Greek Debt Risk Still Present

Last week the Standard & Poors 500 Index surged 5.6% having almost everything to do with the possibility of a resolution to the Greek debt crisis.  Most market participants felt that the situation was resolved.  You might have noticed that I did not blog about the possible solutions being bandied about.  Why?

Because frankly European solutions to eurozone or European Union issues tend not to be ones of substance.  Instead, they tend to push into the future a decision that could and should be made today.  In fact, the Greek debt crisis is something that I have been writing about for more than 15 months!

The solutions that were thrown around last week didn’t really address the real heart of the problem facing Europe.  Namely:

• The Greeks lied their way into the EU by forging their economic statistics.
• The EU has no mechanism for kicking a member out if its entrance was won by lies.
• Europe has no enforcement mechanism for making any of its members adhere to its rulings.
• European states are increasingly acting in an individualistic manner, ignoring the EU as a whole.
• These issues, unless addressed, will remain sources of investor anxiety for as long as the EU does not address these issues.

Well lo and behold this morning Standard & Poors wearing its credit ratings agency hat has said that the deal brokered last week will trigger an act of default by its definition of such things.  A default is the same thing as saying that Greece, as a nation, will have failed as a creditor.  That will trigger all of the ugly debt covenants that Europe has not wanted to deal with heretofore.  In other words, the terms of the contract between the borrower (Greece) and its creditors (investors) will have been violated.  Ouch!

But wait, there’s more.  Do you remember that Greek Prime Minister George Papandreou called for a vote of confidence in his government?  Do you remember that the financial markets began rallying from that moment onward?  Do you remember me saying at the time that the situation in Greece is still precarious even though Panandreou won his vote?  Specifically, I said:

“Much of the investing world, including those in the U.S., are hailing the vote as the removal of an important obstacle to a solution to Greek’s government debt woes.  However, in a 300 person Parliament, Papandreou only won 155 votes, or just barely more than a tie.  What this means is that he really doesn’t have that much breathing room.  Should he disappoint any of the members of his political faction any debt solution crafted by Europeans may be voted down.

“So in Greece we also have a situation where not much has changed.”

Well now that S&P has announced its position on Greece it is likely to strain the political situation in Greece, where protesters have already died in their efforts to try and forestall a financial day of reckoning.

Additionally, the word on the Street – and here I mean Wall Street and other financial streets – is that many banks are less than thrilled with the coercive (preliminary) solution that was predominately brokered by France.

In typical European fashion, on Saturday evening, finance ministers pushed the debt talks into mid-September.  This would presumably be when they would discuss a permanent solution to the ongoing, increasingly farcical debt talks.  Simultaneously, European finance ministers approved a fifth payment to be made to Greece from the bailout package agreed to last year.  If no permanent solution is in place by September then the International Monetary Fund has the right to refuse making a sixth payment to Greece.

If that occurs then we are right back where we started: Greek debt fears tanking markets worldwide.  The whole situation is like divine comedy when you consider that Greece accounts for a paltry percentage of EU gross domestic product (GDP).  In fact, if there were a default it would not be a big event.  But the Europeans have let the Greek debt crisis reveal just how shoddy an understanding governs the EU.  And that has made everyone nervous.

Incidentally, I have been saying forever that the credit ratings agencies needed to change if we had any hope of a real economic recovery post The Great Recession.  Kudos to Standard & Poors for having the courage to rain on the European debt resolution parade.  That is the sort of moral fortitude that will help ensure that governments and businesses are more honest in the future.

In closing, we aren’t past the twin debt crises of Greece and the United States, yet.

Jason

[This post has been edited for typos and flow.]