Signs All Bad For Greece

Includes: GREK, NBGGY
by: Markos Kaminis

The latest days' news wire has been full of bad signs for Greece. While you have to infer a bit and see implications to developments in order to say so, it's not too far a reach to see what could be stewing for Greece this winter is not a warming trend.

The latest omen came last week, when negotiations broke off between the Greek government and private bondholders. The effort is geared to liquidate about half of Greece's private debt or 100 billion euros' worth at the cost of the bondholders. It's a lesser evil choice for the bondholders, which is only acceptable because it may help preserve the remaining portion of their investment in or loans to Greece.

This very important effort for Greece's recovery is now also a critical step for its short-term survival. This is because it must be accomplished in order for Greece to qualify for its next tranche of aid funding from the international community. Representatives of the bondholders stated that they were stepping away in order to "pause for reflection." The quandary is created because of math and capital markets, as the Greeks are really seeking more than the 50% cut discussed, because the effective market value of the bonds will likely drop immediately when the bond swap takes place. That said, if Greece recovers, the contract value should be approximated by market interest.

Clearly, if Greece defaults, bondholders will be left with empty hands, so Greece does have some negotiating power. However, the bondholders also know that Greece wants to avoid default and that they are needed for that process. It seems to me that whatever will satisfy the IMF is what should be adopted at this point. The reaction of stocks Friday seemed to show indifference, as the Athex Composite rose 2%. The National Bank of Greece (NBG) gained 1.7% and Coca-Cola Hellenic Bottling (CCH) rose 1.6%.

Compounding the problem, Greece just reported that its budget deficit expanded in 2011 by 0.8%, to 21.64 billion euros. It was a bit better than the government's revised forecast, but its details reflect fundamental obstacles to Greece's economic and fiscal recovery. Despite all the government's new taxes to lift revenues, and its expense reduction efforts, the budget still widened. That was because personal income tax collection actually softened and its ordinary budget revenue generation fell by 1.7%. Meanwhile, despite its cost cutting efforts, spending rose by 2.8% on the significantly increased debt service costs that plague the embattled nation. There should be no surprise here for readers of my column, as I've argued readily against the logic of harsh short-sighted austerity.

The budget deficit is supposed to have shrunk to a smaller portion of Greece's gross domestic product. How you get there with GDP declining and the deficit rising defies my understanding. Maybe it's European math. In any event, there's very little here to reassure the troika or the capital markets that Greece is making progress, and so the pressure remains.

It seems to me, given Standard & Poor's sovereign debt slashing of much of the euro zone Friday, that it is hedging if not forecasting Greek default or some sort of unsavory result. Nine countries were downgraded in total, with the most damage done to France and Austria, which lost their top grades. Germany was spared, with its constitutional construct cited as a safety against its government's potential for making poor decisions.

This coming week, the IMF resumes debt talks with Greece, sending a "mission team" to Athens as part of the review process. All the above discussed matters will be reviewed. Perhaps the presence of the IMF and renewed understanding of the criticality of "private sector involvement" will bring a conciliatory and cooperative tone and progress for Greece. However, the signs are bad.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.