Monday, April 5, 2010

Greece Will Default

I am not mincing any words here. What ever has been discussed by the powers that be in Europe is all fluff delaying the inevitable.

The IMF has already released their results on the Greece situation last year. Nothing has changed in the interim.

http://www.imf.org/external/pubs/ft/scr/2009/cr09244.pdf

From the IMF report, its safe to surmise the following:

-After joining the EU, the income gap between Greece and the EuroZone fell because of lower interest/funding costs. The demand boon that resulted directly benefited from these lower rates. During this boom, Greece's fiscal deficit stayed at 95% of GDP. Bond spreads widened considerably during this period which caused credit downgrades. Most of the debt in Greece is centered (Surprise) around government and financial services, as private debt is low. As output dropped, Greek real wages remained high. The quality of assets on Greek balance sheets kept on eroding as household and corporate credit growth vastly slowed down. They simply were not able to keep the giant ponzy scheme going. As bond spreads widened, higher interest costs for new debt issuance was painful. This caused giant government shortfalls.

The IMF is projecting uncertain and negative growth throughout 2010. Of course the EU which owns very much most of the bad Greek Debt has much rosier projections.

European policy makers can talk all they want about bailouts and IMF support. Its all talk. The Greek policy makers know they can't put that type of austerity measures on their society without revolt. The crushing level of debt is too much of a burden for Greece.

Currency markets have raised their negative bets against both the Euro as well as Cable(GBP).





As well as this graphic from Reuters Credit Views.


As you can see, Greece needs to roll much of this debt over in the short term.

There seems to be a fight between the CDS players and bond market participants. As we have seen, the EU policy makers phony bailout templates have hit the market. From this CDS rates have come down as bond yields have widened. The CDS market has reacted to the bailout news as many speculative players have sold or closed out positions. But many bond market players are long term players who seem to think that all is not right. So who is right? THE CDS players or the cash bond guys? Has the CDS market overreacted, or is the bond market slower to process the credit risk? Any way you look at it, both curves are not anticipating any magic bullet to save Greece. What we are seeing is the beginning of a strategic default of Greek debt as all that Greece has to show for their troubles so far is even higher interest costs mounted on existing debt with even more billions of issuance on tap.

The endgame here is either debt repudiation via inflation or default. I say the later is in order.

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