Monday, June 20, 2011

Greece Poised to Default; Lehmans Round Two


It appears that the Greek crisis is coming to a head this week. Which way will it tilt? Will this be a Lehman Brothers type disaster or will the EU come up with a package to keep the wolf from the door for another few months?

The Greeks are short US$242 billion for next year and beyond. The proposal to 'fix' this is US$64 billion of loans, US$81 billion in money left over from last year's bailout, US$43 billion in asset-sales and US$43 billion from creditors (the haircut) (figures courtesy of The NZ Herald)

Angela Merkel, the German Chancellor, seemed a little 'down in the mouth' today when she said,
"policy makers must make sure the Greek crisis didn't infect the rest of the euro region and spark a new global financial crisis. We all lived through Lehman Brothers, I don't want another such threat to emanate from Europe. We wouldn't be able to control an insolvency."
When the Germans worry, Europe should be fearful. Germany is the biggest economy in Europe and appears to have little stomach for another bailout of a Greek nation that appears to have no idea or will on how to extricate itself from this mess.

The EU leaders and Bankers are scrambling to fix this. The options are default, partial default (read: default) or a 'kick the can down the road' bailout package of more debt to pay the debt.

Another method proposed is for creditors to take a 'haircut'. That is they suffer losses of up to 50% on the amount of euros invested. This is spin language for 'default' anyway. If creditors don't get their money back, the debtor has defaulted, even if only partially.

Markets are not stupid, they will see this and may begin to call in their loans from other distressed European countries. They may also begin to look further afield for their cash. Maybe asking New Zealand to stump up with some borrowings. Or halting new lending altogether.

This would leave New Zealand, and other nations reliant on more debt to pay debt, in a precarious position. Interest rates will skyrocket as the cost of capital goes beserk. This occurs when the demand for money increases and supply decreases.

This could happen in a matter of days. It was mentioned a few days ago in this blog, that computer programs deal in milliseconds and the market could tumble violently very quickly.

But you could look at this situation another way. Is this a failure of the EU experiment? Will it all revert back to individual currencies and nation states?

Or is this a stepping stone to greater EU power by the European elite Bankers and Politocos.  The end game for democracy and self-rule is a consequence of debt that none of us like to ponder. Note that Greece is being asked to sell assets to fund their debt. Some of their strategic assets will soon be owned by these elite from Germany and France.

Perhaps this is what the riots are really about?

Gold in New Zealand dollars: $1899.68 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $44.60 per oz
Previous all time high: $48.58
per oz

Articles of interest:


Crisis Hour: Europe May Withhold Half Of €12 Billion Greek Aid As No Emergency Meeting Decision Reached

See article here
www.zerohedge.com


Boris Johnson: let Greece go bankrupt and leave the euro

See article here
The Telegraph
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