Tag Archives: Portugal

Austerity measures lead to unrest in Greece

In anticipation of €26 billion ($37.4 billion) in spending cuts and tax increases to reduce Greece’s deficit over the next five years, unions called for strikes. Affected services included public transportation, schools, hospitals, and media. In addition student demonstrations in Athens turned violent as protesters hurled bottles and firecrackers at police.

The austerity measures are in return for last year’s €110 billion EU/IMF debt bailout. A good portion of the proposed cuts will be to public sector salaries, defense and health care spending.

Was the bailout enough to keep Greece afloat? According to the Wall Street Journal’s scorecard they could have used about €151 billion, which means they should borrow about €40 billion more to plug last year’s hole. The tab has grown in the interim and markets are demanding 15 percent to lend to Greece. S&P rates Greek bonds “in deep junk territory.”

Charles Forelle at Brussels Blog offers four possible solutions: 1) Modify the current measures by extending the time horizon to pay back the bailout, “plow ahead with privatization”, and restructure the terms of the bailout loans 2) Give Greece more bailout money, 3) Delay paying creditors in exchange for new bonds that are paid off later, and 4) Tell lenders to take a “haircut” today.

Each of these comes with its own set of  repercussions: political, economic and fiscal.  The choice will depend on which fallout Greece’s government want to face. Markets have already reacted to yesterday’s strikes in Athens (and S&P’s warning to Portugal’s banks). A round of  euro selling was touched off by investors concerned that Greece is likely to default again.

Is California’s Debt a Greek Tragedy?

James Surowiekci writing at The New Yorker considers whether there is good reason to think California’s fiscal plight puts it on course for a Greek-style collapse. Greece is not the only EU nation in trouble. Add in Portugal, Ireland, Italy and Spain to the massive debt club (a.k.a the PIIGS), with debt levels at 60% of GDP in 2008-2009. By contrast the most fiscally troubled states of California, New York, New Jersey and Illinois had debt-to-GDP ratios of 15% during the same period.

Surowiecki suggests this may be reason to breathe a little easier. The biggest debtor nations in the EU owe three times as much relative to GDP as do their high-debt counterparts in the US. Plus, the states can count on a federal bailout.

Yet, neither of these thoughts are entirely comforting.

First, states have underestimated their pension obligations by threefold. Official reports estimate New Jersey’s unfunded pension obligations at $45 billion. Using more reasonable discount rates to estimate New Jersey’s pension obligation reveals an unfunded liability of $137.9 billion, or 261% of total state debt. That’s before adding in Other Post-Retirement Benefits (OPEB) and health care for public sector workers.

Secondly, a half century of  intergovernmental infusions from D.C. in the form of transfers,Medicaid, and stabilization money hasn’t kept the states afloat. Quite the contrary the erosion of fiscal federalism has meant a loss of states’ control over spending and policy.

The FY 2009 stimulus has been as effective as a shot of morphine. States have now spent their education money to expand spending and avoid cuts. Fast forward to FY 2010. Revenues haven’t recovered. Pension obligations loom larger and those “saved and created” jobs are now in search of funds.

Factor in the growth in Social Security, Medicare, health care spending, and annual deficits projected to average $1 trillion over the next  decade and America 2030 looks alot worse than Greece 2010.