Bailouts And Interest Expense For Greece's Debt Crisis

Includes: DIA, FXE, GREK, QQQ, SPY
by: Randy Lacen

There is still no particular measure in place for the European Union to take further action and quell the extending debt-to-GDP crisis in Greece. The reality behind the Greek debt crisis today is not solely based on the assumption of getting the Greek nation's debt-to-GDP back under manageable checks and balances. The reality presents the ultimate task of getting Greece to pay its bills on a quarterly basis, regardless if the debt-to-GDP situation could be solved with or without cutting expansion to the sovereign nation.

During the credit crisis back in 2009, Americans were beginning to wonder about what could happen if the United States was unable to keep up with the interest expense on its outstanding debt at only 90-100% of debt-to-GDP. The situation in Greece at the moment is identical. Greek citizens are very concerned about the spike in their country's debt-to-GDP after 2007, where at this point Greece was roughly about .07 cents indebted to its creditors. Prior to that period, the economy of Greece held its debt-to-GDP under the 100% marker between 2003-2004. This event actually increased the case for Greece on a global and macroeconomic scale to become a marketable engine on the open capital markets and gain further interest for expansion from external sources of finance.

What has ultimately come to Greece's demise in accumulating higher public deficits over the last decade, is the ongoing issue of Goldman Sachs helping Greece "cook the books" with faulty derivatives back in 2002. According to a business report from South Africa's IOL breaking news website in March of 2012, "Goldman Sachs approached Greece in 2002 when Greece was already cooking the books. Now, to qualify for admission to the EU in 2001, the country had to achieve a budget deficit of not more than 3 per cent of gross domestic product (OTC:GDP) in line with the Maastricht requirements." A Sarbanes Oxley Blog continued this discussion about Greece and addressed the issue of Goldman and faulty accounting practices head on: "To get around that, Goldman Sachs devised a whole lot of complex financial instruments in the form of cross-currency swaps where Greek government debt, issued in dollars and yen, was swapped for euro debt for a certain period." "The swaps were to be exchanged back into the original currencies at a later date. But by pushing it out into the future, the swaps never showed up in the Greek debt statistics which in turn hid and obscured the extent of the Greek budget deficit." As a result, back in 2002, the Greek deficit was calculated at only 1.2 per cent of GDP which then got Greece into the Euro currency. But ultimately, the reality was that Goldman Sachs had essentially helped Greece cheat on its financial reporting to the European Union as its deficit was much higher than the required 3 per cent by the Maastricht.

At the moment, Greece has a total government net debt for fiscal 2012 of 362.897 billion euros. The interest expense on Greece's net outstanding debt is taken into account, after the total government net debt as a percentage of GDP. This figure of 157.654% is directly correlated to the outstanding runaway debt-to-GDP that is plaguing Greece at the moment, and the 362.897 billion euro gap to fill for fiscal 2012 has been relatively cut in half at the end of January 2012. On Saturday, January 28, 2012, investors holding 206 billion euros in Greek bonds, or about $272 billion, exchanged them for new Greek bonds with half the face value. This deal ultimately reduced Greece's annual interest expense from about 10 billion euros to only about 4 billion euros year over year. When these new issuances mature, Greece will only have to pay its bondholders 103 billion euros which accounts for only half of the original 206 billion. Private investors hold two-thirds of Greece's debt, which is equal to an unsustainable 160 percent of its annual debt-to-GDP. By just restructuring the interest expense on its debt, Greece hopes to make this debt-to-GDP gap a more manageable 120 percent by decade's end.

Government revenue in general for Greece in 2012, is said to account for 42.196% of Greek GDP but is consistently coming off its highest levels dating back to 2011. This means that Greece's second bailout can make Greece's debt sustainable and compensate for sliding government revenue in Greece, but Athens will have to stick firmly to the tough policies it has already agreed to until 2030 and Athens may need more money after 2014. The analysis, prepared by the European Commission, the European Central Bank and the International Monetary Fund for euro zone finance ministers and obtained by Reuters, shows that Greek bailouts in addition to the private debt deal could cause Greek debt to fall to 116.5% of GDP in 2020, and 88% of GDP by 2030. The New York Times and Reuters reports that the restructuring of privately held Greek bonds would help to initially reduce the debt burden in Greece, but that this debt would only bounce back again to 164 percent of GDP in 2013 due to the shrinking economy. The New York Times/Reuters, however, keep on a more positive note for all the effort to help out in Greece: "Once the fiscal adjustment is complete, growth has been restored, and privatization receipts are accruing, steady reductions of the debt ratio commence. Greece would have to maintain good policies through 2030 to reduce the ratio below 100 percent of G.D.P."

Fiscal year 2012 gross domestic product for Greece is set at 230.185 billion euros. The analysis by Reuters forecasts that after another year of recession this year, the Greek economy will stabilize in 2013 and see a mild recovery in 2014-2017. Longer-term, the Greek economy is set to grow at a steady rate of 2.5 percent annually after 2017. Fitch also raised Greece's debt rating to B-, or out of default after the news spread that there is hope still for Greece. Now it is up to investors across the globe and the free-market capitalist system to continue upward momentum, as far as creating global business is concerned. Investors around the world need to entertain the idea of a "V-Shaped" recovery for Greece. At the end of the day, there is no telling when the overall economy will improve and when exactly the Dow Jones Industrial Average will trade above 14,000, once again here in the United States. Investors will have to continue to bet on the fundamentals improving out of the Greek economy as the market will have to continue to wait and see what happens next in Greece. The Greek economy still being "accident prone" worries the majority of market participants day after day, as well as the other periphery countries within the Euro currency. But investors are staying positive and are still buying into this rally.

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

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