06.18.11

Greek exposure and derivatives exchanges

Posted in Economics, Financial Markets, Politics and Policy at 1:53 pm

There’s a considerable amount of debate regarding the exposure of US banks to Greek sovereign default via their CDS protection sales to European banks.  See:

http://streetlightblog.blogspot.com/2011/06/indirect-us-exposure-to-euro-debt.html

http://ftalphaville.ft.com/blog/2011/06/17/597931/whos-selling-greek-cds-again/

http://streetlightblog.blogspot.com/2011/06/us-bank-exposure-to-greece-part-3.html

http://blogs.reuters.com/felix-salmon/2011/06/17/parsing-banks-expsosure-to-greece/

Yet some policymakers and industry participants still aren’t convinced of the need to move CDS trading to exchanges and bring transparency to the market?  Seriously?  We really didn’t learn anything from the 2008-2009 crisis.

A Greek Debtor’s Prison

Posted in Economics, Financial Markets, Politics and Policy at 8:42 am

Some key stats:

  • Debt-To-GDP of around 150%
  • Budget Deficit >10% of GDP
  • Current account deficit >10% of GDP.
  • GDP growth for Q1 2011 -5.5%
  • 15.9% unemployment rate
  • 2-Yr hitting a high of 30% and the 10-Yr hitting a high of 18%

With average interest rates around 20%, and around a 150% Debt to GDP ratio, Greece needs a primary surplus (government budget net of interest) of 30% to service that debt.  Yet tax revenues are falling at an alarming clip because of the decline in GDP.

What Greece needs, in order:

1. Economic growth
2. Lower interest rates

Austerity programs (lower spending, higher taxes) lead to lower economic growth in the short to medium term, with very little impact on interest rates over that time period.

The bailouts increased the debt to GDP ratio, and any softening effect they had on market interest rates was highly temporary.

Unfortunately for Greece, an absence of bailout funding means an almost immediate default on existing debt.  I agree that this would be a highly destabilizing event for the entire Eurozone if not the world, BUT – the architects of the bailout have no credible explanation for how Greece is to sustain its debt service over the next 2-5 years apart from simply ASSUMING that austerity will somehow magically lead to both balanced budgets and robust economic growth, which is NONSENSE.

Meanwhile, EU/ECB/IMF leaders’ primary concern is how to get Greece’s creditors to rollover short term maturing debt in a manner that does not trigger a “credit event”.  The fact that they are talking in CDS terms speaks volumes.  This is silliness.

The Greek Parliament ought to outright REJECT the asuterity measures that European banks are attempting to impose on them.  Tell the EU/ECB/IMF that they want to honor their debts but that the only way to do so is through economic growth, and ask for a plan that will increase economic growth to a level that makes current debt service sustainable.  Make it clear that the only other option to the “growth plan” is immediate default, French and German banks be damned.

The more Greece tries to balance its budget by cutting spending and increasing taxes, the more the budget deficit will actually widen as the economy slows and tax receipts decline.  Austerity is not the solution, it is a big part of the problem.  Likewise, exchanging existing government debt for new government debt, while interest rates continue to rise, only makes future debt service more difficult.  Stop the madness.

There’s a reason why we abolished debtor’s prisons a long time ago.  They effectively make it impossible for the debtor to ever repay his debts, and thus are to the detriment of both debtor and creditor.  Yet, what the European authorities have done is essentially put Greece into a debtor’s prison named Austerity.  They should release Greece if they are to have any hopes of being paid anything back.