Greece is still a train wreck

The country faces a 5 billion euro bond payment, which it doesn't have, and European finance ministers aren't helping.

By Jim J. Jubak Nov 10, 2012 7:44PM
Image: Europe -- Photodisc, SuperStockOn Thursday, I said that European leaders looked to be headed toward another round of kick the can on Monday with more delay on approving the next 31.5 billion euro rescue fund payout to Greece.

Friday, it's clear that I was much, much, much too kind.

We're now looking at something I'd call a train wreck.

Not only does there appear to be almost no chance that European finance ministers will vote to approve the cash that Greece needs on Monday -- Greece faces a 5 billion euro bond payment on Nov. 16, and the country doesn’t have the money to make the payment -- but also now it appears like any payout to Greece will have to wait on resolution of a bigger deal that will require eurozone countries to cough up another 15 billion to 30 billion euros (yes, that's very popular in Berlin and Helsinki) or that will require a big write down in the value of Greek bonds held by the European Central Bank (you can hear the screaming from Frankfurt) or quite possibly both. The need for that bigger deal puts in doubt the consensus fallback timetable that pegged approval of the Greek cash payout to the European summit on Nov. 22 -- on the rather questionable assumption that Greece would be able to dig up the cash it needed, somehow, until then.

The problem is that the International Monetary Fund, one of the members of the Troika that is to report on the condition of Greek finances for the November 12 meeting, is pressing the unpleasant truth that even with the latest austerity package Greece is not on track to reduce its debt to GDP ratio to a sustainable level -- defined as 120% -- by the 2020 deadline. Some calculations show that the ratio would be 145% by the deadline.

The IMF is insisting that the eurozone deal with this problem now -- before it signs off any new disbursement of funds Greece. "Dealing with it" would, first, require a formal acknowledgement that Greece needs more time -- an extra two years to 2022, Greece says -- to meet its targets and an agreement on how to pay for it. A two-year delay would require funding of 15 billion to 30 billion euros. 

Second, "dealing with it" would require the eurozone to come up with some way -- besides an endless succession of less and less effective austerity packages -- to reduce the Greek debt burden. Any reduction would require the European Central Bank to write down the value of its holdings of Greek debt -- something it didn’t do when private bond holders took their haircut as part of the last rescue package for Greece. So far, as you might imagine, the European Central Bank is refusing to line up at the barber.

There was hope, until Friday, that for the Nov. 12 meeting, the issues could be kept apart. The finance ministers would vote, this plan went, to accept the Troika report and approve the payout to Greece. The sustainability issue would be put off to later. But the IMF has refused to go along with this approach and since without IMF money there is no Greek rescue that stance killed those hopes.

So now it's back to the drawing board. Fortunately, the 5 billion euro bond payment that Greece
is supposed to pay -- and can’t -- on Friday, Nov. 16, is owned to the European Central Bank. The bank does have a technical trick or two available to it that would allow the central bank to roll over the bonds. And Greece has been able recently to sell short-term debt in the markets -- I shudder to think where that debt is winding up -- so it can stumble along for a while as long as the European Central Bank continues to fund the Greek banks that are, ostensibly, buying this short-term Greek debt.

But it's hard for me to see this stand off between the IMF and the ECB getting resolved quickly, especially since most solutions would require either approval from national governments in the eurozone or even worse votes by national parliaments to approve the payment of additional taxpayer money to Greece.

Do I know how bad this crisis will get in the coming weeks? No, I don’t although "pretty bad" seems a reasonable estimate.

Do I know how badly this crisis will shake the financial markets? No, I don’t, although looking at the 0.35% drop in the euro today to $1.27 and another 0.6% decline in the German DAX stock index; I’d say that events will almost certainly hurt European markets. I’d doubt that U.S. and Asian markets would escape damage.

Caution suggests raising some cash today on the very modest uptick in the U.S. Standard & Poor's 500. That gives me a little protection and a little more cash to take advantage of any selling in stocks I'd like to own for the long haul.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
Nov 10, 2012 9:40PM

And Spain, Italy, Ireland, Portugal, France and the USA are not?   LOL 


All of these countries are running massive deficits, even if they are not as great as they were.  They still are trying to Borrow, Print and Spend their way to prosperity.  Obamanomics still does not and never will work.  We have been following this formula for 4 years now, has it helped here?


This will not end well and it will be ENTIRELY the democrats fault.  We need to BALANCE the budget by slashing spending.  Until we realize that we will spiral into a depression.


Nov 11, 2012 9:56AM
its called checkmate. romney didn't do it but the economy will. no place to run, no place to hide, no place to shuck and jive.
Nov 11, 2012 2:18PM

Obama is a boy trying to play a mans game.  He is absolutely clueless.  And he has people around him that are actually worse.

I don't know what he does not get when we say no new taxes on anyone.  It is a quit spending agenda.



Nov 11, 2012 2:16PM
Cash is King! As the Nation begins to resemble Detroit, deflation will take hold in a big way. Thank goodness for bear funds or better yet double & triple bear funds. Enjoy.
Nov 11, 2012 10:51PM
The end game is ECB and the FRB will print baby print. Buy gold and gold stocks.
Nov 12, 2012 10:31AM
America is expecting trouble.  Gun sales up 650%.  Do we really need million more firearms?  The majority of America clearly believes we do, and that says the majority believe we are headed for economic collapse, based upon debt, borrowing, handouts, and socialism.

American's are putting their money where their brains say they should.  Specie, Weapons, ammo and overseas.   

I wonder WHY they so strongly  believe this.   I expect the trend to grow.  
Nov 12, 2012 11:53AM

The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies.

Over the past 5 years, our federal debt has increased by $3.5 trillion to $8.6 trillion.That is “trillion” with a “T.” That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next 5 years, between now and 2011, the President’s budget will increase the debt by almost another $3.5 trillion.

Numbers that large are sometimes hard to understand. Some people may wonder why they matter. Here is why: This year, the Federal Government will spend $220 billion on interest. That is more money to pay interest on our national debt than we’ll spend on Medicaid and the State Children’s Health Insurance Program. That is more money to pay interest on our debt this year than we will spend on education, homeland security, transportation, and veterans benefits combined. It is more money in one year than we are likely to spend to rebuild the devastated gulf coast in a way that honors the best of America.

And the cost of our debt is one of the fastest growing expenses in the Federal budget. This rising debt is a hidden domestic enemy, robbing our cities and States of critical investments in infrastructure like bridges, ports, and levees; robbing our families and our children of critical investments in education and health care reform; robbing our seniors of the retirement and health security they have counted on.

Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities.

Senator Barack Obama
Senate Floor Speech on Public Debt
March 16, 2006

Anyone want to bet we have MORE FAILED LEADERSHIP in the next two months?

Nov 12, 2012 10:37AM

It is time to treat democrats like a Jew would treat a Nazi...  These people are our enemies.  Don't asscoiate with them, don't do business with them, and don't hire them.
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