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Trade with Greece
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is not going to happen. There are much broader
implications ... It would be a fundamental break to
the unity of the Euro zone”, stated Greece's for-
mer Finance Minister, George Papaconstantinou.
Friday, March 09, 2012:
ISDA, the International
Swaps and Derivatives Association, announced
that, following the implementation of the PSI
scheme (debt restructuring), a credit event had
occurred and CDS payouts would be triggered.
March 6-10:
Various European officials told the
international Media: “Greece's default will have
no impact on the Euro zone. No other country is
at risk”; “Now there is no fear of a domino effect
in the rest of Europe, due to developments in
Greece. Portugal and Ireland are in better shape,
while confidence in Spain and Italy has recov-
ered.”
Greece was led to a voluntary default. European
taxpayers (who, in many cases, are in the run-up
to elections) agreed to lend Greece 130 billion
euros. In order to get this money, Greece passed
many critical tests, and finally 100 billion euros
were written off. On the other hand, though, there
is an extra debt of 30 billion euros, which is very
unlikely to be repaid in the future. For those who
may not be aware of it, the new debt is already
tradable in the markets, without even having been
issued.
Nonetheless, we should all focus on the situation
in Greece. The benefits of the austerity measures
have not yet manifested themselves. The Greek
economy has been sinking deeper and deeper
into recession since 2008. In the fourth quarter of
2011 Greek GDP fell by 7.5%. Unemployment
has exceeded 20%-50% among young people.
Things seem extremely tough. Analyst estimates
suggest that after the restructuring the debt-to-
GDP ratio remains at 160%. Will Greece be able
to return to the markets in 2013? Or 2014? Or
even 2015?
There is no doubt that, for the time being, the pri-
vate sector involvement deal has improved
investor sentiment. It will not, though, improve the
situation in the Greek economy. The new meas-
ures and their consequences include further
salary reductions, state expenditure cuts, higher
(or, at least, more) taxes and increased unem-
ployment. If Greece left the Euro zone, these
problems would not be mitigated, but most likely
they would change form, possibly requiring a sci-
entific kind of state-of-the-art management.
Anyway, the markets relaxed, but first the system
had teetered –once again, after four years– on
the brink of a crash. Wall Street can, for the time
being, sigh in relief. How long will this last? If
European officials are right this time, and there is
no need for further restructuring in other coun-
tries, then this calmness is here to stay.
How likely is this scenario? Not very, judging by
the macroeconomic situation in Spain and
Portugal. Spain revised the 2012 deficit target
upwards to 5.8% from 4.4%, while last year's
deficit stood at 8.5% against a 6.0% forecast. The
talks between Spain and the EU do not go well.
Unemployment stands at 25%-50% among young
people.
Things are no better in Portugal. The country's
debt is unsustainable. Even credit rating agencies
are certain that Portugal will be the next country
to require a debt restructure.