A New Greece?

I am sure you are aware the Greek Parliament in the early hours of Monday, February 13 passed a so-called ‘austerity bill’ that is said will result in private investors taking a 60% – 70% ‘haircut’ on the Greek Sovereign Debt owed to them.  Among other things, that bill calls for a 22% reduction in the Greek minimum wage, as well as pension and job cuts.  The 70% haircut that seems now to be settled (at least by the Greek Parliament) on the portion of Greek debt that is privately owned amounts to – as best I can tell – to something in the order of €100 billion (or about U.S.$132 billion).  I made that calculation based on the following (approximate) numbers and percentages that I have taken from various sources.  I can’t attest to their accuracy:

Total Greek debt                                                         €350 billion

% privately owned                                               40%-55% (say 50%)

Amount of that debt that is privately owned              €175 billion

60%-70% (say 65%) ‘haircut’ – rounded                    €115 billion

Current exchange rate €1 = U.S.$1.32                 U.S.$152 billion

That said:

• I see this likely as being far from the end to Greece’s (and the Eurozone’s) current financial woes, and perhaps some distance away from the terms of any deal actually consummated;
• as best I can tell, this would leave Greek debt outstanding at about €275 billion, before any new advances from the European Union or the International Monetary Fund;
• the EU and IMF are saying “they have had enough of broken promises and that the funds will be released only with the clear commitment of Greek political leaders that they will implement the reforms whoever wins an election potentially in April”.  The funds referred to is the €130 billion bailout package that is said to be currently needed to keep Greece ‘afloat’ economically;              

Note:  To put €130 billion into at least some perspective, at current exchange rates that is U.S.$172 billion or U.S.$15,926 for each of Greece’s 10.8 million people.  The equivalent amount based on population for other selected countries would be (1) Australia – U.S.$363 billion, (2) Canada – U.S.$549 billion, (3) France – U.S.$1.04 trillion, (4) Italy – U.S.$968 billion, (5) Portugal – U.S.$169 billion, (6) Spain – U.S.$736 billion, (7) United Kingdom – U.S.$992 billion, (8) U.S – U.S.$4.8 trillion, and just for fun (9) China – about U.S.$17.5 trillion.

Query #1:  What, if anything, does the proposed EU/IMF Greek bailout package say in the context of ‘precedent setting’ looking forward to the Sovereign Debt issues faced by other Eurozone and non-Eurozone countries?

Query #2:  Is EU/IMF financial support in concept ultimately inflationary or deflationary in a world context?  I readily admit to being out of my depth on this, but intuitively have to think it has to be inflationary in the short term with unknown consequences in the longer term.

• interestingly, based on what I have read it appears that following the ‘private investor write-off’ and the EU/IMF advances, Greece will have slightly more total debt than it now has.  If my assessment of this is correct these Greek debt ‘transactions’ strike me as likely doing little more than buy more time without really solving much of anything by way improving Greece’s covenant to pay its resultant outstanding debts. Write to me at info@stockresearchportal.com if you have reason to think my numbers are materially incorrect.

I suggest you reflect, if you have not already done so, that all this is happening in the face of Greece’s:

• over 20% reported unemployment rate, and almost 50% youth unemployment rate;
• industrial production, building activity and retail sales declines  in recent months;
• being classified as a ‘high-income, developed country’.  According to the World Bank Greece had the world’s 32^nd highest GDP in 2010.  By business sector, in 2010 Greece’s service sector is said to have accounted for almost 4/5ths of GDP, its industrial sector for under 20% of GDP, and its agricultural sector for under 4% of GDP.  Greece’s Public Sector accounted for 40% of total economic output (see Wikipedia).  My comment:  assuming those figures are reasonably correct, it seems to me if my view that a vibrant and growing industrial sector and minimalized public sector are fundamental to a country’s balanced growth, fiscal budgets, and net trade positions vis a vis its trading partners, Greece’s reported numbers are a recipe for disaster going forward; and,
• as I write this the Greek people are responding by demonstrations that are proving to be violent in Athens and other Greek cities.  As one who periodically says ‘you can’t take things away from people and leave them happy’, in the face of ongoing Greek economic events one can only say “little wonder”.

In light of what is ongoing in Greece as I write this, I think it important that you take the time to read an October 26, 2011 article written by Lucas Papademos. Mr. Papademos became Greece’s Prime Minister on November 11, 2011.  An economist, he previously was Governor of the Bank of Greece (1994 – 2002).  He also has been a visiting professor of public policy at Harvard University’s Kennedy School of Government, and a Senior Fellow at the University of Frankfurt’s Center for Financial Studies.

As I read Mr. Papadermos’ article, he works to make the case that depending on how it is done a restructuring of Greek Sovereign Debt potentially may cause more harm than good not only to Greece, but to the Eurozone generally.  According to Mr. Papademos, the only portion of outstanding Greek debt that can be restructured to bring net financial benefits to Greece, and in turn to the Eurozone, is the debt held by foreign private investors – which he says that last October amounted to about 40% of the total outstanding Greek debt.  Thus if his numbers are accurate at a current date, a 70% haircut on that debt would represent a reduction of only about 28% of the total Greek outstanding debt.  Mr. Papademos raises a number of contagion issues that I think are worth thinking carefully about.  My conclusion:  The Greek debt situation is a highly complex mess that has implications that likely are fully understood by only very few people, or perhaps no one.

I strongly suggest that if you participate directly or indirectly in the equity markets you take the time to read and consider Mr. Papademos comments carefully.  In the end, you may not agree with his views, but you may gain an improved perspective on the Greek debt issues.

See ‘Greek Lawmakers Approve Austerity Bill as Athens Burns’ published February 12 by CNBC – reading time 5 minutes.

Also see ‘Violent Clashes as Parliament Passes Austerity Bill’ published February 13 by Spiegel Online International – reading time 4 minutes.

Finally, see ‘The pitfalls of EZ sovereign debt restructuring’, October 26, 2011, written by Lucas Papademos – reading time 10 minutes.

Congress Does The Right Thing!

As a follow-up to previous commentaries I have written on the subject of legalized insider trading by U.S. Congressmen and their aides, last Thursday the U.S. House of Representatives (Congress) passed the STOCKS Act by a 417-2 majority, although the Bill as passed …..continue reading.

Commentary reading time 1 minute. Referenced article(s) reading time 1 minute.

U.K Quantitative Easing

Last Thursday the Bank of England announced it would purchase a further 50 billion pounds (about U.S.$480 billion) of assets – apparently mostly British government bonds.  This is reported to, when completed, bring the total of such holdings by the Bank of England to about …..continue reading.

Commentary reading time 1 minute. Referenced article(s) reading time 3 minutes.

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