Tags: hans | parisis | greece | france

The Moral Hazard of Saving Greece

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Thursday, 11 Feb 2010 03:00 PM Current | Bio | Archive

France’s top auditing body, the Cour des Comptes, has warned its government to cut public debt, which more than doubled in only one year from 3.4% of GDP in 2008 to 7.9% of GDP in 2009.

The body also said France has to bring such deficit levels down or the nation runs the risk of a credit rating downgrade that automatically would imply higher borrowing costs, which is, by the way, is very accurately demonstrated by higher yields of any country’s government bonds.

Amid the ongoing Greece saga, the warning to France made me think that we could see the fiscal frailties of small, as well as big, euro zone members being exposed.

We’ll see if their fiscal pump-priming endeavors have been successful or not.

If they weren’t successful, then the respective deficits will be subject to very unwelcome upward pressures — whether or not the concerned governments feel compelled to conjure up fresh spending programs.

Meanwhile, the nature of any support for Greece and the legality of the support under the European rules have yet to be worked out.

Keep in mind, it any agreement could still be unattainable.

Any kind of constructive and effective assistance to Greece, I’m afraid, will probably contradict — or be perceived as contradicting — German Finance Minister Wolfgang Schäuble’s vow that there will be no breach of the so-called no bailout criterion.

However, it won’t be the actual cost of whatever financial assistance Greece is given — that shouldn’t be a major problem in itself.

It will be the “moral hazard” the assistance will cause — the implicit guarantees to those with similar fiscal needs.

We could say that “recompensing” Greece’s profligate behavior in some way or another will without any doubt rip the lid off a “moral hazard” can of worms that was already opened with the de facto abandonment of the Fiscal Stability Criteria soon after the euro bills came into circulation.

The Stability and Growth Pact is — or "was" in reality — an agreement by European Union member states related to their conduct of fiscal policy, to facilitate and maintain Economic and Monetary Union of the European Union.

It consists of fiscal monitoring of members by the European Commission and the Council and, after multiples warnings, sanctions against offending members.

The two rules that member states must respect:

First, an annual budget deficit no higher than 3% of GDP (Greece is expected to show a budget deficit in 2009 of 12.5 percent of GDP).

Second, a national debt lower than 60% of GDP (Greece’s national debt is expected to rise to 72 percent of GDP in 2010 and 2011).

But, yes, the Stability and Growth Pact is only some words on some kind of paper …

Bottom line: EU President Herman Van Rompuy said there is an agreement on helping Greece, but details still have to be worked out Monday and Tuesday at the Ecofin Council meeting.

Brussels is faced with a number of choices — none of them good for the euro.

It’s as simple as that.

The IMF, in its latest report on the World Economic Outlook (WEO) of October 2009, stated the “real GDP” growth for Greece was expected to contract by 0.1% in 2010 — certainly not a GDP growth zone where Greece can be reasonably expected to put its fiscal house in order.

In the text of the Council of European Union on Greece, the last phrase is interesting: “Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support.”

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France s top auditing body, the Cour des Comptes, has warned its government to cut public debt, which more than doubled in only one year from 3.4% of GDP in 2008 to 7.9% of GDP in 2009. The body also said France has to bring such deficit levels down or the nation runs the...
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Thursday, 11 Feb 2010 03:00 PM
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