Is the Greek Drama Over Now That Money Has Been Promised, Again?

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by: Reggie Middleton
I was having a conversation with a very respectable young man from the press, and he asked me the following question, "Last week, I remember you saying that you thought Greece would default and that could put Europe into recession or worse. Does the fact that Greece was able to raise debt in the past few days change your view on that?"

I thought I would post my answer to the blog, for I want my views on this to be crystal clear.

Answer: Absolutely not! Greece has three primary problems.

  1. One, it has cash flow issues. The recent bailout "promise" potentially alleviates the cash flow issues, and at the same time exacerbates them. Although the 5% rate promise that was offered is less than the market is charging, it is still more than what will put Greece on sustainable footing. In addition, since this (4th) bailout "promise" was announced (and still has to be voted on), Greek banks, stocks and bonds have tanked further, as well as Greece being put on rating watch negative by the ratings agencies (one of the very few times we agree on something). I warned months ago about the very banks that have collapsed (price-wise), stating that they were virtually guaranteed to see hard times. See the Greek banking attachment included below (banks exposed to central and eastern Europe and the Greek Banking Fundamental tear sheet). I warned this time last year about the Spanish banks. We shall see if that warning bears fruit as well.
  2. The second problem is that it is insolvent; it spends more than it makes. Its liabilities (when combining on and off balance sheet items) are more than its assets. Thus there is a huge capital hole. This hole needs to be filled with something that will not make it any larger. Offering a highly indebted entity something that will make it more indebted is not a viable or sustainable solution to the problem, it is just kicking the can down the road.
  3. Third, Greece has a significant, and deservedly so, credibility issue. It has been caught lying too often. To be honest, many other nations have the exact same issues as Greece, but many of them have stronger economies and are able to print their own money, hence that flexibility will allow them to kick the can down the road further than Greece can. Attached below are other Country analysis, and pay particular attention to these two posts: Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware! and Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!

Below you can find the entire public version of the sovereign debt crisis. I will attempt to release the finale of the Sovereign debt crisis research which will show exactly how each country is linked into another, on a global basis. Thus, one can visualize how a Greece or Spain or UK default can potentially bring down the whole system. It was an immense amount of work, and also something that one will be very hard pressed to find in the mainstream media.

In the meantime, Bloomberg reports that the bond markets (which have been considerably more rational and realistic than the equity markets 12 months and counting) unequivocally agree with me: Greek Bonds Show EU Rescue Package May Be Tapped as Borrowing Costs Rise [my thoughts in bold]:

April 15 (Bloomberg) -- Greek bonds show the nation may have to tap a 45 billion-euro ($61 billion) international bailout to convince investors it can avoid a default.

The 10-year bonds were little changed today after declining the past two days. The yield premium investors demand to hold the securities instead of benchmark German bunds rose above 400 basis points for the first time since euro-region finance ministers announced the aid package last weekend...

“There are concerns that the money will not be available,” said Toby Nangle, who helps oversee 46 billion euros as director of asset-allocation research at Baring Investment Services Ltd. in London. “There are people who are willing to place their own money at risk in anticipation of this thing not going through.”

Finance ministers said on April 11 the EU will provide Greece with 30 billion euros of three-year loans at an interest rate of about 5 percent if the nation requests the cash. The International Monetary Fund would provide another 15 billion euros. The agreement came after earlier pledges failed to convince investors that the government is able to narrow a budget deficit that is more than four times the EU’s limit for members.

... Pacific Investment Management Co., which owns the world’s largest bond fund, said this week it’s not yet ready to buy Greek bonds. BlackRock Inc., the world’s biggest asset manager, said that donor countries need to demonstrate they can withstand a backlash from their citizens.

“I don’t think Greece would go as far as waiting to be seen as failing in the market, Christopher Pryce, a director at Fitch Ratings in London, said yesterday. “They would prefer to go to the EU. It could well be a week or two. I don’t think they could leave it much longer than that.” Fitch cut Greece two levels on April 9 to BBB-, one rung above speculative grade.

The yield on Greek two-year notes fell the most on record the day after the aid package was announced before paring more than half that decline the following two days. It rose to 7.83 percent on April 8, the highest since the euro’s debut in 1999, according to Bloomberg generic prices. The yield was at 6.86 percent at 8:19 a.m. in London today.

... The cost of protecting against a default in Greek debt for five years surged 56 basis points to 436 basis points yesterday, credit-default swaps showed, compared with a record closing price of 443.5 on April 8. It narrowed to 431.5 basis points today.

The German Finance Ministry would seek “legislative authority” on the loans should Greece call for aid,bMichael Offer, a spokesman, told reporters in Berlin yesterday. The lower house of parliament “would of course have to endorse such authority,” he said, without saying how long it might take. [This short paragraph says it all. If they haven't sought legislative authority already, then they aren't taking this seriously. Greece will most likely need the money immediately when (not if, but when] they call upon it. To wait for legislative approval and a likely political/legal battle will simply, and unnecessarily, disadvantage Greece from a timing perspective].

France, which would be the second-largest aid contributor after Germany, would probably be able to obtain parliamentary approval to raise the funds within a week, Finance Minister Christine Lagarde said on April 13 [but why not do it now?]. Ireland will pass legislation on Greek aid within the next couple of months, Finance Minister Brian Lenihan said April 12 [Sure they will. See The BoomBustBlog Ireland Fiscal Analysis is Now Available, and Just in Time!, Ireland may very well need one of these packages itself!].

“If legislation fails in one parliament you may find time is running out rather quickly,” said David Schnautz, a fixed- income strategist at Commerzbank AG in London. “You don’t have that much time for trial and error.” [My point, exactly! And everybody knows this. Greece is being put in the political test tube on purpose and unnecessarily. They are playing games!]

See "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! and Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! for more on my take on Greece. Contact the authors of the Bloomberg story excerpted above to share your opinions of my analysis with them.

Reporter on this Bloomberg story: in London at mbrown42@bloomberg.net

The Pan-European Sovereign Debt Crisis, to date:

  1. The Coming Pan-European Sovereign Debt Crisis - introduced the crisis and identified it as a pan-European problem, not a localized one.
  2. What Country is Next in the Coming Pan-European Sovereign Debt Crisis? - illustrates the potential for the domino effect
  3. The Pan-European Sovereign Debt Crisis: If I Were to Short Any Country, What Country Would That Be.. - attempts to illustrate the highly interdependent weaknesses in Europe's sovereign nations can affect even the perceived "stronger" nations.
  4. The Coming Pan-European Soverign Debt Crisis, Pt 4: The Spread to Western European Countries
  5. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
  6. The Beginning of the Endgame is Coming???
  7. I Think It's Confirmed, Greece Will Be the First Domino to Fall
  8. Smoking Swap Guns Are Beginning to Litter EuroLand, Sovereign Debt Buyer Beware!
  9. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
  10. "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire!
  11. Germany Finally Comes Out and Says, "We're Not Touching Greece" - Well, Sort of...
  12. The Greece and the Greek Banks Get the Word "First" Etched on the Side of Their Domino
  13. As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis
  14. Once You Catch a Few EU Countries "Stretching the Truth", Why Should You Trust the Rest?
  15. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!
  16. Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe
  17. Moody's Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks
  18. The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!
  19. How BoomBustBlog Research Intersects with That of the IMF: Greece in the Spotlight
  20. Grecian News and its Relevance to My Analysis
  21. A Summary and Related Thoughts on the IMF's "Strategies for Fiscal Consolidation in the Post-Crisis
  22. Euro-Gossip Debunked, Courtesy of Trichet and the IMF!
  23. Greek Soap Opera Update: Back to the Bailout That Was Never Needed?

Disclosure: Short European banks