|What the Eurocrats Think of Greece|
But it’s looking like France, Germany, Holland and the UK are all balking at the reality of having to save the Greek’s hide once again. Boris Johnson, the flamboyant Mayor of London, openly called for Greece to exit the euro in an op-ed in the Telegraph. Several of the participants in the negotiations are asking for Greece to make deeper austerity cuts first, before getting more bailout money—
—and of course, the Greeks won’t do that: Their population won’t stand for any more austerity measures, as they believe (correctly) that the reason Greece is in the hole it’s in is because rich people shirk their obligation to pay taxes. Also, the Greek people are getting handouts left and right from their government—paid for with deficits and debt.
So no European bailout, no money for Greece to continue funding its government.
So like I said, Greece is about to go down the toilet.
So now that we can, we have to step back, look up, and figure out what’s coming up next on the horizon, once Greece defaults.
The answer is obvious: Portugal, Ireland and Spain are coming up—and coming up fast.
Specifically, Portuguese and Irish debt: As of this writing, the 10-year Greek bond is yielding a staggering 17.34%. But the Irish 10-year bond? Safe as houses, you ask?
No! Irish 10-year debt is yielding 11.54% , while the Portuguese 10-year is at 11.15%.
So regardless of whether or not the Greek situation is somehow fixed and smoothed over with more money—“stabilized”, in that wonderfully bloodless turn of phrase—Ireland and Portugal are soon enough going to be needing another bailout of their own.
Just like Greece, Portugal and Ireland are spending way more than they’re bringing in via taxation. The reasons for this are different, but the result is the same: They both need boatloads of cash. So they have to go out and borrow this cash, in order to pay for their government.
In other words, Portugal and Ireland need relatively cheap debt.
However, what happens if there is an outright Greek default?
Obvious: No one would want to lend money to Ireland and Portugal. Irish and Portuguese debt yields would shoot the moon—easily reaching Greek levels, if not superceding them. (Remember: Debt yields are the inverse of debt price. The lower the price of a bond goes, the higher the yield.)
The reason this would happen is because the debt markets would all be running for cover after a Greek default—rushing to a safe haven, or at least not rushing to buy the “P” and the “I” part of the PIIGS’s debt, after the “G” defaulted.
So if Greece goes down the tubes, Ireland and Portugal would almost immediately need a bailout: They would not be able to borrow on the open markets the money they need in order to continue funding their governments.
That is, if Greece defaults, the Irish and the Portuguese would suddenly find themselves without the money to fund elementary schools, ambulances, sewer systems, power grids, etc.
So! What is the European leadership doing?
Dithering! They are not approving a Greek bailout—and they are not giving a clear signal that Greece will be booted out of the eurozone, but Ireland and Portugal will be protected. In other words, the European finance ministers who are supposed to “stabilize the markets” are creating the conditions of uncertainty in the markets—
—which only hurts Ireland and Portugal.
Now, why is defending (financially speaking) Ireland and Portugla essential?
In a word, Spain.
Spanish 10-year debt is yielding 5.6%—nowhere near as bad as Greece, or Ireland or Portugal, and just a shade over German 10-year of 3.5% or so.
However: Spain is just as bankrupt as Ireland or Portugal or Greece, with a massive 20% unemployment and—unbelievably—a 50% youth-unemployment rate. Why do you think all those Spanish kids are protesting at the Puerta del Sol: They got no place else to go!
And if that massive unemployment wasn’t bad enough, the Spanish banking sector is teetering like Humpty Dumpty before his Great Fall—scratch that: Teetering like a drunk Humpty Dumpty sitting high up on his wall.
So what’s obvious is, if Greece goes, Ireland and Portugal are sure to follow—and if they go, then Spain is next—
—and Spain can’t be saved.
It’s as simple as that. Spain is too big—roughly half the size of Germany. If Spain goes, it will drag down all of the European continent with it—that is, bank failures (on both sides of the pond), a crash of the eurozone as a currency, massive unemployment, a European economy that would grind to a halt—
—basically, the worst parts of the Great Depression.
So you see why Greece matters?
The European leadership have got to quite dicking around! They have got to make up their minds once and for all: Either save Greece, or let it die.
But this prolonged agony—even if at the end of it they save Greece—helps no one, and hurts everyone.
And it brings Ireland and Portugal—and Spain—that much closer to the edge.
At The Strategic Planning Group, I’ve just released a full-scale Scenario discussing what happens if and when Greece and the other PIIGS default and then exit the eurozone. Do check it out here, if you’re interested.