Tags: Greece | ECB | troika | Europe

Is Greece the New Lehman Brothers or Bear Stearns?

By    |   Wednesday, 11 Feb 2015 07:51 AM

By the time we go to print, we might be witnessing the first domino fall in the collapse of Greece.

Or maybe nothing will happen. The Dow Jones Industrial Average closed 139 points higher Tuesday, showing no concern whatsoever.

We're watching another Greek drama that could have significant unintended consequences — far beyond anything the market has priced in today. When the Greek crisis began four years ago, its debt-to-GDP ratio was 120 percent. The world got concerned and the 10-year bond yield rose to 48.6 percent. Everybody agreed that Greece couldn't actually pay that debt, and since so much of it was owed to French and German banks (with not an insubstantial amount owed to Italian banks and those in other countries), the eurozone decided to bail out Greece, which was a backdoor way of bailing out their own banks. In later years, when it came to Cyprus, it was cut loose and crushed because it owed very little or nothing to European banks. Go figure!

So as the bailout played out in Greece, the whole world breathed a sigh of relief and the yields plunged to well below pre-crisis days. But the rescue came with austerity measures, and GDP shrunk by 25 percent. As a result the debt-to-GDP ratio is now 175 percent. If Greece could not pay back 125 percent, it certainly cannot pay back 175 percent.

The austerity measures did not sit well with the Greek and eventually they decided to block the Troika (the European Central Bank, International Monetary Fund and European Commission) by electing the Syriza, which ran on the platform of reversing the austerity measures. The Troika seems to hold their position of not backing down on the demand for fiscal discipline, setting up the showdown Wednesday and then Feb. 16, when Greece has to request renewal of the debt programs that the European countries need for their parliaments to get approval before end of month when the current facilities formally expire.

The Syriza wants to increase government bureaucracy, increase the tax-free income for the masses and increase minimum wages. None of these will help grow the economy. But the Greek masses want relief. Yet the Greek masses also want to stay in the euro. Without the euro, the Greek economy would suffer significantly more.

It is not clear what the Greeks will do. A significant majority of the population wants to stay in the euro. But if Prime Minister Alexis Tsipras and Syriza back down, it is unlikely their government will last the year. The problem is compounded by the fact that Greeks have already started not paying certain of their taxes that Syriza has indicated it wants to cut or eliminate.

Finance Minister Yanis Varoufakis has just ended his European trip and has come home with a big fat zero. Of course it does not help when the prime minister accuses the Germans of being like the Nazis. France will not cross Germany. Italy is singing of its own sheet and cannot rescue Greece. Spain is pushing for no deal with Greece to stave off its own version of the anti-austerity party, Podemas. Hungary and Poland have their own battles to focus on these days. So Greece is not finding much support from anyone.

So it has really come down to whether Greece will be saved by the ECB or not. This is a high stakes game of chicken in Europe. Yet the markets seem completely unfazed. Yes the euro is at 1.13, but this could get a lot worse before it gets better.

Hold on to your seats, as this boat will rock violently now. I would buy the CBOE Volatility Index (VIX), as uncertainty will definitely rise in next few weeks.

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Advani
By the time we go to print, we may be witnessing the first domino fall in the collapse of Greece.
Greece, ECB, troika, Europe
621
2015-51-11
Wednesday, 11 Feb 2015 07:51 AM
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