The Greek Tragedy is really a Ponzi Scheme

Greece has certainly been in the headlines lately with the other heavily indebted countries in Europe. Markets are concerned that these countries could default on their sovereign debt, which could trigger part 2 of the current debt crisis. The various governments assure us that they are financially healthy and that they would never default on their debt. Furthermore, politicians suggest that it is nefarious speculators who are betting on sovereign collapses through Credit Default Swaps and attempting to create a crisis. What is the truth?

A few facts about Greece, which could easily represent any of the other PIIGS.

1. Total debt of Greece: $405.7 billion equaling 125% of GDP

2. 2009 budget deficit as a percentage of GDP: 12.7%

3. 2010 projected budget deficit: 8.7%

4. Their current austerity measures are expected to help reduce the budget deficit to around 3% within I believe the next 5 years. Please notice that their national debt still increases under this scenario to around 150% of GDP.

5. The Greek government has been lying about its finances for the past 15 or so years. To join the EU and get access to cheap money, Greece was required to keep their budget deficit to under 3%. Through various swap agreements with Goldman Sachs and other off balance sheet transactions, Greece was able to fraudulently gain admission to the European Union.

So what does all of this mean for Greece? Are they really insolvent?

Short answer is maybe. The definition of insolvency is being unable to pay your debts as they come due. Can Greece pay their debts as they come due? Only if they can continue to borrow $50-60 billion through government debt auctions annually. Greece is so heavily indebt that it can never mathematically pay pack the national debt. But they are able to continuously pay their debts as they come due along with interest by issuing more and more government debt.

This is where it gets really interesting. As long as Greece is able to sucker the financial markets they will be able to borrow cheaply at around 4-4.5% and issue more and more government debt. Thereby keeping the ponzi scheme alive and kicking for a few years. But alas the financial markets are calling shenanigans on Greece and since the beginning of the year forced Greece to pay 6-7% on any new debt issuance. The real concern for Greece is not being able to issue the required amount of debt to continue running the government. This is why it has become a crisis with the EU elite and Greek government lamenting the speculators for "attacking" them. This of course is absurd. The financial markets are simply wising up to the fact that Greece's financial position is similar to other banana republics like Zimbabwe, which require higher interest rates. Indeed if Greece were not under the protective umbrella of the EU it would be paying around 10% or more for a ten year debt issuance. I mean would you really want to lend money to a country who can only pay you back by borrowing more and more money from other people?

What is the end game?

Most likely the EU will step in temporarily with some loans and debt guarantees which will act as a band-aid. I know what you’re probably thinking: Why would the solution to too much debt be more debt but this is how governments operate these days. The EU bailout is not a long-term solution and eventually Greece will have no choice but to default and withdraw from the EU. That day will come when Greece suffers a failed auction and investors shut Greece out from the debt markets until it gets its act together. The only real solution for Greece is to have control of its own currency again (drachma) which it will debase by printing money to pay its debts. There really is no alternative, unless you believe Greece will stick to its
austerity measures for the next 100+ years.

One last thought to consider. This is not only a Greek problem but a US,UK, and entire EU problem.

Black Swan Insights


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