Greek ‘Drama’ Only in First Act, or ‘Beware of Greeks Bearing Gifts’
Posted by Larry Doyle on April 6, 2010 1:42 PM |
Prior reports that Greece’s financial problems are now in the rear view mirror are exceedingly premature.
As we navigate ‘across the pond,’ we learn that the Financial Times’ Wolfgang Munchau believes Greece Is Going to Default but Not This Year:
Greece will not only have to make an extremely large public sector deficit reduction effort but it will also have to do this under a condition of disinflation, and possibly deflation, which would push its nominal growth rate to negative levels during the adjustment period. That, in turn, would jeopardise the debt reduction programme of both the public and private sectors. Under those circumstances, there is no way that Greece could ever stabilise its debt-to-gross domestic product ratio, no matter how hard the government of George Papandreou tries.
To get out of this mess, one of five things will have to happen. The first, and most optimistic, solution would be a significant fall in the euro’s exchange rate, say to parity with the US dollar, coupled with a strong recovery in the eurozone. This might just do the trick to sustain Greek growth as it adjusts. The second is that Greece gets access to low interest rate loans from the European Union and the International Monetary Fund. The third would be a private sector debt restructuring to prevent a Fisher-style debt-deflation dynamic. The fourth is that Greece leaves the eurozone. The fifth is default. If you go through the options one by one, you realise that the first is improbable. The EU has in effect ruled out the second. The third would require an unlikely additional bail-out of the European banks. While option four would be most convenient for the Germans, the Greeks are not so stupid as to leave the eurozone. That leaves them with option five: to default inside the eurozone. It is the only option that is consistent with what we know.
But it would throw the eurozone into a potentially terminal crisis. Spain and Portugal have problems of a different kind but of a similar dimension. Spain will have to go through a disinflation/deflation period that will produce a formidable private sector debt-deflation spiral. Without devaluation, or the possibility of a sustained fiscal boost, the Spanish depression could last forever, or at least for as long as the country stays in the monetary union. Portugal, like Greece, suffers from a combined public and private sector debt problem.
Greece needs deficit funding badly. Asian nations, primarily China, have indicated little interest in providing this funding. So, where is Greece looking to turn? America. The Wall Street Journal shares this fact while also highlighting how Greek debt is currently plummeting in value. The WSJ writes, Greek Bond Yields Soar to 7.1%:
Greek government bond yields jumped Tuesday and the cost of insuring Greek government debt rocketed (LD’s edit, interest rates on 10yr Greek debt moved higher by over 50 basis points or .50%), as market concerns accumulate over domestic capital flight and the country’s ability to fund its budget deficit without aid from the International Monetary Fund.
The moves come on the back of concerns that Greece may be looking to cut the IMF out of the recently agreed aid package, which also is to be led by Greece’s European Union partners.
The high rate of interest Greece has had to pay on its recent bond issues supports concerns that investors could be hard to attract to future debt issues to fund big budget gaps.
If this spike higher in rates was not bad enough, a run on the banks seems to be taking place as well, as The WSJ adds:
A denial by a senior Greek official failed to allay investors’ fears because of news that Greek banks are facing a wave of cash deposit redemptions by the country’s most wealthy citizens and corporations.
Earlier Tuedsay, two senior Greek officials said Greek Finance Minister George Papaconstantinou will pitch a dollar bond to U.S. investors after April 20, adding, however, that an Asia roadshow is now less likely after limited interest from investors.
High five to the Latin scholars at Boston Latin School (including Mr. Duch and Mr. Cahill) who always impressed upon me, “Timeo Danaos et dona ferentes.” Yes, we would be wise to be on guard and “beware of Greeks bearing gifts.”
Might I add that we should do the same with those in Washington who also claim to be bearing gifts.
There are many acts to play out in our global financial drama.
This entry was posted on Tuesday, April 6th, 2010 at 1:42 PM and is filed under General, Greece. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.