Will Greece Default And Blow Up The World?

16.8%.  That’s how much the current Greek 10-year bond yield is producing thanks to their debt mess.  16.8% is a juicy 13.9% higher than the current US 10-year yield to put things in perspective.  The question on everybody’s mind is will lawmakers pass a new 5-year, 28 billion Euro austerity plan in order to tap a 5th installment of the bail out money available to repay almost US$10 billion worth of maturing bonds this August? We shall see come Thursday, June 30 whether the Greek Parliament implements the package if it passes on June 29 in the first place!

More than a year has passed for the market to digest the European debt crisis, but after a year of hand wrangling, pretentious pronouncements by aggravated government officials, and raucous rioting in the streets of Athens, nothing much has changed. The economic recovery that was to produce the growth and tax revenues to bail out the sinking ship of “PIIGS” has never materialized, and patience is running thin as potential defaults creep into the not too distant horizon.

The European version of Wall Street’s “CDO” meltdown has gradually unfolded over the past two years, beginning with leaks in the press that something was askew in Greece near the end of 2009. As the truth of the financial depth of deficits finally surfaced, the crisis hit front-page news headlines in May 2010, when it became apparent that the financial malaise was not confined to Greece alone. A new anagram, namely the “PIIGS”, entered our daily lexicon. Portugal, Ireland, Spain, and possibly Italy had similar, but different, according to finance officials, debt and deficit problems.

The crisis was met with proposed bail out packages from the stronger banks in the region that claimed that capital stress tests would prove their stability to meet most any contingency. Each proposal and subsequent approval was accompanied by pompous protestations from each government that debt payment schedules and bloated deficits were no longer issues to be concerned about, at least until the next revealing story in the press negated everything that was previously said. This bumbling scenario has been repeated countless times to the point that confidence in the respective governments has all but disappeared.


Greece continues to miss the financial goals set with each bail out program. Interest rates are up, credit markets are tight, and small business loans are nonexistent. Demonstrators demand that bond payments be withheld. Analysts contend that such a bond default would be tantamount to the impact that the collapse of Lehman Brothers had on the global economy prior to the “Great Recession”. The central bank insists that a default cannot be allowed since the ripples will spread to other European member states and wreak havoc on European banks, which are the primary holders of much of the toxic securities. One bond mark down will initiate a flurry of unwanted mark-to market adjustments across the board, as was the case with CDOs.

When the Euro was originally conceived, may questioned what would happen when the stronger member states would have to step up and bail out their beleaguered partners. Greece, Ireland, and Portugal have received bailout packages. Spain has remained on the sidelines, but its government has severely cut back spending, postponed pension payments, and allowed unemployment to rise. Public demonstrations in Madrid have also ensued.

Rumors began to spread in May that the European Union may suffer departures that could lead to a Eurozone collapse. Feelings ran high that Germany was tiring of the debate, and statements from unknown high sources contended that Germany might exit or demand the expulsion of Greece. Memories of the deterioration of Bretton-Woods and the “Snake” have not dissipated, and although the Euro replaced national currencies, officials privately admit that the geography and politics of Europe will never emulate a single economic unit. Monetary policy may be set by a single central bank, but member states still have the latitude to operate independently and pile up unmanageable deficits.


German exporters, however, have benefited enormously with the introduction of the Euro and the presence of weaker member economies. From a German perspective, the diluted “Euro” actually increases demand for its manufactured goods.  Just check out what the stock of BMW is doing.  En fuego!  Experts agree that a new Deutschmark would be valued considerably higher than the present Euro if Germany exited the Eurozone. Such an exit would be greeted by an immediate reduction in German export demand, a condition that no German exporter wants to encounter. Small business loans would be nonexistent for an undeterminable period of time as credit markets shut down.

While public demands for an exit in Germany may mount, the total cost for such a move would be prohibitive. For the moment, Germany can continue to bank its export gains.  The EuroZone, led by Germany has no choice but to bailout Greece if it chooses to default by not accepting the 5 year austerity measures plan.  Greece actually has the upper hand in the current ultimatum.  The austerity measures imposed by the EU are harsh and necessary, but what’s more necessary is that Greece doesn’t default for the EuroZone’s sake and the rest of the world’s interests, since Greece can’t get more screwed!

Readers, do you think Greece will give in to the latest and final austerity demands, or default like a logical person would? Even if they pass the austerity measures program, do you think they will implement everything?

My perverse bet is that Greece gives Germany, the EuroZone, and the rest of the world the finger and rejects the 5-year austerity measure.  Why would they if they know that if they default, other countries will have NO CHOICE but to bail them out fully?  Sure, they will get booted from the Euro, and their Drachma will depreciate by 99%, but it’s all good baby!

Wouldn’t it be somewhat thrilling to see global markets dive 10% and watch politicians get skewered? They’ll just blame rich people for Greek’s problems again, but people will finally realize that blaming the financial industry is a cop out. The people to blame are the very people the government serves! They have nobody to blame but themselves.  Long live moral hazard, because we might need some some day ourselves!




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