A Greek [Default/Bailout]: Flowcharting The Dominoes

Tyler Durden's picture

It appears that in the 11th hour, Europe is still unable to decide just what the proper approach to rescuing Greece is. The Sunday Times has just released information that a plan to be published by Brussels on Tuesday, titled "Urgent measures to be taken by May 15, 2010" will demand dramatic Greek austerity measures, such as cutting "average nominal wages, including in central government, local governments, state agencies and other public institutions" and proposes new luxury goods and self-employed taxes. Yet the kicker is that "Richer eurozone countries such as Germany and France would be expected to bail out Greece in the worst-case scenario, to prevent a disastrous crash in the value of the single currency" - not very surprisingly, this is precisely the Plan B that Almunia yesterday swore up and down that the EU was not, repeat not, considering. Moral Hazard has indeed gone global. Yet even with this bureaucratic memorandum on the table, it seems certain that the EU will not actually act before Greek deterioration escalates out of control. Here are the near term catalysts that will likely make the cost of inactivity very high. Think full Dick Fuld stature when screaming upright.

But before presenting a timeline of near-term events, here is a simplified flow-chart of how bond, and CDS, investors should handicap Greece's near-term future, courtesy of Barclays.

As the chart highlights, the critical junction occurs once the market digests the forthcoming fiscal adjustment: should the market deem that insufficient, the immediate options are two: an EU bailout and an IMF bailout. We remind readers that the IMF has already pointed out that it would be willing to provide critical assistance to the Mediterranean country. In either case, Barclays expects that the "bailout" manifest itself via a bridge financing which would "buy time for another round of fiscal adjustment attempts." Logically, if the bridge ends up going nowhere, then the country will have to evaluate how to deal with a potential default scenario.

Of course, this flow chart will not occur in limbo and will be determined by a variety of internal and external stimuli.

Much has been made recently over Greece's €8 billion bond issuance. Yet in the near-term the country faces substantial bond maturities, which will have to be tackled ahead of their April and May refi dates. The chart below presents the key GGB maturities through the end of 2011.

If bond (and CDS) investors realize they have the potential to force issuance at even wider spreads than the recently auctioned €8Bn, look for upcoming GGB spreads to be materially wider than anything consider reasonable for a eurozone member.

As has been pointed out repeatedly in the past, Greece is the 13th largest GDP in Europe, implying even a default would likely not have dramatic consequences over the greater European economy.

The greatest procedural stumbling block is that the country has a euro-based currency, implying monetary policy in Greece can not be detached from what Brussels thinks is the proper approach for other European countries. This is precisely the reason why rumors of the drachma's reappearance have become so loud recently.

Yet while a Greek default in isolation would not be devastating, the proverbial snowball effect may lead to a much more dramatic climax. Where Europe is weakest is among some of the key Greek banking and trade partners, namely Bulgaria, Serbia, Macedonia. Furthermore, fiscal concerns will also implicate more "developed" countries such as Hungary and the Baltic states. Combine the two avenues, and you get a fully-blown continental crisis, which could reach to the very top in the GDP pyramid - Germany.

The conclusion is that of all countries, Bulgaria is by far the most exposed to a collapse in the Greek banking system and trade deterioration, with Serbia, Romania and Turkey following.

And while Almunia will likely have no problem in throwing Bulgaria and other poorer countries to the wolves, what is certainly keeping him up at night, aside from acid reflux as a result of just too many Davos functions, is the implication for other comparable fiscal debacles. This is where the rest of the PIIGS come into play.

The contagion threat from a "fiscal fear" standpoint is thus most acute at the more advanced recent EU inductees: Hungary, Latvia, Lithuania and Poland.

It is unfortunate that so far the EU has bet the house on a slowly-developing situation, in which cash and CDS traders exhibit a world of patience. Which they won't: as the last two weeks have shown, when Greek CDS exploded by over 100 bps, the EU's ability to control the situation is quickly evaporating. Furthermore, should CDS sellers commence to cover their long exposure in greater numbers, thereby minimizing further losses, the spreads for the abovementioned "contagion" countries have a likelihood of surging substantially more than to date. This will be magnified if existing GGB holders, who have so far withheld a desire to bail on their positions en masse, finally capitulate, as the yield impact will be much larger in the materially greater (in notional terms) cash market. The bottom line - the EU will soon have to move away from empty rhetoric to decisive action; should it wait any longer, the market, just like in the Lehman bankruptcy, may very well take any optionality away from the Brussels bureaucrats, and result in a fragmented, bankrupt, sick and contagious EU hinterland, whose disease will slowly but surely make its way to the heart of Europe. (Alternatively, CDS on Bulgaria, Hungary and the Baltics may still be relatively cheap, although Germany's may be by far the cheapest).

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dumpster's picture

Tyler .. get some sleep lol

Number 156's picture

The sun never sets on Tyler Durden.

DoChenRollingBearing's picture

Outstanding piece.  The breadth of topics covered here at ZH is amazing.

Zerohedge is without doubt one of the best financial sources of information anywhere.

Cursive's picture

Extend and pretend until terminal velocity is stopped by the ground.

WaterWings's picture

Raising the debt ceiling on the American side of the pond gave us another few seconds.

Anonymous's picture

Well, I think that the statement that the EU will not act until the Greek deterioration escalates out of control is the single point in the article you really need to consider.

The method of operation here, globally, across all financial environments, is to talk a lot of sh*t while the ship is sinking and to do nothing. Talk about the lifeboats but don't actually move to put any in the water. The purpose of this is to stall for time so that when the whole ship goes down lifeboats and all with all men aboard they can be satisfied. A job well done. Not one person got off the boat alive.

That was the intended outcome.

If you think I think this is a grand conspiracy by some really evil people against mankind, you'd be right.
If you think I'm crazy you'd be wrong. Like an innocent child, you simply haven't enough experience with the dark side of life to understand who and what is running your world.


Anonymous's picture

+kazillion. This.

Onehunglow's picture

Spot on Mr. MobBarley. 

When EU Monetary Affairs Commissioner Joaquin Almunia denied in Davos saying "there had been no special plan formulated by the European Commission, only standard regular discussions on the fiscal imbalances of Greece and other countries" and "No Greece will not default. In the euro area, the default does not exist." He reminded me of BS Bernanke when he said circa 2006 “House price increases largely reflect strong economic fundamentals, including robust growth in jobs and incomes, low mortgage rates, steady rates of household formation, and factors that limit the expansion of housing supply in some areas.”  Or this little gem circa 2005 “unquestionably, housing prices are up quite a bit; I think it's important to note that fundamentals are also very strong. We've got a growing economy, jobs, incomes. We've got very low mortgage rates. We've got demographics supporting housing growth. We've got restricted supply in some places. So it's certainly understandable that prices would go up some. I don't know whether prices are exactly where they should be, but I think it's fair to say that much of what's happened is supported by the strength of the economy” WRONG

They are both puppets being controlled by the same marionette(s).

MarketTruth's picture

Marionettes... ahh, you mean the string pullers Rothschild, Morgans, Warburgs...


Anonymous's picture

This is non sense!
The treaty of the European union,had foreseen the case when an overspending member would be tempted to draw checks on other members accounts.
The answer,members are not joint and several in debts.
Again a case where legislators may think well,speculators may not, CB and peripherals execution failed.
Markets and associates are shaking the wrong trees,there are much richer crops on other countries risks.
Moody SP Fitch will be soon again on the bench.

sohbetme's picture

I like your ideas and thoughts. by chat greetigns..

Anonymous's picture

Elementary my dear Watson!!
When in troubles try to steer bigger problems elsewhere.

tom a taxpayer's picture


Greece's Prime Minister Papandreou talks with Jordan's Queen Rania at the World Economic Forum in Davos.

From the photo at this link, Papandreou is reaching out to Queen Rania and he has the solution to the Greek debt crisis almost in hand.




hound dog vigilante's picture

The Europeans haven't faced real crisis in 65 years, and they've never faced a real crisis collectively, as a union.


Expect half-measures, delays and timidness. European policymakers and 'leaders' are privileged careerists and only nominally accountable to citizens. It will take years if not decades for European bureaucracy to effectively 'respond' to any crisis.

Dirtt's picture

Credit The Big Lebowski..."Sometimes you eat the bar, and sometimes, well, he eats you"

Chopshop's picture

TD on fire last few days; tomahawk dunking from the 3-point line.

Thanks for the effort, sir.  yet another tremendous piece.

Anonymous's picture

EU so far successfully applied rapid tightening tactics to several East European nations - Estonia, Latvia, Hungary - with and without loans from IMF. And they have been very tough, no money , no help if tightening not done.

I wonder if that is possible in old corrupt "historically great" nations like Greece and Spain as well.

Iceland seems to be destined to default this year. A small nation, but can trigger large scale uncertainty about European national debt and thus, further defaults.

I guess gold will be an asset of choice soon, during 2010.

Anonymous's picture

EU so far successfully applied rapid tightening tactics to several East European nations - Estonia, Latvia, Hungary - with and without loans from IMF. And they have been very tough, no money , no help if tightening not done.

I wonder if that is possible in old corrupt "historically great" nations like Greece and Spain as well.

Iceland seems to be destined to default this year. A small nation, but can trigger large scale uncertainty about European national debt and thus, further defaults.

I guess gold will be an asset of choice soon, during 2010.

caconhma's picture

The situation is quite simple: Pan-European socialist economic/political model does not work and ready to collapse.

As for East European nations - Estonia, Latvia, Hungary, etc., they are former communist countries where governments do not give shit about people and populous is still under suppressed communist mentality. Just look at Russia, Ukraine, etc., where governments do whatever they like and people take it.

Consequently, Pan-European Union is about to go down creating new European landscape. There is no need to be afraid of changes regardless of "systemic" or not. Utopian dreams just could not last for too long. 


Please do not expect French do bail out anybody. They care only about  themselves.


Anonymous's picture

Is it a bird? Is it an aeroplane? No, it's an outlier !

Anonymous's picture

Being french, I can tell you that what you describe is pretty much the reality.

The guys in brussels are far away, in another galaxy.

Arrogant and eventually totally dumb... they are going to talk endlessly.

That's the curse of UE : it wasn't able to work at 6. So imagine at 27...

We are talking about the Greek issue since almost one year and a half... Even the dumbest bloggers on Internet was aware of the Greek Risk. What have they done during this time ?

Just wishfull thinking, like all the other clowns : "it's going to be okay... the crisis will end soon" blablabla.
Instead of :
-assessing the situation
-and taking actions

You will never see the Greek gvt, a bunch of corrupted third world people, ordering cut in expenses. Never. Their brain is just not wired for such a concept.

And they are too afraid from the "streets".

The rest of the population is as dumb as them... with hot blood, and a strong leftist mania (after the repression of the right wing generals).

They will start to strike, to riot (like they did in the past), leading to the total paralysis of the gvt.

So the case is obviously closed : Greece will be bailed out.

But too late and not with a "shock and awe" style, that could boost the effects. No instead... decisions will be taken too late, and on a scale always smaller compared to the scale events.

However... you can be sure that they will try the US way : aka deception and lies. If the ECB, France or Germany have to buy greek debts undercover... they will do it. Before the cover up blows up. Eventually.

Anonymous's picture

Cultural globalization has really gone world wide; except for the hot-headedness everything's the same in the U.S. and private industry is as dumbstruck with their own genius as are the bureaucrats. Here though, instead of hot-heads protesting every measure to right the ship, if it hurts them a bit, we have sheep that willingly watch the whole thing go down. Take your pick.

It's truly a decline in culture: integrity, decency, compassion have all gone out the window replaced by faux-religion in lieu of spirituality. All we're missing is patriotism to be whipped up to see the whole thing explode in a III try.


WaterWings's picture

Merci bien pour votre réponse.

Dirtt's picture

"However... you can be sure that they will try the US way : aka deception and lies."

Hey!  Easy now!  While there are plenty Americans that can wear that shoe - and I'm all for revisting the days of the guillotine (the only real justice for this crisis) - I wouldn't throw stones in glass houses.

That slime that you refer to is a human issue not exclusively American. Cmon now. "Ca ca can't we all just get along?"

Oracle of Kypseli's picture

Mr. Frenchy,

The EU inactivity on the Hellenic issue is not any different than any other country at the moment, "Extend and Pretend."

Furthermore, the French are also willing participants of the same even though they claim that they have better manners than the Greeks or the Italians the Irish etc.

Calling the Greeks 3rd world is as arrogant as it gets.

The Greeks said "Ochi" to the Nazis and when the French were asked to fight back they said "Pourquoi."

You had to wait for the USA to bail your asses out.

Shut up.



ivars's picture

Cut spending, that is easier, and more useful. Reduce government.

Anonymous's picture

"Expect half-measures, delays and timidness. European policymakers and 'leaders' are privileged careerists and only nominally accountable to citizens". Not that the ones who are accountable to their citizens are any better. The whole world politicians have become self centered. Gone are the days of real "civil"servants. Corruption runs deep almost in every part of the world. I still remeber the days where you can point to at least some people whom you could say"those are honest people",who happens to also be politicians...

Handle with care's picture

I predicted a year ago that Eastern Europe would bring about the second leg of the crisis when I read that Western European banks had insane loan portfolios extended to those countries.  For example I recall Austria's banks having loans to Eastern Europe equalling 120% of Austria's GDP.

And the loans are primarily mortgages to people in formerly communist nations with no history of knowing how well they'll perform.  And in most countries the mortgages are in Euros, which means that weakening in the Eastern European countries currency automatically triggers waves of defaults that then cause further weakening and property price crashes and general economic mayhem.

You couldn't design a system more unstable and likely to tip into a spiral of crisis if you tried.

Anonymous's picture

Greece isn't part of Eastern Europe...idiot!

Rusty Shorts's picture

Yeah, it's further South, where all the hicks live.

Anonymous's picture

That seems pretty arbitrary - it is one of the easternmost parts of Europe. There are countries in "Eastern Europe" that are west of Greece, like Croatia.


Handle with care's picture

Another one that hasn't read the article.

Anonymous's picture

All these loans are recourse. You should know it by now. There is no "strategic default" as an option... like in US.

PolishHammer's picture

Except, of course, this has nothing to do with Eastern Europe and everything to do with Greece.  But you could still make it as CNBC analyst.

Handle with care's picture

Have you read the article?


It states that the Greek banking system's links into emerging (Eastern) Europe is probably more systemically important.


While its flattering to have a CNBC staffer say I could make it as an analyst with your fine company, I'm afraid other commitments prevent me taking up your kind offer

dan22's picture

The price level there is too high and wages most go down on the international level, while the budget cuts needed for these countries to remain solvent during a deflationary depression enforced on them by Germany via the Euro are so staggering that no modern democracy will be able to handle. As the riots in Greece have shown, any government in the world that will try to make public spending cuts in double digit percentage points will not survive. Not to talk about the fact that will need to lower the minimum wage during a depression, an action never done by any government.

masterinchancery's picture

Correct.  The Greek government is weak and corrupt; it will never have the cojones to do any real cutting,and may well increase expenditures on the sly, and the notion of collecting significantly more tax revenue is delusional.

Anonymous's picture

Your data shows that Greece needs approx. 25 billion euros to roll over 2010 debt.
This is not a significant sum, especially when combined with the fact that Greece represents 2-3% of total European GDP.
The EU will bail out Greece and this woud be the equivalent of the US bailing out a small or mid-sized state.
This is not Europe's "California moment."
To be frank, speculators are whipping this issue for the sake of a quick buck, but as your BarCap chart shows for the majority of outcomes, Greek bond spreads will most likely decline, going forward.

Gussiefink-nottle's picture




Milton Friedman predicted that the Euro would be unlikely to last much beyond 10 years. His argument was premised on the fact that, unlike the United States, where a common currency is backed by Federal taxation and a central treasury, the Euro has no such central support.

Each member state has sovereign control of its own fiscal policy and is free to issue its own bonds to cover deficit spending. Interest rates however, are set centrally for the Euro as a whole.

The aim of the Euro's founders was that countries would only be allowed to join if they met the rigid membership criteria demanded. The purpose of this stipulation was to ensure that the economies of the new members "converged" with those of the existing membership, so that economically, they would be marching in step, thus allowing central interest rate policy to be set at a level that was appropriate across the Euro area as a whole.

Inevitably politics and fudge got in the way of principles. Not only were countries allowed to join who only momentarily, if at all, met the “convergence” criteria. (Italy, Greece, Portugal) but also the economies of the Euro area were marching in anything but step. Interest rates were set at an appropriate level for Germany and the Benelux countries, but at far too low a rate for so called PIGS. (Portugal, Greece, Ireland & Spain.)

During the glory years these unrealistically low interest rates caused a debt explosion in the PIGS largely on the back of a soaring property market, just as Friedman predicted. The collapse saw the deficit spending of most Euro member governments soar, making a mockery of the “Stability and Growth Pact” which limited government deficits to 2% of GDP, and now countries such as Greece are at levels 6 times that.

Poor old German taxpayers. Having paid for the reunification of East and West Germany, it looks like they will be on the hook for the weaker Euro member deficits as well, as there is too much political capital at stake to allow the Euro to break up at present. It comes down to national characteristics. The Euro masters will calculate that the German taxpayer is less likely to riot than the Greek one whilst the Greek economy is weaned off the debt habit.

Madcow's picture

So there are a million ticks on the dog that is Germany. 

The ticks are killing that dog.

They only way Germany can survive is with a dramatically devalued Euro.

Not hard to see how this ends ...

illyia's picture

Or it could kill the ticks.

Same difference, though...

caconhma's picture

Milton Friedman substantive predictions that the Euro would be unlikely to last much beyond 10 years are about to become true. 

As Soviet and Chinese experience has shown very clearly, from time to time, socialism needs tanks in the streets to rejuvenate and revitalize its well-being.

Bailing out Greece will just postpone and exacerbate the overall European situation.

fredboy's picture

Forget Greece. What about California. A default in the making

MarketTruth's picture

Well, while Greece in a smallish cut (one of 1000 per se), California is a HUGE event and a far higher percentage of USA's financial situation than Greece is to the EU.

Anonymous's picture

Cali is just fine. Didn't you hear that they're getting $2 Billion in Fed money for a high speed choo-choo. Think of all the jobs that will create. Think of all that ripple effect into the larger Cali economy. It will "save or create" the universe as we know it, or create a newer, better parallel universe. Oops, the total project is $42.6 Billion, and we all know these types of projects ALWAYS com ein under budget, and always are self-sustaining. Once up and running, this choo-choo won't need any taxpayer subsidizing, right? http://www.mercurynews.com/crime-courts/ci_14281245

We're screwed.

tom a taxpayer's picture


Napa Valley Wine Train stimulus project! Without competitive bidding,  a $54 million federal contract that provides a new railroad bridge and other structures for the famed Napa Valley Wine Train is one of the biggest federal stimulus contracts in California.

"About a dozen times each week during peak season, the train carries tourists on a five-hour round-trip from Napa to St. Helena aboard restored dining cars. A champagne dinner on the Vista Dome car costs $129 per person. More than 100,000 people ride the Wine Train each year."

The $54 million to build a flood wall at the wine train depot, elevate the tracks and move them 33 feet, and raise four bridges is part of a larger flood control project.  "The total price has ballooned from $250 million to more than $400 million. The price tag might have been significantly lower but for the Wine Train, a private rail line established by the late Vincent DeDomenico, the wealthy creator of Rice-A-Roni..."The Wine Train's rail bridge in downtown Napa was too narrow for the wider river channel proposed, so it's being replaced. A new floodwall will also be built to protect the train's Napa station. Tracks are being relocated as well."

"The added expense of accommodating the Wine Train was politically necessary, said Chris Malan, manager of the Living Rivers Council environmental group and a proponent of the tax measure. Without the support of the politically influential DeDomenico, the tax measure would never have passed, she said."



Using taxpayers money to bail people who made risky bets by building in Napa Valley floodplain. Sound familiar? 


Build in a floodplain;  then, rather than keep new development outside the floodplain, build even more development in the floodplain. Invite more and more residential and business development into the floodplain, as if there is no danger, no risk. Sound familiar? Sound like the California/Wall Street mortgage/CDO fraud?


Get taxpayers to spend to spend millions$ on flood control projects that encourage more development in the floodplain and allow developers to lure more and more people and investment in the floodplain. Sound familiar? Sound like the California/Wall Street mortgage/CDO Ponzi crimes?


Then when a flood overwhelms the piecemeal and under-designed flood controls, and destroys residential and commercial infrastructure, demand that the taxpayers bailout them again. And again. And again. Each time rebuilding and increasing the infrastructure and lives at risks. Sound familiar? Sound like increasing systematic risk?


And every time the taxpayer bails out the gamblers on floodplain development, the gamblers double-down their bets and continue building in the floodplain because they know the government will bail them out. Sound familiar? Sound like moral hazard? 






duo's picture

Maybe we'll see this soon.

xxx Times has just released information that a plan to be published by Washington on Tuesday, titled "Urgent measures to be taken by May 15, 2010" will demand dramatic California austerity measures, such as cutting "average nominal wages, including in central government, local governments, state agencies and other public institutions"

Rainman's picture

That plan should be a real hoot. A demand for austerity measures in Kalifornia crafted by Uncle Sugar's minions in Washington, D.C.

Doesn't get much weirder than that.