A payday loan advance or two will not be enough to help the Greek economy!
Recently Germany was hoping to create the post of super Commissioner with the right to veto new spending by Greece.
They proposed that the second aid plan for Greece not to be paid unless two strict commitments are met. First to honor the debt service before expenses, which reduces significantly the risk of default.
Second, in view of the disappointing implementation so far, Greece would have to accept to give up part of its fiscal sovereignty for some time. These requests were striking especially in a country that has experienced Ottoman occupation for centuries. This could lead to a rise in hate between Europeans compromising any European project.
Of course there are problems in Greece as fraud raged long, especially in the more affluent sections of the population. But it was no secret to anyone, and it had not prevented international lenders to pour tens of billions over the country. It very easily overwhelms the borrower, but rarely the lender. Moreover, it is unnecessary to detail the amazing cuts and massive tax increases that have occurred since 2 years. However, this austerity produced no result because it has led this country into economic depression, with a 2011 deficit well above that of 2010.
The people, after having strongly protested and failed to get a referendum, apparently gave up in late 2011. Thus, the depression will deepen. In recent weeks, we rediscover a centuries old law: past a certain level of debt, the cards are in the hands of the State, and not in that of the creditors. Greece shows now the likely path out of the debt crisis: The general restructuring of national debts. After a year of statements on the theme of Greece will repay all, we went in July to private lenders will lose 21%, then in October 50% and next 70%. In all cases, private investors will lose 70% of their money, which is the sanction of their irresponsibility, but also the occurrence of a risk for which they were paid handsomely through high interest rates.
Discussions between Greece and its creditors on a debt swap recently resumed. Banks had suspended their discussions on debt restructuring with Athens, threatening the country from default. But behind the collapse in Greece it is the global financial system that is at risk. Recall the situation as of July 2011 when the Greek debt stood at 160% of GDP, or 360 billion euros, 110 billion owned by international bodies like the IMF, about 100 billion by public institutions, and 150 billion by private institutional investors. The European Summit had decided to involve the private sector on a voluntary basis in order to alleviate the Greek debt. It has been proposed that banks voluntarily accept a discount of 21% of the amount of their debt. Because the amounts owed by Greece are obviously non-refundable it must go through a restructuring.
At the continuing difficulties of Greece, the summit of October 2011 has increased the amount of voluntary loss to 50%. Be clear that this amount is the result of an agreement between the government and association of major banks and global financial institutions, which represents the banks. But it is only a kind of union, which did was really able to impose decisions to all its constituents. We thus arrived at a maximum discount of 50% of 150 billion euros, 75 billion, or about 20% of the Greek debt. In fact, all private investors were not affected by the voluntary downgrade. While 75% agreed, the total discount is only 55 billion or 15% of the total Greek debt. In summary, the agreement does almost nothing, and in the end, it may even more debt Greece. However, the Greek economy is collapsing, bending under unbearable austerity measures that prove totally against-productive: the final 2011 deficit was much higher than that of 2010. Greece has asked banks to increase the restructuring by up to 75% but the big banks are refusing to go beyond 60%.
The problem is that if voluntary loss, CDS (Credit Default Swap or insurance against default) are not activated, they are therefore useless in this case. However, several hedge funds have smelt the bargain with the Greek CDS, and they bought in recent months large amounts of government debt at a low price, and they are determined not to accept voluntary haircut. There are two possibilities: either Greece is repaying, aided by private creditors who accept the discount, and the hedge funds will be refunded in full. Or Greece actually does default, and in this case, hedge funds will be reimbursed by the issuers of CDS. Thus, the number of creditors with a stake in Greek default increases, threatening the whole. It is of course possible that under pressure, a last-minute agreement is reached, but it will only postpone the date of the default which is inevitable, as Greece cannot repay such amounts.
But the Greek default, short or medium term, carries with it many dangers: impact on the ECB, IMF lending and public structures, destabilization of bank balance sheets, failure of CDS issuers, major tensions in the bond market and therefore the financing capacity of states and banks. All because of € 360 billion of debt. Recall some self-explanatory figures: Spanish + Italian debt: 2300 billion; German + French debt: 3700 billion; U.S. debt: 12 000 billion.