PIIGS (Portugal, Ireland, Italy, Greece, Spain) II and the Greek crisis

Par Robert Elman le 23 avril 2010

Angela Merkel, Chancellor of Germany is being confronted with some very difficult choices. Does she participate in an active bailout of Greece and incur the wrath of the German electorate or does she commit German funds, and possibly save the EU from collapse. For a collapse of the EU means the disappearance of the once mighty Euro.

This decision might very well have been made for her as spreads on Greek debt soared to levels not seen since the writing of Maastricht.

On April 11, European leaders agreed to offer the tormented Greek government a financial olive branch of up to 30-billion Euros in three-year loans at a most attractive 5 per cent rate (this rate, however, was above the rate which Germany must pay, hence providing a possible profit on the deal). When you include the IMF contribution, which could be around 10-20-billion Euros, it would have covered Greece’s financial requirements through 2010.

Hold your horses. The deal is not yet done. With credit spreads widening so much (the Greek bonds were trading north of 7 per cent), it seemed possible, if not likely, that Greece might just default. Needless to say, Germany would not wish to be exposed to a possible massive loss on its share of the 40-billion and default could be as damaging for EU as Lehman’s bankruptcy was for the US and the global economic community.

On April 19, German finance minister Wolfgang Schauble pleaded with his German citizens to back the joint EU-IMF bailout worth up to 45-billion Euros. The risk associated with a failure to respond positively, he said, would be a financial meltdown.

In Der Spiegel he said, “we cannot allow the bankruptcy of a Euro member state like Greece to turn into another Lehman Brothers.” 

“Greece’s debts are all in Euros, but it isn’t clear who holds how much of these debts.

The consequences of a national bankruptcy would be incalculable. Greece is just as systemically important as a major bank,” he added. 

“Investors are not going to believe in a rescue deal until every ‘i’ is dotted and every‘t’ is crossed,” said Marc Oswald from Monument Securities.

There is real fear that a Greek failure could bring down the whole house of cards.

There was a time, not that long ago, when the PRC envisioned the Euro as a possible successor to the US dollar, or at worst, an alternative. As China began to “diversify” its currency holdings by reducing its vast position in the US, it began to accumulate Euros.

IMF data shows that China & emerging markets have accumulated $4.8 trillion in foreign reserves. Roughly $1.7 trillion is invested in Euro zone bonds.

Investors are also very concerned with growing hostility within Greece; of the austerity measures being proposed, which if carried, will represent slower growth and growing unemployment. When all else fails, fire the people. This is the fear of the Greek citizenry and the powerful labor unions.

Greek leaders appear to be playing a waiting game, perhaps hoping for a better deal and better terms, or perhaps a debt restructuring that might result in extending the pay period, and providing some breathing room. Carl Weinberg, chief economist at High Frequency Economics, has proposed a multi-year restructuring that would extend the duration of the debt and ease the pain of debt service.

It is becoming increasingly clear that a Greek default would begin to look like Bear-Stearns and Lehman. A bailout will likely result in the PIIGS coming to the trough, and resemble those handed to CITI, Bank of America, GM and AIG.

We wish you well, Angela Merkel.

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