Our Big Lean Greek Wedding

What was available could have been shared out more fairly, but the Budget’s  courageous realism kept the shotguns unloaded

Listener: 4 June, 2011.

Keywords: Macroeconomics & Money;

Mentioning credit ratings at the 2011 budget was like mentioning sex at a wedding. Everyone knows, but you dont say it. Instead they focus on the feast and festivities. Not that there were a lot.

Outside were the credit rating agencies, with their shotguns unloaded as long as the expenses were kept down. The bride and groom have been doing a lot of borrowing (she is near 34 percent pregnant, he is 45 percent high) so there was not much left for the festivities, despite shuffling the fare on the tables to obscure the shortage.

Certainly the parents of the couple are not going to admit they are a bit skint. Instead they talk about the desserts and champagne they have saved for the top table arriving in  BMWs. Down at the trudging bottom the sausage rolls were in short supply and cold.

Ask them about what happens the night after, they mutter about Greece. But it is no honeymoon there. Greece has reached the stage where despite severe cuts to its living standards, its rising debt is out of control.

It’s hard to be always sympathetic to the Greeks who are facing much harsher fiscal restraint than we art. The Germans havn’t been. When asked to bail the Greeks out, they learnt that they received a state pension not later than age 60, whereas Germans have to wit until they’re 67. And there is the strange story of the Greek unemployed going on strike over their holiday pay; how does an unemployed person go on holiday? Work?

But squeeze th Greeks too far or too fast, and there could be a civil uprising. It was not so long ago that the colonels were running the country (badly – they even threatened to execute an economist). Straight after the Second World War there was a civil war between communists and royalists. Who knows what will happen if the turmoil on the Greek streets and the industrial unrest gets really nasty?

As I write, the European Central Bank, the International Monetary Fund and various countries (especially the Germans whose banks were major lenders) are trying to sort the Greek debt problem out. Oh sure, the Greek government is involved but the tensions between the bankers are also great. Some of the lenders are going to have to write off some of their debt; each wants others to take the hit.

That is the almost unspoken background to the 2011 budget. Our economy is not as badly indebted as the Greek one, but our national and public debt could get out of control unless we take firm action.

Increasingly nervous lenders burnt in Greece face similar threats in Ireland, Portugal, Spain, Italy, Belgium, some US states and elsewhere. They are toughening up their lending requirements. While loaded shotguns are not trained on us, they went off against the ‘big four’ Australian banks on our budget day, as all experienced a credit downgrade just a week after the Australian Federal budget.

A credit downgrade threatens to raise the cost of offshore borrowing. It would feed into the economy as higher interest rates. Home buyers and credit-card users pay more. Businesses pay more and might put off investing. The government pays more on its borrowing, and has to cut spending or raise other taxes. The main beneficiaries of the interest rate hike are the offshore funders – of almost $160 billion – who get higher returns we’d pay. Warding off a credit downgrade is a kind of tax cut, the ‘tax’ being what we would pay in higher interest rates.

Not that the guests acknowledged that. The festivities were subdued and they grumbled about the food and liquor. Certainly what was available could have been shared out a bit more fairly, but the shotguns remain unloaded. The courageous realism of this election budget deserves to be acknowledged; sadly it wont be during the election campaign.

We are promised more meat and drink next year. That assumes a recovery of the economy which many think unlikely. Next year’s budget is likely to be even leaner.