The Germans and French got their European Financial Stability Facility expansion last week, though details surrounding how the EFSF will operate remain murky. But now the focus returns to Greece, and whether the Greek government can satisfy demands to avoid technical default.
The reality is, though, that Greece is going to default. As our president likes to say, its just simple math. You can take that to the bank. (Just not a Greek bank.)
Let’s start with the fact that recent projections have the Greeks missing their deficit reduction target considerably:
Greece is likely to miss the deficit targets agreed as part of July's bailout package, which would cast further doubt on its ability to steer safely through its current financial crisis and will send new tremors through global financial markets.
As the country's cabinet agreed a controversial plan to begin laying off 30,000 state workers, its latest budget plan indicated a deficit of 8.5% of GDP this year, missing the 7.6% target agreed with the European Unionand the IMF. In 2012 the deficit is expected to fall to 6.8% of GDP – above the year's 6.5% target. A recession that has been worse than expected is behind much of the increase. According to Reuters, Greece expects its economy to contract by 5.5% this year and 2% next.
But it gets worse. Suppose for a moment that the Greek government reached deeper with cuts, were able to avoid a long-term tax collector strike, and somehow make their deficit target this year. The reality is that their stack of bills are just too high to imagine getting away without getting creditors to take some kind of haircut.
Greek debt-to-GDP is currently close to 175%. To put this in context, Greek debt-to-GDP should be closer to 60% or 70%.
The credit default swaps market is pricing the probability of a Greek default at 99.9%—a stunningly sharp bet, and potentially damning for Portugal at 62%, Ireland at 51%, Italy at 33%, and Spain at 28%.
Reports today are that discussions are underway for an orderly default, with creditors taking a 40% haircut (more than the 21% that had been floating around in the past months). Whether or not a deal gets done in this framework, the bottom line is that Greece can not afford the interest payments on their massive debt long time. They’ve been going to the wrong way on deficits—just consider that their fiscal deficit was 2.5 billion euros higher in the first two quarters of 2011 than the same period last year—and the political will to cut everything isn’t there. And even cutting everything would probably miss a debt payment eventually.
Kyle Bass has made/is going to make a lot of money.
Just finished ridaeng your article on the situation in Greece. I'm very impressed by how well you illustrated the angles you chose to cover, and I'm a little sad that you couldn't cover everything.I also feel kinda bad. When I finished ridaeng the bit where you described the possible motives for why people would want the Greek economy to flop like a fish out of water, the word Cool! went through my head. I'm a poor, starving college student and I have nothing against Greece. I think I thought it was cool was because clever motives like that fascinate me. Yes it's evil, yes it's corrupt. But I'll be a monkey's uncle if it isn't clever.And while I was thrashing this out with myself, I got to thinking, What if it's all three? All of it could, in fact, be fueled by racism, and profit is simply a bonus.Start with number 3: Hatred for Greece. How can German and the rest of Europe make an example of the Greeks and put them, as I'm sure they would say, in their place ? Someone notes for whatever reason that Greece is a hot tourist spot and that large profits could be gained from the islands. So someone suggests that they take financial control of the islands. But how?Credit default swaps. They start taking out fire insurance on their neighbor's house. They get it for a low cost and start betting against Greece's financial situation. If the country defaults, they just won the lottery, a week's worth of money at five or six poker tables (each), and every horse race for the next century. And where does this fortune go? Why, to buying footholds in Greek tourism. These footholds are quickly followed by butt-holds, more commonly known as recliner chairs, couches, and what have you.Racism is more than just a motive, though: It's also a means. If I understood correctly, Greece is using the Euro and the accompanying prices, but their wages haven't changed a bit. People are getting payed the same amount, but prices got jacked up. So people are in a really crappy financial situation and desperately need outside help.And here figures in the racism. Keep the rest of Europe poised against Greece and they won't help at all. With a corrupt government currently in place, the economy will sink lower and lower until the country defaults because no one wants to help these heathens .How the corrupt government got there I don't know. It may have been planted, or it might simply be what a friend of mine would call a happy accident . At least, from the point of view of those wanting Greece to fall. Either way, it's the wrong thing in the right place at the right time. and Cool! just went through my head again. I feel bad.
8/22/2012 3:29:15 PM