The Greek budget won’t stick

Can Greece save itself – from itself?

This is a country whose public finances have got into such a big mess, they make even Gordon Brown look prudent. Both in Money Morning last week and in this week’s MoneyWeek magazine (subscribe to MoneyWeek magazine) we look at why the Greeks have got themselves so far up the debt creek.

So I’ll not repeat it all here. Except to say that the country’s current budget deficit of 12.7% of GDP, and the massive borrowing that goes with it, can’t go on. And Greece’s politicians recently talked a good game on ‘austerity measures’. The aim is to slash back the country’s soaring state shortfall to the EU’s 3% limit by 2012.

What’s more, the EU is now onside. “Greece has adopted an ambitious programme to correct its fiscal imbalances and to reform its economy”, says Economic and Monetary Affairs Commissioner Joaquin Almunia. “The commission fully supports Greece in this difficult task”.

For the moment, this has brought some calm to the bond markets, where investors were fretting about whether to lend Greece any more money. The spread against German bunds, i.e. the extra interest the Greeks have had to pay to sell their bonds, has dropped back slightly from last week’s highs.

But the problem is it’s one thing to make lots of promises, it’s quite another to carry them out. Greece has a lively band of leftists and anarchists. They’re guaranteed to stir up plenty of ‘civil unrest’ – last year saw the worst riots for years – as major spending cuts appear.

The Bloomberg chart below sums up the problem in a historic context.

The red bar on the left-hand side shows the scale of the Greek government’s deficit-cutting plan compared with previous such schemes in other countries. And it’s “unprecedented and very tough”, says Carsten Brzeski at ING. “Greece’s best performance since the 1970s was a reduction of slightly more than 5% of GDP”.

Nasty. And if Greece falls a long way short of what it needs to achieve, which is quite likely, there could be some real financial trouble ahead.

That includes a potential EU or IMF bailout, or indeed a possible Greek default, as we talk about in the magazine.