bailing out greece

January 14, 2009

Standard and Poor’s today downgraded Greece to A-, which was largely expected. Although Greece is a member of the Eurozone, S&P see the increasing deficit as a problem. And arguably, a bigger problem is that although Greece has experienced some remarkable growth in the last few years, the deficit issue was not adequately addressed by the government. In fact Greece has one of the highest public debt to GDP ratio in the world, and topping that with one of the worst current account deficits does not really help.

The folks at the have a very interesting recent presentation which touches on the matter. On p.11 there is a discussion on who would bail out Greece in case of troubles (either deserved or undeserved). As I understand it, their point is that no institution will be interested or capable of rescuing the Greek economy. They also see some cracks appearing in the <<weakest link>> of the Euro area.

And Greece will need to go to the global credit markets for EUR50bn+. Only yesterday they raised a mere EUR2.5bn, amidst higher spreads, which are now about 250bps (2.5%) above the German yield. Now they will have to raise 20 times that amount.

Should we expect spreads shooting up and Greece defaulting on the existing debt as a result of its inability to roll over? A speculative attack on Greek bonds? A test for the euro?

An IMF document discusses the Greek economy. Overall Greece is exposed to south-eastern Europe and the Balkans, which is not surprising. What surprised me is what a crap job Greek banks do within Greece, with such a high percentage of non-performing loans recorded in a boom period. I can only guess the quality of the loans that they have given in Albania, Romania and Serbia…


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