Friday, February 10, 2012

Greece Slips Towards Default

It is not so much a question of if but when the default will become official. technically Greece is already in default. Greeks concede that the big problem afflicting the economy, now in its fifth year of recession, is the uncertainty about whether Greece can stay in the euro and get its act together. Savers are anxious that their cash might be forcibly converted to a new Greek currency. By November the Greek banking system had lost a quarter of the deposits it had two years earlier. Banks have had to borrow $56 billion from the Greek central bank on top of €73 billion of secured loans from the European Central Bank. Credit is in short supply because banks have had to cut loans and raise borrowing costs. Informal credit arrangements between firms are breaking down and many foreign suppliers now demand cash payment upfront, making liquidity even scarcer.

Few investors or businesses are brave enough to risk long-term bets on the Greek economy in these conditions. “You can buy good companies for pocket money,” says one business chief. Assets are cheap but they would become cheaper still were Greece forced out of the euro. Capital spending is down by almost half from four years ago; house building has fallen by two-thirds. The one bright spot is tourism: visitors to Greece were up by 10% last year, in part because tourists steered clear of the unrest in north Africa.
There are hopes that the economy might recover next year if Greece’s place in the euro is confirmed. Agreement on a big new support package from the euro zone and the IMF would put some minds at rest.

Greek politicians also have to come up with around 3bn euros in extra spending cuts or tax rises, to unlock the first tranche of the revamped 130bn euros IMF rescue package, first announced to the world by European leaders more than six months ago. This means Greece must put public finances on a sustainable path, that would require that private-sector creditors sign up to a bond-exchange deal that will see more then half of the face value of their Greek paper written off. For weeks, there has been a clear gap between the amount of debt relief for Greece that the private sector would "voluntarily" sign up to, and the amount needed for the IMF or anyone else to be able to say, with a straight face, that Greek sovereign debt was on a sustainable path. Many suggest that the ECB will also have to take a write down to help bridge the gap, but this is only one piece of the horrendously complicated puzzle that is the Greek "bailout". For one thing, those private sector creditors voluntarily losing a large part of their shirts still have actually to sign on the dotted line. That assessment already looks too sanguine as the headwinds facing the economy are proving much stronger than had been forecast. Greece’s GDP probably fell by 6% last year, far more than expected as a weaker economy has made it harder for Greece to meet its fiscal targets.

The Greek central bank’s figures show that bank credit to households and private firms fell by 2.4% in the year to November. Banks suffering a drain of deposits have had to husband their liquidity. Official lending figures do not reflect the drying up of other sorts of credit. An informal system by which firms used postdated cheques to pay for supplies has also broken down. Firms complain that the government is slow to pay value-added-tax (VAT) rebates, making the liquidity shortage worse. While public opinion also still favors the euro with more than 70% of Greeks say they want to stay in the single currency, from where will Greece get the breathing-room it needs to right its economy? It has to convince its rescuers that they are not throwing good money after bad. A deal on private-sector losses is only a first step; it seems likely that the euro zone will also have to stump up more money than expected to keep Greece going.

There is huge pressure for the Greek political leaders to agree a deal but a package of cuts and reforms would go down very badly with an austerity weary Greek nation. Some of the proposed ideas include cutting minimum wage by 22%, reducing supplementary pensions by 15% and possibly basic pensions as well, and cutting 15,000 public sector jobs by the end of 2012. Oh yes, and after they have done all that, those same Greek politicians may have to agree, at Germany's request, to let the new money go into an account with a big EU-IMF padlock on it, marked: "Use first for paying off bondholders. Payments to Greek government itself only under advisement." You can imagine how much Greek voters would love that.

If the Greek government does not sign up to all this, it is difficult to see how Greece avoids a formal sovereign default in the next few weeks. European officials are said to be "exasperated" with all the delays. But they cannot be entirely surprised. If I were a Greek politician, faced with these options, I'd be pretty keen to put off any agreement  as protesters gather in the streets and outside parliament in Athens. Eurozone ministers insist  that the Greek coalition gives "strong political assurances" on the implementation of this "program" as the world looks on. It is clear that Greece cannot service its huge debt, we must face reality and our fears that a default could endanger Europe's financial stability and even lead to a break-up of  the Eurozone.

THE  2/13/2012 UPDATE

Trips that I have made to Greece over the years confirm that it is a lovely but very poor country where the fastest growing occupation may be that as a pick-pocket in Athens. As I write this Greeks are rioting in the streets. The economy has ground to a halt. The most recent austerity measures have been passed that will allow the next phase of the bailout to move forward, but passed not without a cost.

This is not, and should not be a surprise or a reason for celebration as members were pressed hard to pass the package under the concept of "vote for the awful or be prepared for worse". About 40 of the elected members of the Greek Parliament have been "expelled" because they would not vote for the austerity package. Point is these austerity measures will not be supported by the masses

Little coverage by the media of  the massive protest in Portugal is making the airwaves. Is this a glimpse of  what democracy will look like across the world in coming years? Another circus, a farce, a sham, lie stacked upon lie, this a another gimmick, we are seeing the can is again being kicked down the road. It seems our whole "system" is a lie and that is a fact. Democracy is being redefined to mean "they will do with us what ever they want to."
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