With all the talk about weapons in markets these days, it’s amazing nobody has said this yet:
Last week I mentioned the idea of the Greeks committing the ultimate sacrifice and defaulting in order to avoid taking down the rest of Europe with them. It’s the noble thing to do.
It seems that Greece still fails to understand the difference between liquidity and solvency. Here’s an explanation for you – with last night’s European Union & IMF rescue plan, Greece solves their LIQUIDITY problem. They did nothing to solve their SOLVENCY problem. Liquidity is cash flow – solvency is balance sheet. This rescue plan addresses the cash flow, but does nothing to remedy the damaged Greek balance sheet.
I’d use credit instead of solvency, but he’s right. The difference between the two is this: credit/solvency problems pertain to commitments you need to pay off next year. Liquidity problems pertain to commitments you need to pay off the next day. Greece has a good deal of debt coming due between now and the end of next month, which squarely puts this in the liquidity camp.
“After the latest developments, with the terms now set, the gun on the table will be loaded,” Papandreou told To Vima daily in an interview to be published on Sunday.
“Speculators will know this,” the PM said, according to excerpts of the interview that appeared on a website operated by To Vima’s parent media group.
“The question is whether this mechanism will persuade the markets purely as a gun on the table. If it does not, it is a mechanism that exists and could be used,” he added.
Who do you think the gun is pointed at? The markets? Or Greece? I’ll give you a hint: if they could’ve done something to stop this:
they would’ve done it already. They could’ve paid it off when it came due – a nice, clean shot from the Barrett .50 cal. Everything would’ve stopped and shorts wouldn’t have just covered, they would’ve went long on the Euro and the continent.
But as Kid Dynamite explained, this is a credit problem. Just look at the following charts. GDP growth in Greece is declining while other countries around Greece are improving.
Greece is the yellow line. Lagging everyone else.
Exports? Puhleeze. Exports on a Y-o-Y basis are lagging everyone else. Again, Greece is the yellow line. These are not signals that a country that’s recovering from The Great Recession should be sending out:
So to bring it all back to the analogy Papandreou used, who is the gun pointed at? I’d offer this is a suicide negotiation – not a hostage negotiation.
And the Greeks are playing the part of the overly dramatic, bipolar, meth-addled, manic-depressive potential suicide victim…