Tuesday, Apr 06, 2010
Better than a battered mars bar
Yahoo: Greece battered on markets
Market News International quoted unidentified senior Greek government sources as saying Athens wanted to renegotiate the EU aid deal intended to protect Greece from potential default as it struggles to handle a 300 billion euro ($402.3 billion) debt in a crisis that has shaken the euro
Posted by mark @ 04:56 PM (730 views) Add Comment
6 Comments
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1. uncle tom said...
This is pushing Greece to the brink, and probably past the brink, of a debt spiral..
The numbers published today indicate that Greece is now paying 7.25% interest on it's debts.
In rough terms, that means nearly a third of tax revenue is going towards debt interest payments, and after deducting that expense, for every two euros they have left over, they are spending three euros..
..to square the books by cutting expenditure, they need to reduce public spending by a third, which in turn would dramatically reduce GDP. With GDP continuing to contract anyway, hopes of increasing tax revenue are little more than wishful thinking..
Greek sovereign debt is currently carrying a risk premium of just over 4%, which seems a rather paltry amount, given the ever growing risk of a default and a resultant haircut..
Would I buy into Greek debt for a 4% risk premium? No way. Would I buy in for a higher premium? No, because they cannot possibly afford to make the payments.
Now, this is logic that even the dimmest investment banker can understand...
So will the rest of the eurozone and IMF ride to the rescue?
It is probably illegal for a eurozone bailout to take place without a new treaty, and the German constitutional court would ensure that no decision was made for months, if not years. The IMF on the other hand, is not in the business of handing out cash it won't get back; but it is quite good at smoothing over sovereign defaults, and providing temporary help.
Greece's budget deficit is so extreme, that even after defaulting, and ceasing to make payments on its sovereign debt, it would still struggle to balance its books, assuming that is, that its citizens continued to pay their taxes..
A default, while remaining in the eurozone, although technically possible, does not offer a lasting solution.
The solution is for the Greeks to break with the ECB, let the new Greek euro plummet in value; and then ask the IMF for temporary assistance until their renewed competitiveness in export markets and tourism revived their economy.
It is beginning to look like it's only a matter of time before this happens, and there seems to be nothing for them to gain from waiting..
..if I was a Greek citizen with savings right now, I'd be putting them in a German bank account..
2. mark said...
or an australian bank account..
does anyone have any knowledge on how this will effect the UK? Or what effect it may have?
3. drewster said...
Nice analysis, uncle tom. Greece will have to either slash spending (in Euros), or if it leaves the Euro, it will have to devalue sharply and pay state workers in worthless drachma. Either way it doesn't look great for social unrest. I'd avoid Greece for a summer holiday this year - apart from avoiding the strikes and riots, it will also be a lot cheaper in future years.
4. tyrellcorporation said...
'..if I was a Greek citizen with savings right now, I'd be putting them in a German bank account..'
that's exactly what has been happeneing recently. There was a story the other day about wealthy Greeks moving money out en masse and causing havoc for Greek banks. It's all looking pretty messy eh?
The big question though is will we (in the UK) end up having to take similar action?
5. sneaker said...
Greece is an emerging market
http://www.ft.com/cms/s/0/5427bfe4-40f0-11df-94c2-00144feabdc0.html
but still part of the Euro.
Is the Euro now an emerging market currency? Clearly not, but how can it house Germany and France, on the one hand, and an emerging market, Balkan nation on the other? Makes no sense, as I said in 1998 when currency union was gathering steam.
6. uncle tom said...
sneaker,
The eurozone is a dog's breakfast - a shotgun marriage of incompatible economies, without a strategy for economic convergence..
..remarkable, when you think about it, that this fatally flawed project has not come unstuck sooner..