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Greece is the WOR(L)D…

Prime Minister George Papandreou

Investment adviser John Mauldin has some advice for Greece: In order to avoid default, the socialist government of Greece should impose a severe austerity regime on its voters. Greece could default on its debt, but Wall Streets would not take too kindly with that move

…if Greece defaults it does not necessarily mean they have to leave the EU, any more than if Illinois defaulted they would have to leave the United States. Greece could still use the euro and life could go on. EXCEPT. The markets would no longer lend the Greek government money at anything close to a livable rate. Greece would be forced to balance its budget.

Greece, because it uses the euro also doesn’t have the option of devaluing its currency as Argentina was forced to do when it was pushed to the brink. So their only option is to downsize government:

Since they are part of the euro, devaluing the currency is not an option. The results of controlling their fiscal deficit would not initially be pretty and would almost insure a serious prolonged recession or depression in the Greek area, with fall out in the region. It would be a sad decade for Greece. But in the long run, it is a better option than default.

A better option for whom? Mauldin is not clear. Perhaps it is better for the member states of the EU, who would be threatened by the Wall Street if they show any leniency toward Greece:

Bailing out Greece without serious and credible deficit reductions by their government over the next few years would simply delay the problem, and it is not altogether clear the bond markets would go along for very long.

So the writing is on the Wall Street – no help for Greece:

At the end of the day, it may be the bond market which forces the Greek government and its people to take some very bitter medicine.

In case you didn’t get the message, Spain, Ireland, Italy, Portugal, et el, we’re coming for you next:

Stay tuned. This is just the beginning of what will be a series of sovereign debt crises over the coming decade. It is important for the world that we get this one solved right, or the consequences will be quite severe.

Further, and more important to the rest of Europe and the world, the results of a Greek default would be financial turmoil. 250 billion euros (and maybe 300!) of Greek debt is in international bond funds, pension and insurance companies, and above all at banks. Think German banks. Already undercapitalized banks. Also, think of all the investment banks who have been selling relatively cheap (given the apparent risk) credit default swaps on Greece, in an unregulated market, exposing their balance sheets. What should be a simple, if sad, matter for the Greeks, becomes a problem for the world, just as subprime debt in the US caused a world credit crisis. And the risk of contagion from Portugal, Spain, et al is serious. 2 trillion euros of debt could get downgraded by the bond market in very short order. It could be a replay of the last credit crisis, just with new actors as the prime problem.

  1. February 9, 2010 at 8:14 pm

    In and of itself a Greek bankruptcy or bond default should -in theory- not affect the Euro as such very much, Greece being maybe 3% of the total. However, just as a Californian bankruptcy would reflect badly on the “state of the Union” as a whole so would the default of on EU country, coupled with the rising interest rates and thus further destabilisation of the remaining over-leveraged member states, make investors wonder when sovereign default across the board is likely. Thus they wouldn’t commit themseves to bonds of longer maturity and that’s the beginning of the end.

    • charley2u
      February 9, 2010 at 8:59 pm

      I believe that there is no threat of default in Greece. What we are witnessing here is global bond market terrorism, designed to force the socialist government to impose austerity.

      The entire point has been to dump years of odious deals and bond market ponzi schemes into the laps of the socialists, and let them convince the unions to capitulate. Once the socialists have succeeded in renegotiating the social contract, they will be thrown a lifeline – on decidedly unfavorable terms. (It never hurts to rub salt into a festering economic wound. At least, it never hurts the right people.)

      Wasn’t this what happened with AIG?

      The beginning of the end occurs when the socialists renounce Greece’s national debt. Once this is done, they can then go to the unions and discuss how the budget should be balanced without appearing to be the toadies of Wall Street banksters.

      The solution, should this happen, is simple: reduce hours of work. But, my guess is the army takes power to protect the bondholders.

  2. February 21, 2010 at 3:50 pm

    It is trending towards Japan-like status, but relatively slowly, to the point where we won’t get to where Japan is today for decades. And because Japan isn’t sitting still on this front, by the time we look like the Japan of today, the contemporary Japan will look a lot worse.

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