Monday, January 26, 2015

Ok Greece now what?

A new prime minister has been sworn in as of this morning, his #1 goal is to negotiate new terms with ECB and all its creditors.  As of now, Greece outstanding foreign debt is around Euro 250 320 billion. which was a problem when the country was doing OK, but has become a bit of joke for a country that has seen its GDP shrink by nearly 33% over the past 7 years.

Greece is a shadow of its former self -- when money was free, and credit was available, they were able to spend nearly Euro 15 billion on olympic installation that were shut down the day after the olympics.  Now that's "olympic" spending.

To say that the Greece were profligate would be an understatement, but when you are spending other people's money...who cares.  Now, and this is an old saying: when you owe the bank $100 you have a problem, when you owe the bank $1 million, they have a problem.  Guess what, the ECB and all of Greece's creditors have a problem.  Over the past 4 years, European banks have been very good at dumping (onto the ECB) all their Greek holdings; at near par.  Europe has been happy to buy the stuff, because no one else was ready to buy that toxic stuff.  Now the ECB is saying that they are ready to accommodate Greece with lower interest rates, or maybe deferred payments.

Greece's reality is that with a population of 11 million, and a minuscule private economy (the government prior to the crisis account for nearly 60% of GDP), there is simply no way for Greece to pay back -- for the past 5 years its been an exercise in "extend and pretend", well the new Greek government has a mandate to change the situation.

First off they should ask for massive write-offs; my best guess is that I would aim for a 15c/dollar; so that Greece's debt is modified into a Euro 50 billion total debt.  I would also make this deal conditional on ALL creditors signing -- no one wants another hedge fund coming back in a decade asking for all its money back.

Second, I would ask for about Euro 10 billion in new credit, with a 10/15 year term.  Just to make sure that the country can move ahead.

Third, I would look at exiting the Euro entirely; Greece's economy (which is highly inflationary) is unable to deal with the Euro's fixed exchange rate.

The reason I say this is that at Euro 60 billion (about 40% of Greece's GDP) there's a chance that these creditors will be repaid.  The odds of this outcome are near zero, lets be clear this would open the door to Portugal and Spain -- Greece is a pimple in economic terms; as is Portugal, but Spain (nearly 6% of Europe's GDP) is another story entirely.  Because the problem of Greece (and Cyprus) are the problem of Italy, Spain and Portugal.  These countries lived well because they entered the Euro at too expensive an exchange rate, and that the structural reforms required to adjust to this high prices (without deflation -- the ECB is scared shitless of deflation) are simply not feasible.

So geopolitically what's next for Greece:  the simplest would be for Greece to start by exiting the Euro, and the saying that all foreign debt will have to be approved by the new central bank (a bit like what SAFE did in China), renegotiate with all creditors new terms -- between 10c and 20c on the dollar and see were that goes -- we are talking exchange controls here.

Some will say that leaving the Euro will be too expensive for Greece, well so far Greece has seen a social breakdown, a collapse of its GDP and a deeply frustrated population that is willing to look as some rather unattractive political parties.  So my view is:  I DONT KNOW HOW IT COULD BE MUCH WORSE THAN IT IS RIGHT NOW!

Greece has a new prime minister who campaigned on a promisse to leave the status quo, and to find a new direction for his country.  There are not that many options available:  Repay the debt is impossible, pretending is possible but the social cost is unacceptable; leaving the Euro seems to be too much but what's the option.  Will Europe agree to forgive Greece its excess without imposing strict controls -- that go back to the Prime Minister's promise?

This could be too much for the Euro!

Update:  Had to check this AM the amount of debt outstanding because of an article in the Financial Post (that got it wrong).  Total outstanding debt is around Euro 320 billion -- of which Euro 300 was refinanced (by the ECB) taking the debt away from banks/pensions/insurance companies, and making it a European wide problem.


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