Last week, the new Greek finance minister tried to renegotiate the bailout plan the country had agreed to with the rest of the EU, by suggesting weaker austerity. After that overture was rebuffed, the Greek government–the one that revealed the prior administration had been falsifying the national accounts for years, triggering the current crisis–was found to be preparing legislation for a necessary parliamentary vote that incorporated the weaker austerity measures the EU had rejected. Apparently, Greece was planning to ratify the weaker terms and then present the rest of the Eu with a fait accompli.
Now it appears the Greek government may not have the votes to pass any austerity plan.
It’s hard to know which side to have sympathy for–Greece, which merrily used its EU membership to run up bills it knew it never could pay, or the rest of the EU, which fudged its membership criteria to get Greece in and which seems to have known what Greece was up to, but just underestimated the extent of the fraud.
I think the EU has two objectives:
–it wants to avoid having its banks forced to write down the Greek government bonds they’re stuffed to the gills with; and
–it wants to avoid setting a precedent that Ireland and Portugal, if not Italy and Spain, could reasonably expect to follow.
Greece, on the other hand, seems to fully appreciate the maxim that if you owe $20,000 to the bank you’re in trouble; if you owe $200 million, the bank is in trouble.
Today’s development is that large French banks have “voluntarily” proposed to roll over much of their Greek debt for thirty years, while reducing interest and reinvesting a large part of the coupon payments into new Greek sovereign debt.
A wildcard in these proceedings is credit default swaps–how large, who owns them and what are the precise terms. History tells us that Continental European banks tend to be the ultimate “dumb money,” which would lead to the surmise that there are a lot of CDSs and European banks are on the losing side in case of default.
The burning question, then, would be about the terms. Let’s say the EU as a whole reaches an internal agreement about Greek debt that it believes solves the problem without requiring the banks to write down any of their Greek bondholdings. What happens if the rating agencies declare that despite this legal paper shuffling, the solution is in fact a default. Does this trigger the credit default swaps? My experience says “Yes” is probably the correct answer, but I don’t know.
It seems to me we’re entering the final innings of the game. The outcome is still in doubt, and no one is leaving the ballpark.
From an equity investing point of view, I think the negative effects of an ugly outcome to the Greek situation will be felt mainly in European financial companies and in firms doing most of their business in Europe. A good portion of the ugliness has to already be discounted in global stock prices. Still, this is an issue to watch carefully to make sure the ripples don’t spread far wider than one might expect.