Greek Debt Crisis in Perspective

By: Andrew_Butter

The only solution for the European debt crisis is if the ECB prints a trillion Euros and does a “Fed” by buying up dodgy bonds, and then puts them in cold storage; if it doesn’t do that, soon, then something nasty is going to happen.

The negotiations as we speak are to find a piddling $8 billion to pay the salaries of the Greek public sector in October; it’s that close to the wall. Meanwhile the European political process is paralysed and the ECB does not have the power to do anything; Europe runs on consensus and rules, when the consensus disappears and the rules get broken, what’s left? Don’t expect a TARP or a TALF.

This is Greece’s story:

All you see in the media is the “hockey-stick”; no one tells you that Greece’s debt to GDP was 100% since 1995, regardless that Maastricht stipulated it should be maximum 60%. So big-deal, nominal GDP went down, but clearly they had a structural problem for years, you don’t solve a problem like that between now and October.

Will that bring down the Euro and the World financial system? Perhaps but in the grand-scheme of things, that’s got precisely nothing to do with Greece, here is a chart with some selected timelines:

Oops, what happened to Greece? Ah…Phew….there it is, silly-me, now I see it, that’s the “flat” blue line at the bottom of the chart.

Mm…and the rest is OK I suppose? Like Line 66 which is how much toxic assets America sold to moronic European bankers and pension funds (mainly) who didn’t speak very good English so they got confused about the small-print, as in “NON RECOURSE BABY!!”

The story now is still about the residual of securitization, that line for USA is total bonds outstanding in USA excluding Treasuries and Municipal debt, plus the “assets” of FDIC insured banks. There is no “double-counting” there, although a sizeable chunk of that is sitting on European balance sheets (Line 66).

During the “heady” days of easy money starting in 2000, economic growth, if you can call blowing bubbles using debt, “growth”, was driven by the “unlocking” of capital afforded by securitization, in USA; and by clever PPI deals in Europe that had the same effect in that they pushed the debt “off-balance-sheet”, and let governments spend on capital intensive projects (they say – how much was just paying civil servant salaries is debatable), “safe” in the knowledge that they would be able to generate the income in the future to service the debt.

The difference in America, apart from the fact that they blew a couple of trillion playing Rambo, was that it wasn’t hard to figure out how bad things were when the penny dropped that a AAA rated collateralized debt obligation lovingly crafted by Goldman Sachs was not all it was put up to be.

In Europe, with so much of the debt in opaque government-brokered deals, it’s still hard, if not impossible to know what the situation is. I don’t have an equivalent line for what bank “assets” plus securitized bonds, plus cleverly hidden scams, are waiting in the wings in Europe, I suspect no-one does.

And problem there is that, as Greece is finding out, unlike securitized debt, that stuff is mainly recourse, as in even if you sold the collateral, your creditors can still come after you for the balance.

There is a growing realization that when you lend money you need collateral to be put up, that’s not a new idea, but it got forgotten. When you distil out the AAA tranche of structured debt, rule of thumb the LTV on the collateral is 70%; that’s the back-stop. The trick is doing the valuation for the “V” part properly, and the number you need in your mind there is what that “V” will be worth when you might want to collect.

That’s what everyone forgot, debt was priced on “future-cash-flow” with (for that sweet AAA tranche), a 1.2 DSCR; which is all very well, until the future doesn’t materialize, and then if there is no collateral, you are Greece.

Right now securitization is frozen, until it re-starts in a format where investors can get access to loan-by-loan data (on computer – that’s lots of data, but no one in their right minds will settle for anything less), the only solution that will avert a melt-down, is for central banks to print money to paper-over the accumulated mistakes of the past ten years.

That might buy some time for the nanny-states in Europe and the Rambo lookalike over the water to reign in their aspirations or to figure a way to balance their budgets by taxation (it’s one or the other), and for the private sector to re-enter the market-place, lending money against collateral.

Denial will just make the catastrophic re-adjustment worse, the rich are going to have to take a hit, either via (a) the tax-man, (b) the hair-dresser, or (c) via inflation, perhaps once they do, they will decide to be a little more careful about who they get into bed with, next-time.

But there is a long-road before that happens, meanwhile the spectator sport is betting on which way those European bunnies paralysed by the headlights, are going to jump.

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2011 Copyright Andrew Butter- All Rights Reserved
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