Is it now too late to save Greece?

By Felix Salmon
April 27, 2010
Greece and Portugal have been downgraded, the rush to the exits is palpable: the flight to quality is on, and bond yields in the European periphery are going stratospheric.

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When Goldman Sachs noticed a pattern of regular losses in its mortgage book at the end of 2006, it decided to start going short, in a move which helped to position it as the most successful bank in the financial crisis. The markets have learned their lesson: now that Greece and Portugal have been downgraded, the rush to the exits is palpable: the flight to quality is on, and bond yields in the European periphery are going stratospheric.

Greece’s bonds can still be used as collateral at the ECB: Moody’s hasn’t (yet) downgraded them. But S&P’s sovereign-ceiling principles mean that all of Greece’s banks now have a junk rating, and it’s surely now only a matter of time until Moody’s and Fitch follow S&P’s lead and Greek debt becomes a speculative credit instrument rather a government bond which is safe in anybody’s eyes.

The trick about going short an imploding asset class, of course, is that it only works if you’re in the minority. If everybody is doing it, you just get overshooting asset markets and chaos — which is what we’re seeing now. As far as the financial markets are concerned, if any bailout comes now, it’ll be too late: no country can sustain Greece’s combination of funding costs and debt-to-GDP ratio, no matter how much German money it burns through. Plug 13% yields into my Greek debt calculator, and the results aren’t pretty, even if they don’t have any effect at all on all the other optimistic assumptions.

greecedebt.tiff

This is the problem with the way in which the EU insisted that Greece reach a point of desperation, exhausting all other funding opportunities, before it turned to Europe for help. At that point, it might be too late. And it’s going to be really hard to persuade Germany and the rest of Europe that lending new money at low rates to a country in this kind of fiscal situation makes any sense at all.

13 comments

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The point is that everything the swap cops criticize about ANY other country, is true x 18 of the United States. It is the United States which is going to collapse, never mind all the other frogs in the pond.

Posted by jrysk | Report as abusive

For the sake of its own long term health the West needs to suffer a lot more than it has do far, because it hasn’t yet learned its lesson. The political class and others are still fantasizing that we can soon go back to “prospering” by spending money we don’t have. It is apparent that only suffering comparable to the Great Depression will return the West to the ethos of thrift and savings-funded investment that it so desperately needs to rediscover.

Posted by Osomec | Report as abusive

I think Greece is the first domino. If Spain and Portugal are in as bad a shape they may be they will also go down the tubes. We in the US need to make sound financial decisions our first priority. We can stop stimulus spending whenever we choose to and it better be soon. I do not think the Republican Party has seen or ever will see the handwriting on the wall and they stand to go under with their boat.

Posted by fred5407 | Report as abusive

its too late for greece, and also for EU. germany was only asked to give same percentually as the others in euro zone, to protect the single currency, and they have fallen down to playing electoral politics with euro as a ball. the only satisfaction will be to see german economy implode together with greece. i hope BILD editors and coalition politicians will than be rewarded for their “leadership”.

Posted by johny2 | Report as abusive

Nice articles, Felix..thanks..I like the “X 18″ comment above too..ah, the successes and excesses of the sociopaths astound me..”stand from under”,folks..

Posted by gramps | Report as abusive

Lacking any of the expertise needed to make an intelligent forecast about Greece, the EU, or any other country or group of countries, I’ll refrain from predicting — except in the case of my home country, the U.S. At upwards of 60, I have spent a lifetime reading the financial media, usual in the context of the political policy decisions that go with the economy, trying to understand those issues.

I’m still not convinced we need to experience another Great Depression or worse to come to our senses, as Osomec suggests. (I’m not picking a fight, Osomec; I just have a different view, and I do recognize I may well be wrong.)

Four-dollar-per gallon might be good for us, right now. When we were paying that, in one of the Balkan countries folks were paying the equivalent of about *$11* per gallon. With a substantially lower average income. Even today, much of Europe pays far more than we do. To pay $4/gallon would have the double-whammy effects of reducing our use of a limited resource (much of which we import from not-so-nice countries) *and* making us pay attention to pennies. Pay attention like folks in the Depression did — had to. The same applies to coal, natural gas, etc. We have a Tiffany’s driving life on a Walmart budget. And this goes beyond driving. Heating oil, for instance. We might not be so insistent on keeping the temperature at a near-toasty 78 degrees (instead of putting on a sweater or light coat and letting the temperature go substantially lower — 70, even 68, say) if we were paying true costs.

In many cases, our homes are much larger than we need them, though that’s changing during the current crisis as people lose their homes, jobs, or both, and by force of circumstances have to downsize. I’m single, but even singles often like to have some wide-open spaces in their homes, more than is necessary. I, however, have lived in one-room efficiencies as small as about 200-250 square feet — and had PLENTY of room. I saved money on both rent and utilities, and the housework was much less than if I had had larger spaces (and I loathe housework).

And what about other possessions? Do we really need to have televisions in the family room, kitchen, and every bedroom? Computers? How about that 12-foot-deep and 6-foot-wide walk-in closet stuffed with clothing . . . for one person?

On the utility question, I’ve cut my utilities (electric and water; don’t have gas) by around 60%. And I’m fine. I’m on my computer many hours every day, with the TV on in the background (since I’m a news addict). I don’t sit around in the dark. I do live in a tropical country, but I haven’t turned on my aircon in months, using fans instead — and I hate heat. (Today’s high was about 100, for instance, but with my fans, I was just fine in my ground-floor apartment in a 9-floor apartment building.)

Shopping is my biggest failing; if I let myself, I’m terrible about impulse buying. I’m finally learning more and more to make a list and to stick with it. Further, I don’t go shopping the second I finish the list; I make it out a few days before I need to go — and then I consider it, ruthlessly eliminating anything I don’t *actually* need.

So, some of my thinking involves getting hit with a hammer from the outside — fuel prices, for example — while some of it is more along the lines of “sit-up-and-smell-the-coffee.” If I don’t buy that suit that runs $400 but that I don’t really need, that $400 for something else A vacation fund. Next year’s school clothes. An advance payment on the mortgage or an extra car payment, maybe. A few more Christmas gifts. Whatever.

Or, $400 more in the rainy-day fund, something more and more people are appreciating.

I hope we don’t have to have another Great Depression. And I hope that if we do have to go through that, we’ll come out intact, if down, on the other side.

Posted by MekhongKurt | Report as abusive

Felix, you are right that in all probability this is late for Greece. It is hard to imagine how Spain will be able to find $250B to roll over their maturing debt, meaning repeat of the show.

By now it is laughable to see how people got fooled that without political union how a single currency would work. In a normal course, if Greece were to have its own currency the debt would have had ‘automatic hair cut’ due to free falling currency. On the flip side the country would have had a chance to get out of debt via export. Both options are not available to Greece and Spain. (That is why I believe it is unlikely such crisis to come to UK & USA. Also read California news, state running $3B ahead in tax collection….repeating the phenomenon at Fed level….)

So as your site said, likely outlook: negotiated ‘haircut’ while Greece and Spain forfeiting any road map to get out of this mess because they will be kept inside Euro. Even Germany will continue to have the albatross around in the manner of drastically subdued demand for her goods in near Europe. Looks like instead of outright money and continued bailout moral hazard, Germans prefer the curtailment of their future growth. It is a sovereign nation and that is their right to make the call. None of their option is good.

Posted by umeshgeeta | Report as abusive

Well stated ‘gramps’.What you have written is totally logical.Such commonsense is a breath of fresh air.If we took some time and mental disipline to discern what we actually ‘need’as opposed to what we think we need,we may be surprised!

Posted by SANAGAT6 | Report as abusive

It’s dreadfully superficial to assume that the Goldman-induced Greek crisis will just churn woefully on, spiraling inexorably toward Athenian demise, without major intervention.

For one thing, your calculus synthesizes unregulated regard for the fake rules and fraudulent *reputation* of the predators involved while making it appear as though austerity unleashed on those least involved (i.e. European civilians) were an inevitable outcome. And that’s just plain wrong.

For another, if he wants to keep his job, Bernanke needs to conclude his dithering investigation of GS for shafting Europe. This, even by Ben’s low standards must surely end soon and not by any means favorably to those “fabulous” handmaidens of Enron. Judicially as well as politically, it’s a sure bet that much more than GS’s “reputation” is heading for the toilet.

For yet another, the EU isn’t just wagging the finger at Greece: they’re steaming mad at the disreputable WS sods who spun the web of deceit by which Greece’s issues were enmeshed in derivative nightmares. The Greeks are not alone – not just talking France or Germany here, but the whole Eurozone lining up for battle.

If the UK doesn’t step up to the wicket, the Cayman Islands are likely to be shut down faster than Greece is. GS is already past its shelf life in China, Australia and Japan – it’s that serious. In a world without Goldman, Greece and many other nations can survive, better than the other way round.

One way or another, a game-changing overhaul is about to happen. Complex financial vehicles as we (barely) know them simply won’t be around much longer, nor will the lethal obligations they’ve brought into existence.

Long before we get to the right-hand side of your projection curve, it ain’t going to be business as usual anymore. The scenario in which Greece turns over the Elgin Marbles to Blankfein so he can have them carved into a bidet isn’t going to apply.

Instead of hand-wringing powerpoint projections you can expect radical consequences, pretty darn soon. Goldman fanciers, brace yourselves for impact.

Posted by HBC | Report as abusive

I will skip the bank bashing and anti capitalist rhetoric and stick to the Greek issue. Anyone who knows Greece well will not be surprised by the outcome of their membership of the Eurozone. The Greeks were always going to look at the short term gain they could make from membership and never the long term implications of being a responsible part of an common currency. And gain they did! Unfortunately, like overspending on your credit card, this can only go on for so long before it’s payback time. The problem is that the country is to all intents and purposes bankrupt. A Greek source warned me that the original figure of 12.7% was too low and he was right. He reckons that the true figure is 14.5 – 15%. Add to this the fact that the economy is going backwards and it is easy to calculate that the debt will end up much more than 115% of GDP. The interest keeps going up while the ability to pay goes down. The banks that have exposure to Greece would be better off cutting their losses and refusing to lend more until Greece is out of the Eurozone. It will be cheaper in the long run! You need to be in Greece to realise that it has very little foreign currency earning potential outside of tourism. The shipping money is kept offshore and agricultural exports are small. Unfortunately since joining the Euro prices have shot up making it expensive for tourists (and locals!). When Greece is once again a cheap destination then folk will flock there in the numbers they once did. Greece needs to re examine what it is good at and focus on that and give up trying to be a Holland or Germany. Unfortunately it looks as if more cash will go down the plughole before that realisation dawns.

Which raises questions about the future of the Eurozone itself. I have always thought that it was a political fudge and never an economic decision. If the French hadn’t been so keen to protect their farmers from competition from Spain, Italy and Greece outside the Eurozone then these country’s would never have gained entry. As it is the Euro is doomed. Not tomorrow ( as it can be patched together for some time) but ultimately doomed. The member economies, fiscal cultures and disciplines are too disparate for it to succeed. Germany will eventually baulk at the cost and then it’s all over ( in it’s present format). I could see a new Eurozone consisting of Germany, France, Holland, UK, Denmark and the nordic countries emerging. But the current model is in a slow motion car crash.

Posted by paulos | Report as abusive

“no country can sustain Greece’s combination of funding costs and debt-to-GDP ratio, no matter how much German money it burns through”

I suppose “German money” is meant precisely to reduce those “funding costs”. The question is whether Greece has enough fat to cut in response to German diktat that comes (wisely) bundled with German money. When I was a student in London in 1978-1981, I kept watching on the TV about “cuts” in public spending. I spent many years away from Greece, in the rest of Europe and in the US, and all I kept hearing about was public spending cuts. Never in Greece, though. Greece started along that path only last month. Surely those Germans will find very much waste to cut. It has been accummulating for the last thirty years.

Posted by ggeorgan | Report as abusive

With regards to the “cuts” in public spending and (my addition here) tax increases:

I think we’re all going to be surprised at just how big these changes will be in Greece. Public spending is MASSIVE and there is a boatload of fat that can comfortably be cut.

The new “layout” of the land, the Kalikratis plan, essentially cuts down the state by half or more. 50 prefectures, with prefects & councilmembers etc have now been reduced to 7 regions. Something like 1000 city councils have been merged into 330. Of course, thousands of state employees will be affected, but they all had phantom jobs anyway. The only potential problem is social in nature, if unemployment, already at 11%, grows quickly to say, 15 or 20%.

But the state will be better off. And that’s what’s needed right now.

Taxes – According to local reports, the IMF found that in all of Greece, only 15 people had a declared income of over 1 million.

75% of doctors and lawyers had declared incomes below the poverty line.

These statistics show that there is ample room for increase tax revenue, simply by chasing the massive tax-dodgers and the local tax offices have started, doing things like using Google maps to identify all homes with pools and cross-referencing this with people who’ve reported this. Guess what? Thousands of homes have pools installed (which the law says you must declare an income of X in order to have such a luxury) yet the number of declared pools is…300.

This is just one example of better taxation measures that are only now starting to take hold.

I don’t know (I can’t know) how much the public finance will improve with all the above measures but I wouldn’t be surprised if the improvement turns out to be startling. We all know that for the longest time, the greek state was profligate and “tax” was a four-letter word. Now that things are definitely changing on this front, I’m extremely interested to see what the effect will be. It’s often been said that greece is a poor country with rich inhabitants but this is already changing, because everybody knows that the future is at stake.

Posted by FSantos | Report as abusive

It’d be interesting — I mean, scary — to speculate on what ‘fail’ means here. If there’s anything to learn from the Great Depression, it’s that awful economic conditions can have absolutely toxic political consequences.

Posted by leoklein | Report as abusive