Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Greek Debt Crisis Won’t Spawn Second Global Financial Crash

Interest-Rates / International Bond Market Apr 28, 2010 - 06:09 AM GMT

By: Money_Morning

Interest-Rates

Best Financial Markets Analysis ArticleMartin Hutchinson writes: The Greek debt crisis is starting to display an uncanny resemblance to the subprime crisis that sank the U.S. housing market, sent the global economy into a tailspin and touched off the worst financial crisis since the Great Depression.


Indeed, Greece has behaved very much like a subprime country:

•It has borrowed more money than it can possibly repay - all the while lying to everybody about its true state of affairs.
•"Liar loans" have been made, in Greece's case, to enable the country to "cook the books" with regard to its budget deficits.
•New problems continue to emerge - apart from the liar loans - making it impossible to be sure all the troubles have been unveiled.
•And as was the case with the subprime-mortgage crisis, embattled Wall Street investment-banking-giant Goldman Sachs Group Inc. (NYSE: GS) appears to have been intimately involved in the business.
And the similarities don't end there.

Why Bailouts Can Bite Back

Bailouts of a single-such miscreant are possible, but nobody wants to undertake them because of the distaste created by the miscreant's past and present activities.

Just as Lehman Brothers Holdings Inc. (OTC: LEHMQ) executives kept voting themselves giant bonuses as the company was tottering into bankruptcy, so, too, do Greek-public-sector workers go on strike after strike to protect their right to retire with a full pension more than a decade earlier than ordinary German workers.

As with the subprime miscreants, the temptation is strong to let the borrower go to the wall ... except for one thing - the deep-seated fears that the miscreant's demise will touch off a "domino effect" among other weak borrowers, several of which may be endangered if Greece is allowed to fail.

But a bailout attempt may not be the answer, either. Horrifyingly, because of the exposure that French and German banks have to Greece and the rest of southern Europe, there is a very real prospect of the entire global banking system collapsing - with incalculable danger to the world economy - if things are done wrong.

The main factor that separates the Greek debt crisis from the U.S. subprime-mortgage crisis is that the danger of a "contagion" spreading if Greece goes bankrupt appears to be less.

Portugal - generally viewed as the next-most-obvious defaulter after Greece - has a considerably lower debt load (at 90% of gross domestic product, or GDP) and a considerably narrower deficit (at 9% of GDP). In fact, Portugal's deficit is actually less than the budget shortfalls of Great Britain and the United States. More important, Portugal's affairs have been run with a probity and conservatism lacking in Greece - the latter having viewed the European Union that it joined in 1981 as an ideal funder for its idle and corrupt socialist fantasies.

The poorer countries of Eastern Europe - most notably Romania and Bulgaria, which both joined the EU in 2007 - have made certain (by virtually every measure imaginable) that Greece will no longer be ranked as the EU's poorest member.

Unfortunately, the mere addition of less-affluent countries doesn't mean that Greece is any better run. Indeed - except for moments of extreme post-communist fantasy in Romania, Bulgaria and Hungary - nowhere else in Europe is anything as badly run as it is in the Hellenic Republic. Certainly Italy isn't: That southern European country had too much debt going into the crisis, but is currently well managed. It carefully avoided foolish "stimulus" during the recession and - as a result - has a budget deficit that The Economist expects to reach a mere 5.3% of GDP in 2010.

The calculus is thus different from that of the subprime crisis.

U.S. Subprime Crisis - Part II?

Whereas the fall of Lehman Brothers caused a justified concern that the whole of Wall Street was in the same predicament, a Greek default would cause "contagion" only in the minds of fevered hedge-fund speculators, without any solid basis in reality. There would be no need for the euro to break up (whether or not Greece abandoned its attempt to remain a member) and no particular strain on the EU as a whole.

That suggests that the German attitude - an opposition to a Greek bailout - is probably the economically better approach.

Indeed, the German government has perceived quite correctly the problem with a Greek rescue. Whereas, with the U.S financial crisis, there was no danger that the Wall Street bailout would produce subsequent outbreaks of subprime-mortgage lending (though the determination by the U.S. Federal Housing Administration to keep lending in the downturn appears to have done so, at great-and-increasing expense to U.S. taxpayers), the "moral-hazard" danger of a Greek bailout is immense. All over southern and Eastern Europe, there are substantial minorities of the population for which the possibility of a bailout by German taxpayers is an invitation to total government-spending profligacy.

For an illustration of this problem, take a look at Hungary from 2002 to 2008. The Socialist government of Ferenc Gyurcsányran mad for six years, under the theory that EU membership - achieved in 2004 - meant they would never have to pay for their crazed spending. However, Hungary is by no means the most profligate of the Eastern European members of the EU - Romania and Bulgaria are certainly worse. Moreover, Italy and Spain both have huge minorities, often in control of those countries' governments, which if bailouts were acceptable would find the temptation to expand government spending at Germany's expense pretty well irresistible. A Greek bailout could thus lead to bad fiscal behavior among so large a proportion of the EU that future rescues would become systemically impossible.

This is the paradox of the Greek-debt situation: It seems to be understood by German Chancellor Angela Merkel, but by almost nobody else involved.

The Road Ahead

A Greek default offers few dangers - Portuguese or Italian debt would become huge "Buys" at the prices they would reach in that case, but the EU and the European euro would be unaffected, or even strengthened. However, a Greek rescue would bring huge long-term perils - and given the spending propensities of the less-responsible elements of the European left, "long-term" means no more than four to five years away.

With apologies to Lord Nathan Rothschild, the message for outside investors in European stocks and bonds is quite clear: Buy on a Greek default, sell on a rescue.

Source : http://moneymorning.com/2010/04/28/greek-debt-crisis/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules