Greece

John Mauldin (www.johnmauldin.com) mentioned a statistic in his column last week which is quite startling: Greece, a country of 11 million people, had only six people filing taxes for incomes in excess of 1mn Euros. How is it that we notice these absurd statistics only after a crisis erupts? (Another one of my favorites: in January 2008, there were only 12 AAA-rated companies in the world, but 64,000 structured finance instruments with an AAA rating).

I first heard of Greece's precarious sovereign debt position in November 2009, around the same time stories of Dubai World's voluntary restructuring of its debt surfaced. Since then, many developments have occurred and attitudes about the problem have shifted; consider, for example, the following quote by Swedish premier Fredrik Reinfeldt on December 10, 2009:

"What we now are seeing in Greece is of course problematic, but it is basically a domestic problem that has to be addressed by domestic decisions,"

Obviously, this is no longer the prevailing attitude. In fact, as Mohamed El-Erian wrote in a piece in the FT in early February:

"Without external assistance, any Greek policy efforts would entail such contractionary fiscal policy measures as to cause a disaster locally, especially given the initial conditions (including the size and maturity profile of its debt) and the existing policy framework (anchored on adherence to a fixed exchange rate via the euro), such adjustment is difficult and not sufficient."

As of yet, no external bailout has transpired, but the EU has come out and said it will take "determined and coordinated action" to help Greece with its debt problems (as far as I can tell, no one knows what that means exactly). This gave Greece some respite, with its yields and ballooning CDS spreads falling. It's also important for another reason: as the U.S. learned during Mexico's debt crisis in 1994, instilling confidence in a country can massively reduce a bailout package by allowing the government to refinance itself.

According to Fitch, Greece needs to raise around 50bn Euros in 2010, both to cover deficits and roll over maturing debt. So far, Greece has managed to raise 8bn Euros in 5-year bonds via a syndicated issue in late January priced at 6.2%, around 350bps over mid-swaps rate, the rate for credit-worthy borrowers of Euros. The syndicate of banks drummed up massive interest in the bonds, with orders for the issue hitting 25bn Euros. (Despite this massive interest, the bonds quickly sold off on the secondary market, perhaps a sign that many had bought in to the issue for a quick profit, a practice known as "flipping").

My instinct tells me that it will have a much harder time raising the rest of money (it will need some new financing as early as April), due to a host of issues:

- According to the numbers I have seen (see aforementioned John Maludin column for details) and based on historical precedent, Greece’s 3-year plan to reduce its deficit from 13% to 3% of GDP is not credible and/or impossible;
- There are major issues with data collection and book-cooking in Greece, although Greek authorities seem genuinely intent on changing this;
- Over 50% of Greece's GDP is government spending, 30% of its economy is underground, and it has powerful trade unions and major problems with tax collection. These are not issues the market can gloss over, and are not problems which Greece can solve in the short-term.

Thus, to many the question is shifting from if to rather how (and by whom) Greece will be bailed out.

In the next post I consider the implications of a Greek default for markets, and how the Euro is faring during this crisis.