Hard as it was, the recent Greek default was easy because Greece just stiffed private banks and hedge funds. Next time – yes, next time – it will be harder. This is because most of Greece’s debt is now held by the IMF, the ECB and many European nations who lent directly, or via the bailout fund, to Greece. So, Greece’s creditors are now, generally, tax payers of neighboring states!
Tag Archives: Greek Default
Recessionary Austerity
The deep recession in Greece and the milder one in Portugal don’t matter to the overall performance of the euro-zone, as they are less than 5% of the area. They are, proof that during a recession repeated government spending cuts and taxes increases don’t increase investor confidence nor boost growth and private sector investment. Rather, it’s a recipe for economic contraction that will doom the latest rescue effort.
Creditless-Default Swaps?
As the Greek government defaults on its bonds, holders of Greek credit-default swaps will probably get nothing as the default will be “selective” and will thus not officially trigger a default. This not only hurts banks who thought they were hedging by buying the CDSs, but also Portugal as it will discourage banks from holding its debt if they cannot hedge against a default. This will raise yields and increase volatility.
It’s All Greek
Greece is adopting severe austerity measures yet is not making enough structural changes to its economy to boost log-run growth to “grow out” of its problems. If Greek growth remains weak, and with Europe in a recession bank on it, Greece must run huge budget surpluses, which are socially impossible, to stabilize its debt-to-GDP ratio. As a result, more severe debt write-downs are a must, otherwise this crisis never goes away.
Italy is Next!
Greek PM Papandreou’s call for a referendum to approve additional financing has heightened fears that Greece will default. In response 10-yr Italian debt yields hit 6.33% a euro-era high and as much as 4.55% above super safe German bonds. Once the spread exceeds 4.5%, clearing houses can force investors who use Italian debt as collateral to make margin payments. In the recent past, all such requests have resulted in bail-outs. Italy, look out, Berlusconi, bye bye!
Greeks Bearing Gifts
The chances of a Greek default in the next 5 years is 98%. It now costs $5.8 million upfront and $100,000/year to insure $10 million of Greek debt for 5 years. This is because the austerity plan is failing, the Germans refuse to give the Greeks more money, Greece’s budget gap widened 22 percent in the first 8 months of ’11 and their economy is shrinking. And, oh yeah, interest on 2-year Greek notes is almost 70%. Default is Greece’s best hope!
Moral Hazard
Ideally Greece would leave the Euro, default on its debts, and get on with its economic existence. But, leaving the Euro would be a disaster for the Euro zone. So the Europeans won’t let it happen. Neither will the Chinese as they do not want the US Dollar to be the only reserve currency. Since the Greeks know this they have no incentive to financially behave because they know they will get bailout out.
Return to Drachma
Greece must leave the Euro! Argentina (Arg) shows why. From ’98 through ’01 Arg was in a bad recession; the Peso was pegged to the USD. Arg borrowed from the IMF cut spending and the economy tanked. Then Arg defaulted on its foreign debt. The economy shank a bit but has been great since. In 3 years Arg was back to its pre–recession level of GDP. If Greece remains in Euroland it will take it 10 yrs.