Financial Stability News

News about financial stability and central banking

Greece from bad to worse

According to this post from Naked Capitalism today, the situation in Greece is deteriorating rapidly. Unemployment is approaching 20 %, suicides are up over 20 % since 2009, and pharmacies are running out of medicines. The only solution around seem to be more budget cutting, with further devastating effects.

As GDP contracts, the IMF targets for the budget deficits seems more and more elusive, and there are suggestions that the only way out is for bigger haircuts on private creditors (i.e. banks and hedge funds, sitting with most of the Greek bonds). However, the current Private Sector Initiative (PSI) is running into headwind, and according to this story is about to break down (even based on the current proposal for haircuts).

At the same time, hedge funds are positioning  to reap profits either way: If no haircut, they will get their money back in full; with a haircut, they bet on cashing in on their CDS protection or force a 100% conversion. Latest estimate was for hedge funds to sit on 80 % of the Greek debt, after European banks unloaded it before Christmas.

So, is an exit from the Euro an option for Greece? Not according to London-based hedge fund firm Toscafund: “A Greek exit from the euro zone would be worse than catastrophic and could provoke greater social unrest, Zimbabwe-style inflation and a military coup”. But as someone noted in a comment: They must be heavily invested in Greek bonds to pull such a horrible story. But then, you never know.

With so much focus on the problems in the peripheral countries, S&P came with a welcome balancing news in the afternoon: A possible downgrade of France and Austria. Which shows that all the EU countries are in the soup together. Perhaps it is time to find ways to get out of it together as well. This alternative view is presented by Dr. Heiner Flassbeck from UNCTAD in thisYouTube video. If you have the time, watch it over the week-end and learn how Germany is the real villain in the story. Refreshingly different perspective to the current travails of Europe.

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One response to “Greece from bad to worse

  1. Jeff January 14, 2012 at 10:59 pm

    There are no good options for Greece, but defaulting and/or leaving the euro would at least retain some sovereignty from the banks.

    http://jeffstilley.wordpress.com/category/economy-2/

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