Part 1: A closer look at PIIGS panelist, Charlie Fell

This Thursday join Currensee and an all-star panel for a no-holds-barred discussion of what the Eurozone debt crisis means for the Euro and all who invest in it around the world. Of our panelists we are lucky enough to have Charlie Fell. Below Charlie tells us a little bit about himself, and a lot about his stance on the Eurozone debt crisis- This is just Part 1. Part 2 will be posted on Wednesday. Enjoy.

Tell us a little bit about yourself.

I have been involved in the financial markets since the late-80s.  I managed funds for a leading Irish investment manager for more than a decade, before venturing out on my own.  I have lectured finance and investment across the globe and currently write a well-known column on market matters entitled ‘Serious Money’ for the Irish Times.  I set up my own advisory firm a number of years ago that provides investment advice and training to corporate clients.

What is your overall take on the financial state of the PIIGS countries?

Portugal, Ireland, Greece and Spain all benefitted from massive capital inflows priced at ridiculously low interest rates during the early years of monetary union.  The availability of cheap financing contributed to massive macroeconomic imbalances as reflected in large current account deficits that were brutally exposed once the financial crisis struck.

Portugal, Ireland and Greece all required financial assistance and the question now is whether the three sovereigns can stabilise their public finances and return to sustainable growth without some form of debt restructuring.

Low savings rates, a low degree of trade openness, inflexible product and labour markets alongside a lack of political unity means that the Greek situation is virtually hopeless.  The Portuguese face the same negative factors and are also crippled by large private sector debts, which means they are unlikely to generate the growth necessary to reverse the unstable public debt dynamics, even though their government debt burden doesn’t look particularly large versus Greece or Italy.  Ireland possesses several positive factors that may save the day including high private savings rates and a balanced current account, but the dysfunctional banking sector may prove too big a burden.

Why do you think Greece has decided to do little to help with its debt, while countries like Ireland and Portugal have been aggressive?

It is unfair to say that the Greeks have done little to help themselves.  The scale of the task is simply too great to begin with.  Greece reduced its fiscal deficit from 15.4 to 10.5 per cent of GDP last year – a remarkable achievement given that the economy shrank by 4.5 per cent.  The cyclically-adjusted tightening amounted to 8 per cent of GDP – the largest one-year consolidation in recent history for any advanced country.  However, the tough austerity programme is self-defeating, as low savings rates and a relatively closed economy have lessened the economy’s ability to absorb the fiscal tightening.  Fatigue has now set in, as reflected in increasing social unrest, and a default is all but inevitable.

When people refer to how quickly Greece’s economy needs to grow in order to steer away from default - how rapidly are we talking? What would it take?

Assuming the Greeks can return the primary fiscal deficit i.e. before interest costs, to balance this year and assuming no further improvement in the budget balance, the Greek economy would need to record nominal growth of roughly seven per cent per annum simply to stabilise the public debt at roughly 165 per cent of GDP.  Greece did manage growth rates of this magnitude during the ‘good’ times, but primarily as a result of abundant cheap financing and relatively high inflation rates.  The capital markets are now closed to the Hellenic Republic and low inflation rates are required to restore competitiveness.  In a nutshell, the best that can be hoped for is three per cent nominal growth and the fiscal adjustment required thereof is simply too large to be considered realistic.  The government needs to produce primary surpluses of about six per cent of GDP consistently in the years ahead as against a previous best of less than five per cent in 1998.


Stay tuned for Part 2, posting on Wednesday!

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