Greek Tragedy: Austerity And Default7 June, 2011, 19:31. Posted by Zarathustra
Tags: Economy, Europe, Greece, United States
As the crisis unfolds, things are getting ever more similar to what happened after the United Kingdom went back to pre-WWI gold standard.
Large public sector cuts mean job losses and wage cuts at the time when the private sector isn’t having any appetite for absorbing the losses. As public cuts bite, private sector wouldn’t be doing any good. As a note from Bank of Merica Merill Lynch pointed out some days ago, retail sales in Greece fell by 13.2% yoy in March, and lending to domestic private sector contracted by 0.5% yoy in April after a 0.4% yoy decline in March. Even though inflation in Greece is still among the highest of the Eurozone, it has be steadily declining, and it will probably decline more in the months to go.
Thus there is very little wonder that Greeks are coming out and protest on the street. Reuters reported that the Greek Parliament will vote on the latest austerity measure in order to secure a new round of bailout. If new loan isn’t agreed by June 23-24, the alternative will probably be a disorderly Greek default in July. But that’s not easy of course. As the people of Greece protest against austerity, even the government’s backbenchers stop supporting its own government.
Turning to the issue of default, it is somewhat inevitable. Yet the EU/IMF/ECN are still trying hard to avoid. European banking system is probably not well capitalised enough to withstand the shock created by a Greek default, as a report from Bloomberg suggested. Some others have even more gloomier look, suggesting a real possibility of a simultaneous European banking collapse. If that sounds scary, it should. Robert Peston of BBC pointed out that banks in the US has quite a large exposure to Greece (I assume he did not try to separate between exposure to the sovereign and private sector). The total potential exposure to Greece of US banks amounted to $41 billion according to Bank of International Settlement statistics, which is, surprisingly, higher than even German banks. Thus a Greek default will not only cripple Greek and other European banks, but also means losses for US banks as the sovereign fails and European banks crippled.
That is why any credit event of Greece will be both inevitable and unpalatable.