Showing posts with label Greece. Show all posts
Showing posts with label Greece. Show all posts

Monday 29 June 2015

Greece explainer: What the financial crisis means

Greece announces bank holiday

As Greece inches closer to a financial default, the government closes banks and initiates capital controls.
While the world recoiled in horror at the terrorist attacks in Tunisia and elsewhere, another crisis was unfolding in Europe.
This week begins with Greece about to default on its debts, its banks closed indefinitely as citizens panic and rush to withdraw their euros.
Greece is facing soaring unemployment while wages have sunk and pensions have been slashed.
Greece is facing soaring unemployment while wages have sunk and pensions have been slashed. Photo: Bloomberg
Next Sunday the people vote on whether to accept the terms of a rescue package offered by Europe, which outlines more cuts to pay and pensions and imposes some steep tax rises.
The result could determine Greece's future in the euro zone and even in the European Union. It will send financial and political shockwaves around the world.
Between now and then will be a week of economic and political turmoil.
Greek Prime Minister Alexis Tsipras addressed the nation from Athens,
Greek Prime Minister Alexis Tsipras addressed the nation from Athens, Photo: Reuters
I thought they were about to agree a solution to all this?
So did (almost) everyone else. For the last fortnight Greece has been negotiating with the IMF and other Eurozone countries for 7.2 billion euros in new loans, to help pay old loans. The creditors were demanding that Greece make some reforms and cuts before they handed over the money.
While some warned that Greece was sleepwalking into a crisis by playing hardball in Brussels, others praised their bold approach to negotiations, their 'red lines' that they would not cross.
According to calculations by Reuters, Greece owes its official lenders 242.8 billion euros, with Germany its biggest creditor.
According to calculations by Reuters, Greece owes its official lenders 242.8 billion euros, with Germany its biggest creditor. Photo: Reuters
They figured Greece was bluffing. That they had to act crazy, give every impression they would push the button on default, otherwise they would again be steamrolled by the lenders and Euro zone countries. But few thought they would actually go through with it.
The collapse of the talks was met with shock and disbelief in northern Europe. They clearly thought that they were just a few hours of haggling, a few billion euros here and there, from agreement.
But it showed a wilful ignorance of the reality on the ground in Greece. Syriza was elected this year to change the script on negotiations with Europe. The Greeks sent their new government to Brussels with an ultimatum to get the country a better deal, not just a general mandate to 'give it another go' then settle for more austerity policies such as cuts to pensions, wages and public sector jobs.
People line up to withdraw cash from an automated teller machine on the island of Crete.
People line up to withdraw cash from an automated teller machine on the island of Crete. Photo: Stefanos Rapanis
So what exactly is the problem?
Basically, Greece was hit hard by the financial crisis, and since then it has borrowed a lot of money that it says it can't pay back – at least not yet.
According to calculations by Reuters, it owes its official lenders 242.8 billion euros, with Germany its biggest creditor.
The lenders include the IMF (International Monetary Fund), the ECB (European Central Bank) and the Euro zone governments.
Many of the loans don't mature for years, even decades.
However some do. In particular, Greece was due to pay 1.6 billion euros to the IMF by the end of June in overdue interest. After that, 3.5 billion is due to the ECB on July 20, and another 3.2 billion in August.
On top of that, more than 8 billion euros in short-term bills are due over the next two months.
Greece says it has scraped together all the money it can to pay its debts – it even called in cash reserves from councils, hospitals and other public bodies. It says that, to pay the money owed, it would have had to stop paying money into pensions and public wages – which it refuses to do.
What happens if Greece doesn't get the rescue money?
Barring further surprises, it will default on at least some of its debts.
Sovereign default does have precedents, but it always comes with major economic upheaval.
Though the consequences of that are long-term (difficulty finding lenders willing to invest in the country), there will be immediate side-effects.
After months of massive withdrawals, fearing this very crisis, Greece's banks are surviving on emergency credit from the European Central Bank. Without that, they have had to impose capital controls to stop any more money going out.
Greek people will have less money they are able to spend. Business will be unable to invest. The economy will head into recession.
So far the Greek government has refused to countenance 'Grexit'. However if no new rescue deal is negotiated, Greece would have to supply the banks with money itself, or they will collapse.
But the government has no money. The only obvious solution is to start printing new money to get cash back into the economy.
This 'new drachma' would effectively mean Greece has left the euro – at least temporarily.
The 'new drachma', even if it began on parity with the euro, would quickly lose up to half its value. Essentially, the value of everything in the country would be halved.
There will be high inflation, and the new exchange rate would make imports much more expensive. Life will get even harder for ordinary Greeks and Greek businesses.
On the other hand, some economists say it would stimulate the local economy and, in the long run, leave the country stronger. There is fierce disagreement over this view.
Why would the Greek people possibly want this?
They are sick of austerity. Unemployment has sky-rocketed, wages halved, pensions were slashed, public bodies like hospitals, schools and universities starved of funds.
Many no longer believe that austerity is just a necessary, temporary measure to put the country back on its feet. They believe it is wrecking their economy and their lives. They are willing to take a risk and try something else.
Does it affect Australia?
A loss of faith in the Eurozone could make Australia more attractive to overseas investors, driving up the Australian dollar – hurting our export industries. On the other hand it could scare away investors and push down the dollar.
Either way, though, there would be widespread market instability, a loss of investor confidence and morale. None of which is good for business and growth.
How will all this affect other countries?
The euro is already tumbling on international markets.
If Greece defaults it leaves many of its neighbours short. Germany is owed 57 billion euros, France 43 billion, Italy 38 billion and Spain 25 billion – on top of those countries' contributions to the IMF loans.
The loans don't mature for almost 30 years, there is almost no interest on them and some of the loans came with a 10-year moratorium on interest payments, so it's not like the countries need the money back immediately. However it's still a lot to have to take off the bottom line.
Confidence in Europe, and the euro, has been profoundly shaken. Eyes will turn to the continent's other weak economies such as Portugal, Spain and Italy. They may start to lose capital and investment.
Is it just an economic problem?
No.
This could also drastically change the political balance in Europe. If Syriza makes a success out of splitting Greece away from the rest of the continent, it will embolden other nationalistic parties such as the National Front in France or UKIP in the UK.
Future elections in Europe could see a surge in nationalism, a rejection of the European project, potentially enough to threaten Europe's stability as a political union.
Speaking of which, the UK is in the early stages of debate on a referendum on whether to stay in Europe, next year. If Europe is a basket case this time next year, public opinion (currently in favour of staying in) may drastically change.
Then there is the question of Russia. Syriza has already made overtures to the Kremlin, with Tsipras a star speaker at Putin's recent big international summit in St Petersburg.
If Russia comes to Greece's aid, with money, other support (or both), it will be a new factor in the current Cold War-like tensions between east and west.
Greece has already expressed its anger at Europe and NATO for not doing enough in its regular chest-bumping with Turkey. If Russian warships find a friendly berth in Greek ports, the strategic map of Europe is drastically redrawn.
What happens next?
The next set-piece is a referendum on Sunday, in which Greece votes to accept or reject the terms of the rescue deal most recently proffered in Brussels.
Between now and then, of course, anything could happen.
If the referendum takes place, and is a 'no', then Grexit appears all but inevitable.
On the other hand if it is a 'yes', then the Syriza government has effectively lost power. It will return to Brussels and hope that the deal is still on the table – which is not guaranteed. And after that, the country will probably pretty quickly go back to the polls to find a new government.

http://www.smh.com.au/business/world-business/greece-explainer-what-the-financial-crisis-means-20150628-gi05r2.html


Comment:

When you owe money, it is a big problem for you.  Your future is no longer totally in your control.  Your creditor can demand and you need to comply.

When you owe a lot of money and cannot pay back, it becomes a huge problem for your creditors.  

Saturday 16 June 2012

How to Profit From the Great Greek Bankruptcy of 2012


Don't play a starring role in this big, fat Greek tragedy

So how can investors position themselves to profit from all this, if events play out according to plan? First and foremost: with patience. The Athens Stock Exchange Index has fallen far already -- down about 63% over the past year. But Russia's RTS took a pounding prior to its default, too, and that didn't save it from sliding further post-default.
The low P/E ratios on stocks like National Bank of Greece (NYSE: NBG  ) or Coca-Cola Hellenic Bottling (NYSE: CCH  ) may tempt investors today, but have no doubt: They could get even cheaper in the event of an official exit from the euro. A "Grexit" could likewise spark selling of foreign-listed but Athens-based shipping companies such as DryShips(Nasdaq: DRYS  ) , Diana Shipping (NYSE: DSX  ) , and Excel Maritime (NYSE: EXM  ) .
Long story short, there will be a time to profit from the great Greek bankruptcy of 2012. But that time is... not yet.


National Bank of Greece (NYSE: NBG  )

 Coca-Cola Hellenic Bottling (NYSE: CCH  

 DryShips(Nasdaq: DRYS  )

 Diana Shipping (NYSE: DSX  )

Excel Maritime (NYSE: EXM  ) .


Stocks Near 52-Week Lows Worth Buying

Just as we examine companies each week that may be rising past their fair value, we can also find companies potentially trading at bargain prices. While many investors would rather have nothing to do with companies tipping the scales at 52-week lows, I think it makes a lot of sense to determine whether the market has overreacted to the downside, just as we often do when the market reacts to the upside.
Here's a look at a fallen angel trading near the 52-week lows that could be worth buying.

It's all about being greedy when others are fearful. 

Coca-Cola Hellenic (NYSE: CCH  ) , the second-largest bottling company in the world and the exclusive bottler of Coca-Cola (NYSE: KO  ) products in the region, exclusivelydistributes sparkling beverages, juices, and energy drinks in 28 countries. Because of weakness in the region and heavy investments into the company over the coming years, results haven't been fantastic, as is evidenced by the 2% drop in unit volume and its cash outflow of 32 million euros in the latest quarter.
However, investors need to keep in mind that barriers to entry remain extremely high in bottling. The Coca-Cola brand name when combined with Coke's marketing budget give Coca-Cola Hellenic incredibly strong pricing power. It's also worth noting that energy drinks and Coke Zero products showed strong year-on-year growth. At less than 10 times forward earnings, Coca-Cola Hellenic has a good mix of value and a strong brand name at its current price.




http://www.fool.com/investing/general/2012/05/29/3-stocks-near-52-week-lows-worth-buying.aspx?source=itxsitmot0000001&lidx=6 








Saturday 24 December 2011

What America Can Learn from the Greece Financial Crisis

Written by Lewis E. Lehrman
Thursday, June 30, 2011

Observations on the Greece financial crisis and what America can learn:


  1. Greece is only one example of an irresponsible, reckless, insolvent government, which is spending itself into bankruptcy. There are dozens of such countries, both developed and emerging.
  2. Central bank and commercial bank credit financing of the government budget deficits in every country leads to inflation. This mechanism leading to inflation is subtle but pervasive and inevitable.
  3. The solution to the problem is to prevent governments from requiring their central banks and commercial banks from creating new money and credit to finance government spending.
  4. In the case of America, the budget deficit and the balance of payment deficit affect the entire world because the world is on the paper dollar standard. The dollar is the official reserve currency of the world. These US deficits are financed by the Fed, the commercial banks, and foreign central banks with new money and credit which cause the depreciation of the dollar. The vast new Fed created credit of QE1 and QE2 floods the world banking system with excess dollars, causing world wide inflation.
  5. Greece is the concrete lesson for American public finance. Central bank and commercial bank financing of the government budget must be restricted or, even better, prohibited.
  6. The best institutional restriction on undisciplined Federal Reserve discretion to finance the budget and balance of payments deficit is to establish convertibility of the dollar by statute to a fixed weight of gold and to end the official reserve currency role of the dollar.
  7. When the dollar is convertible at a fixed parity to gold, then if the Fed and the banks create too much money and credit, causing inflation, the American people can protect themselves by turning in their undesired dollars for gold at the fixed parity. Since the Federal Reserve and the banks would be required by law to redeem the dollars in gold, the banks must then reduce the expansion of credit, tending to reduce inflation.


The gold standard, in a word, is democratic money. The sovereign American people should regulate the quantity of money and credit, not the Federal Reserve, a government agency. Gold is also the money of the Constitution as stipulated in Article I, Sections 8 and 10. Thus, the monetary system must be regulated by a democratic people, and not by economists manipulating the currency at the Federal Reserve Board and the Treasury.

Friday 21 May 2010

Whatever Germany does, the euro as we know it is dead


"Money can't buy you friends, but it does get you a better class of enemy" – Spike Milligan
For Angela Merkel, leader of the eurozone's richest country, a queue is forming of high-quality adversaries. As she tips German Geld und Gut into the furnace of a rescue package for the euro, while going it alone in a misguided ban on market "manipulators", the brass-neck Chancellor has infuriated domestic voters, angered her EU partners (in particular the French) and invited the so-called wolf pack of global traders to do its worst.
In one respect, Mrs Merkel is right: "The euro is in danger… if the euro fails, then Europe fails." What she has not yet admitted publicly is that the main cause of the single currency's peril appears beyond her control and therefore her impetuous response to its crisis of confidence is doomed to fail.
The euro has many flaws, but its weakest link is Greece, whose fundamental problem is that for years it spent too much, earned too little and plugged the gap by borrowing in order to enjoy a rich man's lifestyle. It flouted EU rules on the limits to budget deficits; its national accounts were a moussaka of minced statistics, topped with a cheesy sauce of jiggery-pokery.
By any legitimate measure, Greece was unworthy of eurozone membership. That it achieved card-carrying status was down to the sleight-of-hand skills of its Brussels fixers and the acquiescence of central bank bean-counters. Now we know the truth, jet-hosing it with yet more debt makes no sense. Another dose of funny money will delay but not extinguish the need for austerity.
This is why the euro, in its current form, is finished. The game is up for a monetary union that was meant to bolt together work-and-save citizens in northern Europe with the party animals of Club Med. No amount of pit props from Berlin can save the euro Mk I from collapsing under the weight of its structural dysfunctionality. You cannot run indefinitely a single currency with one interest rate for 16 economies, when there are such huge fiscal disparities.
What was once deemed unthinkable is now, I believe, inevitable: withdrawal from the eurozone of one or more of its member countries. At the bottom end, Greece and Portugal are favourites to be forced out through weakness. At the top end, proposals are already being floated in the Frankfurt press for a new "hard currency" zone, led by Germany, Austria and the Benelux countries. Either way, rich and poor are heading in opposite directions.
When asked on Sky if, in five years' time, the euro will have the same make-up as it does today, Jeremy Stretch, a currency analyst at Rabobank, the Dutch financial services giant, told me: "I think it's pretty unlikely." The euro was a boom-time construct. In the biggest bust for 80 years, it is falling apart.
Telegraph loyalists with long memories will be shocked by none of this. In 1996, Sir Martin Jacomb, then chairman of the Prudential, set out with great prescience in two pieces for The Sunday Telegraph why a European single currency, without full political integration, would end in disaster. His prognosis of the ailments that might afflict the eurozone's sickliest constituents reads as if it was penned to sum up today's turmoil.
"A country which does not handle its public finances prudently will find its long-term borrowing costs adjusted accordingly," Sir Martin predicted. "Although theory says that default is unlikely, nevertheless, a country that spends too much public money, and allows its wage costs to become uncompetitive, will experience rising unemployment and falling economic activity. The social costs may become impossible to bear."
Welcome to the headaches of George Papandreou. The bond markets called his country's bluff. Greece is skint, but its unions don't want to admit it. There is insufficient political will to tackle incompetence and corruption, never mind unaffordable state spending. But, locked into the euro, Greece cannot devalue its way out of trouble, so it relies on the kindness of strangers.
Dishing out German largesse to profligate Athens, with little expectation of a reasonable return, is a sure way for Mrs Merkel to join Gordon Brown as a political has-been. Fully aware of the revulsion felt by Mercedes and BMW employees at the prospect of their taxes being used to pay for a Hellenic car crash, she has resorted to creating a bogeyman – The Speculator.
By announcing a ban on the activities of short-sellers (those who bet to profit from falling prices in financial markets), she is hoping her decoy will avert German attention from the small print of Berlin's support for Greece, which talks of developing processes for "an orderly state insolvency". This sounds ominously like a softening-up process for a form of default.
Greece's severe difficulties were home-made. The euro has come under pressure not from dark forces of speculation but respectable investors, many of them traditional pension funds, which, quite correctly, worked out that when the crunch came, the Brussels elite would sanction an abandonment of its no bail-out rule and cough up for a messy fudge.
In 1990, the late Lord Ridley, when still a government minister, caused a storm by telling The Spectator that Europe's planned monetary union was "a German racket designed to take over the whole of Europe". One knew what he was getting at, but it has not turned out that way.
Protecting the euro has become a project via which profligate states dip their fingers in Berlin's till. Germany is taking on nasty obligations without gaining ownership of the assets. Germany's version of The Sun, Bild Zeitung, feeds its readers a regular diet of stories about the way ordinary Germans are being taken for mugs. Trust has turned to suspicion. Next stop is divorce.
As for the United Kingdom, we must be grateful that those frightfully clever Europhiles, such as Lord Mandelson and Kenneth Clarke, did not get their way. Had they been able to scrap the pound and embrace the euro this country would be even closer to ruin. Without a flexible currency, the colossal deficit clocked up by Mr Brown would have crushed us completely. We have little to thank him for, but it would be churlish to deny that his decision to reject Tony Blair's blandishments in favour of the euro was a life-saver.
Sterling's devaluation has not been pretty, but it is helping to keep our exports competitive while the coalition Government begins rebuilding the nation's finances. Siren voices from across the Channel, calling for closer integration between Britain and the rest of the EU, can be confidently rejected. As for joining the euro, I find it impossible to imagine any circumstances under which it would be in the UK's interest to do so.

Wednesday 19 May 2010

Greece gets $18bn from EU; to repay debt

Greece gets $18bn from EU; to repay debt
REUTERS, May 19, 2010, 12.03am IST

ATHENS: Greece received a 14.5 billion euro ($18 billion) loan from the European Union on Tuesday and can now repay its immediate debt, but still faces a mammoth task to claw its way out of recession.

Concerns that other EU countries such as Portugal and Spain could follow Greece and need aid from the bloc have hit the euro, while investors are still watching Athens to see whether its austerity plan will stave off the risk of default. The EU and IMF agreed at the beginning of the month to lend Greece 110 billion euros ($137 billion) over three years to help it pay billions in expiring debt after being shut out of financial markets by the high cost of borrowing.

With 5.5 billion euros already delivered by the IMF, Greece has now received the first 20-billion euro tranche of the loans, the Greek finance ministry said in a statement. Athens now can and will repay an 8.5 billion 10-year euro bond which matures on Wednesday, a government official said. "Greece no longer has the liquidity anxiety, it will not need to go to markets to borrow to pay salaries and pensions," EFG Eurobank economist Gikas Hardouvelis said. Greece will be paying interest of around 5%, well below current market yields of well over 7% for Greece's 3-year bonds.

Though it has gained a breathing space, Greece must now convince markets it can rein in its deficits so that it can eventually start borrowing again. "The programme has been designed so that Greece is able to stay away from the financial markets through the end of 2011 and the first quarter of 2012. We don't expect that to be the case, we want to come back to markets much sooner," finance minister George Papaconstantinou said in Brussels.

Socialist Prime Minister George Papandreou's government has already implemented sizeable public sector wage cuts and raised taxes in return for the EU/IMF bailout.

Stocks fall, euro at 4-yr low, oil dips


Stocks fall, euro at 4-yr low, oil dips




NEW YORK: Stocks fell for a third day on Monday on growing concerns that Europe's debt problems will hamper a global rebound. The Dow Jones industrial average fell about 80 points in late morning trading. The Dow fell 81.4 points, or 0.8%, to 10,538.6. It has fallen seven of the last nine days.

Stocks fell after the euro, which is used by 16 countries in Europe, fell to a four-year low. Investors are questioning whether steep budget cuts in countries including Greece, Spain and Portugal will hinder an economic recovery in Europe and in turn, the US traders are also concerned that loan defaults could ripple through to banks in stronger countries like Germany and France.

The austerity measures are required under a nearly $1 trillion bailout programme the European Union and International Monetary Fund agreed to last week. The rescue package provides access to cheap loans for European countries facing mounting debt problems.

The euro fell to as low as $1.223 early Monday before moving higher. The plunging euro has been driving trading around the globe in recent days. The weakness in the euro has helped boost the value of safe-haven investments like the dollar, Treasuries and gold. It has also driven commodities like oil lower.

Oil fell below $70 a barrel for the first time since February. Oil is priced in dollars so a stronger dollar deters investment in oil. Crude oil fell $1.76 to $69.8 per barrel on the New York Mercantile Exchange. That hit shares of energy companies.

A disappointing report on regional manufacturing from the New York Federal Reserve weighed on sentiment. A forecast from home-improvement retailer Lowe's Cos also fell short of expectations. The questions about Europe overshadowed other news and dominated trading. Investors in the US who had been growing more confident about a rebound in this country now are questioning whether the problems in Europe will disrupt a recovery.



http://timesofindia.indiatimes.com/Biz/International-Business/Stocks-fall-euro-at-4-yr-low-oil-dips/articleshow/5942500.cms

Time to let the euro die

Time to let the euro die
May 18, 2010 - 7:10PM

The time for tough decisions is here. In the next few months, the members of the euro area will have to make a choice: create a genuine fiscal and political union or let the euro die a slow death.

The European Union now realizes the Greek crisis has revealed some major flaws in the common currency. There's no point trying to fudge it. The euro can only be rescued by a sweeping centralization of control over tax and spending.

There's just one snag: A single economic government for the euro area isn't going to work. The surrender of national sovereignty is too great. The timing is all wrong. And there is still no realistic mechanism for enforcing whatever new rules are made in Frankfurt or Brussels.

With every step that this crisis takes, the euro moves closer and closer to falling apart. In a few years, we'll be talking again about the deutsche mark, the franc and the peseta.

After dithering for too long, policy makers now recognize that the foundations of the euro weren't strong enough.

The Stability and Growth Pact, which limited budget deficits to 3 per cent of gross domestic product, didn't work. Greece was running fiscal gaps far larger than those during the good years, and plenty of other nations were as well once the global economy turned down. It became a massive free lunch.

Countries could spend like crazy and get their neighbors to bail them out. It was hard to see how the system could survive for long if those were the rules. Everyone had an incentive to do the spending. No one had any incentive to do the bailouts.

EU response

''The Commission proposes to reinforce decisively the economic governance in the European Union,'' the EU said in a statement last week. Member states will have to submit their national budgets to the EU for approval.

It isn't hard to see the implications of that.

''The sovereign-debt crisis could be acting as a catalyst for an ever closer union of European countries,'' Morgan Stanley said in a May 11 note to investors. ''The decisions taken this weekend first by European leaders and then by finance ministers mark a big leap towards a fiscal union in the euro area.''

A fiscal union - in which budgets and taxes are decided centrally - would fix the problem. Member states wouldn't be able to run up unaffordable deficits. When they ran into trouble, money could be diverted from the more successful states to the ones that needed help. That's how it works within countries. It is how the euro should work, too. But here's why it probably won't.

Three reasons

First, the surrender of sovereignty is too great. Countries signed up to a single currency. They didn't sign up for a single government. Once you lose control of fiscal policy, you stop being a nation, and you become a district. It is hard to believe that will ever survive referenda or national elections. It is hard enough to persuade taxpayers to subsidize regions in the same country. Persuading electorates to send their taxes to a central authority, without having any control over where it is spent, will prove impossible.

''The budget law is a matter of national parliaments,'' Guido Westerwelle, Germany's foreign minister, said last week. ''The European Commission doesn't determine the budget. That is the job of the German Bundestag, the national parliament.''

Second, the timing is wrong. For the next five years, the only thing governments will be serving up is pain. Deficits are out of control. Spending has to be cut. Creating any kind of fiscal union was going to be tough enough even in the boom years, when you could hand out lots of cash to build new schools and roads. It will be much tougher when spending is being cut. The EU will take control of national budgets at precisely the moment they get slashed. Does that sound popular? Not really.

Third, there still isn't an enforcement mechanism. The latest proposal is that all the national budgets get submitted to Brussels in advance. The EU will approve them, or it won't.

So what happens if a budget is rejected, and local politicians tell the EU to go take a hike? Euro police aren't about to storm member parliaments and cart politicians away in handcuffs. So far, all that has been proposed is a rewrite of the stability pact, but with some more forms to fill in, and a bit of snarling if you break the rules. It didn't work last time, so why should it work now?

The EU has come up with the only realistic solution to the crisis presented by Greece's mountain of debt. But it's still not going to work. And once that becomes clear, there will be only one option left: let the euro die.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

Bloomberg News

Tuesday 18 May 2010

UK economy is stuffed – but not as badly as Greece

UK economy is stuffed – but not as badly as Greece

You can hardly blame George Osborne for over-egging the point. Gordon Brown was still trying to blame the Tories for all the ills of the world 13 years after they were swept from power, as if his own mismanagement of the economy in the meantime might not have had a little something to do with it.

By Jeremy Warner, Assistant Editor
Published: 10:22PM BST 17 May 2010

So it seems reasonable enough that still less than a week into office, Mr Osborne should use the opportunity of his first Treasury press conference to blame the last lot for all the pain he's about to inflict. It's what incoming governments do.

But it's rare indeed that an incoming governments gets such manna from the last lot.

"Dear chief secretary, I am afraid to have to tell you the money has run out, yours, Liam." This single-line letter from the outgoing Chief Secretary, Liam Byrne, to his successor at the Treasury, David Laws, was apparently meant as a joke, but it serves equally well as New Labour's final epitaph. Had Mr Byrne said: "we've spent the lot, and frankly, you're stuffed", he could scarcely have been more blunt about the true horror of Labour's legacy.

Things are much worse than you think, Mr Osborne said on Monday in an attempt to soften us up for the blows to come. In an interview, he said: "By the end, the previous government had become completely irresponsible and has left this country with terrible public finances, worse as a proportion of our economy than Greece."

Mr Osborne is hardly the first to say it, and strictly speaking he is right on both counts. I've written myself at length about the pork barrel spending that took place in the run up to the election, with ministers showering money on the regions as if it was confetti. It is also true that the UK has one of the biggest Budget deficits in Europe. But Britain is not yet Greece, and the new Chancellor should take care not to frighten the markets into believing it is.

The public finances are possibly in worse shape than the previous Government was letting on, and obviously there are a whole range of public liabilities that should properly be brought back on balance sheet. Public Finance Initiative liabilities alone have rocketed from £60.5bn in 2000 to £206.8bn (nearly 15 per cent of GDP).

But I would be astonished if Mr Brown had actually lied, a la Greque, about the true state of the books. Much of the smoke and mirrors that took place under Labour were almost childishly transparent. The real problem lies rather in the use of overly optimistic assumptions about growth and tax receipts. These may be unrealistic, but Britain is hardly alone in assuming a possibly unrealistic rebound to above trend growth.

There are a number of reasons why comparisons with Greece are ill-founded and possibly quite dangerous. Greece, too, it will be recalled showed no lack of enthusiasm for tackling the deficit. It was only after the Papandreou government announced its first austerity programme that the real damage to confidence occurred. This was primarily because the markets fast realised that the scale of the consolidation was so extreme that it was likely to condemn the country to years of economic contraction, thus making the medium term debt burden worse, not better. Greece would thus be incapable of repaying its debts without help.

This doesn't have to be the case in Britain, which in any case has a much larger and more robust tax base. What's more, the UK mercifully still has control of its own currency and interest rates, so can counter the fiscal medicine with accommodative monetary policy. The eurozone's reluctance to apply any kind of inflationary counterweight condemns much of the Club Med to extreme deflationary contraction over the years ahead.

Mr Osborne's task is similar to that of applying chemotherapy; in seeking to kill off the cancer of the deficit he must be careful not to lose the confidence of markets and end up killing off the patient too. It's a balancing act between too little and too much. On Monday, he said a little too much.

Even so, the new Chancellor's first day at school was on the whole an encouraging one. The establishment of an Office for Budget Responsibility under Professor Sir Alan Budd is an important innovation which promises to restore credibility, destroyed under Mr Brown, in the Government's handling of the public finances.

Sir Alan is right to view his task as more important than the establishment of the Monetary Policy Committee by the incoming Labour Government in 1997. Inflation was yesterday's enemy by the time Labour came to power. To me, it seems unlikely the Government's judgments on interest rates would have been significantly different from the Bank of England's.

Indeed, the idea that economic policy was somehow safe in the Bank of England's hands lulled everyone into a false sense of security, thereby allowing Mr Brown a degree of leeway on tax and spend he might not otherwise have enjoyed. Rather than pump-priming the feel-good factor with interest rate therapy, the Government did it instead with debt and public spending.

Mr Brown cynically manipulated the "golden rule" to the point of laughable irrelevance. By the end, Britain was running the sort of deficit you would normally expect from a recession, not an economy in the midst of a consumer boom.

Mr Brown was not just judge and jury, he was prosecution and defence too. By calibrating the Government's tax and spending plans against genuinely independent forecasts for growth and the economic cycle, the OBR should do for management of the public finances what the Bank of England did for monetary policy.

Sir Alan was a key player at the birth of independent inflation targeting. He rightly regards his latest task as an altogether bigger challenge. The scale of it is laid bare in the International Monetary Fund's latest "Fiscal Monitor". Across advanced economies there needs to be an adjustment amounting to 8.75pc of GDP on average to primary Budget balances to get overall debt down to pre-crisis levels of around 60pc.

More work still needs to be done to deal with projected increases of 4 to 5pc of GDP in health and pensions spending over the next 20 years. Those countries that fail to achieve fiscal sustainability will see their growth potential permanently and seriously impaired.

But Mr Osborne shouldn't be too downhearted. Things could be worse. The ruinous deflation that Britain might be facing now if it were in the euro hardly bears thinking about. On this level at least, comparisons with Greece are justified. Whatever Mr Byrne says, we are not as badly stuffed as they are.

http://www.telegraph.co.uk/finance/economics/7734494/UK-economy-is-stuffed-but-not-as-badly-as-Greece.html