Greek deficit

The country must change or sink. It is time for a new social deal. We must embrace Spartan austerity. Fine words, spoken at the financial equivalent of Thermopylae. But Greek prime minister George Papandreou’s speech neither played well at home – a nationwide strike is threatened this week – nor abroad. Investors continue to sell the country’s bonds and stocks.

The desirability of his aim – slashing the Greek budget deficit from over 12 per cent of gross domestic product to less than 3 per cent – is clear. The problem is getting there. Since 1981, the Greek budget deficit has only been that low once, in 2006. True, over the previous decade the deficit did shrink from a ruinous 15 per cent of GDP to within a whisker of 3 per cent. But that took more than nine years. Mr Papandreou now proposes tightening almost as much and in half the time. Increasing public sector pay and taxing bankers’ bonuses will not get him there.
This does not make Greece a Lehman-in-waiting, however. When Lehman went into bankruptcy protection, it owed more than $600bn; Greek sovereign debt currently totals about $250bn. Most importantly, top European Union officials have said that Brussels would help euro-member governments in trouble. Those statements have not been retracted.

But EU solidarity does not represent a blanket guarantee. If it did, Greek government bonds would trade in line with German Bunds. Nor would any help be an act of EU charity. Other eurozone members would rather see Greece’s problems contained than have them contaminate their markets – and so jack up their cost of funding.

The scale of any aid need not be prohibitive; Greece accounts for less than 3 per cent of the eurozone economy. There is also a precedent. Hungary, Latvia and Romania have all won EU and International Monetary Fund backing, albeit with tough conditions attached. In short, the risk of a default remains remote, although Greece will have to take pain, either now or later.