Bad Books Cook Greece (Update 2)

The head of the International Monetary Fund said Thursday that the debt crisis in Greece is serious and there would be no “silver bullet” to resolve the issue in an easy manner. (Updated from AP 11.50 EST)

Moody’s lowered Greece’s sovereign ratings to A3 from A2 and placed them on review for further possible downgrade. (Updated 10.50 EST)

There was alarm in the global credit markets and among the Eurozone nations when it was discovered late last year that some of the numbers in the Greek budget were wrong. The news gave investors and potential investors in Greek sovereign debt pause.

Greece’s inability to properly keep its finances and present an accurate budget have caught up with it again. The Eurostat research agency says that the numbers in the Greek budget are wrong again.

According to MarketWatch, “Eurostat is expressing a reservation on the quality of the data reported by Greece, due to uncertainties on the surplus of social security funds for 2009, on the classification of some public entities and on the recording of off-market swaps,” the agency said. Eurostat said that the Greek deficit/GDP ratio could have to be revised from 13.6% of GDP to 13.7%.

The percentage may be small, but it takes the chances of Greece refinancing its sovereign obligations from improbable to nearly impossible. Greece has debt of $402 billion and over $50 billion of that comes due this year. Forecast are that the deficit/GDP figure for Greece could be over 100% by 2015 as the interest rates it must pay rise and its GDP falls.

The new budget data almost certainly puts the problem of Greece’s finances in the hands of the Eurozone and IMF which have offered a $40  billion bailout of the southern European nation.

The bailout of Greece has been complicated in recent days by political challenges to Angela Dorothea Merkel, the Chancellor of Germany. The  proposed role of the largest nation in Europe in the bailout is unpopular with German voters. Merkel’s political future may be based on her willingness to reign in her country’s promise to take a major role in saving Greece from a sovereign default.

The new Greek budget data also makes it more likely that the nation will be pushed out of the 16-nation Eurozone alliance. Greece would be forced, under those circumstances to rely on devaluing its currency. That move may not be enough to allow it to raise capital at any reasonable interest rate. A number of the largest bond investors in the world, include US fixed income giant, PIMCO, have said they will not buy Greek paper even if it is available at high yields

Greece has trouble beyond keeping its books. Its debt service will likely grow to a level that its government cannot pay. Greek workers repeatedly strike over cuts in their compensation.

The Eurostat figure will almost certainly hasten any bailout of Greece, if indeed any nation is willing to do so. Any withdrawal of Eurozone support would mean Greece would need to turn the the IMF which would force Greece to keep its books accurately or be forced into bankruptcy.

Douglas A. McIntyre

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