Credit: Shutterstock photoThis morning, as I searched for writing inspiration, I flicked through the business TV channels, as I often do. I didn’t have to look for too long before realizing that an old problem, Greek debt, was once again rearing its ugly head.
Well, to be more accurate, its head never actually disappeared from view, it just disappeared from our TV screens. You may remember that just a few years back the coverage of the Greek government’s serious debt problems was ubiquitous. At the time, it seemed that this was the thing that would bring the global recovery to its knees. Then in stepped the ECB and the IMF, and Greece was no longer news. The crisis in Greek government financing is though, as these things tend to be, a potential car crash in super slow motion. The rescue package that the EU and the IMF put together was really just a temporary fix. Without any major reforms the real problems were always going to come this summer and in 2019 when massive repayments of principal come due. Those repayments total around 7.4 billion Euros this year and 10.6 billion in 2019.
Despite this, however, Greek bonds have been gaining in value over the last few weeks, with yield falling to close to recent lows. The benchmark 10 Year Greek bond is currently yielding around 7%, which in part explains the lack of coverage when compared to the 25%+ yields in 2012 or even the 15% top two years ago.
The problem, though, is that the optimism that has caused those yields to decline is all about the ECB, with IMF help, once again coming to the rescue. This time around though there is a good chance that IMF involvement will make the cure worse than the disease. The package of austerity that they will most likely insist on would be bad enough if the Greek economy were at least mediocre, but two quarters of negative GDP growth in 2016, including a Q4 decline of 1.2% make it a dangerous time to cut spending even further.
Logically then you may ask why the ECB is looking for IMF involvement. Why not just buy a bunch of Greek bonds themselves, effectively handing Greece a big pile of cash while also driving rates down? Well, put simply it is because ECB rules don’t allow them to. They have effectively done that in the past, but, as this excellent Bloomberg blog post points out their own rules preclude them from holding more than a third of the debt from any EU member country, and they are already close to that level with Greece.
It looks, then, as if the ECB and IMF will once again have to step in for a short term bail out of Greece, but almost immediately that happens the prospect of an even greater crisis in 2019 will start to dominate in the minds of traders and investors. With each bail out the authorities are depleting future options to repeat the operation and it is becoming increasingly obvious that sooner or later things will come to a head. The question then become whether or not the damage to financial institutions can be contained.
The recent buying of Greek bonds, however, presumably in search of short term profits, indicate that the world’s banks have learned little from the events of 2008/9. They are still engaged in a game of “hot potato” taking short term profits in the hope that they won’t be left holding the debt when the music stops. That is a dangerous game for all of us, and the risk makes the political back and forth here in the U.S, look like a distraction and an indulgence that we can ill afford.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
