Sunday, 7 February 2010

Greek Endgame Approaches

The festering Greek sovereign debt crisis has now spread to infect, and affect, the whole Eurozone. Portugal, that put the P into PIGS, last Monday was left with 40%, €200 mn of its latest Euro bond offering unsold. This hit not only Greek and other non-Greek Eurobonds but also the Euro itself which fell heavily against the Dollar and the Yen. The PIGS' CDSs, Credit Default Swaps, the cost of insuring against default, also blew out. Worse, there is a story that the counterparties writing these swaps are mainly Greek banks!. Pig on pork as they used to say in the City.

The FT recently published the table below on the total 302,5 bn US $ debt Greek debt exposure by country:

France 75.5

Switzerland 64

Germany 43.2

Others 120

Exposure in this case is likely to be a mix of sovereign, corporate and bank debt — and it could easily have been reduced using hedges (one reason European CDS liquidity is also increasing):

Size of exposure is not the only issue here, there’s also the issue of concentration. According to BNP, Irish, Austrian and Portuguese exposure is concentrated in just a few banks.

In France, Greek-exposure is concentrated on Credit Agricole, as owner of Emporiki, and Societe Generale, which has stakes in Geniki Bank and Hellas Finance. German exposure by contrast, though ultimately high, is spread thinly between many banks, according to BNP Paribas.

This makes for some interesting politics with a few French banks standing to lose a great deal.

The pressure is on for a bail out by the wealthier members of the Eurozone but that of course would generate demands for similar treatment from the other PIIGS. The other option is to call in the IMF which would be anathema and a big admission of failure to the Eurocrats who hate all things American. It would however leave them able to blame the Anglo Saxons for the inevitable blood bath that would follow implementing the swingeing cuts in public spending the IMF would demand for any loans it makes to Greece. The other usual IMF demand in return for its support is devaluation of the currency something that is outwith the control of the Greek government unless it leaves the Euro. The Germans will not accept propping up the PIGS with their hard earned. Merkel's government would fall if she tried to.

Public spending cuts have to come in all the PIIGS. (and the UK as well but that's another story!) When you have the levels of unemployment of 20% and 40% youth unemployment eating up a huge chunk of the Government budget how can you cut without provoking huge civil unrest, riots and strikes? Governments would be toppled and the political elite lose their lucrative jobs!

The latter is obviously unacceptable to politicians of all colours in all countries but the alternative of Greece leaving the Eurozone followed by the other PIGS would pose a mortal danger to the Eurocrats' great project and even more lucrative lifestyles. This split between the interests of national politicians and the interests of the Eurocrats is the real threat to the EU. It is our best chance and probably only chance of getting out of the EU. UKIP as currently lead will sit in the bars and brothels of Brussels and not even realise what is happening. As Burns wrote in his great battle hymn Scots wha hae, "Now's the time and now's the hour"

It is only the Germans and the French that can topple the EU. UKIP must do all in its power to show the people of these two great powers that it is in their interest to rid themselves of this bureacratic nightmare.

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