Posts Tagged ‘greek fiscal crisis’

Greek Debt and Fiscal Crisis Gets Steadily Worse Amid a Sea of Deception

April 22nd, 2010 Comments off

If you thought the revised Greek government fiscal deficit projection for 2009 was disastrous at 12.3% of GDP, fasten your seat belt and hold onto your hat. As awful as that  figure was when Prime Minster George Papandreou revealed that the previous government in Athens had deliberately lied about the deficit so that Greece would be admitted into the Eurozone, in retrospect the powers that be in Brussels, joined by the IMF, wish to God that 12.3% was the number. Now, we learn, the actual deficit figures are even worse, though nobody can be certain at this point how bad they really are.

Eurostat, the statistical department of the EU, has released its own evaluation of Greece’s fiscal reality, and has concluded that, at a minimum, the actual deficit to GDP accrued by Athens in 2009 was 13.6% and might even be as high as 14.1%. Due to deliberate bookkeeping chicanery by previous Greek governments, apparently facilitated at least in some measure by the unique financial engineering of Goldman Sachs, the true state of Greek fiscal reality is hidden by a thick layer of artfully contrived opacity.

In the light of this latest revelation, courtesy of Eurostat, yields on Greek government bonds continue their upward climb. For example, yields on ten year Greek bonds now exceed 9%, nearly six hundred basis points higher than the equivalent bonds being offered by Germany. Clearly, the sovereign debt market is far from reassured by the latest version of the ever-changing Greek bailout package, which in its latest manifestation was cobbled together by the Euzozone countries and the IMF.

In response to the ever-worsening truth now emerging about how dire the Greek debt crisis really is, the ratings agencies are again weighing in with a downgrade of Greek sovereign debt. Moody’s has lowered its rating on Greece by  another notch, and likely the other ratings agencies will soon weigh in. This will inevitably further expand the spread in bond yields, and only add to the complication of even a short-term bailout.

When Lehman Brothers collapsed in September of 2008, there was an immediate freeze in the global credit market, reflecting acute distrust by counterparties spooked by misleading financial representations by major investment firms, especially with regard to mortgage backed securities. The latest revelations concerning the Greek fiscal crisis point to a similar phenomenon that is increasingly likely. As the sovereign debt crisis currently afflicting Greece not only worsens but spreads to other countries with large deficit to GDP correlations, the risk of a Lehman Brothers type scenario with respect to the sovereign debt market becomes increasingly probable, with one important difference.

When Lehman Bothers collapsed and credit markets froze, sovereigns borrowed massively and bailed out their financial systems. However, if this time sovereigns  are the actors frozen out of the credit market, who bails them out? Answer than one, Ben Bernanke and Timothy Geithner.

Eurozone Sovereign Debt Crisis a Growing Global Danger

February 14th, 2010 Comments off

In my book, “Global Economic Forecast 2010-2015: Recession Into Depression,” I project that a growing sovereign fiscal crisis will transform the current Great Recession into a synchronized global depression. The events currently transpiring in the Eurozone are early indicators that my forecast is on track.
At the recent summit of European Union leaders in Brussels, which included the head of the European Central Bank, the PR spin doctors released what can best be described as ambiguity in the form of a communiqué, offering unspecified assurances that the Eurozone’s major actors will not permit Greece to succumb to its current sovereign debt crisis. The hope was that the markets would buy this assurance, thus preventing a further slide in the euro.

Not only are the markets, at least terms of the euro’s relative value, not being reassured by the happy talk that emanated out of Brussels; upon his return to Athens, Greek Prime Minister George Papandreou  was harshly critical at the lukewarm words of EU reassurance. He said, “in the battle against the impressions and the psychology of the market, it was at the very least timid, ” in referring to the EU communiqué.

The bottom line is that without a massive bailout by the big guns in the Eurozone, in particular Germany and France, Greece faces fiscal collapse, which in turn will prove destructive to the whole Eurozone. However, if indeed Greece is bailed out, a host of other insolvent EU members using the euro will be lining up for their bailouts. Even ignoring the feelings of the German and French taxpayers (which is not politically tenable) there simply is not fiscal capacity within the Eurozone to backstop the other potential sovereign basket cases.

I foresee no possible scenario that allows for a soft landing from this escalating sovereign fiscal and debt crisis.

Greek Debt Crisis May Be Canary in the Coal Mine For Eurozone

February 10th, 2010 Comments off

Greece is in the midst of its worst fiscal crisis since the end of World War II, with a budget deficit now officially stated as being 12.7% of GDP. However, given the past shenanigans when it comes to government bookkeeping in Athens, it would not surprise many if the true deficit ratio to GDP is even higher than currently admitted. The Greek government cannot employ monetary policy as a means to inflate down the value of its national debt, as it is part of the Eurozone. The primary policy option it has left is reducing its budget to sustainable levels, but that would require sacrifices on the part of the population that would likely lead to social disintegration on a massive scale. Already, mass waves of strikes are being planned, in protest at austerity measures being promised by Greek politicians.

Athens is hoping and praying that the wealthier and less profligate members of the Eurozone will bailout Greece, reducing the level of austerity that will be imposed on Greek citizens. Greek political circles clearly hope that the systemic risk posed to the entire European monetary union by its fiscal crisis will compel German and French politicians in particular to swallow the risk of moral hazard, and have their taxpayers bailout Greece. The news that the President of the European Central Bank, Jean Claude Trichet, will be attending an emergency European summit on February 11 in Brussels sent stock markets around the globe soaring, in the hope that Germany and France will bailout Greece. It should not surprise anyone at this stage in the global economic crisis that the best news for investors seems to be taxpayer funded bailouts, as opposed to real economic progress.

The speculation is that the ECB and key Eurozone actors will capitulate, and sacrifice their concern over moral hazard for the sake of preserving the euro. However, this is at best short-term thinking. The fiscal catastrophe Greece finds itself in today, and which Iceland has been experiencing for more than a year, threatens many other European countries. Spain, Portugal, Italy and Ireland, not to mention Eastern Europe and the UK, are all wrestling with exploding levels of sovereign debt. Even if the Eurozone political leaders and the ECB cobble together a bailout of Greece, they simply lack the financial resources to bailout the next wave of European sovereigns that will feel the wrath of a savage fiscal crisis that is actually being made worse by the cumulative taxpayer liabilities that are now expanding towards infinity.