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Greece; a slippery slope getting slippier

21 May 2010 1 comment

Roy McPherson

On the 6th May I blogged https://www.finextra.com/blogs/fullblog.aspx?blogid=4044 to say that I thought Greece could signal a bail out of the Euro and the more I read the more I think this will happen. Angela Mekel has seen the warning signs and believes the ban on short selling will stem the flow. Unfortunately this is the financial equivalent of applying a neck brace to a broken leg. The reason is that the ban on short selling wont alter the fact that Greece's fundamental problem is wasted years of cash injections from the Euro zone frittered away, state earnings are low and yet the underlying costs have grown. One might suggest that Greeces entry into the Euro zone was a massive sleight of hand with fudged figures, forecasts and balance sheets but in the name of the good ship Europe, and in a relative boom time, who cared about a minor blemish. Well the blemish is turning into an open wound and getting worse, the Greek trade uniions appear to be in denial and the new austerity measures are set for a rocky ride.

There is no way that a two tier Euro can be introduced but Greece could withdraw and have the ability to devalue and manage its own currency; the tax payers of Europe would draw a collective sigh of relief. If the problem persists heads of state will find themselves at odds with their own electorate and if the main source of funds, Germany, falls out of love with the whole idea what price an even larger fall out.

Time to brush off the old currency pairs, what odds a $/drachma and $/escudo by end of 2012?

This content has been created by the Finextra editorial team with inputs from subject matter experts at the funding sponsor.

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Comments: (3)

A Finextra member

24 May 2010

Well to continue with the nautical there's saying "smooth seas don't good sailors make" so it's always been fairly clear that over the last ten years or so whilst the world was in an artificially low interest rate mode there would be few problems as the debt bubble inflated. Now the bubble has started to deflate (yes there's more to go) people are more interested in return OF capital instead of return ON capital.

The Eurocrats will of course seize on the problems to demand more integration and control and an even bigger gravy train. Whether or not the voters are stupid enough to agree to this only time will show.

I have read that Greece's debt will increase to 150% of GDP and it is widely thought this is well beyond the point of no return. In Spain this weekend, Cajasur was failed out at a cost of EUR 550m. Goldman Sachs says Spain's property companies have debts of €445bn, or 45pc of GDP and these losses will have to be recognised eventually, bringing down many institutions. Bank of Italy last week suspended mark to market for eurozone government bonds which means that they don't have to take a capital hit - kick the can down the road.

Morgan Kelly, professor of economics at University College Dublin, warns that the rescue of the Irish banks would ruin the country. "Even under the most optimistic assumptions about government spending cuts and bank losses, by 2012 Ireland will have a worse ratio of debt than Greece."

and it's not just Europe, on the other side of the pond Weiss Ratings has issued a press release, warning that 20 giant U.S. banks are still vulnerable to serious financial difficulties — and even failure. The list includes Bank of America, Citibank, Wachovia, HSBC Bank USA and RBS Citizens.

Dr Doom Roubini says "The crisis is not over; we are just at the next stage. This is where we move from a private to a public debt problem."

My forecast is for a hot summer of social discontent.