As illustrated in Why The Taxpaying Populace Of Greece Better Get Some Grease, a visual representation of Greeece's gross government debt easily demonstrates that their problems are structural in nature, and not cyclical...
What does this mean? Well, first of all, bailout loans only help in cyclical situations where the loan recipient is in a downtun in its ecconomic cycle, but expects upticks to allow it to earn its way out of both its current economc situation and the added debt service from the bailout loans. As you can see from the chart above, Greece's expenditures have literally been a permanent fixture hanging considerably above its revenue, considerably above. For twenty years, Greece has been kicking the inevitable can down the road. Now, after a global credit implosion, with:
- asset values plunging
- and economic activity stagnating
- with the promise of even more stagnation down the pike in the form of intense austerity programs
- material push back from the labor forces, unions, and the few legit taxpayers there are
- and collapsed asset values that were perpetually overstated in and attempt to sell to fill the void left by the credit crisis
- an insolvent banking system stuffed to the gills with bonds trading at 50 cents on the dollar held at par at 40x leverage, NPAs bulging and mismarked,
- rates about to spike
- trading partners undergoing their own austerity programs reducing exports and tourism
- and most importantly tens, if not hundreds of billions of Euro in bailout funds with collateral strings attached...
Greece is somehow expected to earn its way out of this 20 year hole that was made lethal by the Pan-European Sovereign Debt Crisis. Does anyone really think this will happen, or is Greece getting set up to have its assets confiscated at firesale prices. Is the Greek culture up for highly discunted volume sale, Walmart style?
A Quick Backgrounder
Advanced economies continue to face challenges as they deal with the juxtaposition of a huge public finances, mounting debt rollovers, a still-impaired financial sector at a time when economic growth is at snail’s pace, and unemployment levels & social unrest are at unprecedented levels. Expansionary fiscal policy in the wake of the financial crisis has helped banks repair their balance sheet and reduce leverage. Indeed, the public indebtedness has replaced private indebtedness. Current budget deficits, partly cyclical were also swollen by policy responses to the crisis, and are large in relation to GDP.
Notable decline in national incomes as a result of slower growth and increased government expenditure, thanks to huge bail out packages, have caused a dramatic deterioration of fiscal positions in many industrial economies. Growth in Public debt is unlikely to be halted any time soon as economic recovery will be slow, tax revenues will be lackluster, and expenditures are expected to continue their march north. Tax revenue is not expected to reach pre-crisis levels sooner as most of the tax revenue was windfall, thanks to the boom in financial, credit, real estate & construction markets. With aging populations many industrial countries are expected to face rising pension and health costs, beyond 2011.
In addition, rising interest rates will exacerbate interest payments. In short, deficits are expected to remain at unsustainable levels not just in the near-term but also in the medium term posing a heightened risk of L-shaped economic scenario in the entire Western world. In addition, the deterioration of fiscal balances could also impede central banks’ task to keep inflation at stable levels. The ultimate cost of cleaning up the financial system is still unknown, but we do know this – it is significantly larger than nearly all policy makers anticipated and it morphs and transforms as if it were a sentient being attempting to avoid capture.
Banks in several large and strategically pertinent countries are still fragile while being exposed to volatile financial markets and a deteriorating commercial real estate market at the same time that global interest rates are poised to enter a nearly unprecedented period of volatility. This “perfect storm” of ingredients leave the FICC businesses of these fragile banks open to significant ruin, as detailed in our article The Next Step in the Bank Implosion Cycle???
To make matters worse, the financial intertwining of European economies over the past decade has only increased the costs of such spill over. The dominant theme within the credit market currently is the fears over the solvency of peripheral European sovereign.
The market focus on $12bn debt roll over by Greece is myopic. Even if Greece is able to restructure $12bn of debt, the next trance would not be more than a year away, and an even greater need the following year, with a greater portion of debt the year after that. Overall, Greece has $55bn of debt maturing over the next 12 months and $195bn over next five years. To give a perspective, Greece has to roll over debt equating to 17% of its GDP (a number which is most likely overstated) over next 12 months compared with 14% for Spain, 12% for Portugal and 6% for Ireland. Total debt rollover over the next five years is c60% of GDP for Greece, 43% for Portugal, 34% for Spain and 24% for Ireland.
CNBC reports European Banks Increasingly Angry Over Stress Tests.
Yer damn skippy. Look what really happens when Greece needs the Grease,
As excerpted from It Should Be Obvious To Many That The Risk Of Defaulting Sovereign Bonds Can Spark A European Banking Crisis
If you think those charts look painful, imagine if the Maastricht treaty was actually respected. Our models haven’t pushed passed 80% debt to GDP, but if you were to put the treaty’s debt ceiling in you would see the very definition of contagion. The following chart represents the first order consequences of a 62% haircut on Greek debt…
Despite the fact that the only way out of this is a true default and destruction of the debt capital proffered during profligate times, TPTB will try their best to find a workaround, because what's best for the people of Greece, Portugal, Ireland and as we have already seen - Iceland, is absolute anathema to the bankers that binged on this stuff at 40x leverage ans sitting on 50% devaluations as we speak. You simply do the math: 40 x (-50%) = what kind of returns? Insolvency, first and foremost!
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