The Greek problem in a nutshell – time to break out the Ouzo?

10 July 2015


Greek Economy

 

 

 

 

 

The Greek economy – no more moussaka?

There is no easy way to say it and no way to sugar-coat it either: the Greek economy is in a mess!

Greece’s debt mountain stands at 320 billion euros of which 240 billion euros is represented by European bailout funds. The country’s debt to GDP ratio stands at a staggering 177% and there has been a 25% fall in GDP since 2010. The unemployment rate is currently at 25% and among those younger than 25, the rate is above 50%.

Since 2010, successive Athens governments have relied on two EU-IMF bailouts totalling 240 billion euros. Greece last received a cash injection from international creditors in August 2014, and when the Eurozone agreement expired on the 30th June 2015 the Greek government also failed to make a key debt repayment to the IMF of 1.5 billion euros.

From a technical standpoint the IMF has avoided stating that Greece is anything more than in arrears but from a realistic standpoint everyone else knows that they are in default. Greece needs more bailout funds to stay afloat but the rest of Europe has said “no, not without additional reforms”.

In Greece the banks are shut and withdrawals from ATM machines are limited to 60 euros a day.

Greece has asked for additional funding from Europe but so far Finance Ministers of the other member countries have also said “no, unless Greece submits to making changes” – and these changes are unpalatable to the current administration.

Greece is quickly running out of cash and time.

 

Who owns Greece’s debt – can we take payment in Ouzo?

Greece-Debt-Crisis1

 

 

 

 

 

 

Greece’s debt largely consists of EU and IMF bailout loans, loans from domestic banks from within the EU and some loans from outside the EU (including 11.3 billion loaned by the United States).

Graphically this can be represented by:

Greek Leading Creditors

 

 

 

 

What is GREXIT

GREXIT is effectively defined as the Greek withdrawal from the Eurozone and possibly the European Union too as a result of Greece’s inability to deal with its increasingly unmanageable public debt.

The phrase “GREXIT” effectively derives from combining the word Greece with the word Exit.

Proponents of GREXIT argue that leaving the Euro and reintroducing the Drachma would dramatically boost exports and tourism and encourage the local economy while discouraging expensive imports.

Opponents of GREXIT argue that leaving the Euro would impose excessive hardship on the Greek people, cause civil unrest, destabilize and harm the reputation of the Eurozone, and could cause Greece to align more with non-EU states.

At the time of writing of this blog, GREXIT would leave the European Central Bank (ECB) with losses of 118 billion euros lent to Greek banks and 20 billion euros spent buying up Greek government bonds. As a central bank the ECB could simply print the money it has lost to recapitalise itself, although the German government in particular has warned of the dangers of the ECB doing this.

GREXIT could create a potential banking crisis in the Eurozone Area although this is perhaps unlikely. The European Union has as a bloc worked hard to cordon off the banking difficulties of Greece from the other 27 members of the Eurozone. However, even with an effective disaster plan in place, some contagion throughout the rest of Europe is inevitable. The IMF has warned that risks and vulnerabilities remain and a sharp fall in world markets arising from GREXIT is a possibility.

 

How a GREXIT may impact on Trinidad and Tobago and the rest of the Caribbean

 

GREXIT could effectively impact on Caribbean markets in these ways:

  1. GREXIT would almost certainly further weaken a depressed Eurozone economy overall. The knock-on effect of this is that a weaker Eurozone economy will demand less products internationally including commodities like oil and gas. The implications for Trinidad and Tobago as a major exported of LNG are obvious.

 

  1. GREXIT (and in fact the default of Greece) will create a temporary holding back on lending to emerging markets and the rates of interest charged on international borrowing will almost certainly increase for those emerging markets. Inevitably it will be harder for the developing economies to borrow at least in the short term.

 

However, at present Caribbean and Central American Fixed Income securities have been pretty much insulated from the effects of a potential GREXIT and ripples from this issue have so far been largely isolated to Europe.

 

Europe and NATO don’t want no freaks or why a deal might still be found

Even in these final hours there is still a possibility that a deal may be found. Despite the increasingly harsh and conflicting rhetoric coming from both sides, in the final analysis not finding a solution may be too unpalatable for the rest of Europe and also – to a certain extent- the United States to contemplate.

To understand this one has to consider the geopolitical importance of Greece to the rest of Europe.

Firstly, Greece occupies a crucial strategic location between Italy, the Balkans, North Africa and the Levant. As such Greece acts as an anchor for the Balkan states (in this instance primarily Albania, Bulgaria, Macedonia, Montenegro, Serbia, and Kosovo, all of which may be considered to be both immature democracies and underdeveloped economies.

Secondly, Greece effectively acts as a gateway for immigrants entering the European Union (EU) from the Middle East and North Africa. Any weakening of Greece’s ability to police its EU borders (irrespective of whether it leaves the Schengen Area of passport free travel within the EU states) would be viewed with alarm by all of the main players in the EU.

Thirdly, a weakened Greece will come under increasing pressure from Turkey who has long argued over the sovereignty of Cyprus and other islands in the Aegean Sea.

Fourthly, a Greek exit may lead to others leaving the zone. Consider that if Greece goes, Cyprus will almost surely follow, and with anti-austerity groups becoming more prominent in Spain, Portugal, and to a lesser extent Italy others may follow sooner rather than later. If one domino falls, as sure as eggs are eggs, others will follow.

And finally (and perhaps of greatest significance to Cold War historians, geopolitical enthusiasts, conspiracy theorists and Washington D.C.) Greece’s exit from the Eurozone would weaken the EU and most significantly NATO. If Greece leaves the Eurozone then it is likely that they would have to leave the EU too as the two appear to go hand in hand.  The effect of a departure on Greece would create a fresh economic “whirlwind of disaster” that could be so dynamically catastrophic and Greece would become so geopolitically vulnerable, that it could fall under the influence of Russia. /insert suspenseful soundtrack.

Consider that Russia has for the last five years pursued policies that have increasingly attempted to undermine the West. A weak and isolated Greece would offer it a fresh ally, because a weak and isolated Greece would need a new external economic backer. While there could be no blank cheques from Russia given her economic condition, Russia would still be in a position to provide some level of support. A weak friend is after all better than no friend at all!

For these reasons a solution may be found and the marriage of Greece to the EU, however unhappy a union that maybe, may and in all likelihood will continue.

Clearly based on the many competing interests and dynamics, GREXIT (or not) and its consequences may take more than 24 hours to playout fully.

Everyone has to “hang-tough” on this one and we will all have to sit back and wait and see….

 

In other (negative) news:

Though not linked to the Greek Drama, we note that due to the chapter 11 bankruptcy filing of Baha Mar (US$3B resort investment in Bahamas), the Bahamas 2024, 2029, 2033 and 2038 fixed income sovereign bonds have all declined sharply.

That said, stay tuned for a blog on Baha Mar and the implications of its bankruptcy for this part of the world.

 

Looking for some investment grade paper with a yield of over 4% , we found them for you ! See our picks for today, the highlighted bonds at the following link:
http://firstlinesecurities.com/wp-content/themes/fsl/uploads/2015/07/FSL-MARKET-UPDATE-150710-new.pdf

Give us a call (868-628-1175 / 868-628-1554) or send an email:

Mike: michael.derrick@nullfirstlinesecurities.com

Ihsan: ihsan.slater@nullfirstlinesecurities.com

 

 

 

 

 

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