Since the publication in July of stress test for banks in Europe, everything went quiet on the PIGS debt crisis with no much news during the summer. Things however are boiling again and Greek will come back to the forefront of medias sooner rather than later.

1. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
Greece: No news, good news?
After the Q2 2010 turmoil in debt markets across the euro-zone following Greek debt
problem, everything went quiet from mid-July onwards: the euro dramatically
jumped, CDS spreads shrunk and sovereign debt yields followed and media went quiet,
like a remake of the Phoney war on the western front at the beginning of WWII.
We had however a few announcements and markets anticipations/reactions:
• Slovakia did not participate in the first tranche of help to Greece and August 12
the parliament voted overwhelmingly (69-2) to reject taking part in a
European Union aid package to Greece – wise men! The angry reaction from the
European Commission tells a lot about its disrespect of democracy (this is one of the
main roots of the flawed EU construction as we have witnessed it for the past 20-25
years – and don’t talk to me about the European parliament which is nothing more
than a puppy House of Representatives). Whilst Slovakia participation in the rescue
package (just over 1% of the European participation – EUR 80 billion) is meaningless,
its parliament vote is meaningful: countries how small they are ready to stand
and say enough is enough; democracy can regain control.
• Without any surprise (who can think it would have been otherwise?!), on August 19
the European Commission said that Greece meets the conditions to receive
the second part of the EUR 110 billion three-year emergency-loan package
agreed on May 2: EUR 9 billion (including EUR 2.5 billion from the IMF); so we are at
EUR 29 billion and counting (remember it was agreed that Euro-zone would lend EUR
30 billion during year 1 – we already are at 2/3)... This second tranche will be agreed
by European Finance Ministers on September 7.
• On the economic front, Greece’s GDP shrunk for the 7th quarter in a row at
-1.5% during Q2 and inflation jumped to an annualized rate of 5.2%; I guess
this inflation increase, way away from the rest of the euro-zone, is due to tax increases
passed onto consumers. We are better Greece posting a nominal GDP growth in 2010 if
such inflation continues on the same path, or one will have to very worried.
Let’s have a look at the 6 month progress report.
1

2. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
The numbers look rather encouraging with a 47.9% reduction in the ordinary budget for
H1 yoy.
The revenue side remains however weak at +5.8% during the January-June period
(42% of 2010 budgeted revenues), but we will have a clearer view of tax receipts in the
next quarterly progress report, and in particular VAT and consumption taxes that
represent over 2/3 of Greece’s revenues.
Most of the current reduction in the deficit comes from a decrease in
expenditures (+/- 80% of the improvement). However, H1 expenditures already
represent 55% of the full year budget.. A closer look at expenditures makes me more than
circumspect regarding Greece chance to succeed. 60% of PIB have to be spent during H2
according to the most recently revised budget (and the EUR 9.2 billion has been reviewed
downward in the tune of EUR 500 million compared to May) and interest rate payment
will increase during H2 since the euro-zone loan bears a 5% rate and Greece has borrowed
short term at rate much higher than last year, whilst it shows a decrease compared to
2009. You can see the squeeze: ahead for expenditures and late for revenues
(Greece has a wild card: the EUR 3 billion EU help for infrastructure not yet paid that
could arrive at the right time...).
Greece can squeeze even more expenditures but the key is on the revenue side and the
bottom line is GDP growth. Without any growth, Greece will not be in a position to mend
its public finances, and recent economic indicators are not encouraging; in addition, with
inflation more than double the Euro-zone average and the GDP still shrinking, the
economic divergence with the rest of Europe is increasing not the reverse. And
do not forget, Greece is taking more debt every month, mostly financed by other Euro-
zone countries and the IMF and its debt-to-GDP ratio follows the same path.
2

3. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
Greece is in a debt trap and I continue to believe that a debt rescheduling (not to call it
a default), is the only solution to avoid a straight default or a breakup of the euro-zone.
The German economy is doing well thanks to its exports. The economic (and social?
political?) rift between Northern Europe and Southern Europe (France included) is
widening. This is not sustainable.
What are markets telling us?
After a relief (and an over-short market) following the publication of stress test for banks
across Europe, the euro, sovereign debt yield and CDS spreads are again moving
in the direction of anxiety.
Yields on Greek debt are again on the move…
3

4. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
… whilst at the same time yields on the German debt are reaching historic lows, therefore
the spread between Greece and Germany is reaching historic highs and …
… the Euro is backing down after a 10% rally.
4

5. http://marketsandbeyond.blogspot.com/
http://www.pcgwm.com/
Finally, I had a look at the BIS quarterly bulletin and I noticed that French banks
reduced their exposure to the Greek debt at the end of March, down to EUR 67
billion (-EUR 8 billion) whilst and German banks remained flat at EUR 44 billion
compared to the end of 2009. I guess that this exposure has been further reduced
since, the ECB becoming the investor of last resort.
In the meantime, the BIS is watering down new regulations to strengthen capital ratios for
banks, putting emphasis on core capital; this will drag on, otherwise, the stress test that
European banks passed so “successfully” would look meaningless (what it is anyway).
What about investments?
I have not changed for a couple of months: stay clear of Western banks (they are not all
that bad, but there is better value elsewhere), invest in high growth economies (directly or
via proxy companies), brand name consumer goods, and generally speaking companies
with a franchise a strong balance sheet and high yield on their shares (in this environment,
income is key).
Source:
Financial Times: Slovakia under fire over Greece
http://www.ft.com/cms/s/0/2de394aa-a641-11df-8767-00144feabdc0.html
Financial Times: Greece to receive further €9bn of bail-out
http://www.ft.com/cms/s/0/d71db766-ab88-11df-abee-00144feabdc0.html?ftcamp=rss
Hellenic Ministry of Finance: Budget execution – June 2010
http://www.minfin.gr/content-
api/f/binaryChannel/minfin/datastore/0a/12/d0/0a12d0a39f9113e806532a1c85e714647
0fe5a7a/application/pdf/100720_Bulletin_6_ENG_20-7-2010.pdf
Hellenic Ministry of Finance: The economic adjustment programme for Greece
http://ec.europa.eu/economy_finance/sgp/pdf/30_edps/other_documents/2010-08-
06_el_progress_report_en.pdf
Bank for International Settlements: Detailed tables on provisional locational and
consolidated banking statistics at end-March 2010
http://www.bis.org/statistics/provbstats.pdf#page=66
5