Monday, February 22, 2010

Trouble in the Eurozone - Of Greece, PIGS, and STUPIDS

The Greek Debt Crisis has been much in the news lately.

The financial media has been dominated by such
headlines as "Greek Default Imminent" , "Europeans
say "NO" to Greek Bailout", and of course, as expected,
"Goldman Sachs helped Greek Government hide debt,
avoid EU regulatory scrutiny".

Wow - talk about a juicy topic. It's got everything.
Greeks, Default, The European Central Bank, Bailouts,
and everyone's favorite financial pirates, Goldman Sachs,
at the center of it all.

But there's more to it than that. When it comes to
extreme European financial crisis, Greece is not alone.

First of all, there are the truly depressed economies
of the Eurozone's southern tier - a group of nations
(including Greece) that have been called the PIGS -
Portugal, Ireland, Greece and Spain. And, there's a
second group of nations, some in the EU and some not,
who are likely to follow in the PIGS' path, owing to
heavy Euro-denominated external debt. These nations
I'll call the STUPIDS (Slovakia, Turkey, Ukraine, Poland,
Italy, Dubai, and Slovenia).

And the "root causes" of their problems? The same ones
that we in the U.S. have:

1) Huge, ongoing Government budget deficits, with no
realistic plans for fiscal balance;

2) Bloated, unionized public sectors, both in absolute
terms as a percentage of total employment and in
terms of wages and benefits when compared to
equivalent private sector employment;

3) Uncompetitive goods-producing sectors ( manufacturing,
mining, and agriculture);

4) Heavy exposure to "boom-bust" economic sectors
(real estate, hospitality, and tourism);

5) Lack of modern infrastructure for competitive
service economies;

6) Significant untaxed, "informal economies".

And, in the case of the PIGS and Italy, extreme concentrations
of wealth and influence in the hands of oligarchies, with the
attendant problems of capital flight and tax evasion.

And virtually none of these problems were envisioned when
the EU was established with a common currency and common
fiscal, industrial, and social policies. It was as if
with European unification, sixteen nations would become
Germany overnight.

And that's a big, under-reported part of the problem.

Germany is the leading economy of Continental Europe -
its leading exporter with world-class technology and service
sectors, Europe's best-trained and educated workforce, and
modern infrastructure that in many respects is the envy of
the world. And with traditional German traits of industry
and thrift, its budget deficit is minor - in fact, it is in the
awkward position of having to avoid large surpluses to
help keep the Euro from becoming too "strong", which would
hurt the exports of the entire group.

Greece, though, is a different story. Its current budget deficit
is currently 14% of GDP, its total outstanding foreign debt
is 156% of GDP, and its percentage of sovereign (government)
debt to total public and private indebtedness is an astounding

Translation: while the Greek private sector is relatively
conservative and under leveraged, the Greek government
spent like crazy. And now the bill has come due.

And Greece doesn't have a lot of options. As part of the
Euro zone, it no longer has control of the printing press;
inflation is not an option. Neither is default - were Greece
to default on its external debt (most of which is held elsewhere
in the EU), it would trigger a run on all Euro-denominated debt
and on the Euro itself. Neither Germany nor France will tolerate
that. And a Bailout? By overwhelming margins, the people of
the other EU nations are saying "No".

But, a solution is in the works. Recent pronouncements and
developments from both the Greek government and
The European Central Bank indicate that despite all denials,
a "fix" is at hand. Here's why:

1) The ECB, the Greek central bank and the finance ministry
have all requested "Technical Assistance" from the IMF;

2) Despite the fact that the IMF ( the world's sovereign
"receiver in bankruptcy"), normally doesn't intervene
when a country is part of a currency union, the IMF will
have a large say in how Greece will restructure;

3) Greece has already announced a draconian "Austerity"
program including layoffs and pay cuts for public workers,
downward "adjustments" for pensions and benefits, tax
hikes on the middle class and wealthy, and an unprecedented
crackdown on the "informal" economy by virtually outlawing
cash transactions above 1000 Euros;

4) And, most importantly, Greece has just replaced the head of
its debt management agency with a former Goldman Sachs
Europe Managing Director. That means the "deal" is likely to go
down soon.

And here's what will most likely happen:

1) Greece is planning an auction of €17 billion sometime
in the next 30 days to roll over existing debt, with a
coupon somewhere in the 9-11% range and a Moody's
rating of BB- or lower. The auction will fail
(not be fully subscribed);

2) While normally this would be "an event of default",
the ECB, instead of lending money directly, will now
provide a "conditional guarantee" of the rollover,
providing Greece meets the austerity conditions it has
negotiated with the IMF. This will permit the auction
to go through, but this time with interest penalty clauses
that would be triggered if Greek government debt is further
downgraded in the markets;

3) The austerity program, which will be imposed
immediately, will lead to strikes and riots in the streets,
mass poverty and unemployment, and further capital flight
by the wealthy;

4) The continued unrest in Greece will lead to a further
downgrade in Greek debt, triggering the penalty clauses.
At this point, with Greece unable to meet the mandated
interest charges (150-200% of the coupon rate), the
ECB guarantee will come into play, at which point
Greece will have to surrender its treasury and taxation
powers to Brussels.

At this point, Greece will cease to be an independent
nation and become an EU "colony", with its finances,
taxes and government revenues totally in Brussel's

And who will benefit from this? The usual players,
led of course by our favorite financial pirates, the
Squid Nation of Goldman Sachs. The Squid, along with
JP Morgan, Citicorp, and Morgan Stanley ( and European
banks Societe Generale and Deutschebank), have been
quietly buying up CDS's on Greek debt, and shorting
existing Greek issues in the market which means
that the worse the situation gets, the more they profit;

The banksters can't lose. If the Greeks default completely,
both their shorts and CDS's win. And if it looks as if the
guarantee will pay off, they'll be in position to scoop
up the debt at pennies on the dollar and get paid in full.

It's the same hustle The Squid pulled off so successfully
with AIG, Fannie and Freddie in the U.S., although not
quite so large and profitable.

And can the EU do anything about it? They can make some
noises about "audits" and "banning Goldman Sachs from
European markets" , but that's about it. Were they to
even try to take punitive action against The Squid, they
would be guaranteeing that all of the weaker EU economies
would be open to unrestricted speculative attack.
Moreover, to rein in Goldman and the others, they would
have to get co-operation from Washington - which will most
likely not be forthcoming.

Besides, speculators, vultures and pirates serve a useful
corrective function in the marketplace; when companies
and countries falter, the speculators are there to enforce
financial discipline, and the consequences are usually
painful for the people involved.

It's just too bad that that pain can't be visited on the
Greek government as well.

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