8 january acca (athens) - greece and the eurozone endgame

The global body for professional accountants

AGENDA

• The story so far• Greece: a brief update• The limits of austerity• The EU roadmap• The mechanics of contagion• What hope for reform?


1. The story so far.


Stimulus

Sovereign debt crisis

US politics, fundamentals

China slowdown

Green shootsInvestment stalls Inflation peaks,

Africa slows

Uncertainty peaks

Fukushima

Investment stalls


-60

-50

-40

-30

-20

-10

0

10

20

30

40

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012

AmericasMiddle EastAsia PacificCentral and Eastern EuropeSouth AsiaWestern EuropeAfrica


IS IT ALL DOWN TO EUROPE?

• Stimulus withdrawal (incl. China)• Bank capitalisation & Basel III• Household and corporate deleveraging• Falling imports• Corporate cash hoarding• Conflict & civil unrest• Uncertainty


WHAT IS THE EURO CRISIS?

• Debt sustainability & market access• Bank capitalisation, leverage & liquidity

• Contagion•De-integration & bank-sovereign loops

• Falling output; permanent capacity loss• Loss of human and social capital

• Incomplete EU institutional framework• Stretching of legitimacy and mandates


2. Greece: a brief summary


Bank of Greece (2012) Report on the Recapitalisation of Greek Banks http://www.bankofgreece.gr/BogEkdoseis/Report_on_the_recapitalisation_and_restructuring.pdf

http://www.bankofgreece.gr/BogEkdoseis/Report_on_the_recapitalisation_and_restructuring.pdf


CREDIT (1) TO THE DOMESTIC PRIVATE SECTOR(Outstanding amounts and net flows(2) in EUR millions)

% change Nov 2011-12Ι. TOTAL -4.6%ΙΙ. ENTERPRISES -5.4% ΙΙΑ. NON-FINANCIAL CORPORATIONS -4.1% 1. Agriculture -7.0% 2. Industry -4.2%

2.1 Mining and Quarrying -3.6% 2.2 Manufacturing -4.2%

3. Trade -8.3% 4. Tourism 0.8% 5. Shipping -3.1% 6. Construction -5.0% 7. Electricity - Gas - Water 6.3% 8. Storage and Transport services excl. Shipping -6.4% 9. Remaining branches -3.8%

9.1 Information and Communication -4.1% 9.2 Real Estate Activities -0.3% 9.3 Professional and other activities -14.7% 9.4 Other -1.1%

ΙΙΒ. INSURANCE & OTHER FINANCIAL -24.2%ΙΙI. UNINCORPORATED ENTERPRISES -2.8%ΙV. INDIVIDUALS ETC (2) -3.9% 1. Housing loans -3.5% 2. Consumer credit -5.1% 3. Other loans 0.5%


3. The limits of austerity.


IMF: “We got fiscal

multipliers wrong. We assumed 0.5; they are between

0.9 and 1.7”


More significant influence on confidence

ACCA/IMA 2012: Global Economic Conditions Survey Q4 2011

Revenues falling

Global economy seen as making progress

New orders falling

Very good policies

Austerity

Sector-specific factors

Poor policies

Access to growth capital

Business size

Unstable customers

Value-added business opportunities


More significant influence on investment

ACCA/IMA 2012: Global Economic Conditions Survey Q4 2011

Falling new orders

Falling revenues

Potential for new orders?

Profitable projects

Sector-specific

Finance & Gov support

SME

‘Excessive’ austerity

Unstable customers

Global Economy improving

‘Excessive’ spending

Unstable suppliers

Poor policy


Labour taxes only Capital taxes only Labour &capital taxes Real 10 yr yields

Max add tax yield/GDP

Max interest rate


Max interest rate


Max interest rate

GDP Cons

Mathias Trabandt & Harald Uhlig, 2012. "How Do Laffer Curves Differ Across Countries?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, National Bureau of Economic Research, Inc.

42.7% is the limit!


DEBT SUSTAINABILITY

• Debt < (NPV of future fiscal surpluses)• This is a moving target in every way.• In practice, policymakers use arbitrary

thresholds•120% debt/GDP is the best example

• Prisoners of austerity v. prisoners of liquidity


Arlsanalp & Tsuda, 2012. “Tracking global demand for advanced economy sovereign debt," IMF Working Papers 12/284, International Monetary Fund


NOT ALL AUSTERITY IS THE SAME

1. Improved tax administration2. Improved procurement etc3. Benefits cuts4. Public consumption cuts5. Direct tax hikes6. Public investment cuts7. Indirect tax hikes


Quick Q&A Break?


4. The EU Roadmap.


6-pack(macro imbalances,

budget surveillance, co-ordination and enforcement)

Treaty on stability, coordination &

governance (fiscal compact)

CRD / CRR IV

Single Supervisory Mechanism

Recovery and Resolution DirectiveDeposit

Guarantee Scheme Directive

ESM Operational Framework

Single resolution mechanism

Co-ordination of national reforms

Reform and solidarity ‘contracts’ between MS and EU institutions

Participation of Parliaments and EP in further integration

ECB Outright Monetary Transactions


Worse, what if Europe isn’t solvent?


Delia Velculescu, 2010. "Some Uncomfortable Arithmetic Regarding Europe’s Public Finances," IMF Working Papers 10/177, International Monetary Fund


Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision, http://esa.un.org/unpd/wpp/index.htm


5. The Mechanics of Contagion.

The global body for professional accountantsAntonakakis, N. and Vergos, K. (2012) ‘Sovereign bond yield spillovers in the Euro zone during the financial and debt crisis’ MPRA 12/2012 http://mpra.ub.uni-muenchen.de/43284/1/BYS_MPRA.pdf


Labour taxes only Capital taxes only Labour &capital taxes Real 10 yr yields


Max interest rate


Max interest rate


Max interest rate

GDP Cons

Mathias Trabandt & Harald Uhlig, 2012. "How Do Laffer Curves Differ Across Countries?," NBER Chapters, in: Fiscal Policy after the Financial Crisis, National Bureau of Economic Research, Inc.


6. What future for reform?


INEFFICIENCY COSTS REVENUE

• Low returns on public spending• Loss of revenue due to poor tax

administration• Lower tax morale• More so in a recession


Thanks!

8 january acca (athens) - greece and the eurozone endgame

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