The Economy Guy

Results of the Greek Bailout…….

The EU Finance Ministers (under orders from their bosses) approved the Greek bailout of 130B Euros ($170B).  I have reported on the additional onerous terms that the Greeks have been asked to accept – and they caved and accepted them.  All this happened after 12 hours of talks on Monday.

The markets cheered, and the Euro rose.

Included is the permanent stationing of EU personnel looking at every expenditure from now on by the Greek government.  All the bailout money will be escrowed, and not released unless the Greeks continue to “keep their word” on the austerity measures agreed.

In effect, the Greek government has been replaced by a technocratic governance of the EU, and all Greeks just lost their sovereignty.  And, all this without a vote.  Democracy in action?

What does the near term hold?????

Well, those bond holders who were going to take the haircut – haven’t agreed yet.  Here is more detail on this subject – and I find it very interesting.

There are 3 types of bond holders:

1. The ECB and other European Central Banks
2. European banks (and others) who can be influenced by the ECB and Central Banks.
3. Other – non-influencible – bond holders.
   

In other words, the Central Banks have a “carrot and stick” capability over some of the bond holders – for example, all European banks.  So, they can demand that those bond holders “voluntarily” take the haircut – or else!!!!!!

On the other hand, there are independent bond holders – such as hedge funds – who can do whatever they want.  These bond holders – who account for about 3B Euros worth of Greek bonds – are NOT going to voluntarily go for the haircut, but will wait to see what happens.

What can happen?

1. The Greeks (with the EU leading the effort) should be putting a new clause into effect on those bonds – which FORCE all bond holders to take the “voluntary” haircut.
2. However, there is only 4 weeks left before those bonds must be paid – March 20th.  Bureaucrats are notoriously slow in their efforts – and this new clause may not be written by then.
3. If this happens, the involuntary bond holders hope that the CDS market MUST declare their loss as a “default” which would trigger the CDS (insurance) payout.
4. And, in my opinion, this would be very interesting – as it would cause the whole veracity of the CDS market to be tested by a very small (3B Euro max) payout.  The counter-party issue will be tested and the world will see into the opaque world of CDS markets.  Personally, I hope this happens.
   

More interesting from the tidbit point of view is that one of the requirements by the EU was that Greece’s debt would come down to 120% in 2022 (a huge estimating – or guessing? – process) – but in reality all this work will result in it being 121% instead – so I guess one percent isn’t a big thing.

What does the longer term hold??????

That’s an easy question.  Greece will ultimately default.  Their economy continues to decline – down 20% in GDP over the past 3 years – and it is impossible for them to grow their way out of this mess.  Their economy will be:

1. Less government spending
2. Less personal spending – i.e. More unemployment, less pension funding, etc.
3. Less exports – as they continue to be uncompetitive with their export partners – the Europeans.
4. And, this leads to continued negative growth, lower GDP, lower tax revenues, wider government deficits – ugly, ugly, ugly.  So, the Greek situation is terminal.
5. It’s really only a question of WHEN.  And, over that question there is much speculation.  Some people say months, but I think it will go on for a couple of years.  Then the Drachma is the only solution – but the EU has bought time (and it cost 130B Euros) and will attempt to further bolster their banking system.
   

Oil is going up…….

Have you noticed that gold is now over $105/barrel?  And, naturally, gasoline is going up in sympathy – is guess gasoline is sympathetic that oil must bear such a big burden in price.

Well, if it continues, this will become THE election issue in the United States for the Presidential election in November.  Also, it will stop any GDP increases that may be trickling through the economy today.