Well they say that a day is a long-time in politics – that an awful lot can happen within 24 hours. The two days of the G20 summit have seemed like a lifetime. The meeting took place in Cannes from 3 to 4 November, 2011. It was the sixth such meeting of the G20: the 19 largest developed and developing countries plus the European Union.
As chair of the meeting, President Sarkozy of France had planned to address the two key global issues of securing a sustained global recovery and strengthening the global banking system. He also wanted to address other issues, such as climate change, commodity price volatility, social inclusion, corruption and corporate governance. But although these issues are covered in the final communiqué, what took centre-stage for the whole summit was the crisis in Greece and its impact on the eurozone.
The drama began on Monday 31 October. The Greek Prime Minister, George Papandreou, decided to call a referendum on the agreement reached at the eurozone summit in Brussels the previous week. In return for banks being required to take a loss of 50% in converting existing Greek bonds into new ones, Greece would have to continue with its tough austerity measures: measures that have caused the Greek economy to implode.
With worries that (a) the referendum would create several weeks of uncertainty, (b) that the agreement might then be rejected, (c) that the government might fall, stock markets plunged. French and German markets fell by over 5%. The Athens stock market fell by 7 per cent. The yield on Italian bonds passed 6%, amidst fears that if Greece defaulted, so too might Italy. But if the eurozone could survive a Greek default, it might not survive an Italian one. Even though several members of Mr. Papandreou’s Pasok party demanded his resignation, he stuck to his guns that an agreement had to have the consent of the Greek people. That was Tuesday.
The next day, Wednesday, was the start of the two-day G20 conference. What was to have been a meeting addressing wider issues of the global economy, was now having to focus on the Greek crisis. President Sarkozy and Chancellor Merkel made it clear that the next tranche of bailout money to Greece would not be paid until the deal agreed in Brussels was accepted by Greece. They gave the first indications that they might accept Greece’s withdrawal from the eurozone.
On Thursday afternoon, Mr Papandreou signalled that he would back down from the referendum if the opposition New Democracy party would join him in supporting the Brussels deal. He would not resign. But the opposition leader, Antonis Samaras, said that his party would not join with Mr Papandreou and that the Prime Minister should indeed resign. He did not resign, but abandoned the calll for a referendum.
With the Greek crisis dominating the meeting, little concrete agreement was reached. One important outcome, however, was the recognition that the financing of the IMF should be strengthened. As the final communiqué states:
We will ensure the IMF continues to have resources to play its systemic role to the benefit of its whole membership, building on the substantial resources we have already mobilized since London in 2009. We stand ready to ensure additional resources could be mobilised in a timely manner and ask our finance ministers by their next meeting to work on deploying a range of various options including bilateral contributions to the IMF, SDRs, and voluntary contributions to an IMF special structure such as an administered account. We will expeditiously implement in full the 2010 quota and governance reform of the IMF.
But despite this recognition of the key role of the IMF, the agreement was essentially that an agreement would be needed!
Articles
Eurozone crisis: yet another twist to Greek farce keeps leaders on edge of seats The Telegraph (4/11/11)
G20 summit: the main issues at Cannes The Telegraph (3/11/11)
Quick! More sandbags (filled with cash) The Economist, Charlemagne’s notebook (4/11/11)
The burning fuse The Economist, Charlemagne’s notebook (4/11/11)
G20 leaders agree to boost IMF resources BBC News (4/11/11)
G20 summit fails to allay world recession fears Guardian, Patrick Wintour and Larry Elliott (4/11/11)
G20 summit: roll call of doom for a dysfunctional family Guardian, Angelique Chrisafis (3/11/11)
Euro zone finds no new money for debt crisis at G20 The Economic Times of India (4/11/11)
Shares jump after referendum ditched New Zealand Herald (5/11/11)
Bunds rise on EFSF worries, Italy under pressure Reuters (4/11/11)
Eurozone crisis: The possible resolutions BBC News (4/11/11)
The G20 aren’t running to Europe’s rescue BBC News blogs, Stephanie Flanders (4/11/11)
Is the euro about to capsize? BBC News, Laurence Knight (4/11/11)
Final Communiqué
Meeting of Finance Ministers and Central Bank Governors: final communiqué G20–G8 France 2011 (4/11/11)
Questions
- Why might the ‘game’ between the eurozone leaders and George Papandreou be seen as a prisoner’s dilemma game? What are the payoffs?
- Why might increasing the bailout for Greece represent a moral hazard for the eurozone leaders?
- Trace through market reactions between the 31 October and the 4 November and explain the movements.
- How crucial is the IMF in achieving global stability and economic growth?
- Assess the success of the Cannes G20 conference.
The Greek economy is suffering. In April 2010, a €45 billion bailout package was agreed between Greece and the IMF and the EU. This was increased to €110 billion in May 2011. (The bailout loans expire in 2013.) In return for the loans, Greece agreed to tough austerity measures, involving tax increases, clamping down on tax evasion and government expenditure cuts. These measures have succeeded in cutting the deficit by 5 percentage points, but it still stood at 10.5% of GDP in 2010. Public-sector debt rose from 127% of GDP in 2009 to 143% in 2010. The market cost of borrowing on two-year government bonds currently stands at 23% per annum – a sign of a serious lack of confidence by investors in Greece’s ability to repay the loans.
The austerity measures have brought great hardship. Unemployment has soared. In February 2011, it reached 15.9%; in February last year it was 12.1%. According to the IMF’s World Economic Outlook (Table A2), Greek real GDP fell by 2.0% in 2009, by 4.5% in 2010 and is forecast to fall by 3.0% in 2011. But with GDP falling, this brings automatic fiscal stabilisers into play: lower incomes mean lower income tax revenues; lower expenditure means lower VAT revenue; higher unemployment means that more people claim unemployment-related benefits. This all makes it harder to meet the deficit reduction targets through discretionary tax rises and government expenditure cuts and makes it even more important to cut down on tax evasion. But, of course, the more taxes rise and the more government expenditure is cut, the more this suppresses aggregate demand. The austerity measures have thus worsened the recession.
On May 9, the ratings agency Standard & Poor’s downgraded Greece’s rating to B (15 points below the top rating of AAA and 6 points into ‘junk’ territory). It now has the lowest rating in Europe along with Belarus.
Worries have been growing that Greece might be forced to default on some its debt, or choose to do so. This would probably mean an extension of repayment periods. In other words, bondholders would be paid back in full but at a later date. This has been referred to as ‘debt re-profiling’. This could cause a renewed loss of confidence, not only in the Greek economy, but also in banks that are major lenders to Greece and which would be exposed in the case of default or restructuring.
The IMF and the ECB have been quick to stress that Greece can continue to manage its debt and that, if necessary, another loan might be negotiated. Anticipations are that Greece could indeed ask for a further bailout. But is this the answer? Or would it be better if Greece sought a restructuring of its debt? The following webcasts and podcasts consider the issue.
Webcasts and podcasts
Greece may need second financial bail-out BBC News, Stephanie Flanders (11/5/11)
Greece needs revised bail-out Financial Times Global Economy Webcasts, Luke Templeman and Vincent Boland (9/5/11)
Why Greece must stick to the plan Financial Times Global Economy Webcasts, Ralph Atkins, Frankfurt Bureau Chief, talks to Jurgen Stark (11/5/11)
Will Greece need more money? BBC News, Matina Stevis (9/5/11)
Economists debate Greek crisis BBC News, Thomas Mayer and David McWilliam (9/5/11)
Greece at ‘a very difficult stage’ BBC Today Programme, Stephanie Flanders and Vassilis Xenakis (11/5/11)
The Business podcast: PPI scandal and Greece’s debt crisis Guardian Podcast, Aditya Chakrabortty (11/5/11) (listen to last part of podcast, from 19:20)
Greece: Eurozone ministers discuss terms of second bailout BBC News, Nigel Cassidy (16/5/11)
Greece dominates eurozone talks in Brussels BBC News, Matthew Price (17/5/11)
Articles
S&P moves to cut Greek credit rating Financial Times, Richard Milne, Tracy Alloway and Ralph Atkins (9/5/11)
One Year After the Bailout, Greece is Still Hurting Time Magazine, Joanna Kakissis (12/5/11)
What price a Greek haircut? BBC News blogs: Peston’s Picks, Robert Peston (10/5/11)
What is debt ‘reprofiling’? BBC News, Laurence Knight (17/5/11)
Reprofiling: Greece’s restructuring-lite Channel 4 News, Faisal Islam (17/5/11)
Questions
- What are the arguments for and against tough austerity measures for Greece and other eurozone countries with high deficits, such as Portugal and Ireland?
- Should Greece seek a restructuring of its debts?
- What is a ‘haircut’ and is this a suitable form of restructuring?
- What are the arguments for and against a default, or partical default, by the Greek government on its debt?
- Is it in the intesests of European banks to offer a further bailout to Greece?
- What should be the role of the IMF in the current situation in Greece?
The Chancellor of the Exchequer, George Osborne, delivered the annual Budget on 23 March. He was very keen to have a ‘Budget for growth’ given the pessimism of consumers (see Table 1, UK, line 3, in Business and Consumer Survey Results, February 2011) and the bad news on inflation (see 4.4% and rising?).
But what could he do? Despite being urged by the Labour opposition to stimulate aggregate demand by cutting the deficit more slowly, he ruled out this alternative. It would be perceived by markets, he argued, as a sign that he was ‘gong soft’ on the commitment to tackle the deficit.
If stimulating aggregate demand directly was out, the alternative was to use supply-side policy: to provide more favourable conditions for business by cutting ‘red tape’, providing tax incentives for investment, reducing regulations, simplifying tax, cutting corporation tax financed by tax increases elsewhere, creating 21 ‘enterprise zones’ and funding extra apprenticeships and work experience placements.
The links below give details of the measures and consider their likely effectiveness. Crucially, the Budget will be much more successful in encouraging investment if people think it will be successful. In other words, its success depends on how it affects people’s expectations. Will it help confidence to return – or will the impending tax increases and cuts on government expenditure only make people more pessimistic?
Webcasts
Budget: Chancellor George Osborne opens speech BBC News (23/3/11)
Budget: Osborne wants to ‘simplify taxes’ BBC News (23/3/11)
Budget: Osborne lowers corporation tax BBC News (23/3/11)
Budget: BBC Economics editor Stephanie Flanders BBC News (23/3/11)
Budget: BBC business editor Robert Peston BBC News (23/3/11)
Enterprise Zones on the way back Channel 4 News, Siobhan Kennedy (22/3/11)
Articles
Osborne’s Budget ‘to fuel growth’ BBC News (23/3/11)
A budget for big business BBC News blogs, Peston’s Picks, Robert Peston (23/3/11)
Budget 2011: tax grab is the real story Guardian, Patrick Collinson (23/3/11)
Budget 2011 – full details Independent (23/3/11)
Osborne shakes up corporation tax Financial Times, Vanessa Houlder (23/3/11)
Osborne unveils ‘Budget for growth’ Financial Times, Daniel Pimlott and Chris Giles (23/3/11)
Budget 2011: Guardian columnists’ verdict Guardian, Jackie Ashley, Martin Kettle, George Monbiot, Julian Glover (23/3/11)
Budget 2011: a million low-paid people escape tax but fiscal drag catches others The Telegraph, Ian Cowie (23/3/11)
Budget 2011: some good news and lots of micro-management The Telegraph, Janet Daley (23/3/11)
Micro trumps macro BBC News Blogs: Stephanomics, Stephanie Flanders (23/3/11)
George Osborne, growing giant of the Tory party, launches ‘slow burn’ Budget Guardian, Nicholas Watt (23/3/11)
Budget documents
2011 Budget, HM Treasury (23/3/11)
Budget 2011 press notice, HM Treasury (23/3/11)
2011 Budget documents, HM Treasury (23/3/11)
Questions
- What supply-side policies were included in the Budget?
- What will be the impact of the Budget measures on aggregate demand?
- What are the major factors that are likely to influence the rate of economic growth over the coming months?
- What would have been the advantages and disadvantages of a more expansionary (or less contractionary) Budget?
- What will be the effects of the Budget measures on the distribution of income (after taxes and benefits)?
In the post of the 17th November, Greece 2: This time it’s Ireland, we looked at the problems of the Irish economy in servicing its debts and whether it would need a bailout. Well, despite protesting that such a bailout would not be necessary, in the end events overtook the Irish government. International loss of confidence forced the government to accept a bailout package. After a weekend of talks, a deal was reached on 28 November between the Irish government, the ECB, the IMF, the European Commission and individual governments.
The deal involves loans totalling €85 billion. Of this, €35 billion will go towards supporting the Irish banking system. The remaining €50 billion will go to supporting government spending. The loans will carry an average interest rate of 5.8%, which is more than the 5.2% on the bailout loans to Greece, but considerably below the rates that Ireland would have to pay on the open market. Being loans, rather than grants, they only delay the problems of dealing with Ireland’s large debt, which has been rising rapidly and is predicted to be around 80% of GDP for 2010 (see Annex Table 62 in OECD Economic Outlook Statistical Annex). They thus provide Ireland with liquidity while it implements policies to reduce its debt.
Ireland itself has contributed €17.5 billion to the loan fund; of the rest, €22.5 billion will come from the IMF, while the European Union and bilateral European lenders, including the UK, Sweden and Denmark, have pledged a total of €45.0 billion, including £3.25 billion from the UK.
One of the main purposes of the loans is to reduce the likelihood of speculation against other relatively highly indebted countries in the EU, such as Portugal, Spain and Italy. The hope is that, by granting Ireland loans, the message would be that similar support would be made available to other countries as necessary. ‘Contagion’ would thereby be halted.
Podcasts and webcasts
Ireland’s €85bn bailout is best deal available, says PM Guardian webcast (29/11/10)
Interview with Jim O’Neill BBC News (29/11/10)
Irish deal ‘better than market rate’BBC Today Programme, Ajai Chopra (29/11/10)
Ireland bailout ‘doesn’t stop pressure building’ BBC Today Programme, Tony Creszenzi and Brian Hayes (29/11/10)
Articles
EU/IMF Irish bailout – the details FT Alphaville, Neil Hume (28/11/10)
Ireland rescue is not a game changer Financial Times, Mohamed El-Erian (29/11/10)
IMF insists Ireland got a ‘good deal’ Irish Times (29/11/10)
Can the eurozone afford its banks? BBC News blogs: Peston’s Picks, Robert Peston (29/11/10)
Irish bailout leaves markets nervous for good reason CNN Business 360, Peter Morici (30/11/10)
Eurozone debt crisis deepens Times of Malta (30/11/10)
Will the Irish crisis spread to Italy? Vox, Paolo Manasse and Giulio Trigilia (29/11/10)
Questions
- Distinguish between liquidity and solvency solutions to sovereign debt problems.
- Is Ireland’s debt problem purely a sovereign one? Explain.
- What will determine whether the bailout for Ireland will halt contagion to other countries?
- Why might the implementation of an austerity package make the sovereign debt problem worse in the short to medium run?
- Will the Irish crisis spread to Italy?
National debt has increased rapidly over the past few years. In 2006/7 general government debt was £577.8bn or 42.9% of GDP. In 2009/10 it was £1000.4bn or 71.3% of GDP. It is set to go higher, with government debt forecast to be around 87% of GDP in 2011. This compares with forecasts of 82% for Germany, 87% for France, 103% for the USA, 134% for Greece and 195% for Japan.
Getting the deficit and debt down has, not surprisingly, become an issue in many countries. In the UK it has become the major current pre-occupation of the Coalition government and on 20 October it is set to announce major public spending cuts as a means of achieving this.
To get a flavour of the government’s thinking and the message that ministers are putting out to the electorate, the following are quotes from the Prime Minister’s and then the Chancellor’s speeches to the Conservative Party Conference:
This year, we’re going to spend £43 billion pounds on debt interest payments alone. £43 billion – not to pay off the debt – just to stand still. Do you know what we could do with that sort of money? We could take eleven million people out of paying income tax altogether. We could take every business in the country out of corporation tax. That’s why we have acted decisively – to stop pouring so much of your hard-earned money down the drain. We are already paying £120m of interest every single day thanks to the last Labour government. (David Cameron)
It’s the borrowing that doesn’t go away as the economy grows, and we have £109bn of it. It’s like with a credit card. The longer you leave it, the worse it gets. You pay more interest. You pay interest on the interest. You pay interest on the interest on the interest. We are already paying £120m of interest every single day thanks to the last Labour government. Millions of pounds every day that goes to the foreign governments we owe so they can build the schools and hospitals for their own citizens that we aren’t able to afford for ours. How dare Labour call that protecting the poor? (George Osborne)
Let’s unpick this a bit. Who earns the interest? The answer is that it is paid to holders of government debt in the form of government bonds (gilts), national savings certificates, premium bonds, etc. In other words it is paid to savers, whether individuals or pension funds or companies.
Does it all go abroad? In fact 29% of gilts are held abroad. The rest are held by British residents. Thus some 70% of the interest rate paid on government debt goes to British residents and supports pensions and savers. It can thus be seen as a transfer from taxpayers to savers.
Because of the record low interest rates many pensioners who rely on savings interest have seen their incomes fall dramatically. Others draw income from a ‘self-invested personal pension’. The amount that can be drawn each year is based on tables according to a person’s age and the current 15-year Treasury gilt yield (currently 3.45%). Thus the lower the rate of interest, and the less the yield, the less that can be drawn.
So who are the gainers and losers from high general government debt and attempts to get it down? Read the following articles and look at the data and then try answering the questions.
Articles
Britons have donated £7m to help pay off the national debt (but that’s a drop in the ocean) Mail Online, Daniel Martin (9/10/10)
A trillion and rising: Britain’s £1,000,000,000,000 debt means it is now paying as much in interest as it does for defence Mail Online, Hugo Duncan (1/10/10)
Spending cuts “not enough”, say small firms Telegraph, James Hurley (8/10/10)
UK public finances post record August deficit Guardian, Julia Kollewe (21/9/10)
Another paradox of thrift The Economist, Buttonwood (16/9/10)
Data
The gilt market UK Debt Management Office
Gilt market data UK Debt Management Office
Overseas gilt holdings UK Debt Management Office
Public sector: current position ONS (30/9/10)
Public sector finances ONS Statistical Bulletin (21/9/10)
Government deficit and debt under the Maastricht Treaty ONS Statistical Bulletin (30/9/10)
Contributions to the government deficit and debt ONS Statistical Bulletin (31/3/10)
Questions
- Explain the difference between central government, general government and public-sector deficits and debt.
- Who loses from a rising public-sector debt? Who gains?
- Conduct an international comparison of (a) the level of the government deficit and debt and (b) their rate of growth over the past few years.
- What is meant by the ‘yield’ on a particular gilt?
- If gilt yields fall, does this mean that the government pays less on existing gilts? Is it likely to pay less on new gilt issues? Explain.
- How do cuts affect the distribution between savers and borrowers?