Politicians in Germany do their best to make the Greek crisis worse–and it looks like they’re succeeding

It ought to be Rule No. 1 for any effort to fix a financial crisis: Don’t do it during an election. Politicians pandering to voters are likely to make a bad situation worse.

Which unfortunately is exactly what’s happening in the current Greek debt crisis.

The German government of Angela Merkel faces a tough May 9 state election in North Rhine-Westphalia, Germany’s most populous state, that could force coalition partner the Free Democrats to campaign against the plan for a $60 billion Greek rescue co-financed by the IMF (International Monetary Union) and the members of the European Union. Germany would pick up the biggest share of the tab in any such rescue plan.

Opinion polls show that 86% of Germans oppose the bailout plan. And with support for the Free Democrats at just 6% to 8% in recent polls, the party faces an almost irresistible temptation to bash the plan. Especially because the opposition Social Democrats have ratcheted up their criticism of the plan.

That has left Merkel’s government, a coalition between her Christian Democratic Union and the Free Democrats, doing some tough talking that threatens to make the bailout plan into a recipe for disaster in Greece. Merkel said just today, April 26, that she won’t release any funds until Greece shows that it has a credible plan to cut its budget deficit not just in 2010 but in 2011 and 2012.

The Greek government has already introduced increases in the national value added tax, cut public sector jobs, wages, and benefits, and pushed to cut private sector wages as well in an effort to reduce a 2009 deficit projected at 12.9% of GDP to below 9% in 2010.

Merkel is now asking for detailed plans that would cut the deficit by another three to four percentage points of GDP in each of 2010 and 2011.

There are three things that can happen here. None of them good. Read more

Could Greece turn into another Lehman and take down the world financial system? I’d say No.

The Greek deficit crisis could turn into a Lehman-type event capable of freezing the financial markets, according to a report today from Deutsche Bank.

If Greece acts to restructure its debt at the expense of current bond holders, it could cause financial markets to freeze up just as they did after the Lehman Brothers bankruptcy in September 2008. Despite trillions in economic stimulus and bailout cash from the world’s governments some markets for some types of assets still aren’t functioning.

It’s good these days to read any warning of danger in the financial markets with a pound of salt. Someone may be yelling, The sky is falling because they want to get regulators to back off on proposals for stricter regulation or because they’re still looking for a government handout.

So how good is Deutsche Bank’s argument? Read more

The Greek debt crisis is back as deficit numbers actually get worse

Greece: It’s not so bad that it can’t get worse.

Not exactly the slogan I’d use to rally investors to buy the bonds of a country overwhelmed with debt and deficits, but it’s one that fits the news out of Europe this morning, April 22.

According to the statistics office, Eurostat, of the European Union, Greece didn’t run a budget deficit of 12.9% of GDP in 2009.

It was more like 13.6%. And further revisions may take it to more than 14% of GDP.

So much for the Greek government’s forecast of 12.9% from just two weeks ago.And the European Union’s estimate of 12.7% of GDP in November.

It was that November forecast from the European Union that really brought the Greek crisis to a boil.

The financial markets haven’t been slow to turn the news into a rout for Greek bonds and to force a further retreat by the euro. Read more

The Greek crisis goes on and on an on–with no light at the end of the tunnel

 “A default is not an issue for Greece,” Jean-Claude Trichet, head of the European Central Bank, told a press conference in Frankfurt today, April 8.

 The bond market begs to differ. Greek bonds sold off today bringing the yield premium to benchmark German bonds to 4.27 percentage points. That’s the biggest spread since the start of the euro. The average spread over the last decade has been 0.34 percentage points.

To be fair to Trichet, the difference of opinion could simply be one of timing. Greece does not face a default this week or month. If that’s Trichet’s time frame, then he’s correct. But the bond market is looking somewhat further out and what it sees is a process that finally, sometime in 2011 in all likelihood, results in a Greek default.

The bond market’s logic is very simple. Greece is going to be forced to pay so much to fund its debt that the country simply won’t be able, at some point, to pay the price. Remember, the bond market is saying, that this is a country that’s being asked to cut government spending and private wages to a degree that will send the economy into a recession.

And it’s not like the economy of the rest of the European Union is growing so fast that it can pull Greece out of a recession. Revised numbers show that from the end of the third quarter to the end of the fourth quarter of 2009 the EU economy didn’t grow at all.

What does this mean for investors? Read more

Get ready for a re-run of the Greek budget crisis

I don’t want to rain on anyone’s parade, but we all know that the Greek budget crisis hasn’t been resolved, right? It’s merely been postponed until April and May.

That’s when Greece has to refinance $27 billion in debt. (Doesn’t seem like much? Well, if you scaled that number up to reflect the difference in size between the Greek economy (an estimated $340 billion in GDP, according to the CIA World Factbook) and the U.S. economy ($14.3 trillion in 2009), Greece would be looking at the need to refinance $1.1 trillion in debt in just two months. (Tells you why there is a Greek budget crisis, doesn’t it?)

So far all that’s really happened in the way of a fix is that the Greek government has promised to deliver an austerity budget that would cut the budget deficit from 12.7% of GDP in 2009 to 3% of GDP by 2013 and that European Union governments have delivered vague promises to do something if Greece gets in rally deep trouble..

There’s good reason to believe that those budget cuts just aren’t going to happen. Read more