Saturday, June 25, 2011

Greek Crisis -- My View

*Greece Crisis Stabilized?
Ongoing debates were held to help Greece find a resolution to save Greece from debt troubles and potential default. Greece was downgraded recently by Standard & Poor’s rating agency to CCC (a drop of three credit rating grades below "junk status") meaning Greek debt is “extremely speculative" and the outlook for Greek debt is “negative.”. There is a significantly higher likelihood of one or more defaults in regards to Greece said the ratings agency after the downgrade.

Credit-default swaps on Greece, Ireland and Portugal surged to records on concern European governments’ struggles to resolve the deficit crisis will threaten their ability to pay their debts causing the Euro to surge lower after S&P Downgrade.

The problems with Greece debt has caused a massive amount of ongoing debate and the plot has stayed thick. There were protest in Athens over the governments handling of the debt crisis and economic woes such as unemployment. In Athens, angry Greeks gathered while officials met and the Greeks made sure they were heard.

Banks in the UK and the US have decided to reduce their risk to Greece and there is no appetite in the capital markets to extend finance to Greece. If Greece eventually defaults in the coming years the government could no longer borrow and would have to cut spending rather violently. The Greek lending system would completely implode.

Although Greece is a very small portion of the Eurozone it has created a very large and complicated mess. The only thing Greece can do is restructure it's debt but the ECB and EU have been against it because it would hurt their banks. It’s also very difficult to restructure debt owned to outside governments as those governments would have to take a large losses on their accounts which would cause political uproar from Eurozone members.

Temporary bailouts have been the short-term solution to the problem but there has not been a final solution to the entire debt mess other than kick the can down the road.

Why won't EU let Greece default?
They are afraid of a domino effect. It may actually be better for Greece in the long run to default. If Greece defaults it could cause investment fear that the EU isn't stable and there could be a domino effect (panic & contagion) from other hurting economies such as Spain, Italy, Portugal, and Ireland that would be a worse alternative than bailing out Greece.

The current package of includes spending cuts, tax hikes and privatizations that has become very unpopular throughout Greece.

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