Should We Care About Greek Sovereign Debt? – Part One

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Macroeconomics

As widely expected, the Greek government survived a critical vote of confidence this week and is now faced with the challenge of securing support for the extra austerity measures, amounting to some $40 billion, according to an HSBC note, necessary to avoid default.

Does this fuss about Greek debt really matter in the wider scheme of things? What relevance does the indebted status of a pleasantly sunny but otherwise minor European country have for a manufacturing company in Oklahoma or Osaka?

Let’s Talk Euro and Dollars

Well, it has very real relevance and we could all yet come (if we don’t already) to regret the long chain of events that started with Greece’s adoption of the Euro and has led to their current bankrupt situation. Let us not bandy words here: bankrupt is what Greece is in all but name, with debts of €347 billion (US $500 billion), 150 percent of GDP, according to the Telegraph; Standard & Poor’s downgraded Greek debt yet again last week to CCC, the lowest before junk.

As a result, Greek debt is now the most expensive to insure in the world, even more than Venezuela’s. The market is charging interest on five-year Greek debt at 17.8 percent, a level no country can finance, least of all Greece. Nor does the Greek man in the street have much faith in his government. Physical gold sales are at record highs and monthly bank withdrawals were running at €1.5 billion-€2billion in the first quarter. Last year, depositors withdrew €30 billion, equivalent to 12.3 percent of total savings, according to the FT.

As Europe kicks this can down the road, interest is piling on top of debt as Greece slips deeper into the mire.

How Did They Get In To This Mess?

Successive profligate and weak governments bought popular votes with social pledges the country could not afford, while failing to collect taxes in an economy that is still more reliant on cash transactions than any other in Europe. Even Greece’s one successful export tourism has been gradually eroded by the popularity of their cheaper neighbor, Turkey.

A fierce debate has raged in Europe about what to do. Stronger northern countries, led by Germany, have demanded even greater austerity measures and even suggested debt rescheduling for all intents and purposes meaning default. Wolfgang Schaeuble, Germany’s finance minister, has been urging creditors to agree to swap their Greek bonds for paper with a seven-year maturity. According to the Telegraph, under Schaeuble’s plan, an estimated €270 billion of Greece’s €347 billion of sovereign debt would be restructured ” meaning bondholders would have to mark down the value of their holdings. Germany wants the banks and private investors to share in the pain.

The European Central Bank says this would be a disaster, encouraging contagion into debt costs for Portugal, Ireland, and the nightmare scenario Spain and Italy. If Greece were to default, already shaky European banks would take a big hit. French banks have €49 billion of exposure to Greek sovereign debt, German banks €30 billion, and UK banks €14 billion — nasty but manageable.

But if it triggers fears of a default in Portugal and Ireland as well, the crisis could rapidly spiral out of control. Spain has a €79 billion of exposure to Portugal, Germany €38 billion, France €24 billion, and the UK €22 billion. In Ireland’s case, UK banks own €145 billion of the country’s sovereign debt and Germany €119 billion this is the risk; like Lehman Brothers, it is the interconnectedness of the markets that is the risk.

(Continued in Part Two.)

–Stuart Burns

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