The Global Economy in Turbulent Times

CHAPTER 48 Greece Is Bankrupt¹

A rose by any other name would smell as sweet. In the case of Greece, default by any other name just stinks! The plain truth: Greece is bankrupt. Greece’s sovereign debt crisis deepens daily as the gap in reality widens between politically driven “in-denial” views of European Union (EU) leadership and marketplace views as reflected in five-year Greek bonds trading at a yield close to 20 percent; Standard & Poor’s cutting Greece’s rating to triple-C (the lowest credit rating ever); and the highest premiums payable on credit default swaps (CDSs)—used as insurance to protect investors against defaults—on Greek debt. Probability of default by Greece over the next five years has jumped to 86 percent. Today, a CDS will cost US$2 million annually to insure US$10 million debt over five years. Markets have indicated for some time that Greece suffers from a condition of bankruptcy rather than a crisis of liquidity (i.e., cash-short). This simply means Greece cannot survive without significant debt relief and restructuring, combined with an overhaul of the ways its government collects revenue and expends. In essence, Greece has two major problems: It has too much debt and it cannot grow. I am afraid more and more of the European Union will get contaminated.

The Greek Illusion

Greece should not have been into the euro in the first place. It failed to join in 1999 because it did not meet the fiscal criteria. When it did so in 2001, it was through “phony” ...