So what IS going to happen to Greece?
Its a $254B dollar question, that only Angela Merkle can answer and even she can’t say for sure.
Here’s some of what we do know. Of their $254B debt $64B has to be financed this year alone. Of that 30B has to be sold by March-April.
To get help with this debt the EU and the Bond market are ‘insisting’ on colossal cuts to government spending. A nasty problem with those cuts, apart from the misery it will mean for the poor in Greece, is that it they will themselves cause a 4-5% drop in Greek GDP which will reduce its tax take, which will require it to borrow further to make up that difference, which will…. You see the shape of the misery-go-round. It’s one quite a few countries including our own will soon be getting on.
At the same time, German popular sentiment is against German tax payers bailing out Greek ones. That’s how it is being played out in the press. And to be fair the picture is not helped by the FACT that wealthy Greeks don’t give a toss about Greece, Germany or anyone else for that matter. Sounds a little xenophobic but sadly the facts speak for themselves. Last year according to Greek government figures only 6 people filed a tax return showing income over €1M. Six! Either there is a little parsimony in telling the truth going on here or the rich had already pulled their money out of Greece as they are doing now at a full flood rate.
Let’s look at how big a problem Greece is for the EU. First off, in comparison to Spain its small. Greece is only 2.7% of Europe’s GDP. But large landslides usually start with small pebbles. Here’s the problem. A great deal of Greece’s debt, about two thirds of it is held by the banks of just three european nations: France €73B, switzerland €59B and Germany €39B. Now these are not massive numbers. BUT for France that €73B is 3% of its own GDP.
OK, 2,7% here, 3% there so what? Just one comparison. Bear Stearns which started the whole landslip in the first place was just 2% of US financial holdings at the time.
What I think will happen is that Europe will go for the Argentine solution. When Argentina looked like defaulting a few years ago, its government agreed draconian cuts and its creditors said, fine, and rolled over and ‘re-structured’ critical debts. Disaster averted. When it became clear the Argentine government hadn’t made the cuts the storm clouds gathered again and the same buggers muddle was agreed again. This happened several times making everyone suspect that those making the decision were either very stupid or this ‘just smile and wave’ solution was all it ever was. Just smile and wave boys and buy some time. Eventually it all went flump. But in bank and politician land ‘eventually’ always looks more attractive than ‘NOW’.
The first test will be this weeks Greek bond sale. I expect it to go through because I expect central banks to buy whatever it takes and say they had nothing to do with it. If it fails then we could have a Bear Stearns on our hands.