Two years ago in "Greek Crisis Is Over, Region Safe", Prodi Says - I say Liar, Liar, Pants on Fire! I compared the then Grecian situation to that of Damocles. Well, things have gotten much worse since then and I believe I was one of the most bearish (and accurate) at that time. Now, Greece resembles Icarus tumbing down from the skies, drenched in Hubris. Subscribers can download my full thoughts on Greece's sustainability post bailout here - debt restructuring_maturity extension blog - March 2012. Professional and institutional subscribers should feel free to email me in order to receive a copy of the Greek restructuring model used to create these charts and come to these conclusions.
Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.
The primary balance looks at the structural issues a country may have.
Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!
The best analogy I’ve heard for the Grecian situation is the highly indebted family that has binged on credit cards creating huge interest and debt service payments. They then lose the earning power of one of the parents at the same time that a spike in medical bills and household repairs (ex. Murphy’s law) dig deeper into family finances. The family is then forced to continue spending via credit cards to meet these unforeseen expenses.
In short, the main reason for Greece requiring additional funding is its primary deficit but the main reason why this latest (as well as the two rounds before this latest) round of bailout funding won’t work is Greece’s primary deficit.
- Even with the elimination of interest payments Greece will spiral downward.
- Even with the near total absolution of its debt, as in a 90% haircut of the most recent bonds issued (which were swapped for bonds of which investors took an effective 74% haircut), Greece will spiral downward.
- That is the likely reason why these newest bonds back by EU/IMF bailout economic capital are already trading 70 points below par and rated CCC.
- These bonds are almost definitely slated for a 90%+ haircut by 2016.
With the expectation that austerity measures are not going to drastically reduce Greece’s expenditure in the coming fiscal quarters, and the revenue has no visible source of acceleration either, the assumption built into our modeling is that Greece will continue to experience primary and (as a result) fiscal deficit.
Long story, short - anyone who has purchased this latest round of bonds from Greece should expect a very, very nasty haircut before 2016, and likely sooner rather than later.
Next up I will review our CRE, banking and insurance picks to see how such a re-default will affect them.
I'm in the Dubai/Abu Dhabi area and will meet any readers/subscribers who are local and willling to discuss opportunities.