4 Facts That Prove S&P Misunderstands The Greek Crisis – Credit Rating Upgrade

S&P have upgraded the Greek government’s credit rating from selective default to B-. If you thought S&P has lost all credibility here are 4 facts that prove you are correct.

To quote S&P directly

“The outlook on the long-term rating is stable, balancing our view of the government’s commitment to a fiscal and structural adjustment against the economic and political challenges of doing so,” the agency added.

These comments come as the result of the last Euro Group meeting which outlined the following economic path for Greece which, we are told, will take the country to a position of sustainability in 2020.

S&P’s latest upgrade of the Greek government’s credit rating from selective default to B- shows a complete disregard for the economic facts on the ground.

Here are the 4 facts that prove S&P are regurgitating the words of politicians and do not understand the nature of the Euro and the consequences of this latest Euro Group deal.

1. Greek Government Debt Repayments.

The Euro Group debt deal will see the Greek government reducing its outstanding debt by at least 50 billion Euros. This 50 billion Euros has to be paid for by the Greek economy. Taking 50 billion Euros out of the Greek economy equates to a 18.5% contraction in GDP between 2013 and 2020.

2. Greek Trade Deficit.

There are 96 months between the start of 2013 and the end of 2020. The Greek trade deficit currently averages around 1.7 billion Euros a month. Assuming the trade deficit contracts to average 1 billion Euros a month of the next 96 months the amount of money lost from the Greek economy will be  96 billion Euros, or a 35% reduction in GDP.

3. Greek Government Spending Cuts.

The Greek government has said it is committed to keeping the public sector workforce at current levels and will save money through cutting wages, benefits and pensions and well as investment. The Greek government deficit as a percentage of GDP is running at 10%, the goal is to get this figure down to less than 5%. Conservatively this means the Greek government putting back a billion Euros a month less into the economy. Again, there are 96 months between now and 2020 so the spending cuts will equate to there being 96 billion Euros less in the Greek economy, or a 35% reduction in GDP.

4. Tax Increases

As if the previous 3 points were not enough on their own, the Greek government is also increasing income tax levels massively, it has increased fuel duties massively already along with numerous other tax increases. Even if tax levels were maintained at their current level the situation would be dire, the fact that taxes are being increased in this environment only amplifies the negative effects of the previous 3 points listed above.

To Summarise S&P’s Total Misunderstanding Of The Greek Crisis.

The first 3 points on their own, should the latest debt deal stand up to economic reality for the next 8 years, will see the Greek economy shrinking by 88.5% between now and 2020.

We have been told the latest debt deal puts the Greek economy on a sound footing for the future and will take the country into sustainability by 2020. S&P clearly buys into this assessment.

However the latest debt deal is not going to stand up to the test of time. The most obvious flaw in the whole plan is that it is based on Greek GDP increasing between now and 2020. There is only one way this is going to happen and that is by private sector borrowing increasing dramatically, equivalent of over 10% of GDP, year on year for the next 8 years.

For this to happen there would have to a dramatic uptick in business confidence in Greece as well as their being a massive uptick in the competitiveness of Greek business to support this new found confidence.

For businesses confidence to increase the levels of taxation will have to start falling and currently taxes are increasing at a dramatic rate. As an example, with no tax-free limit of earnings retroactively imposed on 2012 income, the poorest Greeks are going to see their tax bill increase by 30% or more.

The economy is still contracting at an accelerated rate and this is before the latest round of cuts and tax increases have come into effect. Given that the Greek economy has still not stabilized from the last round of tax increases the only logical prediction for 2013 will be an even steeper drop in GDP than in 2012.

Given these very fundamental realities, for S&P to come out and suggest Greece is on a sustainable path shows their complete misunderstanding of the dynamics of the Euro and the Greek government finances.

To state the obvious, their upgrading of the Greek government’s credit rating is completely uncalled for and shows a decision based on information that is not in any way connected to the economic reality.

In short, it appears that S&P are now basing their economic forecasts on the opinions of politicians.

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