greek sovereign trials and tribulations and their impact

Although we do not believe in a further deterioration of the situation in Greece in the long term because the political climate in the country has changed in a way that has not been seen in 30 years. The important news is that reckless finances will become a thing of the past.

Just to clarify we do think that some of the hystrionic press about Greece defaulting was an attempt by traders to cause a self-fufilling crisis based on rumours so they can profit from their short positions.

The graph here shows just how bad the situation is compared to other european countries. This graph captures by how much greek politicians have led the country down a blind alley and how irresponsible the last 30 years have been.

Nevertheless it is clear now that there is a defacto economic government imposed on the club-med members of the EU. It also means that the norms of german financial conservativism will become best practice and in the long term that bodes well for Greece and the rest.

Central Europe vs. Balkans

But what about eastern europe and central europe? (for those that think they know the difference between central vs. eastern europe look at the map for your education...)

For one thing the crisis showed that countries with bad fiscal management suffer whether they are in the eurozone or not. Slovakia, Czech republic and Poland come out of all of this with more credibility as financial actors.

The countries with bad management of their finances and high corruption Greece, Romania, Bulgaria, and the rest of the balkans now seem to be a category of their own. We need a new name for it, but i think for now the Balkans+Romania will do just fine

Legendary commentator and economics professor Nouriel Roubini and his team share their views on the prospects for this region. Our conclusion from this is that given that we see the EURO as safe despite the greek melodrama, for central europe the likely outcome is that Slovakia will carry on being the only euro member in the region, and is likely -after a short pause- sweep all the FOREIGN DIRECT INVESTMENT for itself. This is the way we interpret the last comment on this piece.

What Greece’s Fiscal Crisis Could Mean for Eastern Europe

Feb 22, 2010 11:42AM
Eastern Europe & Southeastern EU will likely feel reverberations from Greece’s fiscal woes. While the possibility of contagion via trade and FDI channels is limited, transmission via the financial channel is a real risk in Bulgaria, Romania and Serbia, given the strong presence of Greek banks in these markets. Any direct spillover effects will likely be limited to these South East European economies, but the potential for indirect effects must also be taken into account.
On the positive side, Greece’s fiscal crisis highlights the comparatively better fiscal positions of EU newcomers in Central Europe. Nevertheless, troubles in the eurozone periphery could further delay euro adoption, which could weigh on emerging European assets going forward.

Grεεk dεbt disastεr

Here’s a singularly-arresting chart from Deutsche Bank’s excellent fixed income team:

That is foreign banks’ holdings of European government debt, and there is an unexpected standout: Greece.
The chart highlights two concerns; firstly, the potential for banks to be burned by the situation in the Hellenic Republic, and secondly, the extent to which the country has relied on outsiders to finance its deficit in recent years.
Here are the DB analysts, headed by Gilles Moec, with a bit more detail:
Such inflows leave an economy vulnerable to a sharp withdrawal of funds at some point in the future should foreigners lose confidence or face liquidity constraints that prevent them from maintaining this exposure. A breakdown of net international investment positions for some of the more vulnerable EMU economies highlights this predicament.
Financing of C/A deficits generally takes two forms – debt creating and non-debt creating inflows. Non-debt related inflows refer to FDI and equity, debt-related inflows can be in the form of either portfolio flows into domestic public or private fixed income markets or loans (e.g. trade credit, syndicated loans). In Greece’s case the majority of its negative net international investment position relates to portfolio flows into the public sector which foreigners can choose to sell whenever they wish. At end-Q3 foreigners held EUR216bn of Greek government debt (72.3% of the total market, 90.2% of GDP), having doubled their position since end-04. Given recent downgrades and another round of revisions to budget data from previous years, a sharp slowdown or even reversal of inflows from foreigners into the local debt market has become an increasing risk.
Matters are made worse by the fact that the ECB has taken a hardline stance on the collateral criteria for its liquidity ops. That means if Greece is downgraded by Moody’s (the only agency still rating it at the A-level) its debt will no longer be eligible for the ECB facilities once the central bank raises its collateral-threshold back to its original level of A-.

Greece is probably hoping that foreigners will continue to finance the government for the rest of 2010, some investors have been piling in to Greek bonds in anticipation of a bailout, but there are signs that may get more difficult.

The country’s Public Debt Management Agency has already said it will not sell any bonds to the market this month, instead opting to focus on T-bills. Bid-to-cover ratios for last week’s auction of 52-week bills was fine at 3.05, but yields rose 119bps to 2.2 per cent. Which means, in short, that investors are demanding more and more of a premium for holding Greek debt.
If foreigners do retreat from Greek debt, the government will no doubt be hoping that its domestic banks could step in to replace them. That however, may also prove problematic, according to DB:
Full financing from the domestic banking sector is probably also not viable. December saw the government sell EUR2bn in bonds in the form of a private placement to 5 banks, 4 of which were Greek. Should the government rely entirely on its domestic banking sector for financing this year, it would result in a 163% increase in their holdings of Greek government debt relative to end- October (EUR32.5bn)1. In the absence of an increase in banking sector liabilities, Greek banks would move from holding 8% of their assets in Greek government debt at end October to 20.2% of their total assets by end-2010. This would only materialise if Greek government debt could not be posted at the ECB as collateral but would undoubtedly translate into a sharp fall in the stock of private sector credit and a more negative growth outcome than is projected by the government, endangering the government’s fiscal targets.

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