Posted by: Armel | June 2, 2011

GREECE: How to waste money…

Here we are, a year after, ANOTHER round of bailout being discussed for Greece. Skipping all the risk involved and the impact on the Euro currency, Greece is just another case of wasted resources. Basically putting good money after bad !

The idea is that only a bailout would give Greece time to work out its problems while ensuring that the foreign banks holding the 340 billion euros of outstanding debt would still get paid with a couple of billions in “haircut”. French and German financial institutions have the most to lose in these restructuring scenarios.

In the end, it comes down to the government ability to repay the debt over time. Re-aligning the payments and extending the deadlines would not-in my view- make a big difference. To begin, the schemes used to calculate the potential of repayment, were made out of wish thinking ! There are strong facts that in reality will put the sovereign crisis back in the front a couple of months from now:

Only 25% of tax goals were achieved by the government during last round of revenues review. A third of the country works for the government, so massive layoffs are expected to rein in the size of state employees. The growth expectations are simply too optimistic. So how can they –in their wildest dream- expect the now revolted citizens to pay not only 100% of existing taxes rates, but also pay an additional $2000 per family in average?

These overestimations from a pure statistical point of view are more than 3 standard deviations away from the mean. The mean being the reality of their previous tax revenue collection compared to projection. Historically, Greece always had trouble paying its debt. People have to realize its almost a Greek tradition to not repay the debt. Greece often defaulted in the past, and it’s therefore an outlier to believe the behavior will be different this time. Lets consider all the facts and historical data as reality which means expect the worse (default), or another round of bailout at least a year from now. Although the Credit Default Swaps (CDS) might not get activated this time, they eventually will: It’s inevitable!

Armel Njeunou

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