Wednesday, 28 April 2010

Greece sneezes, who catches the cold?

So as the dust settles from yesterday's S&P downgrade of Greek sovereign debt to junk bond status we can begin to ask: what does the future hold?

Well first we need the other two shoes to drop. S&P has downgraded, but Fitch and Moody have yet to do the deed. Technically Greece can still call themselves investment-worthy while any one rating agency gives a BBB+ grade, or equivalent. But once all the agencies have pulled the rug then Greece has no chance of selling bonds to fund her deficit (realistically she's already got no chance.) But when the last agency calls there will be many funds legally unable to continue holding Hellenic debt and forced selling will flood the market.

Greece has today forbidden short-selling on her stock exchange. That is to protect her banks who are major holders of Greek debt. It won't stop shorting of stocks on other exchanges.

The IMF is in Athens, although the Chairman Dominique Strauss-Kahn (an ambitious French wanna-be politician looking to make his mark here) has gone to Germany to twist Angela Merkel's arm about getting the Germans to hand over some cash - say 40-50bn euros.

The German public generally think giving any money to prodigal Greeks is a bad idea. The Greek public sector has some "interesting" innovations such the 14-month year. Most salaried employees get 12 pay cheques a year. In some European countries they get 13, an extra one for Christmas. In Greece they're up to 14 paydays a year; Christmas and a Summer bonus as well. This kind of thing doesn't play well in Germany with their Teutonic seriousness. They tend to think Greece has ways to raise the cash it needs: selling islands for example; hardworking German taxpayers should not be expected to foot the bill.

The Greek train will hit the buffers on the 19th May when they need 8bn euros to roll-over some existing debt. If they haven't been bailed out by then they default and debt will be "restructured", ie, lenders will get paid a percentage of what they are owed. And of course, public sector workers risk not being paid at all and will undoubtedly strike.

One solution for Greece is to exit the euro. But that would be so complicated to implement, and such an indictment of the whole EMU project that it's difficult to imagine it actually happening.

So we must ask: if Greece does fail to pay her debts, who's holding the baby? The Economist has a little chart...

France is in the hole for €50bn, Germany for less. Here in the UK we have €8bn to worry about - not massive, but not negligible either. The big surprise is Switzerland on up to €44bn - ouch!

However, we're getting ahead of ourselves. It's too soon to start applying the haircuts.

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