What's a Greek Tragedy?

As actuaries we do not believe in miracles, or do we?

According to a 'strictly confidential' document from the Troika (= EC, IMF & ECB), Greek's Debt/GDP ratio suddenly raised from 149% to 186% in 2013!

This new insight causes a 'potential need for additional official financing' ranging up to €440 billion!! (are you still with me?)

Let's take a look at how Debt/GDP ratio developed in the past and the new optimistic Troika forecast (red line).

Just to help the Troika, I've added a non-miracle 'Maggid' forecast based on simple and more realistic economic principles.

Not a word in the Troika report about the drivers and cultural changes that are necessary to achieve a long term decrease of the Debt/GDP ratio. Everything is based on  suggestive mathematical art.

Continue throwing good money after bad, is not the way forward. Greece will first have to show that it is not only willing, but also achieving debt reduction. Current measures are insufficient. Start for example to raise retirement age to 65 as a beginning...

Let's pray European leaders give up Keynesian miracle thinking and take the right decision:

Stop helping Greece to finance their debt, unless Greece shows strong progress in reducing debt itself every month .

If not.., the line 'A Greek Tragedy' will get a new meaning....

Sources/Links:
- Troika report
- Zerohedge: Greece
- Retirement around the globe blog

Actuarial Proverbs: Will Europe Survive?

According to Eurostat, Europe - especially the Euro (€) 'Coin' Countries that put all their Euro eggs in one basket -  face a difficult time. In a world where money seems to grow on trees, it's hard to take the right measures to prevent Greece from a financial meltdown with unknown consequences.

Questions
Even for actuaries it's hard to understand what's happening and what makes sense or not, It's over our 'actuarial' head....

• Should 'Europe donor countries' support Greece fore more than the '110 billion Euro rescue' in 2010?
  
  
• Is Greece’s 10-year bond rate of 15% an adequate risk premium?
  
  
• Will restructuring Greece's debt solve anything, devaluate the Euro,  or pose other  incalculable risks to the overall Euro zone?

Difficult questions that are hard too answer....


Debt-Deficit Comparison
Let's take an actuarial look at the facts by comparing 2010 Government Debt with Deficit (all in % GDP):

From this chart it's clear that not only Greece is in the danger zone, but also Ireland and the US as well... Moreover, the UK is not free from worries, to put it mildly...

The blind are leading...
Another chart-conclusion might be that the blind are leading the blind'. Relative strong less-weaker countries like Germany and France,  have to carry the financial consequences of cheating and not-performing countries. Above all, we all know: one rotten apple spoils the barrel!!

In fact to save or revive 'Financial Europe' it would take some countries with no debt and a strong positive surplus (= negative deficit) instead of a deficit.

It seems neither sensible nor logical  to restructure another  country's debt if the outlook of the governments debt and deficit of the' helping country' is (slightly less) negative as well. But as we know: only fools rush in where angels fear to tread.

Trying to help other countries that fail to restructure themselves is like banging your head against a brick wall...  No risk premium on government bonds can compensate that...

Countries with a strong relative debt and a deficit should restructure their own country and financial situation at once, before asking ore receiving any outside help.

Growth: The Solution?
Some argue that debt and deficits are not so bad as long as countries are growing. Let's dive into this argument with the next chart (data source: Eurostat):

Indeed, from this 'Growth-Believe' we can now understand why (only) Greece is seen as such a major problem.

From this chart it's also clear that if Ireland and Spain are not going to grow one way or the other, they will become the next big problem. These countries have to take the bull by its horns, before it's too late.

It's throwing caution to the wind when 'debt and deficit countries' with a positive 'Real GDP Growth Rate' try to save sicker country-brothers by lending them money.

Moreover, it's lending money you don't really possess or own, it's like robbing Peter (yourself) to pay Paul....

Combining the two Eurostat charts it becomes clear that that not all 'Garlic Countries' (Mediterranean countries:Greece, Spain, Portugal, Italy) can be lumped together.

Greece is indeed the greatest risk , secondly a non-garlic country: Ireland...
Spain, Portugal and Italy are relatively at arm’s length and could perhaps keep their head above water if they take the right measures in time.

U.S.' Fiscal Gap

Finally, don't forget about the U.S., as the U.S. Real GDP Growth Rate is already declining to 2.3% in Q1 2011.

According to Boston University economist Kotlikoff, the U.S. is broke.  Kotlikoff doesn’t trust government accounting. He uses “Fiscal Gap,” not the accumulation of deficits, to define public debt. This "Fiscal Gap" is the difference between a government’s projected revenue  and its projected spending .

By this measure, the U.S. government debt is $200-trillion – 840 percent of current GDP. 

Conclusions

From all this it's clear Europe is stuck between a rock and a hard place...
Although ECB President Mr. Trichet thinks different, it looks like €-Europe has to choose between two blind goats (Irish saying):

(1) A complete Financial Europe Meltdown in case of endless financing default countries like Greece or

(2) Letting individual default countries go bankrupt, with unsure (systemic) consequences for local banks and other financial institutions that financed or invested in default countries.

How to decide? Guideline:  Of two evils, always choose the less....
As option (1) is clearly putting the cart before the horse, and surely leads to a meltdown, only option 2 is left: QUIT!

Sources and related links:
- Spreadsheet: Used Data, Tables for this blog (xls)
- US Real GDP Growth Rate
- Government Debt and Optimal Monetary and Fiscal Policy (2010)
- English proverbs and sayings (!)
- English deficit (including time table)
- Shadowstats (for the real stats!)
- The U.S. is broke?
- Eurostat: Euro area government deficit at 6.0% GDP (2011) 
- BILD: Interview with Jean-Claude Trichet, President ECB, 15 January 2011

Spanish Risk Management

Why does Europe support Greece with a bailout? And why will Europe support other PIGS countries when they get into trouble as well?

Greece

It all started with Greece.
After Greece joined the Euro (2001),  it became clear that the Greek government lied about its deficit, the Greeks simply 'cooked their books'.

Unfortunately there's no way back. The Greeks held us by the hand in their 'systemic dance'.  Ancient Greeks always believed that dancing was invented by the Gods. The Spartans not only danced before battles, they also fought with rhythmic movements to the strains of flutes. And so, still it is in the year 2010.

Spain
Let's dive a little deeper and ask ourselves the question why the EU needs to help Spain out, once it gets into trouble.

ING
Just have a look at ING Bank, as a simple example.
In 2010 ING has a € 41.3 billion (total) exposure to Spain. That's 124% of their equity.

It's clear, despite of all effort in explaining and defending an excellent (?) risk policy in their 2009 annual report,

ING Risk Management Fails

Even an amateur in Risk Management and Diversification can tell you blind-sighted, that a single country exposure exceeding ING's total equity is a major and unacceptable risk.



What about the Dutch regulator?
This ING debacle also implies that Dutch supervisor DNB has failed as well. DNB did not notice the 'exposure mismatch' in ING's 'Spanish Risk Management' adventure.

If DNB continues 'checking boxes and formulas' while warning the whole world about every detailed risk, instead of using common sense, keeping an eye on the headlines and demanding adequate actions, the future of Financial Institutions will remain at risk. The control approach and attitude of DNB has to be fundamentally revised.

Other European Banks
Back to the banks. Although 'Exposure Lader Spain', ING turns out not to be the only bank at risk.

Just have a look at Deutsche Bank (DB). At first Deutsche bank stated that the exposure to Greece was 'very limited' and that they had 'no comment on others'.

On May 25, 2010 the DB CEO stated he has 500 million euros exposure to Greece in sovereign loans and debt and DB has no sovereign exposure to Spain and Portugal.

As we can conclude from a EVO Research report, these statements are simply not true.


Conclusion
It's clear that European Banks are not transparent about their exposures. They're hiding and mis-communicating information.

Thanks to the bailout and financial support of the European government, European banks are (temporarily) saved (by the bell).
Key Question: For how long?????

 Related Links / Sources:

- Complete European banks exposure to Spain

- Youtube: Espeluznante cogida a Julio Aparicio en Las Ventas en el cuello 

- Greek debt crisis a hazard for EU 

- Greece : dance history 

-  ING annual report 2009