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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.


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.


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

  1. twobob

    ” … look at the chain of consequences for banks … ”

    That is the real problem here and exactly why this will be so very bad not only for Greece but for the entire worlds economy.
    Who knows which banks will fall? They are so interconnected with their CDS that this will cause an almost never ending round of default and CDS payouts triggering yet more defaults and payouts. It will be musical chairs with 100 players and only 5 chairs.
    The worlds economy teeters and it won’t only be the Greeks who’s retirement funds are wiped.
    Where are your funds? What if the worlds stock markets tank as some in the know expect? Will you even get cents on the dollar for your super?
    Letting other people manage your money is lazy and foolish leaves you so very exposed. There is very little that any individual can do but collectively that is not so. To act you need to understand whats going on, and that takes considerable time and effort. It’s well past time that you as an individual gave up listening to economists and started to work out where your money is and exactly how it is being used. Or if that is too hard convert it all to cash and hide it in a very safe spot indeed. You will be glad that you did.

  2. Andybob

    “I spent 90% of my money on women, drink and fast cars. The rest I wasted”.
    – Georgie Best

  3. Apollo

    My friend and I have just talked about this. We reckon Greece can sell the public assets to the ECB to raise fund for additional spending to create jobs and the ECB should guarantee to hold the assets until the Greek are ready to buy them back and not selling the asset to anyone else.

    That way their economy can recover while they can still meet obligation with the loan.

    What’s disturbing is the impost on Spain. They had the housing market crash which has nothing to do with government spending, now they nationalize the debts because the risky capitalists don’t want to lose their money, and they follow draconian austerity directive from Brussels when what they need is stimulus and the citizens who have nothing to do with the debt have to suffer the pain.

  4. Apollo

    imposition, their public assets.

  5. PeterS

    In historical times Greece (well, Corfu, anyway) supplied Italy (well, at least Venice) with all its oil requirements for lighting, heating and cooking. Olive oil, that is.

    With the Middle East bumping against Peak Oil, perhaps there is an opportunity here. How many olive trees would be needed to keep the world’s transport in motion?

    It would be Green Power, too!

  6. Suzanne Blake

    Greece is 1.5% of Europe’s economy, let them sink and learn

  7. 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.

  8. twobob

    In addition Gerard, it should be noted of the disdain that many individuals now feel toward all politicians and politics in general. This disdain leads to a disconnect from all government and adds mighty to calls for small government. Small government leads to less government intervention which inevitably results in less oversight. Less oversight is exactly what the big time entrepreneurs wan’t. Less oversight means that they can get away with more. It’s not really in anyone’s interest to let this happen but it is an inevitable result of the media led assault on politics and their own shabby dealings to gain or retain power.

  9. jaywhar

    A question – didn’t the ECB lend around $1 trillion to the Euro banks at around 1%? Wouldn’t it have been quicker / easier / cheaper just to lend Greece say $400 billion at the same rate? Gives Greece room to get its house in order / grow, means no CDS trigger…?

    Moral hazard, yes; but isn’t lending it to the banks just as bad (and apparently less effective?)

  10. davidk

    I agree 100%
    @ SB
    considered and reasonable as ever.

  11. 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.

  12. Harry Rogers

    The US lent billions to the European banks so they could lend multi billions to European governments so they could give trillions to their consumers so they buy lots of stuff from the US and also from China….

    Now the US consumers didn’t save much so China had to lend them the money so they could buy the stuff from China…
    Now after a while they all realised that there maybe some of the people couldn’t pay back 150% of what they thought they had soooo…
    The US banks put all these loans in a big bucket and went from door to door selling them just like encyclopaedias…..
    The problem was that a collections clerk named Greg at Bank of America who’d only been working there a month rang one of the borrowers and asked why he had not paid back any money on his loan. He said he didn’t have any money and had spent it all but it’s OK you can have my house back…well not really a house more a shack…probably not worth $200,000. Well the collections clerk told his boss and his boss said
    “You can finish up Friday”
    See… if it wasn’t for Greg everything would still be fine. That how we got the GFC … Gregs …Fu…Catastrophe

  13. Mack the Knife

    Let Greece go bankrupt and take down as many of the Goldman Sachs style banks as they can. The world will survive and these too big to fail institutions that contributed to Greece’s misery will get a taste of their own corrupt medicine.

  14. AR

    The euroids most exposed to Greek debt are France, twice as much as German and 4 times that of the UK. The figures below are 3 years old but I doubt that they’ve improved – in brackets is the (private banks/government exposure).
    France 56B (42 private/14 government),
    Germany 34B (12/22)
    UK 15B (11/4)
    USA 7B (6/1)
    As always the duplicitous French are the ones with the fingers in their ears shouting “I can’t hearrr you!” when their hypocrisy is pointed out.
    The trillion euros of wallpaper recently extruded by the ECB was snapped up by the dodgier banks, not to relend or get their local economies moving again but to balance their vast insolvent loan books and buy Eurobond (coz the ECB can’t buy Eurobonds … directly).
    The previous & current tranches paid to Greece were to pay off the interest on the accumulated debt (aka bonds falling due). In domestic terms that is using a credit card to pay off a credit card debt – fine until HarryR’s Greg asks the kind of awkward question that any child would ask at kindie.

  15. gapot

    When you are in dept and you have to sell your belongings you must do it quickly otherwise its a fire sale. Greece has a few islands on the Turkish coast which are available and would pay off their debt to the German banks in a flash, otherwise its civil war, not a good outcome.

  16. green-orange

    Appollo, Greece has been attempting the few state assets not already sold and no one has been interested.
    Who would buy an asset that may lose 90% of its value in a few months if Greece defaults ?

    There was never any reason to believe Greece could pay off its debts. The ECB has been using other peoples money to pay the loans made recklessly by the very banks that make up the ECB membership.

  17. Jane Geo

    There won’t be a civil war, um, and it’s unlikely Greece will sell any islands. I dislike the racist undertone in much of the commentary about this europroblem, especially in reference to Greece. Be smart. I shouldn’t need to say it: Greeks are decent people. Germans are not superior: they’ve had their own economic problems in the past 15 years. And the media has pushed this idea that Greece is falling apart (for example, Guy Rundle compared Athens to Mogadishu). But Greece isn’t disintegrating. Athens is not Mogadishu. You don’t see guns in the street. Neo-Nazis will never run the country.

  18. dunph

    In another earlier century the current social upheaval in Greece would have led to anarchy and civil war.

    Greece – once famous for its city-states – and quaint terms like “democracy” will now feel the full brunt of too many years lived well on borrowed money.

    The outcome will almost certainly be ugly: high youth unemployment may lead to diaspora but to where? the Greeks have the sun as their blanket and a quality of life that the bog-poor Irish of another century only dreamed of!

    More likely will be that Greece will tear itself apart – watched on by its Euro neighbours – whose industry continues to benefit from low-cost labourers from outside the zone.

    Of course there are a lot of Greeks who have made themselves wealthy overseas – if ever there was a time to tax dual-citizens it is nigh.

  19. Jane Geo

    DUNPH: you speak as though you’re an expert on both the past and the future. But clearly you are not. Get a life.

  20. Suzanne Blake

    Greece should be allowed to collapse and send a clear message to other countries.

    The EU has tried many times, bent over backwards and now they need to be taught a lesson, as harsh as it is

  21. Apollo

    Thanks Green-Orange. That’s why we thought only the ECB would be willing to pay good price for the assets and they don’t have to worry about devaluation, prob keep them for another 15 years before Greece have any prospect of buying back. I hear conflicted version some finance people said Greece has a few assets but don’t want to sell it , I’m no expert on Greece but interesting to hear Ken Henry saying EU cannot work without fiscal transfer like our federation, I hope Colin Barnett listens and stop whinging.

  22. dunph

    Gee Jane Geo your turn of phrase and insight is truly underwhelming: trust you have better fortune in other forums!

  23. Nicholas Houston

    I agree with Jane, except no doubt Dunph does in fact have a life.


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