by Don Alexander, MBA
Associate, RSD Solutions Inc.
The stakes continue to remain high in Athens as Greece’s economic rescuers attempt to craft another bailout facility. Demonstrators, while angry, continue to be dazed and confused, and so are investors. However, if talks breakdown it can have catastrophic consequences for Greece, the euro and the financial system. The Greek banks and government would run out of money, cause a sharp euro downdraft and severe financial contagion. The addition of another liquidity facility only postpones the day of reckoning. Even if the new facility appeases the bears, the fundamental problem remains is that the country remains uncompetitive in global markets. It will take years of painful structural reforms to restore competitiveness. Investors with Greek or euro exposure may have to take a painful haircut much as investors in Argentina did in 2001.
Despite the confusion in the streets, there remains a number of questions about the size of the package, of euro 119 billion (about US $120 billion) and the future viability of the Greek economy in its current state. There seems to be a mistaken belief by Greek politicians, that the would be rescuers, would make available another euro 120 billion (or more) in 2012 to provide relief through 2014. This would allow the new EU stability mechanism an opportunity to provide needed relief. However, it seems to ignore the view of investors, the need for assistance to other countries and the recapitalization/restructuring of European banks.
In addition, there are a number of challenges in German courts that the facility is “bridge-financing” and does not violate the “non-bailout” clause in the German and European Constitution. However, analysts do not expect the court to rule the bailouts as unconstitutional, but the uncertainty surrounding the situation adds to potential risks.
In addition while Greek CDS spreads are near record levels, there seems to be further confusion as to what constitutes a default. Rating agencies consider any type of debt restructuring, reprofiling, or even a voluntary rollover of maturing debt as a potential default. However, a rollover according to the International Swap Dealers Assn. (ISDA) may not trigger a credit event. European officials are trying to get around rating agencies’ reservations about a rollover so as to not to trigger a default or credit event.
The depth of the recession is taking a severe toll on the Greek economy as the economy could shrink by 4% in 2011, after falling over 4.5% in 2010. The politicians continue to defend the welfare state and admit the medium-term budget targets are not achievable. There is a growing concern that if the fractious politicians cannot make unpopular decisions – how can they avoid bankruptcy? Dazed and confused - do you know your potential risk exposure?
No comments:
Post a Comment