Monday, 23 November 2009

Beware Greeks bearing bonds and EU regulators

It is a while since I wrote on topics economical but the above issues I raised here around 6 months ago and are now coming to the boil.

AEP in today's business DT has a piece entitled, 'Greece tests the limit of sovereign debt as it grinds towards slump' The Greek bond to Bund spread is now at 178 basis points and Greek debt yields which used to trade at slightly over Italian yields have now blown out also. The average maturity of Greek debt is shortening. No one will lend long term to Greece. The ECB can fund them at the short end but the amount of debt needing to be rolled over each quarter is steadily rising. This is exactly the problem that hit Northern Rock. Greece is not a company and in the crisis in February the German Finance minister Steinbruck promised to rescue any eurozone state in dire trouble. He is no longer Finance minister and anyway it was only a worthless political promise. Greece cannot rely on EU help as Trichet has hinted. CDS Greek bond default insurance jumped 40 bps last week.

The Greek government finances are in a worse state than ours, debt will be 135% of GDP by 2011 on EU figures. The budget deficit will be 12% of GDP. There is a current account deficit of 14.5% of GDP. Around 200 anarchists were arrested in Athens last week in a running battle with the police. Communist shipyard workers have also clashed recently with police. They have just had elections and a new government talking about a pay freeze on state employees on more than € 2000 per month. The Greek nation is in denial about this.

Their tourist trade is 20% down as the diminishing number of holidaymakers flock to Turkey which is cheaper and has better food. I was on holiday in Greece last month and I wrote here how the country was being kept afloat on EU funded public infrastructure projects, many largely useless. They need to devalue but they can't! They are in the Euro so they cannot print money to devalue their currency. Is a salutary lesson to those who think joining the Euro will be a panacea for the UK!

We will see similar civil unrest here in the UK as we also have to bite the bullet.

The UK's problems will be exacerbated by the new EU financial regulations claimed to be needed to restore financial prudence but in reality aimed at getting the lucrative business out of London to Paris and Frankfurt. This will manifest itself by an exodus of wealth creating finance houses to Switzerland and huge pressure on the UK government from the London City establishment to stop this EU grab. This is the sort of pressure that can and must succeed and is our best chance of rolling back the EU and eventually getting us out of it. Its hedge funds, private equity etc that generates all that lucrative work for City law firms and the whole UK legal establishment. If these funds move to Switzerland then they wont need English common lawyers as their contracts and deals will be written under Swiss law.

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