Greece did not have to pay the 21.5% annual interest rate that most Walmart (WMT) credit cards holders do. But, it was close. The southern European nation, which some economists would argue is near to default on its debt, issued 5 billion euros in new bonds and paid coupon interest of 5.9% for seven-year paper. The number was 325 basis points above similar bonds with similar characteristics issued by Germany. Bloomberg pointed out that Greece offered more than five times the yield premium of comparable Spanish debt. Spain is often mentioned as one of the European nations that will soon face its own severe debt and deficit problems.
Greece has raised 18 billion in the capital markets in 2010, but needs to fund 53 billion in obligations.
The 5 billion was a trial balloon for how the global capital markets would react to what is a bailout of the Greek economy using private capital without firm backing from any other country or lender. The IMF and euro nations have indicated that they will assist the Greeks through guarantees or outright loans. But, those commitments are soft and there is no equivalent of a binding term sheet that Greece can give investors as part of its debt offerings.
The euro nations learned through the five billion offering that Greece is almost certainly going to have to pay 7% or 8% for future debt. There is still no evidence that the country has made significant cuts to its national expenses or has raised taxes in a way which will make them collectible. Each time Greece moves to prove that it is creditworthy, a third or more of its municipal workers go on strike. And, the strikes have become violent at times.
There were rumors when the 5 billion euro sales was in progress that the purchase of the bonds was being “gamed” as some European banks and funds, with the backing of their governments, created an artificial demand. That will last about as long as Greece can maintain the Kabuki theater about how quickly it will lower its national deficit.
The Greeks have done a fine job of keeping up appearances. The nation’s premier Papandreou still insists on the days when he is not lucid about his own circumstances that his country does not need aid. This is despite the guarantees from European countries and the IMF which show that Greece cannot bring in capital without outside support. Papandreou has a tiny chance of being right in which case he has created one of the great belt and suspenders financial packages in the recent history of sovereign finance.
Several economists have already made the point that Greece cannot cut its budget deficit by as much as is necessary to conform to the euro zone rules. It may not be able to lower the figure at all. The fact that hides in plain sight is that the Greek population will not bear new, additional taxes and will not abide any cuts in the pay of municipal or union workers. The Greek economy cannot be fixed because the Greek population is determined to keep it broken.
The average Greek citizen is probably much more intelligent than he is given credit for. Greece, if it is acting for its own benefit with no eye toward its fellow members of the euro zone or the European economy as a whole, is best off to quit the group and threaten to default on its debt. It can play the same game that Dubai has more or less played and forced the debt holders into an untenable position where they will have to take what Greece gives them within reason.
There is some odd notion that a European republic cannot do what a desert kingdom can, perhaps because Dubai has one absolute ruler and Greece has a parliament and a well-established democracy. But, a dollar is a dollar in Dubai and Greece and the same holds true for a euro. Greece’s debt is no longer its problem, and knowing that, it now has the leverage to cut its debt without meaningfully altering its national budget, which is something the country has proved it does not control anyway.
Douglas A. McIntyre
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