- Markets & Risk Newsletter
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- Investors Uncover Risk in Greece In the world of investing, there are the risks that you know and the risks that you don't know. And then there are the risks that you have a right to know but never learn about. The collective nations of the European Union, of which Greece is one, have pledged to each other and to the world to maintain a set of minimum standards for financial performance. For example, since 1999 the Maastricht rules have called for significant fines on EU member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt must not exceed 60 percent.
Greece has a history of exceeding the 60 percent debt limit, but has managed to adhere to the three percent deficit ceiling, at least according to official government statements. But behind the reassuring missives from Athens there has been considerable cooking of the books. Huge expenditures were simply not reported. One time, billions in hospital debt was omitted, and another time major military expenditures were left out. A 2004 report by Eurostat painted a picture of consistent problems with the veracity of Greek numbers: "Data revisions of such a scale have given rise to questions about the reliability of the Greek statistics on public finances….The reliability of Greek deficit and debt statistics has been the object of particular attention by Eurostat in the past. Statistical issues in this field were debated with the Greek statistical authorities far more frequently than with any other Member State." In reality, recent Greek government deficit has been far greater than the three percent limit, and in 2009, it exploded to over 12 percent. As a result, Greece has come under increased pressure to implement tough austerity measures. The European Commission, the EU's executive body, has put Greece under closer monitoring than any euro-zone country has ever been subjected to and has also criticized Athens for misleading reporting of statistics. In early 2010, a significant threat to investor optimism was the potential default of Greece and the implications it held for the EU and beyond. But recently the government has made progress in controlling the bleeding. Backing up government reassurances that the nation was on track to meeting its ambitious deficit cutting goals, Athens bowed to EU pressure and introduced additional austerity cuts totaling 4.8 billion euros. This would further lower financing costs for Greece, inspire confidence, and pave the way for successful bond sales. Wirth hedge funds and other institutions betting the country is teetering on the edge of default, Greece is trying to bring stability to its finances by attracting long-term investors. In the past two months, speculators have bought credit default swaps, or protection against a potential default, pushing its price higher. The EU is conducting an investigation of this market, and Spanish President José Luis Rodríguez Zapatero said he hoped to see new CDS regulation during his country's EU presidency, which expires in June. The March bond sale, held a day after unveiling radical fiscal reforms, was a success with 10-year bonds. The government shut the door on banks and hedge funds, and dropped Goldman Sachs and other US investment banks as transaction managers.
Perhaps an effective austerity program combined with long-overdue transparency in federal accounting will increase confidence and lure investors to Greece. After all, many investors don't mind calculating risk, but they do mind getting snookered by government beancounters. For information on powerful risk-management tools that allow you to track and measure the risk of European market indexes, equities, fixed income, futures and options, contact PortfolioScience today. |
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