.11 367,978 31.03.12 280,292 30.06.12 303,527

Total government debt rose from EUR 239.6 bln on 31/12/2007 to EUR 368 bln on 31/12/2011 before PSI occurred. Although PSI imposed a “haircut” of EUR 100 bln; it added EUR 60 bln in bank recapitalisations which are currently driving the debt increase. These includes a EUR 20 bln “sweetener” for international banks, and a EUR 40 bln recap of Greek institutions. The Greek component has not been fully released and is therefore not recorded in Greek government debt.

Public Debt, EUR mln

PSI


Source: Hellenic Ministry of Finance Monthly Public Debt Records

Greek Unemployment Rate

Unemployment has risen from 8% in QIV 2008 to 23% in QI 2012 and 24.4% in June 2012. Unemployment insurance in Greece lasts for 12 months and provides a monthly payment of about EUR 485. Most forecasts place unemployment at 25% by QIV 2012. The situation is compounded by a low employment rate (53% of the workforce), with the female employment rate comprising one of the lowest in the European Union. As unemployment rises, GDP and consumer spending will fall even further.

Source: Hellenic Statistics Authority Unemployment in 2012 is QI 2012


000 inhabitants 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Population 8,867 8,930 8,984 9,033 9,082 9,122 9,179 9,216 9,246 9,282 9,321 9,355 9,362 Workforce 4,609 4,565 4,689 4,749 4,832 4,854 4,891 4,916 4,946 4,991 5,011 4,959 4,958 Employed 4,105 4,052 4,213 4,278 4,331 4,383 4,462 4,519 4,554 4,477 4,299 3,933 3,838 Unemployed 505 513 476 471 500 471 429 396 393 514 712 1,026 1,120 Economically Inactive 4,257 4,365 4,295 4,284 4,251 4,268 4,288 4,300 4,300 4,291 4,309 4,396 4,404 Unemployment Rate 11% 11% 10% 10% 10% 10% 9% 8% 8% 10% 14% 21% 23% Employment Rate 52% 51% 52% 53% 53% 53% 53% 53% 53% 54% 54% 53% 53%

Unemployment Rate

11% 11% 10% 10% 10% 10%

9% 8% 8%

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14%

21% 23%

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Key Forecasts – 1st MOU

Source: IMF Country Report No 10/110

The forecasts in the 1st Memorandum of Understanding (MOU) were incorrect. In 2012, the Troika forecast a GDP growth of 2.1%; actual GDP decline will be over 6%. Unemployment in 2012 was forecast at 14.8%: the actual rate in June 2012 is 24.4%. Moreover, the impact of unemployment, pension and wage cuts will depress GDP growth and government revenue for years to come.

-7.0%

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Nominal GDP - 1st MOU Current GDP - Actual*

Nominal GDP Growth

0.0%

5.0%

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25.0%

30.0%

Unemployment - 1st MOU Unemployment - Actual*

Unemployment Rate

2009 2010 2011 2012 2009 2010 2011 2012


Greek Interest Costs are over 2x Fiscal Adjustment

Source: IMF Country Report No 10/110 Hellenic Ministry of Finance - Monthly Budget Execution Reports

EUR mln 2010 2011 2012 2013 2014 Total

MOU 1 Total Savings 5,800 9,150 5,575 4,775 4,700 30,000

Interest Costs - MOU 1 11,900 13,000 14,900 17,100 18,900 75,800

Interest Costs- Actual* 13,223 16,348 13,050 na na na

* 2010 & 2011: Actual Amounts Recorded. 2012: Budgeted Amount after PSI

An inexplicable factor is failure to understand the high costs of interest in the first Memorandum. Between 2010 and 2014, the total impact of the MOU 1 was supposed to deliver EUR 30 billion in additional revenue and lower expenditure. Yet the interest costs budgeted in this same Memorandum were EUR 75.8 billion: well over twice the “savings”. The failure to purchase Greek government debt at market prices (25-30% discount) or via negotiated purchases is one of the greatest policy errors thus far. Instead of taking advantage of lower market prices, the Troika refinanced Greek government debt at full nominal value plus interest. It can be no coincidence that the main beneficiaries of this decision were French and German banks.

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MOU 1 Total Savings Interest Costs - MOU 1

2008 2009 2010 2011 2012 2013

GDP, Current Prices (Eurostat) 232,920 231,642 227,318 215,088 202,183 196,117

GDP Change 5% -0.5% -1.9% -5.4% -6.0% -3.0%

Public Debt, Year-end (ELSTAT; Navigator) 262,071 298,524 340,286 367,978 323,527 338,086

Debt:GDP 113% 129% 150% 171% 160% 172%

Interest Paid (Actual) 11,210 12,325 13,223 16,348 14,559 15,214

Average Interest Rate 4.3% 4.1% 3.9% 4.4% 4.5% 4.5%

Interest:GDP 4.8% 5.3% 5.8% 7.6% 7.2% 7.8%

Central Government Expenditure 60,925 71,802 66,432 70,135 62,998 60,000

Interest:Central Govnt Expenditure 18% 17% 20% 23% 23% 25%

Greek Debt Sustainability: Optimistic Case

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2008 2009 2010 2011 2012 2013


Assuming a GDP decline of 6% in 2012 and 3% in 2013, a stable average interest rate, a small primary surplus and limited privatisation income, debt:GDP will reach 172% at the end of 2013. Interest costs will comprise 25% of central government expenditure and 7.8% of GDP. Debt sustainability is highly questionable, even under a relatively conservative scenario.


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Base Case 2008 2009 2010 2011 2012 2013 GDP, Current Prices (Eurostat) 232,920 231,642 227,318 215,088 202,183 194,096 GDP Change 5% -0.5% -1.9% -5.4% -6.0% -4.0% Public Debt, Year-end (ELSTAT) 262,071 298,524 340,286 367,978 323,527 338,086 Debt:GDP 113% 129% 150% 171% 160% 174% Interest Paid (Actual) 11,210 12,325 13,223 16,348 17,100 17,921 Average Interest Rate 4.3% 4.1% 3.9% 4.4% 4.6% 4.8% Interest:GDP 4.8% 5.3% 5.8% 7.6% 8.5% 9.2% Central Government Expenditure 60,925 71,802 66,432 70,135 64,000 62,000 Interest:Central Govnt Expenditure 18% 17% 20% 23% 27% 29%

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Greek Debt Sustainability: Base Case


A GDP decline of 4% in 2013 (highly probably due to unemployment, higher taxes and pension/salary cuts), together with an increase in average interest costs to 4.8% (reflecting high treasury bill loans), renders a debt:GDP ratio of 174%; an interest:GDP rate of 9.2%; and an interest:central govnt expenditure rate of 29%.

EUR mln


greece economic update 09.2012

Business

public expenditure

public debt gure

monthly public debt

haircut of eur

greek public debt stock

greek government debt

debt increase

public hospitals