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Greece: State Budget Execution Jan-March 2011

Not looking good
As my readers know, I closely follow Greece’s budget execution. The situation is not
improving:

• Revenues continue to lag forecasts and the fiscal position is deteriorating: -

9.8% during Jan-Feb 2011, -11.0% during Q1 2011.
• Expenditures seem to have reached a point where it is very difficult to significantly
cut further.
• The PIB item was actively “managed” in February (see my previous comment on
29th March) but this could not be repeated.
• GDP is expected to contract for the third year in a row and there is no way
that unemployment will not also deteriorate to ~15%.
• Debt as a % of GDP will continue to increase at least until 2014 according to
my calculations.

© Markets & Beyond

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5 yr CDS spreads are at record levels at 1221 b.p. on Friday according to CMA, the
world riskiest sovereign by a long margin, i.e. a 63% of default risk. Markrit has 1090 b.p.
CDS insurance cost, a 117 b.p. increase over the week and +51 b.p. Friday alone.

Spreads with Germany’s 10 yr bond yield have also passed the 10% mark!

I have long been advocating a restructuring/default/rescheduling of the Greek debt, since

the current bailout is only postponing the inevitable, and the CDS market is clearly
showing the way…

Bondholder will take a haircut, which is perfectly normal since investors should pay
for their mistakes, not the taxpayer. This is the only way to finally clean banks’ balance
sheets and let go under the ones that are undercapitalized.

The EUR has been unscratched since early January due to major events in other
parts of the world, but I do not believe this is going to last for very long, at least
the CDS markets believes so. The more so if the FED will take a less dovish stance at its
next meeting April 26-27, which I expect.

2
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Source:

Markets & Beyond: Portugal, Greece and the EURO crisis- What the news are?
http://marketsandbeyond.blogspot.com/2011/03/portugal-greece-and-euro-crisis-
what.html) and this cannot be repeated