The Banking and Strategy Initiative

Chillin' out till it needs to be funded

The various stages of managed Default |

zyakaira notes: our view on Greece has been and will be that Europe will not bail it out nor will they much of a stir even as markets pause to reflect on their sustenance..

We decided to credit FTAlphaville as the source for the story below because of the bloggers’ generous contribution to the title statement which is actually the fashion statement required to study everything substantial from 2008 onwards..Other reference reads are the Breakingviews blogs on Reuters that have quite ramped up esp on the Yuan and that conjured up our favourite buffet – a scenario by scenario break up of why what will happen without recourse to abject’ive’ opinion

A. If the IMF goes ahead and funds this $13 billion plus the previous $6 billion Greece borrowed from the government with sundries and Greece cut its expenses by 10% of GDP, the resutant lower taxes as debt winds down and social security expenses would mean a financing gap of $130bn in 3 years and to repet the conventional economists’ logic, we willall go down like Argentina did in the nineties..Obvious result – Greece suffers, we don’t

B. Even if Greece were to default and its Debt come down to 60% of GDP after writedowns from 120% the hiatus of two years will give it strength while we would need to ensure liquidity in Grecian Banks and in european markets that would thence be eager to spread the panic to Portugal, Spain and Italy. After it spreads with higher margin calls and higher spreads on CDO insurance, Bunds and other securities from Gordon Brown and Sarkozy will come under threat unless others can force liquidity in their own markets – This is the main reason thy cannot support Greece in a bailout but subsidised debt led by IMF would look tempting. Also this is the only honest option and the most tempting scenario for Greece

Greece cannot be loaned more because it does not have a credit rating. If it rolls over at 8% after rolling over at 6% last time, we are looking at double digit yields on debt and a lot of “carry trade” shopping such yield spreading across Europe and bringing the Euro back to 1:1 parity with the dollar.

Meanwhile the Yuan rise may no longer look to be an advantage for US Dollar economy(ies) as that pushes out lower tech, labor intensive textiles and food to other developing nations like Bangladesh and Vietnam and increases China’s competitiveness in High Tech industry. The Yuan appreciation will create a wider trade in the currency reducing dependence on Dollar and Euro while making US Economists earn their bread and butter from looking at China to buy/sell US treasuries as their surplus has already come under pressure and with an appreciating Yuan that trade would be essentially a slip towards a trade deficit led international front for the Chinese National Parliament


This entry was posted on April 9, 2010 by in Financial Markets and tagged , , , .


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