Thursday, 22 April 2010

IMF fears Greek disease could spread

Syphilis was a disease always blamed on other countries. Back in Roman times it was called the Punic (Carthage) curse and later we called it the French pox and the French called it the English pox. Its been a standard political tactic for over 2000 years. Its latest UK exponent was of course Gordon Brown's Labour party who blames every one of his self created problems on 'international' factors. There is a small nugget of truth in this excuse but it hides that the overwhelming cause of the rapid spread of any contagion syphilis, or economic, lies in the domestic structures of particular countries for which their own government was largely responsible.

This is what concerns the IMF about the Greek situation. The public finances of many countries are in a dire state of indebtedness and imbalances and as such provide a fertile breeding ground for the spread of what they will no doubt call the Greek disease, bloated public expenditure that exceeds income, huge public sector pension liabilities caused by over generous pension schemes.

The 10 year Greek bond to Bund spread is reported this morning as 529 basis points. The Greek government is reported as in a 'state of nervous exhaustion' or as I wrote yesterday, it does not know what to do next. Strikes are rapidly spreading and the budget deficit is, as I predicted earlier, being revised up. I opine it will not be the last upward revision.

The new breeding ground is in the other PIGS. Credit Default Swaps (CDS) for Portugal increased by 36 bps to 235 bps and for Spain rose by 17 bps to 162 bps. These CDS values equate pretty well with the credit spread on the these countries bonds which in turn are related to the annual probability of a default. The IMF are terrified if the contagion spreads to Spain and Portugal it may spread worldwide with dire consequences for us all.

The Brussels bureaucrats however are preoccupied with saving their 'grande project'. The IMF are going to have to use their big stick soon to bring the 'crats to their senses. This may come when Brussels see what happens to the Greek government at the hands of its own people this summer but I would not bet on Brussels ever doing the sensible thing.

The IMF are in the invidious position, as they were in Argentina, of trying to prop up an unsustainable structure and throwing good money after bad into a country that must in the end default. There is now much talk of a Brady bond solution, used to rescue Latin America in the 80s. It worked then but the US ran the show without interference. The EU will never countenance that. The loss of face for the French would be akin to the aftermath of Waterloo when the Brits banged up the great French hero Napoleon on St Helena and left him to rot.

Greece needs a major debt restructuring and I do not see how even this can be effective without a devaluation.

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