Goldman On Greece: "Could Turn Into The Endgame"

Tyler Durden's picture

From Goldman's Erik Nielsen:

Its not been a good week for Greece.  Most seriously, the news yesterday that the four biggest banks are seeking help from the government following a drop in deposits of some EUR10bn pushes them into the danger zone which could turn into the end-game unless properly addressed.  While the EU Summit spelled out how the crisis will be addressed (an IMF-led program co-financed by the Europeans), important uncertainties remain, including (1) whether the Greek government will agree to IMF conditionality; (2) how and when the European money will be disbursed and at what interest rate; and (3) whether the IMF/EU package will be big enough.

Yesterday the four big Greek banks asked for access to EUR14bn in loan guarantees from the government and EUR3bn in government bonds.  It is not clear to me what the banks can do with the guarantee given the government’s own funding problems; the bonds can be repo’ed at the ECB.  I suspect that they’ll need a greater share of the help in the form of bonds.

Good thing the IMF has arrived in Athens.  I suspect that the government and the IMF have now have had the first round of discussions on the outline of conditionality.  Conditionality will likely focus on two set of issues:

  • Structural reforms to regain competitiveness.  This is very unpleasant stuff because without a productivity miracle, it’ll include a significantly lower nominal wages in the private sector.  On our numbers, we may need to see them down by 15%-20%.  We don’t quite know how to achieve this, but it’ll include lower wages in the public sector and liberalisation of the labour market in general; combined with a period of higher unemployment.  I suspect that the government does not much like what the IMF is showing them in this area.
  • There’ll also be some requirements of further fiscal tightening.  The government’s fiscal plans for this year are pretty good, although they may need some fine-tuning.  Local paper Kathimerini reports today that several ministries and agencies are spending well ahead of plans.  Specifically, the Ministry of Economy, Competitiveness and the Marine spent 18.2% of its total appropriation for this year during the first two months, the Interior Ministry 17.4% and the Ministry of Labour  17%.  Some of the insurance agencies, including OAEE health insurance for self employed and social insurance, have disbursed 25%-40% of the budget for the whole year.  If confirmed, this would imply a need for some additional cuts on the expenditure side.  In addition, the IMF will be formulating further fiscal measures for the 2011 budget.

We’ll probably get lots of confusing noise in coming weeks on this front, but at the end of the day, I think we’ll get an IMF program (co-financed by the Euro-zone) before the end of the month.  My guess continues to be a 18-months program worth some EUR20-25bn.  The IMF will charge a bit over 3% and the Europeans probably 4%-5%.  Unfortunately, that’ll cover only a small share of the government’s total financing requirement for the 18-months, so the overall debt sustainability will hinge on implementation of the conditionality - and on a multi-year extension of concessional financing.  The combination of uncertainties in this respect and the need for continued commercial financing during the next 18 months to fill the (post IMF-EU) hole makes it difficult to see how the official sector will put the Greek concern to bed.  (But they’ll take us through May.)

Meanwhile, I look forward to today’s ECB press conference.  Trichet has the tricky task of explaining why the ECB’s introduction of a sloping scale of haircuts from January 2011 (which is virtually certain to imply higher haircuts for Greek sovereign debt) will not be bad for Greece and its banks.  As I have long argued, the answer would be an explicit indication that securities of a sovereign Euro-zone member will never lose eligibility at the ECB all together, and that the assessment of creditworthiness will be based on a broader set of (transparent) parameters than just the credit ratings agencies.  I hope they’ll go all the way, but I doubt it.


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orange juice's picture

James Simon had a good article on baseline scenario about Greek paths to take:

Basically he puts them in the same category as Argentina; default is like dinner, what time do you want it and how?

RobotTrader's picture

Meanwhile, they are still chasing junk stocks in the pre-market like AIG, CIGX, etc.

And many retail stocks are on fire after same store comps.

And upon the first sign of a market correction, the first items sold are:

-  Gold

-  Silver

-  Copper

-  Oil

boricuadigm-shift's picture

Aren't things different now?  That has been the trend in the past, but could that be the case now?

RockyRacoon's picture

RobotTrader could be right... or wrong.  Past performance is no... well, you know.  I'll wait for the smoke to clear and keep my money in cash until the smoke clears.  If the metals go down I'll just buy a little more. 

Keep on truckin'!

CookieMonster's picture

Great article, thanks for the link....

Sudden Debt's picture

I just love a good showdown. There's always one who gets clipped :)

Tic tock's picture

Why am I unsurprised at GS' relief with the IMF turning up.. and justhowmany cards do the neo-capitalists (.!) have left?

Cognitive Dissonance's picture

"...pushes them into the danger zone which could turn into the end-game unless properly addressed."

What a strange little term this is. Properly addressed! One would think the definition is straight forward and self explanatory but alas, it is not. As with all things in life, it's all about context. As in who's ass you're trying to save when considering how something should be "properly addressed".

So, let's focus on the "who" so we don't become distracted by the "properly addressed" portion of this little dance. Let's see, let me think real hard about this, there must be a solution to this somewhere? Who's ass is the "who" in this equation?

Zero Hedge, any ideas?

crosey's picture

Here's my vote....the "who" is certainly not the citizenry.  The "who" is the targets of the citizenry.  When you have nothing left to lose but your life, when you've watched your family and friends suffer, and when you witness the uncaring, detached, mindlessness of the elite, you begin thinking of preparing the dish best served cold....revenge.  It takes a lot of inner fortitude to pull yourself back from this brink, most people don't have it.  And then, what would TPTB do with all that pent-up angst?

Cry havoc, and let loose the dogs of war.

nonclaim's picture

It's never about the general population and here I agree with Leo that the average Greek is fine.

It's not about the current government, because they would not be allowed to make this many stupid statements and look bad to the international community. The rescue would come faster too...

So, who's likely to assume when this government falls?

CookieMonster's picture

Greeks are OK because they traditionally do not trust their own banking system, they will be fine as long as they help each other. The Germans do not want to help even if the French insist that they do. No one else is strong enough in Europe to come up with "exceptional financing", therefore the IMF (with backing from the US Treasury, FED, and other banks) will do the job. That means in a very round about way, the US taxpayers will pay for it somehow....

And remind me how Goldman Sachs is involved in covering this up (no wonder they want to IMF to come in to the rescue!!!)?? I can't find the article that explains it in detail, something about fooling everyone who bought Greek bonds using derivatives to manipulate the numbers and preserve credit worthiness......

Cognitive Dissonance's picture


May I expand on something you said? I'm not quibbling as much as narrowing the focus. You said......

"That means in a very round about way, the US taxpayers will pay for it somehow...."

I really think this type of statement needs to be refined to reflect reality. How about this?

"That means in a very round about way, the US taxpayers will somehow be paying interest on unimaginable mountains of debt used to "fix" every problem in the known (and unknown) universe."

There, that's better. Don't you think so?

CookieMonster's picture

Ahh yes, I feel the universe coming into alignment now, the giant sucking sound of infinite dollars (in perpetuity) being vacuumed into the giant black hole of banksters' greedy appetites for more....
Financial Dictionary

Perpetuity definition

A constant stream of identical cash flows with no end. The formula for determining the present value of a perpetuity is as follows:

Investopedia Commentary

This is not as abstract a concept as you may think the British issued bonds, called consols, which are a great example of a perpetuity. By purchasing a consol from the British government, the bondholder is entitled to receive annual interest payments forever. Although it may seem a bit illogical, an infinite series of cash flows can have a finite present value. Because of the time value of money, each payment is only a fraction of the last.

The concept of a perpetuity is used often in financial theory, such as the dividend discount model (DDM).

Thank you for the clarification, I am honored to be enlightened. I still am clueless about exactly how the mechanics of it all works but I am sure Reggie Middleton will explain that after we Americans have been reamed again in more detail than most would want to know......

Cognitive Dissonance's picture


Thanks for the laughs CM. You are just full of wonderful gems this morning. Fret not my friend for you aren't the only one with this problem.

"I still am clueless about exactly how the mechanics of it all works...."

I admit I'm clueless and so do you. But every talking head propped up on CNBC, Bloomberg etc tell us exactly what's going on and how it works. The same goes for tens of thousands of economists and professors, not to mention some Congress critters who are too many to name.

I agree with your view of Reggie. He and his staff are priceless. It's amazing what can be accomplished when one acknowledges his or her own limitations and then works cooperatively with others to gain a better knowledge and understanding of the unknown.

What a quaint concept these days.

RockyRacoon's picture

No problem!  Just address the problem.

"Hello, Problem!"

Classic Honeymooners Golf Scene

Dr. No's picture"Goldman" does a great job once again by outlining their induced destabilization yet giving a ray of hope in attempt to entice any more fools who have not purchased their titanic tickets yet..

orange juice's picture

Speaking of them, how's their bang-on Euro trade going again?


How much longer until this spreads and we see bond spreads rising out of PIIS? How much longer until that effects German, French and Belgian bond yeilds to rise?

Cognitive Dissonance's picture

I was 23 and with a friend drinking on a Friday night when he "introduced" me to Ouzo. After one sip, I thought this was the beginning of a wonderful relationship with Ouzo. That is, until the next morning, when I woke up with the worst hangover I ever expereinced and with the word "Ouzo" written on my forehead with an indelible black magic marker.

This was the end of two friendships, the "friend" who I drank with, who was guilty of the branding of my forehead. And with Ouzo, for causing the only blackout I ever suffered in my drinking career. It seems this is what's going on with the Greeks these days, black out drinking.

Now where is that black magic marker?

yabs's picture

wow an IMF deal noone could of known that given it was the PLAN all along
Indeed that is the plan to get everyone indebted to the IMF
and have a de facto one world government.

Leo Kolivakis's picture

Natascha Gewaltig, chief European economist at Action Economics, talks about today's European Central Bank policy meeting and Greece's debt crisis. Speaking with Bloomberg's Linzie Janis in London, Gewaltig also discusses Bank of England monetary policy and the U.K. budget deficit. She says EU won't allow Greece to default.


You all need to chill out on Greece. I suggest you take the opportunity of the cheap euro to visit the country.

hedgeless_horseman's picture

I am waiting for the even cheaper drachma 2.0.

Here is the German version of the same video:

Thus, the huge spread versus Bunds.

Cognitive Dissonance's picture

"Here is the German version of the same video:  Thus, the huge spread versus Bunds."


Now that video is just down right cruel hedgeless. Stop poking the bee's nest with that stick or you'll hurt someone.

nonclaim's picture

It's funny to see how little things have changed in the "das auto" production. Sure, robots rule the body shop and assembly needs much less muscle force with zero-g like support, but the machinery and process is mostly the same.

ZackAttack's picture

By definition, since everyone's looking at Greece, and more generally the shameful incompetence of the ECB, that swan is being hatched elsewhere.

crosey's picture

Leo, your brief must assume that there are limitless resources.  Greece is just the start of enormous EU triage.  Unless you can identify the source of these limitless resources, they are essentially, limited.  As such, the power to bail-out faces enormous inertia.

CookieMonster's picture

The risk/reward is kind of dicey on those Greek bonds. Good short term profit if the IMF does come up with an agreement. But it is quite a gamble but if you were a fly on the wall in those meetings, then you'd have an advantage.....

ZackAttack's picture

So, tell us about this Gewaltig's track record. Does she have any more credibility than, say, a Kudlow?


First thing I find, from June 1, 2007, is this quote:


"Consumption is still underperforming overall growth trends," said Natascha Gewaltig, an economist at Action Economics LLC. "But we expect that to pick up as consumer confidence grows and labor markets improve."


How'd that call work out for her? I wonder how many more dead wrong predictions we can find from her if we dig a little.

SheepDog-One's picture

Yea, Im sure the EU simply wont ALLOW Greece to actually be bankrupt (nevermind the other 8 Eurozone countries who are also in the crapper, Greece is just the du jour topic)...and the EU will do what, exactly? Borrow some of Ben Shalom Bernanke's printing machines? Sure, all is well until someone loses an eye, or civil war erupts. I laugh at this notion that the american taxpayer will pick up the tab, it wont happen. I'll go underground before I ever pay for any of this garbage to make billionaires more billions while purposely bankrupting all nations. 

Luke Sidewalker's picture

I thought "deficits don't matter"! The Greek situation kind of blows a whole in that BS...


EU has no option here should Greece fail.  To say that the EU will not let this happen shows how little she understands of the political dynamics at play here. 

ZackAttack's picture

IMF = 25% US funding. It is absolutely unacceptable that US taxpayer funds be used, essentially, to cover the poor decisions of French and German banks.

Remember, come election time, who voted to fund it ($106b) and who didn't. Vote was 226-202 in the house, with all but 5 Rs voting against it and 32 Ds. I'll have the list later.

SheepDog-One's picture

It IS absolutely unacceptable for the US taxpayer to bailout not only the poorly ran USA but all other nations too, I refuse.

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Hatshepsut7's picture

And for non-subscribers to FT, here is the direct link to the article:

sweet ebony diamond's picture

is someone going to bring some control to the situation?

is someone going to re-establish the rule of law?

it was called the Growth and Stability pact for a reason.

yabs's picture

deficits don't matter.......If your'e a central bankster

BlackBeard's picture

Captain Obvious strikes again.