The Irish government announced draconian spending cuts of 6 billion Euros in order to stave off a debt crisis in the worst modern-day downturn in the nation’s history. Even so, Irish government bond yields have been rising relative to German government bond yields, the benchmark for the Eurozone. Over the past five years the spread had averaged about 40bps. Now it is 170bps. But, the Irish seem to be making the necessary cuts forced on them by lower tax receipts and currency union.
The Greek government, on the other hand, is not taking the same tack. Witness comments by the country’s Premier as reported in the Telegraph by Ambrose Evans-Pritchard:
Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state.
Nice sentiment. But what does that mean in practice? I see this as asking for trouble. The only way to interpret this statement is as a vow not to take the same draconian up to ten percent pay cut measures the Irish are now taking – ones that are likely to lead to strikes and social unrest. But, the reality is the Greeks have no other choice. Either make the cuts or face national bankruptcy. It’s as simple as that.
To be clear, these cuts will mean depression in Greece as similar measures in Latvia have done. Evans-Pritchard says:
Mr Papandreou has good reason to throw the gauntlet at Europe’s feet. Greece is being told to adopt an IMF-style austerity package, without the devaluation so central to IMF plans. The prescription is ruinous and patently self-defeating. Public debt is already 113pc of GDP. The Commission says it will reach 125pc by late 2010. It may top 140pc by 2012.
If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower state workers, rising to 20pc for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral.
Indeed, as I indicated in a recent post, market participants are talking openly of a bust-up in the Eurozone because of what is happening in Greece and Ireland. The thinking is that the stress of the tie to the Euro would cause the countries to leave the Eurozone and start printing money to cover their deficits. I see this as unlikely. After all, even Latvia is now risking depression to escape the volatility of small-country monetary independence. Moreover, the U.K and the U.S. are hearing the same deficit hawk voices despite monetary independence.
But, the situation in Greece is worse than it is in Ireland. The debt levels are higher. The spread to German bunds (214bps) is higher, and the budget cuts are not yet forthcoming. For signs of stress, I look to Greece before I look to Ireland.
Note: The Guardian takes a different tack, leading its story on Greece with the statement:
Greece will attempt today to claw back some of its lost credibility with the EU and other international financial institutions by outlining drastic cost-cutting measures to reduce its runaway deficit.
See the article Greece fights to regain international confidence.