Tuesday, November 01, 2011

Greece DOA

Update: In a move that caught European officials, the Germans, and even his own finance minister by surprise, Greek Prime Minister George Papandreou announced a referendum on whether Greece should accept the latest eurozone deal to prevent Greek bankruptcy and a meltdown of the euro currency union. Wall Street markets dropped with news of the referendum call. Papandreou said in response to the turmoil caused by his announcement on Monday, that he needs the support of the Greek people to impose more austerity measures. Measures imposed so far by the EU and IMF have proved extremely unpopular with most Greeks, who have taken to the streets to protest what they see as the sale of their nation's sovereignty to rescue corrupt banks and plutocrats. The austerity measures have hit the public sector in Greece hardest. There are dramatic cuts in wages, bonuses and pensions. Thirty thousand public employees have been suspended on partial pay for one year and then will be laid off. Collective bargaining has also been suspended. Overall the plan calls for €14.32bn in public sector cuts while raising €14.09bn in new taxes. Papandreou has called for a vote of confidence in his government for Friday. His parliamentary majority is down to two following the resignation of one his party's MPs. The Prime Minister will meet with the French and German heads of state at the G20 meeting in Cannes this week. A former German economic minister said that the referendum risks the insolvency of the Greek state since, "Europe will have to consider turning off the flow of money which is keeping Greece afloat." Public opinion in the cradle of democracy now is better insolvent than slave.

Update: {27.10.11}After a weekend of talks that stretched into Wednesday night, Germany and France have managed to put a finger in the EU dike. As expected Greece will technically default on its soverign debt obligations to the tune of a 50% 'haircut' on its bonds. That means bondholders will be asked to accept a 50% loss on the Greek bonds they hold. The Institute of International Finance has begun the process of negotiating the terms, but bondholders will have little choice but to accept the terms imposed by the European Union. Greece will be the first euro country to be rated as defaulting on its debt. The fifty percent cut in value equals a contribution to Greece's debt problem of $139 billion. So far, Greece has been kept a going concern on two rescue loans of $150 billion from the 17 countries in the eurozone. In the new agreement Greece will be given another tranche of loans worth $139 billion, and $30 billion in bond guarantees. To shore up the European Financial Stability fund, it will be leveraged to around $1.39 trillion. Banks have been asked to increase their capital reserves by $48 billion by June. Financial markets have reacted positively to the agreement.

{21.10.11} Greece is headed for default. The numbers do not add up and the Greek people have had enough. A forty-eight hour national strike this week closed the country down, and socialist legislators are beginning to balk at more austerity measures. The Greek economy is suffering under the measures imposed by the EU and IMF causing their national deficit to increase and tax revenues to fall. A Greek default will affect US banks because they are widely believed to be directly exposed by $41 billion to Greece. The $600 trillion derivates market will also be affected by a default and just four Wall Street banks hold 96% of derivatives in the United States. They will have to come up with huge amounts of cash to cover their positions, a situation similar to the Lehman Brothers collapse that triggered the liquidity Panic of 2008. The EU leadership is meeting this weekend to discuss what to do about Greece. There is no agreement among member nations as yet. Greece has about €350 in outstanding debt. 75% of that is held by weak banks in the other nations in crisis: Portugal, Italy, Ireland and Spain. They cannot afford to have their Greek bonds devalued. Greek long bonds are trading at 30 cents on the Euro, implying a 70% haircut. The ripples of Greece's default will spread outward, swamping other European financial institutions. Dexia Bank in Belgium is an example of what will happen. It was nationalized and the governments of France, Belgium and Luxembourg put up €90 billion to cover the yet undisclosed losses. Dexia's balance sheet of about €518 billion is about the size of the entire banking system of Greece and larger than the combined assets of the Irish financial institutions previously bailed out at taxpayer expense. Allegedly it was the safest bank in the European "stress tests". The European Financial Stability Fund is authorized to issue bonds up to only €440 billion. That is hardly enough if a Greek default results in 30 or so Dexia-size banks becoming insolvent. Where are the brave, rich investors going to get the money to buy these Euro bonds? From their banks, of course.