I just had a very interesting conversation poolside at the Beverly Hilton with a couple of high-profile delegates at the Milken Global Conference. The pool, one level down from where all the panels take place: is clearly the place to be: Arnold Schwarzenegger was just a couple of tables away. But I doubt he was talking in great depth about the Greek debt situation and what’s likely to happen there.
I walked away from the conversation decidedly bearish on Greece. Why?
I buy nearly all of this, with the exception of #6 and #8. My feeling is that a Greek default, while it could in theory be a disorderly and chaotic simple failure to pay, would more likely take the form of a public exchange offer, which would help to put a floor on the price of Greek debt.
And I very much doubt that defaults in southern Europe would improve the fiscal status of the US. To the contrary, the flight-to-quality trade would just make it even cheaper for the US to borrow money, and the lesson we’ve all learned many times is that so long as a country has lots of access to cheap money, it’ll go on borrowing.
But I do think that there’s a pretty low limit to how much money Germany is going to spend bailing out Greece. It’s already bailed out one basket-case European country, when it absorbed East Germany. It’s got no appetite to bail out another.
With respect to #1, #2 and #3 – congratulations, you’ve proved the impossibility of not only the 2004 and 2007 accessions, but also of the Common Agricultural Policy.
why does nobody discuss a haircut for the investors? They went into the higher yield intentionally, and yet nobody takes them into consideration.
Salesby- in 2005 you got an extra 15 basis points for lending money to Greece vs. Germany. Is that what you call a “higher yield”?
Felix- there was a good piece put out by Barclays earlier today, and discussed on FT Alphaville, showing that if Greece gives a 90% guillotining (because you can hardly call that a haircut), they still need a 7.5%-of-GDP fiscal consolidation to stabilize debt-to-GDP. No Eurozone country has ever pulled off a positive 7.5% swing in the primary balance over a three year period.
Accordingly the only way for Greece to become solvent is to exit the euro, and given all the obstacles the Eurozone has put in the way, that will likely be about as orderly as Argentina’s exiting the “convertibility” regime.
Felix,
Let me promise you that US debt will not become cheaper to issue after a greek default. The next time a 1st world soverign defaults will be the first time.
At that point the rules change. The risk free rate is no longer risk free and new finance text books get written with hard assets like gold drop below cash on the risk / reward efficent frontier.
Let us pray that Greek does not default!
Good luck in interesting times!
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