Tuesday, October 4, 2011

Only 1 of 4 Greek Bond Options Attracting Private Investment (coupon of 5% for last 20 yrs) & Update on Greece: Is it doing enough to avoid a default (austerity measures)

   Private bond holders are choosing overwhelmingly only one of the four bond/coupon options being offered by the Institute of International Finance (the one with the highest payout; payout is 5% annually for the last 20 years, 4-4.5% for the first 10), complicating things for the euro zone which previously made a deal with holders of Greek bonds built on the assumption that investors would show just as much interest in the other three (proposal was first made July 21, the other 3 options though having the same net present value, would've provided more flexibility for the eurozone). (Reuters: Investors chose most expensive Greek debt option) The other 3 options are discount bond exchanges rolling over into other financial instruments over the next 15-30 years. Private sector involvement is important considering that over €189B is expected to come from that source before 2020. Greece is issuing the bonds at a 21% net present loss. Any restructuring of deals with bond holders would certainly get a negative response from the markets where there's already speculation that Greece's bailout creditors are trying to shift more of the losses over to private bondholders. (Time.com: Greece's Debt Inspectors Back in Athens on Thursday)

As of today (October 4, 2011) Greece only has enough cash to cover expenses through November (the bailout tranche for November was €8B ($10.9B). The next round of bailout money to keep Greece out of default after November, was put on hold in early October due to news that Greece's deficit for 2011 will be 8.5% of gdp (€18.69B which is higher than the 7.8% of gdp/€17.1B deficit projected earlier); News of the higher deficit was also made worse by the fact that Greek gdp contraction will be greater than first thought (5.5% smaller than 2010 gdp versus the anticipated 3.8% recessionary figure). Greece's gdp shrank for 12 consecutive quarters (last quarter that recorded growth was the one ended August 2008); In contrast Germany's gdp hasn't had a problem growing (two consecutive quarters as recently as January 2011 (ended) when it grew 4% & 3.9%. For German bonds, as of February 14, 2011 the 10 year yield was 3.33% (highest since Jan.14, 2010), 2 year yield 1.41%. Between January and mid February 2011 investors made a 4.3% return from Greek bonds, 0.8% from Spanish and 0.1% from Irish but lost 2.1% from German bonds. The eurozone's rescue fund, which has already provided aid to Ireland and Portugal, is €440 billion ($595B) in size. Also anounced on Tuesday: US Fed will purchase up to $5 billion worth of 8-10 year treasury notes (Due between November 2019 and August 2021) in an attempt to lower long term borrowing costs (buying more bonds helps to lower yields/interest rates). Belgium and France stepped up to the plate when Brussels-based Dexia faced problems stemming from their exposure to Greek debt). The shift over to US treasuries as a safe investment haven (30 year long bond) lowered yield rates to 2.70%, the lowest the yield has been since January 2009. (Bonds rise as Greece debt woes spur bank fears)

This question has come up a lot: Is Greece doing enough to reduce the deficit and finally take responsibility for its own debt? I think it has but I'll let you decide.

Pensions: 1. 20% of any amount over 1200 euro will be taken away (ie €2000 pension will be lowered to €1880). Only about half a million Greeks get pensions over 1200 euro. 2. Pensions going to people younger than 55 will lose 40% of any amount that exceeds €1000 while another three million pensioners will be affected by auxillary pension cuts of up to 50% (that loss is just the beginning for those three million because their pension funds are already insolvent). When people retire they sometimes receive lump sum payments, that will be lowered anywhere from 20% to 30%.

Taxes: Taxes will be rendered on 855,000 low income earners for the first time ever after the tax income threshold was lowered from €8 to €5000 (annual gross income). There's also a reduction in the tax free allowance from 12 to €8,000 that will levy an additional €700 in annual tax burdens on those Greeks affected. Net monthly pay lowered by €150 as early as next month for nearly all of the salaried taxpayers represented among the 855,000 people affected.

On Sunday October 2, 2011 the Greek cabinet completed a plan to reduce staff in the civil service by 30,000 overall. (KCTV5: Greek deficit projected at 8.5% of GDP) That figure seems unfathomable considering the public transport employee representatives stated on September 22 that their staff is already low, 20% lower than it was just a couple months ago.

Here is where Greece is coming from. Last year they had 800,000 civil servents collecting $48,000 annually in full pensions, those pensioners became eligible for that at age 52. New austerity measures are likey to impact those people significantly. European banks typically leverage about 80 times (debt used to acquire additional assets), that puts the EU in a more preciarious situation than the United States (40 times leverage).

Making matters worse
for Greece is that the people paying for it all are taxpaying Greeks who, for the most part aren't being given any say in how the cuts are made. Their only leverage is their jobs and those involved
in the public sector (public sector employs 800,000 or about 16% of the total labor force) are using that power in a way that's detrimental to everyone (union strikes have become numerous and affect every part of Greece). The one thing Greece still has going for it is tourism (15% of GDP) and with strikes putting a halt to trolley, bus, subway and even taxi service in Athens (Athens accounts for 40% of all tourists to Greece, 6-7M) GDP recovery is becoming increasingly difficult to achieve. 24 hour strikes first received widespread attention in Athens on September 22 when it stopped bus and trolley's from servicing the downtown core. A 24 hour strike at the Athens international airport is set for October 5, 2011; The strike is just another setback for commercial activity in Athens, a city that has been hit with 24 hour strikes by nearly every major public service union engaged in everything from transporation to healthcare. Greece's situation is untenable a fact that both the people of Greece and their creditors don't seem to understand.

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