Uh oh. News on Greek debt went from bad, to worse, to really bad yesterday. Will the UK follow suit?
The bad news was supplied by those tiresome statisticians Eurostat, which only came along and revised its figures for Greece’s fiscal deficit for 2009 from 12.7 to 13.6 per cent of GDP. And then, to rub salt into the Greek wound, said that it may eventually revise the figures up again to 14.1 per cent of GDP.
How could this happen? It seems not even Goldman Sachs can do anything to make these figures look less frightful.
Then things got worse. Moody’s cut its credit rating for Greece down another notch. Oh dear, oh dear. First of all Goldman Sachs proves to be unable to show that, actually, Greece’s debt really isn’t that bad; and now to cap it all, the credit ratings agency seems to be telling it like it is.
Then the really bad news occurred. The yield on Greek government bonds shot up, to 9.03 per cent, the highest level since 1998, when of course interest rates were much higher across the board. To put the price of Greek bonds into perspective, the equivalent German bonds pay out a yield which is one-third of the Greek rate.
An EU/IMF bail out of Greece is now inevitable. Germany may not like it, but, well, it is happening.
It remains to be seen, however, how this bail out can help Greece in the longer term. Greece can only fix its problems via massive rises in productivity, or via big cuts in wages. The former is nigh on impossible to achieve; the latter is so unpalatable that even ouzo tastes quite nice in comparison.
The truth is, Greece may see it as a victory that the EU/IMF funds are available, but it is a pyrrhic victory. Greece desperately needs a cheaper currency. Maybe they need to bring back the Oracle at Delphi, because no doubt the priestesses of Apollo could have told them as much.
But if you were to try and reach the bottom of the bottomless pit called Greek debt, just a few moments before you crash into the hell that is its base, you will see the UK’s debt. Its bottomless floor is not quite as deep as Greece’s, but it is still pretty… well, bottomless.
In the year 2009/10 the UK’s fiscal deficit was £153bn, a full £3bn less than Alistair predicted in his recent Budget. That is worth around 10 per cent of GDP, by the way, so while the Greek government is borrowing around 14 cents for every euro the Greek economy makes, in the UK the government is borrowing around 10p for every pound the economy generates. So you see what we mean about the comparison between bottomlessness.
But then again, Greece’s total government debt is currently around 115 per cent of GDP. In contrast, the UK government’s total debt is around 62 per cent. But then take into account that much of the UK’s net debt is down to the cost of the banking bail out, then without the cost of financial interventions, is around 53.8 per cent of GDP.
So while the Greek government is borrowing at a rate that is only marginally higher than the UK, total debt in Greece is much, much higher. Not only that, much of the UK’s existing debt is funded by bonds that are more than ten years away from maturity. In this respect, the UK’s finances are on a much stronger footing than just about all our major competitors. The UK may have to raise more money to fund new debt than most other countries, but its requirement to refinance existing debt is far more modest.
So, really, comparing the UK with Greece, as much of the blogosphere does, is scaremongering.
© Investment & Business News 2013