Strategic Briefing | 6.17.2011 | The Greek Debt Crisis

Worries Grow About Breadth of Debt Crisis
The New York Times | June 17
Two Deutsche Bank strategists, Jim Reid and Colin Tan, warned in a report on Thursday that this Greek crisis had echoes of the collapse of the Lehman Brothers investment bank in September 2008, an event that plunged the financial system into chaos and required the commitment of trillions of dollars in government support to stave off another Great Depression. “Everyone in every corner of global financial markets should be keeping a very close eye on upcoming Greek events,” they wrote. “The period is resembling the buildup to the Lehman collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer.” One ugly scene that some analysts are imagining involves a default by Greece leading to losses inflicted on banks in other European countries that own large amounts of Greek debt. The European Central Bank, too, is a big holder of debt, and analysts said in the event of a default it might need to be recapitalized, another blow to confidence.Those losses could then cascade to the United States because the American and European banking systems are so interlocked, lending billions of dollars to each other every day.

Europe’s Greek Stress Test
J. Cochrane and A. Kashyap (Wall Street Journal | June 17
Greek debt is in trouble—again. After a month of dickering, it seems likely that the International Monetary Fund and the European Union will agree to roll over Greece’s debt so bondholders will be paid in full. Why is Europe so terrified of letting bondholders bear some of the risk that comes with high yields? The answer is that most of those bondholders are banks. If Greece defaults, then important French and German banks will be in deep trouble. Even a small rescheduling would force the banks to admit their losses. If Greece is allowed to default, reschedule or abandon its restructuring, Ireland, Portugal, Spain and Italy may soon follow. This scenario is beyond the EU’s bailout capability. And it would leave the European financial system in shambles, because, again, the banks are holding that debt.
Dollar gains vs. euro on Greece’s debt woes
MarketWatch | June 17
The dollar retook ground against the euro Friday, with the market focusing on Greece’s sovereign-debt woes… See real-time currency quotes and tools…
Greece replaces finance minister
FT | June 17
George Papandreou, prime minister of Greece, has replaced his finance minister in a broad cabinet reshuffle to counter widespread anger over tough new austerity measures essential to prevent Greece from a disastrous default. Former defence minister Evangelos Venizelos, who challenged Mr Papandreou for the party leadership four years ago, will become finance minister, replacing George Papaconstantinou, who takes over the energy portfolio.
Oil heads for biggest weekly drop since May on Greece
Reuters | June 17
Brent crude was steady near $114 on Friday as investors assessed the impact of the Greek debt crisis on risk aversion, which has taken almost 4 percent off prices this week in the biggest drop since early May. The euro slipped, with markets still unconvinced that Greece could dodge a default even after appearing to secure a round of near-term funding.
Emerging Stocks Head for Three-Month Low on Greece Debt Crisis Concerns
Bloomberg | June 17
Emerging-market stocks fell for a third day, sending the benchmark index to a three-month low, on concern that Europe’s debt crisis won’t be resolved as leaders meet today to discuss a rescue package for Greece. The MSCI Emerging Markets Index slid 0.3 percent to 1,104.04 at 2:40 p.m. in Singapore, set for the lowest close since March 18. The gauge is heading for a second week of losses.
Will the IMF pay the next tranche to Greece?
Danske Bank | June 17
There are now two issues that could stop the IMF from paying the next tranche to Greece:
(1) if funding is not in place for 2012, and (2) if a no confidence vote results in new austerity measures including privatisation plans not being agreed.
1. With regard to the funding issue, the IMF now seems prepared to release the next tranche if it just gets a promise of future European funding rather than concrete commitments as it has previously demanded. We think that the IMF will receive such a promise on Monday when the Eurogroup is expected to reach a tentative deal for Greece. It will be difficult to reach a deal that all governments and the ECB can live with and it might well be that Greece is not in a position to deliver many promises on austerity measures. Nevertheless, we believe that the EU will find the money. The alternative is simply too scary.
2. If he wins a vote of confidence, Papandreou can go ahead with a vote on the austerity measures including the privatisation plans, which are a precondition for funding from the EU and the IMF. However, if he does not win the vote of confidence, there will probably be a general election, and austerity measures will not be agreed this month. It is uncertain whether Greece could then receive the next tranche from the IMF. But as emphasised by a senior IMF official, it is important not only for Greece, but for Europe and the world, that Greece gets its next trance, so unless it is really evident that a new Greek government would not deliver sufficiently on austerity measures, the IMF would probably go ahead and pay the next tranche. If the IMF decides not to pay the next trance, the EU could step in with more money. But in this situation,
uncertainty is really high.
The most likely outcome is that the EU and the IMF will go ahead and pay the next tranche for Greece even though they now realise that it is increasingly likely that a hard restructuring will eventually be necessary.
Greece – Domestic divisions deepen
Decision Economics | June 16
The Greek political developments over the last day makes the details and timing of a bail-out almost irrelevant and could very well make the IMF change it mind once again. Indeed, it could be argued that the Greek debt crisis is no longer in the hands of Eurozone policy-makers, instead lying purely with Greece. In this regard, the appetite of Greece to stomach further budget cuts looks uncertain at best…More immediately, the risk is of contagion, with peripheral market debt already reacting more adversely, with markets not just pricing in a Greek default but now looking to the possibility of such a default being disorderly and thereby spreading throughout the Eurozone mainly via financial channels.