Thursday, 20 September 2012

Extending vs Haircutting the Greeks

Although today has been heralded as the day when the Greek government and Troika would reach an agreement on the new austerity measures and reforms, don't hold your breath. While the Greeks are waiting to see how many benefits will be cut and how much will salaries and pensions will be reduced, for the rest of the world, hope is that with this package, voices claiming a future Grexit will quiet down. 

On the subject, David Riley, a director at Fitch Ratings, has stated that "An agreement on any change to the Greek program before the next EU summit in October would reduce the risk of a Greek exit or second default". He has also stated that the resolution of the crisis will not be quick and that any positive development would support Fitch's view that the Eurozone would survive. Oh the support! It seems just like yesterday when most rating agencies had their money on the Eurozone failing (or was it a month ago? I wonder what John Paulson and George Soros are betting on now).

Truth is, Fitch is right. The Eurocrisis is not over and it will be quite long until its over. Although I am not good at predictions, I think that 2013 will not be a great year as well, however, still better than 2012 for most nations (with the exception of Cyprus and probably Spain. The biggest question is what will happen to France and Germany). I would like to agree with predictions that 2014 will bring growth back to the Union, nevertheless, I would prefer to refrain from it for the time being. Time will tell. If the Greek austerity-and-reform package is granted an extension then the EU will be a much quieter place in 2013. What remains to be seen is what kind of "magic" will Mario Monti and Mariano Rajoy will do in Italy and Spain respectively to prevent their economies from blowing up.

The CEO of Commerzbank, Martin Blessing, has said that another Greek debt haircut is eminent. What exactly are they going to cut? Banks are now going to receive about 21 cents for each euro they have invested in Greece and this has been the main cause for financial turmoil in Europe. If a even if another 30% haircut is implemented then banks will receive 15 cents for each euro invested. If that does not wreck more havoc in the already trembling South economies then nothing will ever will. Bank applications for bail-outs will soar and the ESM will put its newly printed money into good use if a new Greek haircut is promoted. So, thanks Martin but keep the Blessing for yourself. (as a note, Commerzbank has no exposure to Greek debt, so the CEO might feel a bit free do say what he pleases on the subject)

Extending the period of restructuring in Greece would be a much better alternative than a new haircut, especially for Cypriot, Italian and Spanish banks. If changes are implemented in a longer horizon then GDP will not contract as much (maybe even at all if the reforms are gradual) which would mean that debt, as a percentage of GDP, will be reduced in the future, thus making it more sustainable.

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