Greece – Debt Financing Outlook for 2009 and Beyond


If macroeconomics is about understanding, microeconomics is mostly perception; and where financial markets are concerned, at times, even deception.

Take Greece for example – a typical example of a peripheral, debt laden Euro economy. Its first crash test for 2009 will probably be on Jan 13, when its first bond auction for 2009 will take place. It is almost certain that the spread between Greek and German bonds will be more than 200 points. But what exactly does this spread tell us?

Strictly technically speaking, in times of recession, debt laden economies behave more or less like highly leveraged stocks – the banks squeeze liquidity (shutting down lines of credit, for example) and then ask for added insurance and/or even partial/full repayment of debt. This course of action marks a turning point for the underlying company – management is forced to either wake up and turn around the company or prepare to file for bankruptcy (for a state, that would be something like asking the IMF for help!).

But there is a crucial difference, if you are a member of EU: you can’t really go into “turnaround” mode; you can’t print your own money anymore and you can’t make your own decisions about most issues that an “independent” government would consider within its sole discretion (devalue your currency, for instance). In fact most measures that would normally be taken under such circumstances now need to be approved by Bruxelles. At the same time, if we put aside the unprecedented (and steadily, under all Administrations, rising for the last 2-3 decades) corruption level of the government and public sector in general, a fairly large part of Greece’s misfortunes is to be attributed to common/harmonised European policies. To put it briefly, you can’t have “state-wide” policies without actually having a well-defined, functional state and the EU certainly is not there quite yet. In times of trouble, loose, sometimes intangible unions tend to produce very tangible, harsh results on their weak links – peripheral/satellite economies.

Perception is king: Greece is seen as “weak”, hence spreads widen; but this train of thought suffers from a hidden fallacy. If Germany is the reference index (the benchmark, so to speak), then Germany’s condition should be steady or at least worsening at a lesser rate compared to Greece. This presumption has to hold true, otherwise there is no obvious reason for the wide spread between the two bonds.

But appearances can be deceiving: Germany, as we all know, is not really doing that well lately – in fact it is not doing well at all. Once the “proud locomotive” of European growth, Germany now sees exports heavily hurt from a weak USD (GBP as well lately). In fact, from a more long term view, Germany’s problems are decidedly more frightening compared to those of any peripheral economy. A collapse of Germany would spell instant disaster for the smaller economies of Europe. From the point of a view of a last resort lender, Germany can always bail out Greece or almost any other European economy quite easily, but nobody else has the wherewithal to bail out Germany, should things come to that.

This, in my opinion, is why a further widening of the spread would be totally out of proportion. As bond default is not really a possibility, Greece being a member of the EU, the most likely outcome for Greece will be, at most, further budget tightening , increased taxation, draining of consumer liquidity and decrease of buying power, as well as further deterioration of all social and welfare benefits/services under a Bruxelles devised stabilization plan of sorts. Politically however, this package, offering no hope for the future whatsoever while putting substantial additional burden on the country’s already overtaxed private economy, is a hard envelope to push. On the street, it is more or less evident that the current Administration has already embarked on such a course. And it shows on the polls as well – quite emphatically. Greek media customarily address what they perceive as the voice of the “700 Euro generation”; but assuming such “reforms” go through, it might prove more interesting to listen to the voice of the emerging “400 Euro generation”. The only way out of the deadlock seems to be a Greek New Deal: but to be effective, it would need to be both actually new and fundamentally really a deal; it would seem, however, that this is something that as a whole, the current political system – a rather unfortunate product of decades of state dictated (actually perhaps even totally dominated!) economic thinking and planning – is for all intents and purposes unable to deliver at this time. Still politically speaking, it is always easier to blame everything on a very conveniently timed worldwide financial crisis, the EU (not that these should not be factored in as well!) and everything else under the sun – but ourselves, of course!

Having said that in my opinion a further widening of the spread would be fundamentally illogical, the obvious needs to be taken into consideration as well: markets have a mind of their own; it’s no random walk, but it’s also not a linear function – and logic may not always the best guide. In fact, that’s exactly what makes them what they are: markets. And this very simple, ageless fact has probably been the downfall of all centrally planned, state dominated economies so far.