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Greek Financial Crisis>Political Crisis>Social Crisis

Posted by Larry Doyle on February 25, 2010 8:35 AM |

I would equate the forces at work underlying our global economy akin to shifts in the earth’s tectonic plates. There is no doubt that we experienced a sizable financial earthquake in 2008. The question now begs whether that seismic shock was the culmination of events or merely the precursor for greater political and social shocks over the next period of years.

We see evidence of further tectonic slippage and resulting instability out of the Euro-zone overnight as rating agencies are threatening to downgrade Greece’s sovereign credit.

Bloomberg highlights this seeming inevitability in writing, Greece Risks Downgrade Within Month on Budget Worries:

Greece’s debt rating may be cut within a month as it struggles to pare the European Union’s largest budget deficit, driving up borrowing costs and renewing pressure on the euro.

Standard & Poor’s said late yesterday it may lower its BBB+ rating by the end of March and Moody’s Investors Service said today it may reduce its A2 grade in a few months. The warnings further complicate the government’s effort to persuade investors that it can slash its fiscal shortfall from last year’s 12.7 percent of gross domestic product.

The euro slumped to a one-year low against the yen, most stocks dropped and the premium on Greek 10-year bonds over German debt widened to the most since Feb. 8 on concern that the country may need EU assistance to avoid missing debt payments. Unions yesterday staged a strike to protest Prime Minister George Papandreou’s drive to slash spending.

Papandreou finds himself stuck between the increasingly narrowing rock and a hard place. He has no choice but to implement severe austerity measures in order to gain the backing of the EU, but in doing so he will clearly foment social tensions amongst the Greek citizenry. These tensions are already boiling as The Wall Street Journal highlights, Nationwide Strike Paralyzes Greece:

Tens of thousands of Greeks took to the streets Wednesday as much of the country went on a 24-hour strike against government austerity measures.

A small group of youths threw Molotov cocktails at police, who responded with tear gas. However, the 20,000 people who filed through downtown Athens—a relatively large crowd for a Greek strike—mostly limited themselves to chanting anti-government slogans.

Public- and private-sector unions called the strike to protest a range of measures aimed at reducing Greece’s budget deficit. The government has announced a freeze on civil-service wages, cuts in public-sector entitlements and the closing of tax loopholes for certain professions, including some civil servants. It has also announced a fuel-tax increase.

Will the tensions boiling inside Greece be contained? I view that question in the same light as those who thought issues within our sub-prime mortgage space could be contained. In continuing to connect the dots, Bloomberg concludes:

“It’s getting more difficult than anticipated for the Greek government to implement the spending cuts it promised,” said Susumu Kato, chief economist in Tokyo at Credit Agricole Securities Asia. Further downgrades “may spread sovereign concerns through other European nations,” he said.

This news out of Greece along with further economic weakness highlighted in the jobless claims figures released this morning have our equity markets down 1-1.5% on the open.

Navigate accordingly.

LD

  • coe

    In addition to diving into the numbers, I think it serves a useful purpose to back away and get a flavor for the big picture..and it is a disturbing one..with many parallels here in the US..for example, if Greece in teetering infects the rest of the EU, then the chain is adversely affected by its weakest link..consider the FHLB system here in America – a joint and several cooperative that is definitely under similar duress..and when one speaks of civil service wages , entitlement programs, taxes, and fuel prices, aren’t you really speaking the universal language of the playbook of recession, deleverage, and economic fiscal and monetary policy. You are certainly correct in pointing us in this direction to navigate. By the way, where are we today re the budget deficit as a percentage of GDP? Seems to me that the next generation will have nightmares dealing with that!

  • Sean

    Will California’s and other states’ unpayable debts soon have a similar effect on the U.S. and our currency that Greece’s and the remaining “PIGS'” unpayable debts are having and will have on the Euro, or is the situation likely to play-out differently in the U.S.?

    • LD

      Sean,

      The European Union does not have a formalized Department of Treasury as we do here in the United States. Thus, within the EU the austerity measures come in terms of budget cuts, (programs, services) which weigh heavily on the citizens.

      California and every other state are bound by operating with balanced budgets. But given the pressures on these states along with the fact that California itself is one of the top ten economies in the world all by itself, the pressure from California is moving towards Washington.

      How this plays out is a HUGE question.

      If Washington bails out CAlifornia, why not every other state? Can Washington afford to bail out California? Can Washington afford not to bail out California? Can some form of backdoor bailout be structured?

      Look for Washington and California to buy time (read IOUs) and other forms of extending debts for now.

      Look for a continued drag on our nation’s economy and overall GDP along with this.

      End result. Too much debt eventually needs to be paid back, defaulted, devalued, or restructured. Or some combo of all of the above.

      Your question is a HUGE question as we continue to navigate the economic landscape.

      • Sean

        Why can’t California and others (perhaps even soverigns like Greece) simply admit the clearly obvious that their debts are unpayable by declaring bankruptcy and have a bankruptcy court determine the debts & contracts to be paid vs. those to be forgiven, and then California, Greece, and the others can start over with a clean slate?

        • LD

          Sean,

          If Greece, California or any other entity declares bankruptcy, the cost of capital in the future would skyrocket.

          • Sean

            LD,

            If a soverign is able to start over and eliminate its debt via bankruptcy, would it really need to worry about the cost of capital (new borrowings) in the short-term for at least a couple of years? I’m assuming the soverign would still have the ability to raise funds via taxes, and it would simply have to operate within its tax receipts for a couple of years until Goldman Sachs is able to market new debt for the entity. After all, isn’t that what Goldman Sachs is for, to make unmarketable debt marketable?

            Orange County declared bankruptcy in 1994 and was able to finance 30M+ worth of pension bonds as early as 1996 via Goldman Sachs and also issued 400M in bonds in 2005 also via Goldman.

            Orange County currently has hundreds of millions of dollars of debt all underwritten by Goldman, and is paying 3%-5% on its debt and has the highest debt rating of the three major debt rating agencies.

            The sooner the soverigns realize they can wipe their slates clean via bankruptcy without too many negative side effects, the better. Then they can start the unpayable debt cycle all over again until approximately 2110 when LD the III and Sean the III can have a similar conversation to the one were having right now.






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