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Don’t get too excited about the euro: Greek crisis still isn’t over

posted on September 13, 2010 at 4:16 pm
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Almost a year after the Greek government admitted it had lied about the size of its budget deficit and national accounts, setting off the euro crisis, and four months after a $140 billion bailout “solved” the Greek crisis the European Union still doesn’t trust Greek accounting. A team from Eurostat, the European Union’s statistics watchdog, is headed to Greece to put together what Walter Radermacher, head of Eurostat, calls a “solid estimate” of total Greek debt.

Better late than never, I guess.

The problem is that Greece still hasn’t turned over documents showing the details of debt swap contracts that the country used to hide the size of its debt. Eurostat first asked for the paperwork in February.

For example, Greece used currency swap contracts signed with Goldman Sachs in 2000 and 2001 to reduce the size of the country’s debt from 105.3% of GDP to 103.7%. The swaps included upfront payments that let Greece avoid putting the full amount of the debt on its national books.

Greece isn’t the only euro country to use this kind of swaps but Greece used more of these deceptive swaps than any other Euro Zone country, Eurostat believes, and it is the only Euro Zone country that lied about using the swaps after Eurostat told members to report them in 2008. Estimates say that about a third of Greek debt has a swap attached to it, although not all those swaps are structured to hide debt.

Almost a year after the Greek debt crisis hit the headlines, investors are still convinced that the country will have to default on its debt or at least conduct a reorganization that administers a haircut to holders of government debt. Yields on 10-year Greek bonds are roughly four times higher than yields on benchmark 10-year German bunds. On September 13 the yield on the 10-year Bund was 2.43%. The yield on 10-year Greek government bonds was 8.95 percentage points higher.

The International Monetary Fund projects that Greek debt will peak at 149% of GDP in 2012.  The ratio stood at 115% of GDP at the end of 2009.

Eurostat got new powers in August that allow it to audit a country’s financial data if there’s evidence that the national accounts aren’t accurate. The statistics agency expects to be able include its estimate of Greek debt in its scheduled October report on Euro Zone finances.

In the meantime, expect downward pressure on the euro to continue.

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  • samba on 13 September 2010

    Thanks for the thought Jim,

    October sounds like an important month, How honest are the Greeks i wonder. if the inclusion of the swaps were to show a large difference in debt to GDP, there will be outrage, nobody like being conned

    Also in october, the comprehensive spending review will be be announced in the UK, this should show how serious the coalition are to cut our deficit.

  • kent_geek on 13 September 2010

    Longish but worthwhile article on the problems in Greece – if you believe this author, things may have to get much worse before they improve.

  • ivati on 13 September 2010

    Jim, what’s the deal with DGW????? down 41.55% today……Any possibility it may come back?


  • kowloon dave on 13 September 2010

    I see that Goldman Sachs is up to its old tricks, this time helping a nation (Greece) hide debt from its creditors. Aren’t you proud of GS as an American institution? The more I see of GS, the more I wonder whether they have any social or economic usefulness for the U.S. One thing is for sure–GS, with its creation of money by paper tricks, is giving our country a bad name. Wish the govt could clean up GS once & for all & force them to make money the clean way by traditional banking or the sweat of their brows.

  • diepson on 13 September 2010

    You can buy PCG because PG&E have a very good balance sheet and dividend/yield about 4.11%. FBR Capital maintains an “Outperform/Top Pick” rating on PG&E. Approximately about $1.57 billion in market capitalization has been lost on Friday. PG&E have total $992 million in liability insurance for damages caused by fire and $1 billion in lost equity capitalization. Citigroup was more positive on the PG&E stock. I think PG&E stocks were oversold. I am just long on PCG on Friday. Fall and winter are coming, all PG&E customers bill will go up substantially very soon because the weather is getting colder very day from now to spring next year that mean PG&E have significantly more revenue and profit to come for next quarter and quarter after for sure.
    FYI, on September 09, 2010: “The Company is one of only five U.S. utilities to appear on the World index and one of 10 U.S. utilities to make the North America index. This marks the second consecutive year in which PG&E has been chosen for the World index and the third consecutive year it has been included in the North America index.
    The DJSI track the financial performance of leading sustainability-driven companies worldwide. In selecting the top performers in each industry sector, DJSI evaluated companies on issues such as corporate governance, risk management, climate change mitigation, supply chain standards, and labor practices.”

  • faroos on 14 September 2010

    good read thank you Jim, but the way i look at it; the problem was not the budget deficit of Greece since the Greece GDP if very small compared to its biggest brothers (even compared with Spain). the problem was this exposed a problem in the structure of the Euros, i think it exposed the emperor has no cloth.
    and that did not change in the past month or two, and i dont think having more debt in Greece budget will change incrementally

  • flgator on 14 September 2010

    ultimately, how will this effect NBG? a chunk of their business is outside of greece. i’ve bought at these levels in July and sold at $3.00….worth another try?

  • Domino412 on 14 September 2010

    Anyone care to give an intelligent quess on the price price target between the EUR/USD? Some were calling for parity between the two, while a lot of folks (including Jim) were saying 1.10. This was several months back, while in the ,eantime it has gone as high as 1.33. Who would have thought the Yen would be so strong?

  • yx on 14 September 2010

    No, I didn’t get excited about Euro or Euro Zone. In fact, I was wondering how could it grow with all the austerity in the area, except Germany which has strong exporters.

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