The Next Round in the Greek Tragedy

Thursday, September 16, 2010
By Paul Martin

by Scott B. MacDonald
FinancialSense.com
Thu, 16 Sep 2010

For a small country with an economy based on shipping, tourism and agriculture, Greece caught the world’s attention in April and May 2010, when it edged close to a sovereign debt default and threatened to rend the fabric of the European Union (EU). Supported by a €110 billion credit facility by the EU/IMF, the government implemented a tough economic reform program. Despite the efforts of the Papandreou administration to right the fiscal ship and recreate the Greek economy, considerable doubt remains over the ability of the government to persevere in the face of public discontent, which could become more manifest in the upcoming November local elections. The elections are increasingly going to be a point of focus for Greece and investors as to the government’s ability to stick with the austerity program and stave off pressure to either default or restructure its debt.

Greece, according to the Bank for International Settlements
(BIS), has $297.2 billion of government debt, which makes its debt/GDP ratio over 100% and rising. The burden is more than likely unsustainable. This view dominates the market (hence 5-year Greek Sovereign CDS spreads close to 1,000) and has its cadre of economists forecasting a default or restructuring of the country’s debt. One of the more recent gloom-and-doomer’s is Hans-Werner Sinn, head of Germany’s IFO, a prestigious economic think tank, who believes that Greece’s austerity measures cannot prevent default and will lead to a breakdown of the political order if continued for long. As the good economist proclaimed: “This tragedy does not have a solution.” He also points out that societies under such stress usually end up with political fatigue in the second year.

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