Greek Debt Crisis
There are financial storm clouds on the horizon. In fact, what’s happening right now, has the potential of unraveling the entire world financial system.
In simple terms, a game of chicken is playing out before our eyes. Neither side seems willing to compromise. On the one side is Greece being led by a new government who knows the current path being demanded of them will lead to many years, perhaps decades, of punishing depression for the people of Greece. On the other side is the EU, which worries that if Greece “gets away” with debt restructuring, other weak countries in the Eurozone will want to as well.
What’s the backstory, how did it reach this breaking point, and why should it concern us?
Back in May of 2010, the Eurozone countries, the European Central Bank, and the International Monetary Fund, launched a €100 billion bailout loan to rescue Greece from sovereign default and cover its financial needs through June of 2013. This was conditional on Greece’s agreement to certain “austerity measures,” meaning structural reforms and privatization of various government assets.
However, just one year later, a worsened recession along with a delayed implementation by the Greek government of the agreed conditions in the bailout program revealed the need for Greece to receive a second bailout worth €130 billion (now also including a bank recapitalization package worth €48bn), while all private creditors holding Greek government bonds were required at the same time to sign a deal accepting extended maturities, lower interest rates, and a 53.5% face value loss. That means a total of €240 billion was to be transferred to Greece throughout the period from May 2010 until December 2014.
Due to a worsened recession and continued delay of implementation of the conditions in the bailout program, Greece was provided with a last round of debt relief measures, while IMF extended its support with an extra €8.2bn of loans to be transferred during the period from January 2015 until March 2016.
Against this backdrop, Yanis Varoufakis, the new Greek finance minister declares, “I’m the finance minister of a bankrupt country,” and is currently demanding his Eurozone creditors provide relief to Greece’s staggering debt burden while also relaxing the terms of five years of austerity.
Greek banks have hemorrhaged deposits since December, when a Syriza victory was seen as increasingly likely. Just two weeks ago, Citi Bank economists cited estimates suggesting that around 3 billion euros ($3.4 billion) flew out of Greek banks in December, followed by a further 8 billion euros in January.
According to Bloomberg:
“Net outflows in December totaled about 3 billion euros ($3.65 billion), according to four bankers who asked not to be named because the data are preliminary. Deposits in November fell by 222 million euros from the previous month to 164.3 billion euros, the Bank of Greece said yesterday in Athens.”
CNBC also reports:
“Following the victory of anti-austerity Syriza in the polls at the weekend, traders are seriously considering the possibility of a default on Greece’s sovereign debt. It’s not the first time Greece has defaulted—the first one was around 450 BC and, more recently, private bond-holders were forced to take a haircut on their debt back in 2012. But Greece’s banks are ill-prepared for another one.”
As if all of this wasn’t bad enough, Greece may be only weeks away from running out of money.
Note what MarketWatch is reporting:
Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., reminded clients in a recent note that Greece’s debt schedule eventually leads to a scenario that ends in a government shutdown and/or default, possibly within a matter of weeks.
“Greece will end up with a default, possibly in the form of a restructuring with a sizable haircut, but possibly in the shape of an outright default,” Weinberg wrote. “The only question is how soon. To believe otherwise cannot possibly be more than wishful thinking.”
Pinning down the exact date when the government would run out of cash under current circumstances is difficult due to a lack of daily data on its exact cash position. But Weinberg says that, unofficially, the government was down to 2 billion euros ($2.3 billion) in mid-January.
In order to finance all the repayments, Greece would have to roll over the outstanding T-bills, run a balanced budget on at least a cash basis, and sell €27.6 billion in new bonds, Weinberg says.
Despite all of this pressure and the inability of the Greek government to fund itself, it seems that the Syriza party is sticking to its course:
Here’s what Bloomberg is reporting:
Greece held fast to demands to roll back austerity as the European Central Bank turned up the heat before Finance Minister Yanis Varoufakis met one of his main antagonists, German counterpart Wolfgang Schaeuble.
The encounter at 12:30 p.m. in Berlin came hours after Greece lost a critical funding artery when the ECB restricted loans to its financial system. That raised pressure on the 10-day-old government to yield to German-led austerity demands to stay in the euro zone. Shares of Greek banks plummeted.
The government “remains unwavering in the goals of its social salvation program, approved by the vote of the Greek people,” according to a Finance Ministry statement issued overnight. Its aim is “coming up with a European policy that will definitively put an end to the now self-perpetuating crisis of the Greek social economy.”
Where is this all heading? And why should we care? If you’re a Greek citizen, you obviously have a direct interest in how this brinksmanship plays out. And if you live in the European Union, you should be watching closely to see this plays out for the rest for the Eurozone. But why should this Greek drama concern the rest of us?
The sovereign insolvency at the heart of the Greece crisis is not unique nor isolated. Most other countries around the globe share the same terminal condition of having too much debt. Greece, a small player, is simply succumbing earlier than they are.
And as Greece proves you can’t get blood from a stone, other countries will similarly demonstrate their debts cannot be repaid in full, either. And losses will eventually — inevitably — have to be taken. And when that happens, watch out.
In my next article, I’ll continue with a discussion about how in today’s over-indebted, over-leveraged, and intensely interconnected global economy, the losses created by sovereign insolvencies will spark a cascade of mortal shocks across the world’s financial system. Some countries will fall into deflationary depressions while others will experience roaring inflation. Massive failures will ripple across industries and vast amounts of wealth will be transferred from the hands of the many into the few well-positioned in advance.
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To your trading success,
-Dustin Pass
