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The bitter taste of a Greek bail-out

Stephanie Flanders | 08:01 UK time, Tuesday, 27 April 2010

"Time is of the essence": this was the comment of almost every policy maker in Washington at the weekend on the subject of Greece. Guess what? It really was.

Euro and Greek banknotesThanks to another day of mixed signals from the rulers of the eurozone, the cost of fixing the Greek problem just went up again. If it can be fixed at all.

On Monday, Greek sovereign debt had its worst day yet: the interest rate on two-year government borrowing ended the day at an eye-popping 13.5%. It is now considered rather safer to lend money to Iraq or Venezuela than to Greece.

Strikes and demonstrations in Athens don't help. But angry Greeks don't spook the markets half as much as angry Germans: especially if the Germans who are angry about the Greek situation include the chancellor, Angela Merkel.

You can feel her pain. The German public was lukewarm about the euro from day one; the wider the membership, the less keen they were. They were especially iffy about Greece. For good reason, as it turned out.

I have been taking a look at some of the European statistical agency's reports on Greece over the past few years. Any German who wants their D-marks back after just over a decade of the Euro will not find them a happy read.

You'll remember that Greece was left out of the first wave of euro members and only got in by the skin of its teeth in January 2001. Well, in September 2004, Eurostat decided - in effect - they were false teeth.

It revised the Greek government debt and deficit data for the entire period from 1997 to 2003, with the deficits for 2000-2002 all revised up by more than two percentage points of GDP. The numbers for 2003 went up even further.There have been a string of revisions since then.

Take just one example: the deficit for 2001, the year they entered the single currency. Until 2004, everyone thought the Greek government had borrowed 1.4% of GDP that year, in line with the drastic austerity programme which Brussels (and Berlin) had been promised. By September 2005, that number had been revised up to 6.1% of GDP - more than twice the 3% Maastricht threshold. There were similar revisions to later years.

You might say: well, doesn't every government end up revising its borrowing numbers? After all, Gordon Brown usually did. That is clearly right. But, to state the obvious, chancellors tend to revise their forecasts of the future, or perhaps the financial year that's just ended (as happened last week). In the Greek case, the changes to the forecasts were the least of it. It's the past that kept getting revised.

Many reports later, Eurostat is still worried. Last week it sounded yet another warning about the quality of Greek data.

As we know, the agency revised its estimate of the Greek deficit in 2009 from 12.7% of GDP to 13.6%. But it thinks that it could yet turn out to be higher. That was one of the reasons that Greece's problems came to a(nother) head on Friday. Only a year ago, the Greek authorities promised Brussels that borrowing in 2009 would be 3.7% of GDP.

Yes, this is now spilt milk. Greece is under new management, and the eurozone has a crisis to contain. But for the average German - and probably many others in the eurozone's "hard core" - it rankles more than a little that this is the country that is getting bailed out. Few, if any, countries in the EU have seen revisions of this magnitude in the past 10 years. In Greece it has happened on a regular basis.

So, of course Chancellor Merkel wants to delay signing on the dotted line for Greece for as long as possible - ideally until after those state elections in North Rhine-Westphalia on 9 May. And of course she will use every opportunity she can to talk about "defending the stability of the euro" at all costs (the language that so irked bond investors yesterday - and apparently the French finance minister). If and when she does sign up, the chances are that she will be taken to the German constitutional court for failing to do just that.

As I've said, the months of delay in coming to terms with the Greek problem have been enormously costly - for Greece and for the rest of the eurozone. Just ask Portugal and Ireland. Their cost of borrowing shot up yesterday as well. It may yet bring on the event that even the Germans claim to want to avoid: a messy restructuring of Greek sovereign debt. Maybe not now, but sooner than anyone would like.

However, in their exasperation at German mixed messages and foot-dragging, investors and policy makers should perhaps spare a thought for all those Germans who never wanted to share a currency with Greece in the first place. As far as they are concerned, they woz robbed.

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