8/14/2019 Greek Crisis: an update

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Greek Crisis: an update

1. The news

On Friday, Reuters and the WSJ reported that France, Germany and possibly theNetherlands would directly or indirectly bailout Greece. 48h later, Mrs Merkel, theGerman Prime Minister, denied this.

 What is clear is that we have entered a period of marketing/smoke screen/market testing campaign toassess a market response to Greece issuing a couple of 

 billion EUR part of the EUR 23 billion refinancing exercise of maturing debt coming due by May to be refinanced. Then, you would get EUR 30+ billion of issuance by the end of the year(without taking into account new debt to bridge the fiscaldeficit). This refinancing is therefore crucial for Greece.

The rumored plan would have powerful State owned financialentities in Germany (KfW) and France (CDC) either buying

 bonds outright or issuing guarantees to national banks buyingthe bonds to be soon issued by Greece. This means that private banks would get a nice yield (probably in the 7% region) withno risk but with a bit of arm-twisting from Governments…This would not only be an indirect bailout of Greece

 but also a subsidy to the banking sector. 

However, on Sunday, Germany's Angela Merkel told German ARD public television,according to the Sydney Morning Herald:

“...the German chancellor denied any such plan was in the works, saying "there isabsolutely no question of it.”“We have a (European) treaty under which there is no possibility of paying to bail outstates in difficulty."

 And she is right.

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Last week strike and the violence that followed do not bode well for the Greece successfully reigning in debt and budget deficits. This would be particularly true if they get some kindof bailout from other European countries. It seems however - if one believes whatEuropean politicians are saying- that the pressure is mounting on Greece to takemore drastic measures.

 All this gesture in Europe looks more as being for face saving -“We sold the EU politicaland economic integration as well as the EUR as bringing more prosperity for allEuropeans”- than to see what happens when confronted to the reality of a deep crisis: it isnot possible to integrate so many countries at so different stages of economic,fiscal and social development so quickly. Politics pre-empted reality and

reality is catching up with a vengeance.

2. What’s next?

There is not necessarily a contradiction between what Mrs Merkel said and the behindclosed doors drawing plans for a bailout of Greece by the European Union (or at leastFrance and Germany and maybe some others): KfW and CDC could guarantee banks buying Greek bonds and/or directly buy them for their own fixed income portfolios. Sothis is a real possibility. This scenario is the most probable one in my opinion. TheEU has now a tradition of bypassing rules casted in stone (just refer to France andGermany about their budget deficit higher than 3% and debt/GDP higher than 60% for years, not talking of Italy or Belgium).

I personally think that bailing out a cheater is not right: Greece should pay for itssins. In addition it would be just plugging a hole short term but wouldnot solve thelonger term problem of the EUR and the EU integration: the one fits all doesnot work without loosing sovereignty on fiscal and social policies. In any case what is feasible for Greece is not possible for Spain or Italy or France due to the sheer sizeof their deficits and debts in absolute terms.

 A rescue from the IMF is not palatable to European politicians since it woulddemonstrate their incapacity to solve a Eurozone problem. The IMF receipts aregenerally not a particularly efficient one either, but in the absence of any good solution,

always take the least worst one. This is my preferred solution as it would mutualise thepotential cost to the IMF members and not Eurozone one only. It would also limit theusual arm-twisting/bagging wrapped as consensus between member states. Nevertheless,I rate this solution as a low probability (event if I think that at some stage the IMFinvolvement will be inevitable – BRICs should be delighted: they will be able to buy a big chunk of IMF gold-hard-asset for dollars-paper-money).

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This would be my preferred route and the one that will prevail when the enormity of thetask will make it inevitable.

 All the rest, Greece leaving the EUR (or selling the Acropolis to the Chinese or theMinautor to the Indians) and other ideas, will not occur but for exceptional events (like violent social unrests bordering with a revolution or coup d’état) which I do no foresee. Conclusion

This crisis was necessary for Europe to wake up to the reality of flaws andfraud in the construction of the EU and the EUR , and should therefore be

 welcomed in order to found the construction of Europe on solid ground instead of “grand”ideas based on thin air. This is a chance that Europe should grasp. Otherwise, the demise will accelerate.

However, as reported by Reuters, Jean-Claude Juncker Prime Minister and President of the Eurogroup (in charge of EU economic policy coordination) pointed the finger atspeculators and declared to the German business daily Handelsblatt: "We have the tortureequipment in the cellar, and we will show them if needed."

Here we are, the bad guys are the so-called speculators but not the ones who put Greece insuch a mess (and Portugal and Spain and Italy; by the way add France and Belgium, andthe rest of European politicians who forced the EU integration and disregarded facts). Notencouraging.

 Where does this leave us for the Eurozone?

•  The growth in the Eurozone will be much smaller than enthusiastic andunrealistic forecasts at the end of last year

•  The EUR will weaken until the roots of the problem are not properly addressed

But frankly, beyond Germany that wants a strong currency, most other countries don’tcare if it is not (too) inflationary. We are in a world of competitive currency devaluationafter all.

Buy real assets, invest in high yielding equities with strong balance sheet anda franchise.

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 Source:

The Sydney Morning Herald: No German rescue plan for debt-ridden Greecehttp://news.smh.com.au/breaking-news-world/no-german-rescue-plan-for-debtridden-greece-20100301-pbj7.html

NYT: Germany, France, Netherlands to Buy Greek Bonds: MEP (reporting from Reuters)http://www.nytimes.com/reuters/2010/02/27/business/business-us-greece-germany-mep.html?_r=2

Reuters: EU urges new Greek cutshttp://www.reuters.com/article/businessNews/idUSTRE6204QR20100301

 WSJ: Greece Set to Outline New Austerity Measures Wednesday http://online.wsj.com/article/SB10001424052748703807904575096960117502490.html?mod=WSJEUROPE_hps_LEFTTopStories