Will Greece Default And Blow Up The World?

16.8%.  That’s how much the current Greek 10-year bond yield is producing thanks to their debt mess.  16.8% is a juicy 13.9% higher than the current US 10-year yield to put things in perspective.  The question on everybody’s mind is will lawmakers pass a new 5-year, 28 billion Euro austerity plan in order to tap a 5th installment of the bail out money available to repay almost US$10 billion worth of maturing bonds this August? We shall see come Thursday, June 30 whether the Greek Parliament implements the package if it passes on June 29 in the first place!

More than a year has passed for the market to digest the European debt crisis, but after a year of hand wrangling, pretentious pronouncements by aggravated government officials, and raucous rioting in the streets of Athens, nothing much has changed. The economic recovery that was to produce the growth and tax revenues to bail out the sinking ship of “PIIGS” has never materialized, and patience is running thin as potential defaults creep into the not too distant horizon.

The European version of Wall Street’s “CDO” meltdown has gradually unfolded over the past two years, beginning with leaks in the press that something was askew in Greece near the end of 2009. As the truth of the financial depth of deficits finally surfaced, the crisis hit front-page news headlines in May 2010, when it became apparent that the financial malaise was not confined to Greece alone. A new anagram, namely the “PIIGS”, entered our daily lexicon. Portugal, Ireland, Spain, and possibly Italy had similar, but different, according to finance officials, debt and deficit problems.

The crisis was met with proposed bail out packages from the stronger banks in the region that claimed that capital stress tests would prove their stability to meet most any contingency. Each proposal and subsequent approval was accompanied by pompous protestations from each government that debt payment schedules and bloated deficits were no longer issues to be concerned about, at least until the next revealing story in the press negated everything that was previously said. This bumbling scenario has been repeated countless times to the point that confidence in the respective governments has all but disappeared.

18 STRIKES AND YOU’RE OUT!

Greece continues to miss the financial goals set with each bail out program. Interest rates are up, credit markets are tight, and small business loans are nonexistent. Demonstrators demand that bond payments be withheld. Analysts contend that such a bond default would be tantamount to the impact that the collapse of Lehman Brothers had on the global economy prior to the “Great Recession”. The central bank insists that a default cannot be allowed since the ripples will spread to other European member states and wreak havoc on European banks, which are the primary holders of much of the toxic securities. One bond mark down will initiate a flurry of unwanted mark-to market adjustments across the board, as was the case with CDOs.

When the Euro was originally conceived, may questioned what would happen when the stronger member states would have to step up and bail out their beleaguered partners. Greece, Ireland, and Portugal have received bailout packages. Spain has remained on the sidelines, but its government has severely cut back spending, postponed pension payments, and allowed unemployment to rise. Public demonstrations in Madrid have also ensued.

Rumors began to spread in May that the European Union may suffer departures that could lead to a Eurozone collapse. Feelings ran high that Germany was tiring of the debate, and statements from unknown high sources contended that Germany might exit or demand the expulsion of Greece. Memories of the deterioration of Bretton-Woods and the “Snake” have not dissipated, and although the Euro replaced national currencies, officials privately admit that the geography and politics of Europe will never emulate a single economic unit. Monetary policy may be set by a single central bank, but member states still have the latitude to operate independently and pile up unmanageable deficits.

GERMANY IS SECRETLY LOVING IT, DESPITE HAVING TO PONY UP FUNDS

German exporters, however, have benefited enormously with the introduction of the Euro and the presence of weaker member economies. From a German perspective, the diluted “Euro” actually increases demand for its manufactured goods.  Just check out what the stock of BMW is doing.  En fuego!  Experts agree that a new Deutschmark would be valued considerably higher than the present Euro if Germany exited the Eurozone. Such an exit would be greeted by an immediate reduction in German export demand, a condition that no German exporter wants to encounter. Small business loans would be nonexistent for an undeterminable period of time as credit markets shut down.

While public demands for an exit in Germany may mount, the total cost for such a move would be prohibitive. For the moment, Germany can continue to bank its export gains.  The EuroZone, led by Germany has no choice but to bailout Greece if it chooses to default by not accepting the 5 year austerity measures plan.  Greece actually has the upper hand in the current ultimatum.  The austerity measures imposed by the EU are harsh and necessary, but what’s more necessary is that Greece doesn’t default for the EuroZone’s sake and the rest of the world’s interests, since Greece can’t get more screwed!

Readers, do you think Greece will give in to the latest and final austerity demands, or default like a logical person would? Even if they pass the austerity measures program, do you think they will implement everything?

My perverse bet is that Greece gives Germany, the EuroZone, and the rest of the world the finger and rejects the 5-year austerity measure.  Why would they if they know that if they default, other countries will have NO CHOICE but to bail them out fully?  Sure, they will get booted from the Euro, and their Drachma will depreciate by 99%, but it’s all good baby!

Wouldn’t it be somewhat thrilling to see global markets dive 10% and watch politicians get skewered? They’ll just blame rich people for Greek’s problems again, but people will finally realize that blaming the financial industry is a cop out. The people to blame are the very people the government serves! They have nobody to blame but themselves.  Long live moral hazard, because we might need some some day ourselves!

Best,

Sam


Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. Dave says

    Greece is blocking my country, Macedonia, so I would love to see them bailed out of the EuroZone. Otherwise, I am really sorry for the ordinary people, who will have to pay all that irrational debt.

      • Get Happy Life says

        Have you heard about Greece’s conflict with Macedonia? Greece is preventing Macedonia
        from joining the European Union and NATO by using their veto right unless
        Macedonia agrees to change its country name. According to them, Macedonia
        is a region in Greece and therefore no country may use that name, so they
        insist on a change of the name. On the other hand, no country is willing to
        change its name under exterior pressure. Sad.

        • John says

          Macedonia is a Greek province. Perhaps you mean Vardaska ? Now that Greece is defaulting
          you can buy the name, which I’m sure is available for sale.

  2. Darwin's Money says

    Europeans will continue to kick the can down the road. Greece will have to default (restructure) eventually, and while some may compare it to Lehman, Lehman happened quickly with no warning. We’ve known Greece was in trouble for years. The French especially, will continue to push for more bailouts. French banks have tons of exposure to Greek debt. The Greek people are revolting and for the most part, haven’t been big proponent of paying taxes, so who knows what would make them start now? They will continue to strike, burn cities and stop working while the politicians push for another bailout. I think near-term, they continue to be bailed out, but it only forestalls the inevitable.

  3. Mike Hunt says

    I think the total debt and interest rate is so high that it cannot be repaid.

    The 800 lb gorilla in the room is all the credit default swaps that countries and banks are holding on Greece. The CDS market is unregulated and it is not clear how much the US banks will be on the hook for if and when Greece does default. The effect could be something like when Lehman Brothers went under. In other words, even the smallest countries have now become too big to fail.

    Credit default swaps are instruments to hide debt because if both sides take out debt but buy swaps to make their balance sheet look protected in case of counter party default. However if the counter party does default the CDS interconnects the parties and really the whole system crashes. Then the big governments step in to prevent that from happening and spend our, our children, our grandchildren taxpayer dollars to bail these guys out. Swaps need to be regulated to prevent this from happening.

    I guess if you can’t beat em, join em by buying a 2 year Greek treasury for 28%. However there is a chance they will reject the plan and try and default.

    Sit back, get popcorn, have your cash ready to deploy, and watch the fireworks!

    -Mike

  4. 101 Centavos says

    The current Greek leaders are biting down on that austerity crap sandwich. Perhaps all Greece needs now is for some new (or recycled), ambitious politician to engage the masses with a little nationalistic demagoguery, and the bankers get flipped the middle finger of default.

  5. Patrick says

    So, Greece has a population of a little over 11 million people and the actions of their politicians could jeopardize the entire European Union and potential millions of Americans, seems fair…

    No wonder the people are burning the cities and protesting, I agree Sam, they should protest, elect all new politicians.

  6. cashflowmantra says

    I think Greece defaults, the Euro drops like a rock which will help the dollar, and oil prices drop as a result. Stock markets will get crushed although the US might be seen as a safe haven. Gold would likely go up as a safe haven reaction but I can’t be sure. Buy some puts and enjoy cheaper gasoline prices.

  7. JT says

    They have no incentive to pass and then embrace austerity. If they don’t, the IMF will come in with billions of dollars, of which 20% will be the United States’.

  8. traineeinvestor says

    Plenty of other countries have defaulted on their debt obligations over the years. The only thing that makes Greece any different is the common currency aspect – which is the only reason why Greece has received as much taxpayer funded basket case bail out money as it has.

    Given that every [I think] EU state has routinely breached its fiscal promises, setting an example and kicking someone out is long overdue.

    As much as I have sympathy for the Greek people, to a large extent a good number of them have only themselves to blame – tax evasion etc was something of a national pastime. I have considerably more sympathy for the taxpayers of other EU states who are ultimately bearing the cost of the bail outs without having any meaningful say in the matter.

  9. Untemplater says

    It is crazy there are so many riots in Athens. I was hoping to go there this summer but am starting to reconsider so it will be interesting to see how things pan out. I certainly hope global markets won’t dip 10%!

  10. dfas says

    North Europe has a Plan B for the EURO, don’t spoil it!

    Most counties around the north sea never joined the Euro.
    Why not found the old sucsecfull Hanse tradae block again. Togethe with Netherlands, UK , Norway GER & Scandinavia etc we rere far more stable and successful then the Renaissance guys.

    Yes, we loose 30% on the EURO exit, but we know what we got:
    Real Friends & future of Northern Europe.
    Probably Profit withe a strong new currency.

    Take your loss. Europe was never one.
    No one united EUrope last thousand years and that is it’s strength. Greece is for holidays and you should pay there with holiday fake drachma. Greek people will have a bright future as one big holiday resort with holiday currency. How they manage, the market will judge. Please be what you are and want to be.

    It is reasonable th ask for a moment where to say STOP. At this moment no one tells. That is alone reason enough to leave the Euro. North Europe has a Plan B, don’t spoil it! If you do not have a serious plan, you cannot negotiate. The north has a plan B and it is even better off. This is the end of the EU. Political decisions without a seroius plan B are always bad. Like entering the Euro, afganitan and much more. Never pay without having an alternative. It is blackmail politics.

    North Knows!

  11. MoneyCone says

    The unity of the EuroZone will be in jeopardy if Greece is kicked out, yet bailing out would mean the richer nations will have to bear the burden for now.

    Recently China’s shown some interest in buying Greece’s debt. That’s a very interesting play!

    The next few weeks are going to be very, very interesting!

  12. Jeff @ Sustainable life blog says

    I think they are going to give in – they have no choice, really. Unfortunately, I don’t think the riots will stop, but what can you do – everyone’s day of reckoning will come at some point, but the bigger you are (financially speaking) the longer it will take you to notice.

  13. The College Investor says

    I really cannot believe how many riots are taking place because of this….really, you don’t work, live on government welfare, and now that they party is coming to an end, you riot! Sounds like a rave in LA!

  14. hemp says

    Asian stocks climbed higher again during Friday trading in Asia as the markets reacted positively to the Greek Parliament passing a second set of austerity measures that allowed Greece to receive the latest 12 billion euro 17 billion installment of its emergency loan from the European Union and the International Monetary Fund . Last year a 110 billion euro bailout for Greece was approved by the European Union and the International Monetary Fund but earlier this week the EU demanded that Greece pass a set of austerity measures aimed at increasing the governments revenue and reducing its expenses.The European Union said that failure to pass the measures would show that Greece wasnt doing enough to solve its fiscal crisis so the EU would withhold bailout funds to Greece.Without the 12 billion euros of bailout money Greece would have soon run out of money to pay its debts and would have likely defaulted within a month.Asian markets cheered the news that the Greek Parliament passed the austerity measures because a Greek default could have led to other troubled eurozone countries like Portugal Ireland and Spain following suit..

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