Thursday, 9 February 2012

It`a all Greek to them!

The Greek tragi-comedy continues: an early agreement to secure an 130 billion euro rescue package from the Troika (the European Commission, the IMF and the European Central Bank) is getting less and probable. The officials failed to reach common ground on the sensitive issue of job cuts, lowering pensions and reducing the statutory minimum wage. IMF requests, or let`s say recommends Papadendreou to sack approximately 15,000 government employees and reduce primary pensions by nearly 20% in order to cut the budgetary deficit by 3 billion euro in 2012.

No deal secured

The remaining issue still to be settled is revolving around the pension cuts, which would reduce the deficit by 300 million euro. Of course the approval of such a measure would be a serious political blow to the governing coalition, which finds its popularity, and political acceptance for that matter dropping precipitously. The impending issue is that the 130 billion rescue package is vital for the Greek treasury, as it faces a 14.5 billion euro bond roll-over on the 20th of March. As research from itmtrading shows the Greek will have to come up with almost 30 billion euros to refinance the maturing bond issues, not to mention the financing of its 8%-to-9%-of-GDP budget deficit (the GDP is forecasted to shrink by an additional 5% this year):

Nobody wants to get  haircuts

The voluntary 70% debt haircuts proposed by the European Commission are lacking voluntaries. It seems that nobody is willing to accept a 70% instant loss, in what seems a classic game-theory situation that resembles the free-rider`s problem (everybody wants to be a free-rider, but not all can free-ride in the same time). Provided a partial default of 70% of some of the outstanding debt is to happen, the ratings agency Standard and Poors argues that it still will be too little to late to alleviate the 169% of GDP public debt. The figures are resembling the US 1929 Great Depression. From Cbonds:

  • Some 500,000 Greeks have no money at all, their unemployment benefits having expired.
  • Nearly 500,000 people have fled Greece looking for a better life in other countries.
  • Unemployment for those under 25 is nearing 50 percent.
  • Gasoline has hit nearly $10 a gallon.
  • Hospital admissions are up 25 percent, but hospital budgets have been cut 40 percent.
  • Suicide rates are up 40 percent, the fastest increase in Europe.
  • The rate of increase in homelessness is the fastest in Europe and one Non-Governmental.
  • Organization estimates there are as many as 15,000 people living on the streets, in cardboard boxes and under bridges and sleeping on park benches, scenes from the Great Depression.
  • Violent crimes, including murder, have doubled and Greeks are growing increasingly anxious about robberies and break-ins.
  • With far fewer workers, there’s a lot less money going into the pension system which could see a $3 billion drop in contributions needed to pay the elderly, who could see their auxiliary pensions cut by 35 percent .
  • Some one million Greeks in a country of 11 million say they can’t pay a second 100 percent increase in property taxes being put into electric bills and could have their power turned off – which would decimate revenues for the national power company.


By being over-bureaucratic in their decision process, the European  officials made sure that the financial medicine they are to provide is too little to late. The rapidly compounding debt has far outreached the point-of-no-return and delaying the default will only get things worse. Let the banks that parked easy money in Greek debt thinking that they would get a sleek carry trade take the loss and move on. Iceland offers a great insight in this matter.

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