By Peter Boone and Simon Johnson
Crossposted on BaselineScenario.com
The Europeans announced Sunday they would provide 30 billion euros of assistance to Greece, amid informed rumors that the IMF will offer another 10-15 billion. With a total of say 40-45 billion euros in the bag - more than the market was expecting -- the Greeks have time to make changes.
The Greek government, helped by the market threat of a near term collapse, appear to have strong armed the other eurozone countries into a generous package without making efforts to change seriously their (Greek) fiscal policy. This is good for near term calm, but it does not solve any of the inherent problems now manifest in the eurozone.
Often assistance packages of this nature just help "smart money" to get out ahead of a default. This could be the case here; 40-45 billion euros total money could last roughly one year. Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.
Sunday's package should make it possible for Greece to borrow short-term but it takes courage to lend for 5 or 10 years to the Greeks unless there is much more fundamental change.
There are two key things to watch for:
1) Is the global recovery so strong that Greek's economy picks up fast and their budget deficit comes down sharply?
2) Will the IMF and Greeks now come up with a real austerity program that sharply cuts the deficit so that a year from now, when the official bailout money could run out, the market is receptive to Greek debt?
The danger for private debt holders is clear: Sovereign loans invariably treated better in a restructuring than private debt. So the European aid in some sense squeezes private debt holders. They will be pleased there is no near term default, but it means their recovery value has gone down if things get bad again. Greek long term yields will probably stay high. The key market reaction to watch over the next 6-12 months is long term yields, and whether these come down to levels that imply low risk of default.
And there is still definite risk of contagion. The actions of the EU show they are willing to intervene when yields get up to 7-8% on long term debt and markets close off to a nation.
What does this really mean for Portugal or Ireland? People holding Greek debt lost a lot of money in the last few months. That will not come back soon, as markets will for a long time be wary of buying their debt - especially when Fitch just took the Greek rating to BBB minus, i.e., at the floor where the ECB now lets banks borrow against ("repo") government debt.
The Portuguese therefore are not at all out of the woods. If they do not start making serious moves towards cutting their deficit, they are next for a test.
Surely the eurozone will bail Portugal out also - but where would it stop after that? The stronger Europeans, by coming to Greece's rescue at this time with little conditionality, are effectively showing all the weaker nations that they too can get a package. This will undoubtedly reduce the resolve for needed fiscal reforms across the European periphery.
We are still lurching from crisis to crisis in Europe.
Those of you advising default don't even realize that 80% of Greek debt is held by foreign banks, nor do you realize there are heavy heavy bets in the form of CDS swaps on Greek debt, and that these bets dwarf the actual amount of Greek debt in total. Are the people here actually clamoring for MORE bank bailouts ala the fallout from Lehman? Reading Huffpost on economic issues is maddening.
First, Greece has taken measures already by reducing the pay of its gov't workforce by 30%. It cut pension payments. It hiked VAT taxes. It raised retirement, etc. In fact, every other sober economist is looking at the slashing in the budget (over 10 billion euro) as such a savage slash that it will impact Greek growth negatively and send it on a deflationary spiral. Additional measures will do more harm than good.
Simon Johnson is like all the other economists who keep preaching devaluation. Yes, slash things for the poor, cut education and don't you dare tax the rich.
Facts: The actual rate for Greece was 3-year bonds set by the EU at 5.33%. Greece just did a 7-year deal at 5.9% a week ago. That was the market rate.
The aftermarket of 7% is distorted and not the real rate that Greece has been selling bonds at.
Considering the difference in maturity of the two classes of bonds, one can tack on 50 basis points to the EU deal and arrive at a yield of 5.83% for 7 year bonds from the EU, which is almost the same as the 5.9% that Greece just did.
Economists have already stated that Greece has the longest average maturity in its bonds of ALL European countries. So Johnson is wrong.
Greece is notoriously corrupt in terms of taxes... meaning hardly anyone pays. germans, for example, PAY through the nose.
They need to clean up their corrupt practices and join the rest of the EU before they should be helped.
Why shouldn't Greece be criticized?
well lets look at recent history
the present exchange rate is $1.35 to 1 Euro
now lets say the Euro starts to loose its value maybe by a quarter or a third....
now what was the exchange rate when GB became President I believe about one to one
this shows you the path our Nation and this region have been on....they have a long way to fall just for us to be even as in the past
(a) Bailouts or below market rate loans are illegal under the terms of the Europhiles beloved Lisbon Treaty
(b) Some of the countries from whom bailout loans are to be demanded are themselves in dire need of a bailout.
(c) Greece is living from week to week in terms of the bond markets will most likely have gone into default before all of the constitutional challenges to this proposed ‘Loan’ have been run through the courts of the major donor countries
In order for this loan to be repaid, the Greeks would have to expand their economy by 1% per year, while reducing public spending by 5% per year. Didn’t a certain Gormless Brown tell us that this was impossible? If so, it is possibly the only thing he has ever been right about. All this ‘Bailout’ will do is kick the problem a few months down the road
Incidentally, the bond markets today have made it clear that, now that the details are clear, that they have no more confidence that Greek Bailout #4 will amount to more than politicians’ words than the previous 3. Greek Debt is still yielding at more than
3.5% more than German debt, not too far from the all-time high spread seen last week.
We can safely dismiss this ‘Bailout’ it amounts to hot air and wishful thinking; nothing else
(a) Bailouts or below market rate loans are illegal under the terms of the Europhiles beloved Lisbon Treaty
(b) Some of the countries from whom bailout loans are to be demanded are themselves in dire need of a bailout.
(c) Greece is living from week to week in terms of the bond markets will most likely have gone into default before all of the constitutional challenges to this proposed ‘Loan’ have been run through the courts of the major donor countries
In order for this loan to be repaid, the Greeks would have to expand their economy by 1% per year, while reducing public spending by 5% per year. Didn’t a certain Gormless Brown tell us that this was impossible? If so, it is possibly the only thing he has ever been right about. All this ‘Bailout’ will do is kick the problem a few months down the road
Incidentally, the bond markets today have made it clear that, now that the details are clear, that they have no more confidence that Greek Bailout #4 will amount to more than politicians’ words than the previous 3. Greek Debt is still yielding at more than
3.5% more than German debt, not too far from the all-time high spread seen last week.
We can safely dismiss this ‘Bailout’ it amounts to hot air and wishful thinking; nothing else.
I hope the EU comission will get tought with Greek and take their economic independence away in exchange for more loans, i
just start issueing your own money, FREE OF DEBT!
throw the Banksters under the bus!
Soros is shorting the euro. Its going to be a long bumpy ride to the bottom.
http://yieldpig.blogspot.com/
"The official stressed that this agreement by the finance ministers wouldn't mean that the plan would be tapped any time soon..." The unnamed official is right, if by 'not any time soon' he means it won't be tapped until the start of the business week.