Wednesday, February 15, 2012

If Greece had exited two years ago

At the time the media claimed that such an exit would cause terrible dislocation:

Massive GDP contraction
Massive layoffs
Social unrest.

How exactly is the situation now any better for the Greeks, Check GDP contraction, Check massive layoffs and social unrest.  In fact, and BNP's quarterly results are the proof (if any was needed), the game of shell being played in Greece was to give European banks the time to write off, or selloff their risky assets. BNP first wrote off 20% of its exposure to Greece, then to 50% and now 70% write down.  They have also reduce USD denominated assets by 30%.

BNP is certainly not the only bank that has done this, several have also taken the hard decisions... but Greece is still failing; Over the past three years GDP is down 16% and unemployment has risen from 7% to 20%.  The latest demands -- 30% reduction in minimum wages and further cuts in government programs are certain to make things worse; and there is frankly no optimism to be had.  You can bet that good deals will be had for those foolhardy enough to take holidays in Greece this summer -- walking through the Acropole with the smell of tear gas and petrol bombs.

The big question is why did this occur, why did the Eurocrats agree to this game?  My guess is that saving the banks was the first (and possibly only) concern -- I suspect that everyone remembers Lehman brothers and don't want to risk contagion (especially since European banks have such high leverage).  The reality is that Greece will have to default eventually, both politically and economically the current status quo is unsustainable; April's election is certain to bring a new government -- that would probably be better off with a default prior to accessing power, the numbers don't add up; currently debt/gdp ratio is around 160% (anything above 80% is a problem) -- the new "deal" would reduce this to 120% -- because in the dream world of the Troika, reducing governmental expenditure is a certain way of increasing GDP (trust me its not).  

There is no doubt that Greece is a mess, like many European countries it is the first (and blueprint) for what will happen to the other troubled countries (Spain, Portugal, Ireland and Italy), for a variety of reasons all these countries are looking at Greece as the blueprint for their restructuring -- Greece is an insignificant country (in the greater scheme of things) if default is the outcome it will tell both Portugal and Ireland what to expect.

The Financial Times had a fascinating article about the ECB and other supranational European agencies; how they spurn suggestions from people who had seen massive economic dislocation from excessive borrowing, and then proceeded to make the exact same mistakes -- several times.


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