Roubini on Greece’s Impending Default Crisis
by ilene - February 5th, 2010 3:24 pm
Roubini on Greece’s Impending Default Crisis
Courtesy of Shocked Investor
The markets are falling hard – again – in great part due to the impending Greece default/bailout.
Nouriel Roubini, Dr. Doom, wrote a piece on Forbes magazine in which he says the credibility of the euro and European institutional arrangements is on the line.
At their Jan. 18, 2009, meeting, eurozone finance ministers kept pressure on Greece to fulfill its commitment to cut its budget deficit below 3% of gross domestic product by 2012. In February the eurozone finance ministers will more fully evaluate the country’s spending plans and recommend a timetable for Greece to trim its deficit, estimated at close to 13% of GDP in 2009.
Since the eurozone is a monetary union with a no-bailout clause rather than a political or fiscal union with the associated fiscal federalism, budget cuts to contain the explosion of Greek public debt are urgently needed. In 2010 a sustainable fiscal adjustment must be delivered to restore policy credibility, market confidence and ECB/EU member-state solidarity.
Roubini says that the current and latest default crisis was triggered by three coinciding events:
1. Greece’s sharp budget deficit revisions from as low as 3.7% of GDP to 12.7% in October,
2. the announcement of the beginning of the ECB’s exit strategies,
3. the Dubai default
While in March spreads were broadly driven by a common systemic risk factor, the latest spike bringing Greek yields and CDS spreads to new highs is mostly a country-specific story, brought to light by a change of government and the revelation of far larger budget deficits than previously known and a severe cyclical and structural deterioration in public finances. In tackling the deficit, Greece faces a Hobson’s Choice: whether to accept social pain with financial and economic stability, or instability. Whatever it chooses, Greece will face economic pain and difficult socio-political fallout. Deep spending cuts or tax hikes, which comprise the bulk of Greece’s current plan, will curb or even derail recovery, perhaps inciting social unrest. But if the debt becomes un-financeable in the primary market or if Greece elects to exit the euro and devalue and re-denominate its liabilities (a la Argentina), this could render its banking system insolvent and tip it into economic and financial isolation and decline, also with dire socio-political
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site