More Eurozone Olive-Headed Stepchild Bashing
Poor Greece, and poor Europe: the two are now caught in such an unwinnable tug of war, that the EU is considering unwinding the very fabric of its union (an action, which some say, may not be the worse idea in the here United States) and set the struggling Mediterranean country loose. And if and when that starts, it is game over European Union. Yet posturing will do nothing to change the fact that even as Greek CDS hit an all time high last week, the economic catastrophe in the Ouzo-loving country is accelerating. The latest to join the Greek bashing goon squad is Deutsche Bank, with a note released on Friday, which highlights the key dangers to the country: the ability to finance deficits, capital flights, and an outright default if money does not turn up from under the mattress.
Persistent twin deficits over a multi year period have left Greece heavily indebted from both a public and external perspective. More than ample global liquidity combined with access to ECB liquidity facilities has meant that financing of these deficits has not been problematic in the past but now leaves Greece at risk of a potentially sharp withdrawal of capital at some point in the future.
Probably the most urgent risk emanates from uncertainty on sources of government financing and potential related crowding out issues. While Greece’s fiscal deficits have been wide for some time now, as discussed above, foreigners have been happy to finance these deficits in full and more. Over 2004-08 portfolio inflows from abroad into the domestic debt market, for the most part government debt market, averaged 11.2% of GDP. Over 2005-09 we estimate that foreigners (a combination of banks, insurance/mutual/pension funds, hedge funds and central banks/sovereign wealth funds) on average financed 155% of Greece’s government deficit.
At EUR53bn, Greece’s gross financing requirement in 2010 is below 2009’s which was in excess of EUR60bn. However global financing conditions in 2010 are unlikely to be as favourable for sovereigns as last year. Central banks are beginning to reverse special liquidity facilities while government bond issuance in the developed world remains elevated. Our Euroland strategy team estimates sovereign issuance this year at EUR1005bn (net at EUR484bn), up from EUR907bn (net at EUR373bn) in 2009.
Take home: things are bad and will get much worse unless Greece finds some way to get bailed out or print its way out, which is why more and more are calling for a return of the drachma. Yet with all the great benefits of "globalization" and excel models that crashed if housing prices were projected to go down, who in their right mind would have considered this outcome at the onset of the eurozone. For all intents and purposes, Greece is merely a smaller version of its bigger Keynesian brethren, with the small exception that it has absolutely no access to a printing press. The presence of the latter it appears is the only variable that matters these days: P/E, PEG, EV/EBITDA, these considerations all fade if one only has some cotton paper, some ink and a couple of metal presses.
Full Greece report: