FT Alphaville covers a report by SocGens Dylan Grice on why Greece probably wont be the last Sovereign in difficulties.

Starting with this graph, which I wouldn’t be surprised to see used by Labour at some point before the election, to illustrate how the UK is “best placed” and all that :

See the UK there, sitting pretty?

Oh, wait. Why is Greece having problems then if it is 2nd “best placed”?

This concerns Grice because of the unavoidable arithmetic behind debt sustainability, namely; the interest a country pays on its debt must equal the nominal growth rate of that country.

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If it does, the incremental government revenue generated by the economic growth will pay for the coupons on the debt. If it doesn’t, a shortfall develops between incremental revenues and incremental coupon payments and in the absence of further austerity, more debt is required to finance the deficit.

This might sound abstract, but it’s exactly what happened in Greece. When the first austerity plan was presented, Greece cut public sector wages by a painful 10% causing angry protest and social unrest, although it saved the government EUR650m. But the same austerity plan assumed Greece’s interest cost would be 4.7% and by late February it was paying 6.25%. According to the WSJ, this has blown a EUR700m hole in its budget, more than offsetting the savage public sector wage cuts already enacted.

So, you see the real reason why Greece is in the mire – the bond markets have decided to price Greek debt according to how they see the economy, resulting in their seemingly 2nd best placed position in the world to be nothing but an illusion.

As Burning Our Money is constantly pointing out, the UK could soon be going down the same painful road if we don’t get a strong government prepared to take action after May 6th.