Hellenic Seppuku?

That’s the question on everyone’s mind these days.  Is it better for the Greeks to commit the sovereign equivalent of the ancient Japanese samurai ritual of seppuku and default or continue with the long slog to austerity?

It’s a fair question.  Because what’s really at stake is not the credit rating of Greece.  Far from it.  It’s the stability of this:

The channel on the daily chart is still firmly intact.  Because every day this situation lingers, drags on, languishes, or whatever other verb you want to use that equates to slitting your wrists in a warm tub, the Euro will continue to get punished.  And make no mistake: for all the debates on the Continent about the correct course of action, it’s just talk.  And that’s the European strategy: to jawbone the situation away and pray it works.  How many times have we seen or heard of a rescue package being put together just to find out later it’s a discussion?  Or a “written commitment of solidarity?”

But as Tim Backshall’s excellent analysis points out, it’s all for naught:

Cash spreads continue to head wider while the synthetic spreads (i.e. CDS) lag.  Make no mistake: the availability of CDS protection is keeping cash spreads from blowing out wider.  Plus, it’s preventing the Euro from being picked up by Procter & Gamble as an alternate paper product to make toilet paper with.  Reduce, reuse, recycle.

But back to Greece.  An internal devaluation of wages will cause even more civil unrest while the Greek government’s austerity measures are chasing GDP lower and lower.

But so would higher taxes and spending cuts.

The one thing nobody is talking about there right now is the privatization of government services.  They could spin-off some services, which would help them raise money to pay down the debt they borrowed.  Or they could look into privatization with debt assumption by the new owners.  Who knows why they won’t entertain these things…

But for now, here’s Ambrose Evans-Pritchard on the subject:

In my view, the IMF should not agree to take part in a joint rescue with the EU unless it calls the shots. It should take charge and impose a Uruguay solution. If the Europeans demur — as they surely will — it should make it clear that creditors from the US, China, Japan, Canada, Saudi Arabia, et al, will not waste their IMF money prolonging a dysfunctional foolery by EU institutions. It should walk away, and slam the door.

The longer this situation lingers and holds the rest of the continent hostage, the more reasonable his idea looks.




Filed under finance, government, International, macro, Markets, Way Forward, You're kidding

7 responses to “Hellenic Seppuku?

  1. jm

    Seems that Greece is forcing a call at 450 bps.

    They know at this point they have little to lose and a lot for the EU to lose.

    • Seems that way, or it’s a race between the debt rating (Can they afford another ratings downgrade?) and the spread to Bunds.

      Looks like the Greek banks need to buy more CDS in an attempt to slow down the rise in spread.

      • JM

        “Sometimes nothing is a pretty cool hand.”
        — cool hand Luke

        On the other hand, sometimes it just sucks. 😉

  2. The core of the problem unfortunalty in greece is really with the unrealistic unions.
    I quite liked this article in the IHT a few weeks ago;

    I think germany is right to stay form in the negotiations.

    stan @ http://grabacupwithstan.com

  3. “Is it better for the Greeks to commit the sovereign equivalent of the ancient Japanese samurai ritual of seppuku and default or continue with the long slog to austerity?”

    There is no choice here. Austerity will come upon them whether they want it or not. They can either choose it consciously and cut their social spending and public sector pay dramatically or they can keep trying to thread a non-existent needle with half-measures and end up cutting their social spending and public sector pay very dramatically.

    This holds true for anyone enslaved to debt, whether that be a family with loads of credit card debt, a company with massive loans or a government that borrows and spends endlessly. In the end, austerity will happen.

    • You’re right; it’s merely a choice between volunteering to restraints or having them pushed on you. Sometimes people forget default is also a form of austerity – you’re not worthy of credit, so it’s not given to you. At which point you will have no choice but to do severe belt tightening.

      The only difference is the glidepath their actions will put the Euro on. If they default or implement an aggressive austerity plan on their own, Europe will suffer. It will be quick, severe, but it will allow a genuine recovery to take hold. The Euro will lose value, but it will rebound. The other alternative is what we’re seeing: a scenario that drags on, potential bailout after potential bailout, until they look back 5-10 years from now, everything lying in ruins, asking themselves how they got there. How they got it so wrong. By then, the Euro will be thoroughly ruined and there will be no hope for a monetary union.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s