Friday, February 6, 2015

Greece: a return to the table?

Cutler Investment Group doesn't trade in Greek bonds, but they still have a significant impact on what is happening in our client portfolios.

Yesterday’s move by the ECB was, in my opinion, the first telltale sign that a Grexit may just be in the works. Otherwise, why throw down the gauntlet even before you try harder to, at least, appear to be negotiating. Yes, I agree, who is looking for growth bonds from Greece? Certainly not any one of us. However, before any negotiation you first put on the table everything you want and more, then you scale back. The ECB simply rejected negotiations by imposing even more financial pressure on the Greeks. Who does that help? Don’t get me wrong, the Greeks placed themselves in this situation, but given that there is a new government in place, elected by the people of Greece, should we not try to negotiate first, then show them who is in charge?

Why do I think that a Grexit (I hate using that word but it shortens the message) may be more probable now than ever? Mind you, I am still not convinced that in the next few years there will be only Euro bonds issued by the ECB without any linkage to any country. That solves some problems but not the one in hand. Here is what we have. The Financial Times reports that the total debt for Greece is now around $362 billion and that only about 15% of the debt is now held by the private sector. This means that the public sector, the EFSF Eurozone rescue fund, the European Central Bank as well as the IMF hold approximately $308 billion of Greece’s debt.  The Greek debt to GDP ratio now stands at 177% and is growing rapidly. 

Well, who is hurt the most by a Greek default? Not the private sector but rather those that just levied extra pain. If Greece was to default, they would become the cheapest country in Europe. Tourist would flock by the boatloads. Shipping, a major source of revenue for Greece, is mostly transacted in dollars and not Euros, so they could control the olive oil market. A little inflation pain on the people but, in the long run, no debts and a private sector that just may be willing to take some early chances.

The ECB has a choice, lose money now or keep losing money forever.

A Greek exit is good for Greece, but the ECB has to be worried about: Spain, Italy, Portugal, Ireland, Cypress, and maybe even France looking to emulate.

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