Global Macro Discussion: How to Deal with Greece

Why is Europe taking so long to decide on Greece?
The stakeholders that are involved with the decision on Greece are experiencing a stalemate. But

time is running out as the Greek bond yields are fiercely increasing. The longer they take to make a

decision, the less room for error.

So what are the stakeholders actually saying and what do they actually want from the deal?
Germans and other EU Superpowers
Germans are asking for Greeks to use their properties as collateral in exchange for bailout funds.

The catch is that the properties will be under German control. They also want the bondholders to

take a haircut: to take a loss on their bond holdings, of around 21%.
Greeks
Greeks counter-offered; while they are willing to use their properties as collateral in exchange for

bailout funds, they do not want to let Germans have legal rights over their properties. This way,

they say, can ensure they can get the properties back when they have repaid the bailout funds.
Holders of Greek Bonds
Experts and analysts have calculated that the investors in the bonds will in reality take a haircut

of at least 30% to 50%. Who in their right minds would welcome such a situation?

Time is Seriously Running Out
Current interest rates  on Greek government bonds (taken from Bloomberg) are as follows:

• 1 year bond: 171% p.a


• 2 year bond: 76% p.a


• 10 year bond: 22% p.a

Yes, it is 171%p.a. Nothing wrong with your eyes! The higher the interest rate, the less its worth

is. Greek bonds are now worthless and bondholders will be hit with major losses if their bonds are

monetized. However if the decisions they make later on are not big enough, that is the markets don't

think the governments' decisions on Greece can make an impact, yields will just keep rising. This

may well force the Greeks to kick themselves out of the Eurozone. If not, someone else in the

Eurozone may withdraw from the Euro (consequences explained below).

How to Deal with Greece? Analyze the Root of the Problem
The Euro was established by the provisions of the 1992 Maastricht Treaty. To participate in the

currency, member states should fulfill the criteria below:

• budget deficit of less than 3% of GDP;


• debt ratio of less than 60% of GDP;


• low inflation;


• interest rates close to the European Union average

Here's the flaw. For all good business plans, there must be an exit strategy - be it going public,

sell it to someone else, or liquidate the company when it is not doing well. The Maastricht Treaty

does not have an exit plan! It only considered who could participate in the currency but did not

have a good contingency plan for when things go wrong. According to Professor B.J. Cohen of the

University of California Santa Barbara (
href="http://eh.net/encyclopedia/article/cohen.monetary.unions" target="_blank">EH.net), there

were several attempts by the superpowers of the 1800s who have tried to create a united currency.

The result? Not pretty. When a country withdraws from the currency, the currency will eventually

break down, affecting everyone in the union. What's worse in today's world, is that the Euro is

currently the second largest reserve currency. If this breaks down, 2008 Global Financial Crisis

will just look like a mini appetizer.


Conclusion
There's not much else the European Union can do anymore. Greece is only the tip of the iceberg.

Germans cannot afford to provide one bailout after another. The German government has shown their

intentions in September 2011 that they are preparing for a Greece bankruptcy. What are they exactly

preparing? Well.. imagine this. You're watching a movie and suddenly there's a fire in the cinema,

would you come and tell everyone to calm down or would you pack your bags and run out quickly? God

bless us all.

Any thoughts?