Dear SAP Banking community members,
On the last two weeks we’ve been looking at Greece, apparently the result of its elections was the key to trigger an economic Armageddon.
But 1 week after the Greeks voted what they were said to vote the situation remains the same.
The International Monetary Fund is warning that European leaders have three months to save the Euro.
http://amanpour.blogs.cnn.com/2012/06/11/lagarde-less-than-three-months-to-save-the-euro/
We’ll see in some weeks what’s going to happen with the Euro, if something is going to happen; but today, let’s see what’s happened with Greek’s economy.
For understanding the current Greece situation we have to look at the starting of the Eurozone in 2001. After joining the Eurozone, interest rates in Greece dropped dramatically as the markets wanted to believe that with the elimination of Forex Risk, investing in the Greek economy was as save as investing in Germany or Netherlands.
With the very low interest rates and the low productivity of the Greek economy, the final result was a huge overconsumption bubble which ended with unsustainable fiscal and external imbalances.
For details, I recommend the very good paper in the link below.
http://www.bankofgreece.gr/BogEkdoseis/Paper2011124.pdf
For years nobody looked at those economic imbalances, and as a consequence Greek spread moved from 600 points over the German bond on 1998 to historically low levels in 2003.
You also can have a look at the ratings of Greece sovereign debt at the time here
http://www.fitchratings.com/web_content/ratings/sovereign_ratings_history.xls
Did the markets become blind and deaf or just stupid?
Not really, for years markets made good dividends investing in Greece. Again, a Financial Crisis can be a great business opportunity (for some).
On 2007 – 2008, suddenly, everything became visible and clear (debt, deficit, fiscal imbalances, etc.), and the markets response was to rise the Greek bond spread (again, very good business opportunity for those who took short positions on Greek’s assets, invested in Greeks CDS’s, etc.)
Now, we’re at the end of the process, doing business with Greek economy is not possible anymore ; now it’s the time that Greece pays the debt, or more exactly that part of the debt that Greeks can pay.
That’s why Greeks have to vote the right thing, accept stabilization programs and become poorer and poorer.
During the whole process the clearing houses played a very important role. Greek banks could get liquidity using as a collateral Greek’s assets, making its economy more and more dependent and
inflating the bubble.
When it was the right time for exploding the bubble, clearing houses played their role again, drying liquidity from Greek’s economy, letting fall the value of Greek’s assets, and reducing their value as collateral; in a vicious cycle of insolvency and liquidity crisis.
For years, nobody wanted to see how liquidity was hiding the real health of Greek’s economy.
By the way, this is the same situation of the American economy, and again the markets choose to be blind and keep US spread very low.
Are they stupid? Of course not, inflating the US debt bubble is still a very good business, we’ll see for how long.
“I'm here for one reason and one reason alone. I'm here to guess, what the music might do, a week, a month, a year from now.” (Margin Call – 2011)
Looking forward to read your opinions.
Kindest Regards.
Ferran
On the last two weeks we’ve been looking at Greece, apparently the result of its elections was the key to trigger an economic Armageddon.
But 1 week after the Greeks voted what they were said to vote the situation remains the same.
The International Monetary Fund is warning that European leaders have three months to save the Euro.
http://amanpour.blogs.cnn.com/2012/06/11/lagarde-less-than-three-months-to-save-the-euro/
We’ll see in some weeks what’s going to happen with the Euro, if something is going to happen; but today, let’s see what’s happened with Greek’s economy.
For understanding the current Greece situation we have to look at the starting of the Eurozone in 2001. After joining the Eurozone, interest rates in Greece dropped dramatically as the markets wanted to believe that with the elimination of Forex Risk, investing in the Greek economy was as save as investing in Germany or Netherlands.
With the very low interest rates and the low productivity of the Greek economy, the final result was a huge overconsumption bubble which ended with unsustainable fiscal and external imbalances.
For details, I recommend the very good paper in the link below.
http://www.bankofgreece.gr/BogEkdoseis/Paper2011124.pdf
For years nobody looked at those economic imbalances, and as a consequence Greek spread moved from 600 points over the German bond on 1998 to historically low levels in 2003.
You also can have a look at the ratings of Greece sovereign debt at the time here
http://www.fitchratings.com/web_content/ratings/sovereign_ratings_history.xls
Did the markets become blind and deaf or just stupid?
Not really, for years markets made good dividends investing in Greece. Again, a Financial Crisis can be a great business opportunity (for some).
On 2007 – 2008, suddenly, everything became visible and clear (debt, deficit, fiscal imbalances, etc.), and the markets response was to rise the Greek bond spread (again, very good business opportunity for those who took short positions on Greek’s assets, invested in Greeks CDS’s, etc.)
Now, we’re at the end of the process, doing business with Greek economy is not possible anymore ; now it’s the time that Greece pays the debt, or more exactly that part of the debt that Greeks can pay.
That’s why Greeks have to vote the right thing, accept stabilization programs and become poorer and poorer.
During the whole process the clearing houses played a very important role. Greek banks could get liquidity using as a collateral Greek’s assets, making its economy more and more dependent and
inflating the bubble.
When it was the right time for exploding the bubble, clearing houses played their role again, drying liquidity from Greek’s economy, letting fall the value of Greek’s assets, and reducing their value as collateral; in a vicious cycle of insolvency and liquidity crisis.
For years, nobody wanted to see how liquidity was hiding the real health of Greek’s economy.
By the way, this is the same situation of the American economy, and again the markets choose to be blind and keep US spread very low.
Are they stupid? Of course not, inflating the US debt bubble is still a very good business, we’ll see for how long.
“I'm here for one reason and one reason alone. I'm here to guess, what the music might do, a week, a month, a year from now.” (Margin Call – 2011)
Looking forward to read your opinions.
Kindest Regards.
Ferran
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