Greek-related problems have a long way to go

Submitted by Logan Schuler:

Problems accompanying Greece & Europe are simply not going to go away today, nor tomorrow, nor next month. After the dust settled following the Goldman charges brought by the SEC and investors found their bearings, the markets gave EUR a proverbial ass whooping, pushing it to a 1-yr low of 1.3201, before Greek Finance Minister George Papaconstantinou announced Greece intended to activate the bailout package immediately. Immediacy, however, has never been a quality of politics.

Nor shall it be in this instance, especially with regard to Germany, who not only hates the idea of taxing themselves at higher rates so that their less working, more leisurely Greeks can continue their unsustainable habit of fiscal irresponsibility, but also Germany also requires parliamentary approval before they can give any money to Greece. France too has stated it could take a month to pass any legislation if Greece needs to tap the loan packages. The fact that Greece has 8.5 billion in bonds due in the middle of May, ten days before a key regional German election, is cause for concern to say the least.

Unfortunately for the EU, Greece is not the only member country facing material problems. Eventually the lifeline thrown to Greece will have to also be tossed to Spain, then Portugal, and Ireland likely after that as these countries drown themselves in debt.

Debt & Deficit as & of GDP

Interestingly, Mr. George Papaconstantinou has decided to devote these last ten days of April to an elaborately staged tour through the U.S. where he intends to persuade primarily emerging market investors to buy between 5-10 bln of Greek bonds. There are two things particularly interesting about this:

1. Mr. Asmussen, Germany’s Assistant finance minister had this to say last Tuesday when asked about what Germany will do to assist Greece:

If it comes to finance aid for Greece, then the path will be a pooled credit which in the case of Germany would be done via Kfw [the German state bank]. The solution, however, of buying Greed bonds is off the table.

If Germany considers Greece’s bonds so cancerous they aren’t willing to even consider purchasing them, what US emerging market fund would think it a good investment? Any money manager who finds Greece to be a more attractive emerging market play than China or India shouldn’t be managing money—even if Greek bonds offered interest rates attractive enough to warrant investment from US investors, the high interest demanded on these bonds would likely cripple Greece’s economy.

2. These bonds are denominated in US Dollars!
It’s both ironic and laughable that Europe (via Greece) is being forced to fund its own debt in terms of US dollars. It wasn’t long ago that Greece was able to fund its debt in euro-denominated bonds. It appears, however, that those days are behind us.

All of this serves as a confirmation of the severity and breadth of Europe’s financial issues. The need for IMF intervention has sent a message to the world that will not be forgotten: the EU is incapable of handling itself in times of crises. The high interest that will be demanded on Greek debt by the markets will create a self-destructive situation where the government could default on their own loan repayments.

Any austerity measures will effectively suffocate Greece’s economy as it grasps for air. The Greek debt crisis not only highlights the Greece’s troubles, but underscores the fragility of the EU itself. Contagion to the other troubled states who’s finances are equally stretched (Portugal, Spain, Ireland etc.) could destabilize the entire economic region and further devalue the EUR. As can be seen from the charts, these nations’ immense debt is coupled with a state of high unemployment, further exasperating their domestic issues.

Unemployment

Spain’s economy minister, Elena Salagado, was quoted saying “the global economy could experience another soft patch… and private demand will have to play a more prominent role”. If Greece is able to reign in public finances, it will have the effect of stagnation as consumption would decrease. This could very well turn what Elena Salagado foresees being a “soft patch” into a gapping void, especially when you consider that Greek consumer expenditures accounted for 73.6% GDP in 2009.

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