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Was Greece Rescue Futile, and is Portugal Next?

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We met last week with a savvy German investor, one who unlike many of his peers, is well aware of the German bank exposure to Greek and other Club Med debt. He argued that Greece will default within six months.

That view might have seemed extreme a week ago, but as Wolfgang Munchau points out today in the Financial Times, the markets also appear not to be buying what the EU and Greece are selling:

The European Union finally agrees a bail-out, and the much-predicted rally of Greek bonds turns into a rout. A week later, spreads on Greek bonds had reached their highest levels since the outbreak of the crisis. The financial markets have recognised that, bail-out or no bail-out, Greece is in effect broke.

Yves here. Munchau is at least more optimistic than my German contact, since Munchau believes Greece will not default in 2010. But the only difference in their views is of the timing, not the eventual outcome. The austerity programs demanded of Greece are by some measures more than twice as severe as those imposed on Argentina at the turn of this century. And remember, Argentina defaulted:

To avoid long-run insolvency, Greece will need to find a way to stabilise the debt-to-GDP ratio. This would in turn require a multi-annual deficit reduction plan and a programme of structural reforms to raise the potential growth rate. The Greek government has so far presented a one-year plan to cut the deficit from 13 per cent of GDP to about 8.5 per cent. While this sounds ambitious, it is not very credible, as it is based heavily on tax increases, with no structural reforms.

But even if the Greek government were to present a credible long-term stability plan, the risk of default would remain high. This means that some form of debt restructuring is unavoidable. Restructuring is a form of default, except that it is by agreement. It could imply a haircut – an agreed reduction in the value of the outstanding cashflows for bond holders. The Brady bonds of the late 1980s, named after Nicholas Brady, a former US Treasury secretary, worked on a similar principle. An alternative to restructuring would be a debt rescheduling, whereby short and medium-term debt is converted into long-term debt. This would push the significant debt rollover costs to well beyond the adjustment period.

Ambrose Evans-Pritchard turns to Portugal, and argues that while it is in better shape than Greece, it too is at risk, and were Portugal to suffer funding problems too, the eurozone might not survive the test:

The long-drawn saga in Athens can perhaps be deemed a case apart. Greece lied. Its budget deficit was egregious at 16pc of GDP last year on a cash basis. It wasted its EMU windfall, the final chance to bring public debt back from the brink of a compound spiral….

Brussels admitted last week that Portugal’s external accounts have switched from credit in the mid-1990s to a deficit of 109pc of GDP. This has been caused by the incentive structures of EMU itself. “The more broadened access to credit induced a significant reduction in the saving rate, while consumption kept growing faster than GDP. This development led to an increase in Portuguese indebtedness,” it said.
The IMF’s January report said “The large fiscal and external imbalances that arose from the boom in the run-up to adoption of the euro have not been unwound, resulting in the economy becoming heavily indebted and growing banking system vulnerabilities. The longer the imbalance persists, the greater the risk the adjustment will be sudden and disruptive.” The IMF noted the “heavy reliance” of banks on foreign wholesale funding, equal to 40pc of total assets….

Yes, Portugal’s public debt will be 86pc of GDP this year against 124pc for Greece (EC estimates). That is small comfort. Giles Moec from Deutsche Bank said Portugal’s private debt reached 239pc in 2008: Greece was 123pc. Total debt levels matter. The last two years have taught us that private excess lands on the taxpayer one way or another. For Portugal, the figure is now is in the danger zone above 300pc….

Portugal does not face an imminent funding crisis. If Europe’s economy grows briskly, it may be enough to lift the country off the reefs. But one thing seems sure: Germany is not going to bail out any more countries, and the IMF is too small to cover.

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43 comments

  1. Daniel

    were the austerity programs really worse than the programs in Latvia? I’m not an expert, but they have closed all small schools with less than 100 students, closed hospitals, cut the minimum wage, public wages by 35% and cut pensions. Their economy already shrunk more than the USA during the great depression, so I think it could be worse for greece.

    1. NotTimothyGeithner

      It doesn’t matter if its worse or the same. The same actions can be seen generous or mizerly depending on the time and place. The problem is two fold. Can the Greeks actually pay these debts without harming the local economy shrinking what they can pay?

      The other problem is a political one. The average person being effected did everything they were supposed to do and now they are paying for other people’s faults who they don’t necessarily have a lot in common. The Greek billionaire isn’t paying for this. Now you have a break down of a social contract, and things start to get hairy. Revolutions don’t happen because things are bad. They happen when things have been going well and are about to drop or in the aftermath of the drop. The social contract is being broken relatively swiftly.

      Austerity measures work when the Monarch stays in London and the children are sent to the country and the President goes on rations, but when that doesn’t happen, watch out.

  2. ddf

    Bottom line: either the Germans stay in the Eurozone or the Greeks (and other piigs) but not both. For the sake of the EUR, let’s hope it will be the Germans…

  3. Hubert

    I do not think it is an issue of how much any country lied – as they all do. German deficit does also not include banking bailouts past and present; they also stuffed away some Eastern Germany exposure (“Sonderfonds deutsche Einheit” to name one). Neither is it the big issue what Eurostat includes or not includes.

    The issue is a run on the banking system, primarily by locals. As Wall Street devoured itself (feeding on LEH creditors, WaMu creditors, and the Government via Bear Stearns, Citi and AIG) now the time comes for creditors and depositors in PIIGS banks.

    Greece: Small people will take cash instead of deposits – they are used to that.
    Medium wealthy will deposit money with relatives or trusted people in Germany, Vienna or Paris – not Athens.
    Very wealthy people, the families that run Greece, will take out loans at their cousins banks in Greece and buy some assets in London or whereever. They probably already have.

    The Greek banking system will not be refilled by private banks. They might have been stupid, but from now on: not as stupid.

    The question is: How much money is the ECB prepared to fill into this abyss? The Greek banking system, last time I looked, was somewhat south of 600 bn Euros, 20% of it foreign owned.

    Is the ECB /Brussels/Paris/Berlin prepared to backstop 10% of it – 55 bn ? Maybe. After all the money could return.
    20% of it? I do not think so.
    30% of it? not conceivable to me here and now.

    If the Greeks leave their money in Greece, the ECB could roll the loans for some years with some austerity measures succeding there.
    Problem: The Greeks know Greece.

    6 months ? Sounds right to me.

    1. DownSouth

      ► “Very wealthy people, the families that run Greece…”

      Some things never change, no?

      As Carlos Fuentes wrote in regards to 19th-century Latin America:

      In the phase immediately after independence, Britain managed Latin America’s foreign trade: in the latter part of the nineteenth century, the United States came to be the principal partner. However, they employed the same instruments of economic power, namely favorable agreements for their merchants, loans and credits, investment, and the handling of the export economy of minerals, agricultural produce, and natural products required by Anglo-American expansion. A highly privileged local minority served as intermediaries, both for these exports and for the imports of manufactured European and North American goods, which were in demand among the urban population in the interior.
      –Carlos Fuentes, The Buried Mirror

      1. Toby

        I would welcome a book by you on national and international financial crises of the last 300 years, and how they related to usury/interest. You know, for the kids. We’re all economists now!

      2. kievite

        ” A highly privileged local minority served as intermediaries, both for these exports and for the imports of manufactured European and North American goods”

        There is a special term for this minority: “comprador bourgeoisie”.

    1. Hubert

      Yes, and these are semi-official figures.
      We do not know the real ones.

      Just put yourself into the sailing shoes of some Greek shipping oligarch: Either the Greek government is sucessful in raising money and will be taxing you (income AND wealth) very soon
      or
      it is unsucessfull and you get Neo-Drachmas for your Euros.

      So, what exactly would you do? In both cases very simple: Leave the debt in Greece and put the assets abroad.

      1. Tortoise

        Guys, You do not understand Greeks. Most of Greek money has always been abroad — which makes sense since in fact it is money generated mostly abroad. That was true well before there was a hint of this crisis. Part of the income from this money flows constantly into Greece to sustain the opulent lifestyle of the rich and a crisis will not affect that. Go check how many yachts and other sailing boats there are in the marinas of Attica and then we can talk. (This does not mean that the economy is strong but that a lot of well-off people like to live and spend in Greece.) Also, on fresh news, Aegean Air reports that the prices it has to pay in Athens to accommodate passengers is 250 euros per room per night, more than it has to pay in Frankfurt. Does this sound like a place in the middle of a catastrophic economic crisis?

        One reason Greek money is buying London condominiums now is what you might have expected: good prices. And of course cash is involved. Did you expect that they would reveal their Cayman Islands accounts?

        1. Hubert

          Thanks Tortoise for input.
          No surprise on my side.
          Any guesses how long the banking system will hold there and how much might run out ?

          1. Tortoise

            Hubert,

            The stability of the banking system — in fact, any banking system — depends on perception that is correlated with reality. However, occasionally, perception and reality diverge. If you hear screams of bloody fire in the middle of a crowded theater, then panic ensues and people die whether there is a fire or not. That’s the long-winded way to say that it is inherently impossible to predict how long Greek banks will last. Every banking system can go unstable if there is a “run on the bank(-ing system)”.

            Nevertheless, let us look at some facts: Greek households have mortgages worth about 80 bil euros and other consumer and miscellaneous loans of about 40 bil euros. That’s not a lot. For comparison purposes, household savings in banks come up to about 180 bil euros. I do not know how many bonds Greek households have. (Factoid: In 2001, most government bonds belonged to Greeks, domestically. See http://www.mof-glk.gr/en/publications/debt/bull_21_eng.pdf . But the debt was relatively small then. A government official, the infamous deputy premier minister, stated about a month ago that a significant percentage of bonds still belongs to Greeks.)

            Objectively, I do not see any imminent threat on the banking system from households that default BUT if enough people decide that the system is bound to fail, this may prove to be a self fulfilling prophesy. Also, if the government decides to default, everyone will suffer a big hit — which may be why the government will try not to default. Whether it will be successful is another matter.

          2. a

            “Greek households have mortgages worth about 80 bil euros and other consumer and miscellaneous loans of about 40 bil euros. That’s not a lot. For comparison purposes, household savings in banks come up to about 180 bil euros. I do not know how many bonds Greek households have.”

            Apparently they’re on the hook for 180 bil euros worth. Greek households have deposited their money in Greek banks, which have taken that money and bought Greek government bonds. Just because depositors think and hope that their money is safely stored in the vaults, doesn’t mean that it is.

  4. ZA

    In the Argentina situation, the only people who managed to preserve any assets at all were the ones who panicked early.

    1. DownSouth

      A series of additional measures for the purpose of restructuring a rapidly increasing foreign debt could do nothing to stop the drain of domestic funds, pertaining in particular to the establishment. New funds available could not stop the irresistible drain of funds until in late November 2001 the ‘corralito’ was created, thus prohibiting the withdrawal of deposits – mostly of small operators – from the banking system. This was the drop that overflowed the cup. The rebellion of 19 and 20 December precipitated the fall of Cavallo and De la Rúa. The latter had lasted only two years in office, but he will go down in history as being one of the most inept of all presidents in Argentine history, and also one responsible for the deaths of at least 40 people due to repression.

      During the short period of Rodríguez Saa as president, default was declared; in reality this was a default on private foreign debt. Argentina continued servicing her financial obligations with the IMF and other international financial organizations. In early 2002 the peso was devalued. Convertibility finally came to an end. At that moment pressures of all kinds began to be exerted on government. Devaluation went along with the pesification of deposits and loans. But this pesification was asymmetrical. Deposits were pesified at a rate of 1.40 to the dollar but bank loans were considered at 1 peso per dollar. However banks had already withdrawn their funds from the country or had contracted debts with their home offices. Foreign banks did not honor local deposits, despite the fact that previous presidents of the Argentine Central Bank had declared that the financial system was ‘solid’ due basically to the fact that the bulk of the banking system by then was foreign owned, and that the head offices of these banks would surely honor local deposits. This, of course, did not occur, and it severely questioned the legitimacy of the banking system as a whole.

      [...]

      Thus, Argentine society was substantially transformed in comparison with what it was 20 years before. Income distribution worsened tremendously, access to food, employment, health, housing and security have been trampled upon, as a consequence of the chaos created by what could be termed a system of ‘legal’ but not necessarily ‘legitimate’ macroeconomic looting, in the wake of the so-called process of financial valorization. A system that had given priority to large economic groups and conglomerates thus led to the wholesale transfer of income and wealth to these interests. The rest of society has remained devastated, lacking food, health, education, security, adequate housing, etc. This can be also visualized as part of a vast process whereby the state adopted a series of transfer mechanisms of income and wealth in favor of these ‘privileged’ sectors. These measures did not only serve to increase growth and accumulation – on the contrary, the performance of the economy in recent years has been notorious – but the social consequences and social costs they caused has created an enormous predicament for the future of Argentine society.
      http://www.hawaii.edu/hivandaids/Rise_and_Collapse_of_Neoliberalism_in_Argentina__The_Role_of_Economic_Groups.pdf

      1. kievite

        A system that had given priority to large economic groups and conglomerates thus led to the wholesale transfer of income and wealth to these interests. The rest of society has remained devastated, lacking food, health, education, security, adequate housing, etc. This can be also visualized as part of a vast process whereby the state adopted a series of transfer mechanisms of income and wealth in favor of these ‘privileged’ sectors. These measures did not only serve to increase growth and accumulation – on the contrary, the performance of the economy in recent years has been notorious – but the social consequences and social costs they caused has created an enormous predicament for the future of Argentine society

        The same “economic rape” mechanism with similar results was used in post Soviet states.

  5. PDC

    So, default or not default? If you came to think about it,this is just a political choice. Argentina had nothing much to loose, but Greece… I’m not so sure.

    1. Sid Finster

      To my feline mind, the Greek situation resembles a game of “chicken.”

      The Greek government and the Eurocrats know that a Greek government default will hit both Eurobanks and Eurozone pride in a very sensitive spot. Both these things are important to Eurocrats and they will spend a lot of Other Peoples’ Money to protect them.

      Thus, Greeks can approach Europe, begging bowl in hand and can dictate terms at the same time. Greece will not default as long as long as Eurocrats are willing to spend Other Peoples’ Money.

      Questions:

      1. How long will the Eurocrats be able to continue throwing money? Remember, the EU is famously unresponsive to the concerns of the average frustrated Eurocitizen, such as the average frustrated German taxpayer.

      2. When will other Euromembers line up for their don’t-call-it-a-bailout bailouts? How will the average frustrated German taxpayer react to that?

      3. How will Portugal and Ireland come up with their shares of the money? How will their taxpayers (average, frustrated) react to saving Greece after they have been forced to endure austerity measures?

  6. MyLessThanPrimeBeef

    The good times seem like a Trojan Horse to the Greeks now and ahead lies a long odessey of many lost years through economic wilderness.

    The bailouts, the rescue attempts, are they just siren songs?

    The gods are angry and the only way to appease their wrath is to sacrifice the little citizens, say the leaders.

  7. ray l love

    The following is from an a WSJ article, unfortunately this was all I could get without subscribing:

    ATHENS—Behind the budget crisis roiling Greece lies a riddle: Why does the state spend so lavishly but collect taxes so poorly? Many Greeks say the answer needs only two words: fakelaki and rousfeti.

    Fakelaki is the Greek for “little envelopes,” the bribes that affect everyone from hospital patients to fishmongers. Rousfeti means expensive political favors, which pervade everything from hiring teachers to property deals with Greek Orthodox monks. Together, these traditions of corruption and cronyism have produced a state that is both bloated and malnourished, and a crisis of confidence that is shaking all of Europe.

    1. PJM

      The article about of Portugal is a bit confusing. Why? because this:

      “It did mishandle the run-up to EMU in the 1990s, failing to offset a fall in interest rates from 16pc to 3pc with fiscal tightening. Boom-bust ensued. But that was a long time ago. ”

      And this:

      “Yes, Portugal’s public debt will be 86pc of GDP this year against 124pc for Greece (EC estimates). That is small comfort. Giles Moec from Deutsche Bank said Portugal’s private debt reached 239pc in 2008: Greece was 123pc. Total debt levels matter. The last two years have taught us that private excess lands on the taxpayer one way or another. For Portugal, the figure is now is in the danger zone above 300pc. ”

      Certainly total debt counts. But if we do the same analisys and take the same aproach to others economies, especially Uk and USA, we can say the same. The debt is to high. Whe Portugal is more risky than others? The debt/equity ratio is better for Portugal. The private debt isnt leveraging expensive assets, pushed by bubbles. In fact houeholds can sustain their debt as the banks balancesheets are showing. The householders arent in stress as others countries because their assets dont fall in prices because Portugal didnt have a real estate bubble. The other share of private debt is corporate debt and these corprations are doing weel, increasing revenues, margins and profits.

      In fact, the real threat of global Portugals debt comes from the State. But as the public debt is lower than in anothers places the author focus on global debt. But hey, USA global debet isnt in worst situation? or even british debt? can we do the same scenario about these economies?

      Others do. So, lets check some news:

      “India slashed its holdings of American debt by a little over USD 1 billion in February while China, which is locked in a currency row with the US, trimmed the holdings by USD 11.5 billion during the same period.

      According to the US Treasury Department, India has slashed its holdings to USD 31.6 billion in February, while it was at USD 32.7 billion in January.

      China, which is also the largest holder of US Treasury bonds, has cut its holdings to USD 877.5 billion in February, one of the lowest levels in nearly nine months.

      In January, China’s holdings stood at USD 889 billion. ”

      In http://www.financialexpress.com/news/india-cuts-us-debt-holdings/607385/

      And crossing with others interesting news:

      “”China is becoming concerned about Europe,” said Simon Derrick, currency chief at the Bank of New York Mellon. “Greece is going to struggle to find anybody to buy its debt. There is no road-show in Asia, and it may pull out of its show in the US.”

      IMF data shows that China and emerging markets have accumulated $4.8 trillion (£3.1bn) in foreign reserves. Roughly $1.7 trillion is invested in eurozone bonds. These rising powers will decide how Europe’s drama unfolds. ”

      In http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7608361/Germany-warns-of-Lehman-crisis-if-Greece-defaults.html

      Well, now we know why some authors are atacking the €uro and the memebers of eurozone. Its easy why the concern against global debt in Europe and not in Uk and USA economies.

      However we will who is right in last place. If print machines stops in USA and UK, we will see who is in real troubles. Some can delude ourself spoting others problems but in the last word by markets, I bet that these delusion will cost more to british and americans than europeans.

      1. PJM

        Talking in print machines. Im seeing the last figures for british inflation and are ugly. Very ugly. CPI Y/y 3,4% and retail prices 4,4% Y/y.

        So are the european and portuguese debt the real problem?

        Chasing is good but we should look to others places. They can delude others or even ourself but the figures dont lie.

  8. M.G. in Progress

    I still contend that given the “Money creation for nothing”
    http://mgiannini.blogspot.com/2010/03/money-creation-for-nothing-or-let.html it is indeed becoming the best option to let Greece orderly default and get banks to take the haircut as bondholders.
    Unfortunately Germany warns of ‘Lehman’ crisis if Greece defaults are back again
    http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7608361/Germany-warns-of-Lehman-crisis-if-Greece-defaults.html

    When German banks will stop investing in assets they should not invest? No lessons learnt?

  9. Vinny

    A Greek default is inevitable. Possibly this summer, if the current lack of tourists and volcanic eruptions continue.

    Just for illustrate my faith in the German/ECB bailout: I live in Greece, have some of my money in a Greek bank, but this week I plan to cash it all out and drive to Vienna to buy gold with it.

    Vinny

    1. Hubert

      I hope you have got a big family Vinny,
      you will get 12.500 Euro worth of Gold per person without showing identification.

      1. Vinny

        Yep, we’ll all go there to avoid the identification problem. If necessary, we’ll hang around Vienna for a few days, see a few shows, and have my favorite pastries at the cafe where Sigmund Freud used to have his. :)

        Vinny

    2. PJM

      Dear Vinny, buy some expensive bottles of wine and smugle to USA. ;)

      Good luck and I wish you the best to avoid personal meltdown. you will avoid certainly, I hope.

  10. a

    “I live in Greece, have some of my money in a Greek bank, but this week I plan to cash it all out and drive to Vienna to buy gold with it.”

    Are you able to declare non-Greek nationality or at least a non-Greek address when you set up the account? One assumption people are making in this crisis is that all that matters is the nationality of the bank – money in a German bank is safe, money in a Greek bank is not. But if Greece leaves the eurozone, then it seems to be conceivable that nationality of the depositor will come into play.

    1. Vinny

      Good point, because I think the deposits are guaranteed by the government of the country where the bank operates. I also have an American passport, but I’m not sure that helps much in the EU.

      Vinny

  11. Panayotis

    First, Greek banks are in good shapeand its collateral is accepted by the ECB. Their capital adequacy is around 10% and their nonperforming loans are less than 8%. They have diversified in other countries and any deposit withdrawala even with cash requirements in a crisis is less than 10 billion eurow when their deposits are close to 300 billion euros.
    Second, 80% of public debt is in the hands of foreign lenders who have far more to loose than Greeks.
    Third, private debt in Greece is less than 100% of GDP and not 123% quoted in the article. Greeks are savers and have 200-300 billion investments abroad.
    Fourth, restructuring and renegotiation without default is possible with a combination of maturity extended discount/par bonds.
    The rest is talk!

    1. Vinny

      I understand that a few Greek banks are also heavily invested in the Balkans, with many non-performing loans that do not show on the books of the mother-bank in Greece, but can become a liability really quickly.

      Vinny

  12. Panayotis

    Advice to Vinny.

    If you cannot take the heat get out of the kitchen. Greece will live!!!

    1. Vinny

      Oh, I’m sure it will live. Actually, I think a default and exit from the Eurozone is desirable. Maybe even leaving the EU altogether. I always thought the future of Greece lies in Eastern of Europe and Russia, not in the west.

      Just that with gold I want to protect my savings during the transition.

      Vinny

  13. Panayotis

    Vinny,

    Lets not be dramatic or play out a Greek tragedy for European catharsis. The root of the problem is how the EMU was structured and the absence of a European fiscal authority not revenue constrained. Once again in history Greece leads the way to a crisis that might bring a European resolution (the first independence revolt in the modern era in Europe, the first to fight effectively the fascist forces in Europe) without even remind everyone what it owes to ancient Greece!

    As about Greek banks the point is that their assets are diversified. Also realize that 40% of Greek GDP goes unreported and is more difficult to affect with austerity measures which means that the Greek crisis might be milder
    than otherwise!

  14. Mona Lisa

    Greece has been a big, fat financial mess for long long time and this crisis was long overdue. Where should I start? from the underground economy? the thousands of potitions in the public sector given in exchange for votes (potitions that ‘sucked’ government funds without producing anything), the lack of a coherent plan for the economy, a slow and extended bureaucracy, the inefficiency everywhere from the bus shedules to the tax controls to the drug prescriptions to the hidden payments to doctors for a surgery (along with a ‘who cares’attitude fueled by the chaos of the daily life)and more and more and more….
    At some point the bubble explodes… This crisis may be the best thing that ever happened to Greece if they manage to put the situation under control and change route. A country too weak, however, is a bait for exploitation.

  15. Paul

    I live in Ireland and while I know that Greece and Portugal are major problems, nothing will prepare Europe for the disaster that is brewing over here in Dublin. The bailout of a non domestic bank to the tune of Euro 40billion is a disgrace and smakes of political corruption…time will tell.

    Driving through the country you will see an ever increasing number of domestic retail outlets closing adding more people to the dole cues.

    Ireland is to small to survice the current domestic problems which many are too blind to see. The Government is making crazy decisions and the population is emigrating.

    Soon our tax take will be a fraction of what it is now and having borrowed heavily to bail out the banks..we will need a much bigger rescue package that Greece to bail us out.

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