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Europe

May 15, 2012

Chaos reigns in the slow-motion train wreck that is Greece

Greece has nothing going for it, except tourism but that is overshadowed by close to €300 billion in known debts, the financial equivalent of a black hole that could suck the rest of Europe and global finance into it.

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What are the chances of Greece surviving bankruptcy, and can it depart the euro? Talks tonight between incoming French president Francois Hollande and German Chancellor Angela Merkel may help answer the questions that are dominating global markets and worrying bankers, central bankers and governments.

It’s doubtful anything substantive will occur. We now seem to be in a slow-motion train wreck as Athens fails in another attempt to form a government, meaning Greece looks as if it’s off to the polls for the second time in two months. But will Greece make it, or will it run out of money, forcing the rest of the EU and eurozone to put up more money, or refuse to provide any more funds, thereby triggering an inadvertent default?

Overnight, Merkel, smarting from a big anti-austerity vote in a state election on Sunday, warned Greece it had to back the austerity plan in place, or face the prospect of leaving the euro. Just how that is supposed to happen no one knows, given there are no rules for a country to leave the common currency short of being blasted out by a huge default. There is a game of high stakes “chicken” being played out here.

Eurozone ministers met for another talkfest that said nothing conclusive, dismissing talk of Greece leaving the eurozone as “propaganda and nonsense”. But they also said Greece had to respect the terms of the bailout program agreed with the EU and the International Monetary Fund. There was no mention of what would happen if Greece doesn’t do that, either inadvertently or deliberately.

Hollande is sworn in tonight and heads straight to Germany to talk to Merkel about life in the eurozone. Some European analysts say her warning to Greece was also a reminder to France that there is no going back and changing the program of spending cuts and other policy changes (such as altering the retirement age). Hollande wants to change these and others to try to promote growth. It was the policy that helped him become President. But Greece is the focus and it’s shaky.

That’s why financial markets had another miserable night, falling across the board. The Aussie dollar regained the parity level with the greenback, then fell under 99.60 US cents this morning in Asia. Oil fell to $US94 a barrel in New York. Stock markets fell sharply, especially in Europe, yields on Spanish and Italian debt hit 2012 highs, and yields on UK and German bonds hit all-time lows. In the US the yield on its key 10-year bond closed at 1.74%, the lowest it has been for six months. Yields on seven-year US bonds hit an all-time low of 1.1679%. Australian bonds were trading at 3.28% this morning for 10-year securities, lows not seen for more than 60 years.

Moody’s cut the ratings of 26 Italian banks, including the majors. Some of the cuts were four ratings levels and, according to the Financial Times, an adviser to Hollande warned publicly of the danger of contagion:

“Jean-Pierre Jouyet, the head of France’s financial markets regulator and adviser to incoming president François Hollande, warned that ‘there is a risk of contagion’.

“‘If Greece left the euro, which is a hypothesis that today we cannot avoid, we have to look at the chain of consequences for banks,’ he said in a television interview.”

In Athens, President Karolos Papoulias called off an attempt to set up a government of technocrats. As a result, the country is almost headed back to the polls next month (which will make June problematic with polls in the Netherlands and the French parliamentary elections). But will Greece make it?

Some commentators have wondered if Greece can emulate Argentina in defaulting and surviving. At $US93 billion, Argentina is the largest-ever sovereign bankruptcy. It happened in December 2001, and according to some pundits, Argentina has survived and prospered. But, according to others, that’s not the case as successive governments have fiddled the national accounts, seized private pensions, restricted capital flows, taxed exports and avoided paying court judgments won by various creditors.

And Argentina went bust and then survived in the good times, when credit was easy and plentiful and no one really worried that household savings in the country were wiped out, ruining millions of  lives. Argentina had products people in other countries want — wheat, soy beans, beef and oil and gas reserves (now being run down) — and is a much larger and resource-rich country, which Greece isn’t.

Greece is smaller and poorer. In fact it has nothing going for it, except tourism but that is overshadowed by close to €300 billion in known debts, which is the financial equivalent of a black hole that could suck the rest of Europe and global finance into it.

So what’s the financial picture for Greece and the rest of the eurozone? Well it’s all debt and no assets. According to figures published in European media (The FT, Economist, Guardian and Wall Street Journal), Greece’s financial position is dire. The €5.2 billion payment approved last week under the second bailout package was actually €4.2 billion (one billion was held back). Of that €4.2 billion, €3 billion has to be repaid to the European Central Bank this month as bonds to the same amount mature. But if for some reason these bonds are not repaid, then the ECB pulls the plug and we get an early default.

No wonder a Greek minister warned at the weekend the country only has enough money for another six weeks. That might get them to a new election.The Economist wrote at the weekend that: “Banks have more or less called a halt to new lending to Greek institutions, companies and banks. By the end of 2011, foreign banks’ exposure to the Greek public sector had fallen to about $23 billion from $64 billion in September 2010. Cross-border loans to Greek firms and households had also fallen, from $86 billion to $69 billion. But that is still a lot.”

Some 70% of Greece’s debt is now made up of official loans already disbursed: that’s estimated at €140 billion; the European Central Bank owns around €40 billion of Greek bonds and the ECB has repoed (repurchased) around €140 billion of bonds and other securities with Greek banks. So roughly there’s around €200 billion owed to the ECB, the IMF and EU. Add on the €93 billion of other loans detailed by The Economist and Greek’s debts stand at just under €300 billion.

That’s the size of the risk to the rest of the eurozone, Europe and the global financial system. The eurozone’s global stability mechanism  (the so-called firewall) has €500 billion, so on paper, there’s enough there to protect against a Greek default. But that leaves nothing for Portugal and Ireland, plus Spain (and perhaps Italy). Certainly, if Greece defaults then attention (contagion) will spread to Ireland, Portugal, Spain and Italy, with France also a contender. And, if Greece faults on its IMF debts, it would join the likes of Zimbabwe, Somalia and Sudan that have overdue financial obligations to the fund.

So what happens if there’s a default? Well the ECB turns off the money tap, Greece has problems paying for imports, which stop or slow dramatically, shortages start happening, inflation rises. The economy collapses, demand and production plunge, unemployment soars (doubles from about 20%). If Greece’s banks are cut off, they collapse and the government will have to start new banks from the ruins (much in the way Iceland did after its collapse).

If the country leaves the euro and brings back the drachma, it has to strike an appropriate rate, while at the same time trying to shut the country down to stop a massive flight of capital. It also has to find the money to finance the printing of new notes and coins, the distribution of that money. New border and capital controls would have to be introduced and money found to pay the police, Customs, army and other state officials to try to keep the economy alive and stop more money from joining the €70-90 billion that have already left the country in the past two years.

Chaos is a Greek word and it’s very, very apt.

Glenn Dyer —

Glenn Dyer

Crikey business and media commentator

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24 comments

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24 thoughts on “Chaos reigns in the slow-motion train wreck that is Greece

  1. gerard

    The Hoodwinking of idealism.
    Another big fall in world markets, billions will be wiped off and Greece is tottering on the brink of total economic collapse. Good morning!

    Some European countries which were supposed to be examples of how society ought to distribute wealth more equitable are now being lined up to fall like a row of dominoes set up on the dining table of good and well intentioned but un- equitable sharing of the rich Euro baked pork dish with crackling good social security till the grave.

    What went wrong? Was it the apple sauce?

    The answer might well come from the dining table itself. The excessive ladling out of all those goodies without balancing it to an equal generous increase in taxation revenue was always dodgy. The expenditure didn’t match the income. A classic case of economic delusion that one can live beyond means was always a premier lesson at the kindergarten of economics. If you keep scooping the sand out the sandbox will finally be empty.

    The lure of getting more with less income seemed to have overtaken the world of capitalism. Election after election the sound economic principles of setting expenditure to income was eroded away. The voters swallowed it like marsh-mellows on a stick held above the fire of greed and avarice. Right wing governments took over with the promise of more for less and we were all seduced by this ugly Judas kiss. And look at us now? Will there be blood on the streets once again?

    With Portugal and Spain queuing up after Greece with youth unemployment at a staggering fifty percent it seems to be hovering on a similar precipice into economic collapse.
    In Australia we keep rubbing hands together with glee in how we seemed to have escaped the GFC turmoil with our scooping up of mineral resources. In the process we seem to forget that this is due to luck much more than sound economics. Take out China, and we too would be lining up at soup-kitchens.

    Are we too taken in by the lure of more for less? Notice the upheaval in the suggestion of raising taxation on our resource mining companies. Notice how the Three hot headed Musketeers of our resource companies have taken on Australia and its citizens daring to utter getting paid a fair share of the economic resource pie. Notice too, how the principal of taxing those that defile our environment is fought against tooth and nail. Millions are being spent in advertisement opposing this very sound and principled way of making the environment spoilers pay for it. We too are cruising for a bruising being taken in by the fairy floss of more for less.

  2. Mr Rabbit (aka Steve 777)

    This whole Greek debt thing seems to like a dog chasing its tail. Over the past 18 months or so the cycle has been: the EU has a meeting, comes up with a plan, everyone cheers, markets go up; a few weeks later someone issues a dire warning, there’s gloom all round and markets go down. Now we have a Greek election result that must surely have been a predictable for a long while and we have something close to panic.

    All of this also begs the question of what should happen to the fools who lent these vast amounts to Greece over the years. Surely Greece doesn’t have enough smoke or mirrors to have kept the gargantuan and growing debt pile hidden, so the lenders must have advanced funds to Greece knowing the risk. A reckoning must surely have been predictable. Perhaps the ratings agencies get stuffed up hugely again.

    Why do I get the impression that no one knows what’s going on, let alone what to do about it. Any predictions by market gurus about what happens next (in this and all other contexts) seem to be as reliable as if they had read goats’ entrails.

    I confess to being a ‘free market sceptic’. We have this vast engine called ‘the Market’ at the core of the global economy, driven alternatively by greed and fear, out of control and understood by no one. One day it will dive over a cliff with dire consequences for lots of us as people lose any or all of their livelihoods, homes and savings, not only in Europe.

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