The Ongoing Debt Crisis in Greece

Europe’s debt problems first reared their head in Greece more than 18 months ago and with a bailout package put together by the IMF and ECB it was believed that the nation’s problems had been assuaged.  However, that has been far from the case as the budgetary measures have not significantly helped the nation, and the bailout was not large enough to cover the shortfall. These new problems came to a head in June. 

To begin the month Greece’s debt rating was dropped even further into junk status and European officials began a round of meetings to consider a new aid package for the country.  After receiving an aid package of $160 billion in May of last year, Greek officials estimate they will need an additional $40 billion in both 2012 and 2013 in order to meet the countries debts.  As part of the existing bailout, funds are disbursed to Greece quarterly based on estimates by EU and IMF officials that Greece will be able to finance itself for 12 months.  However, due to the need of additional bailout funds, the quarterly disbursement to fund the country would not be possible until a new bailout agreement is reached, or additional cost cutting measures could be passed. Thus, an agreement for a new bailout or austerity measures would have to be reached before the end of June in order to support the country in the short term, avoid a default, and prevent other debt laden nations like Portugal, Spain and Italy being dragged down with Greece. 

At issue at meetings by IMF, ECB, and Euro-zone finance officials throughout the month was how Greece could help contribute to their own bailout and whether private bond holders would agree to a proposal by German officials to accept delayed repayment of their Greek bond holdings.  Calls for Greece to sell off state owned assets and implement additional unpopular austerity measures met with mixed reviews in Greek Parliament.  The plan called for $40 billion in spending cuts and tax increases and raising $70 billion through a privatization program.  In order to try to gain support for the measure the Greek Prime Minister reorganized his cabinet and held a vote of confidence in Parliament.  On the private side of the issue Greek debt holders would allow their maturing principal payments to be delayed several years and thereby decreasing the amount of bailout money Greece would need in order to repay those debts.  However, under most methods this practice would result in a default under rating agency guidelines. 

After much wrangling between European officials, they agreed to release the next installment of the May 2010 bailout as long as Greece passed the additional austerity measures. Germany gave ground on its demands for private support of the bailout asking for a voluntary rollover of debt.  Greek Prime Minister Papandreou survived his confidence vote paving the way for the austerity measures to be passed, allowing the next installment in aid, and opening the door for the second bailout package to be completed.  On the second to last day of the quarter, Greece passed legislation approving the five year austerity plan, which allows the next installment of the bailout loan to be paid and temporarily stems the crisis.

The markets generally followed the path of the negotiations over the month with stocks falling over the first three weeks of June as an agreement looked bleak.  Once it became clear that an agreement amongst creditors on how to address the problem was reached and Greek officials agreed to the additional austerity measures, the market rallied to end the month with its best week in two years, up 5.5%.  While they are popular in the rest of the world for improving the confidence in the markets, the austerity measures are wildly unpopular in Greece.  There have been massive protests and strikes, with many turning violent, throughout the month and they intensified with Parliament’s approval of the austerity measures.  The agreement has curbed concerns for now, but the agreement is clearly a stop gap solution.  In order to right the ship, Greece needs to improve its fiscal position substantially over the coming months and years, or the world might find itself revisiting the recent crisis.

Index Performance                                     June             QTD              YTD

US Large Cap Stock (Russell 3000)                -1.80%           -0.03%          +6.35%
International Stock (FTSE AW ex US)          -1.33%             +0.68%         +4.25%
US Broad Bonds (BarCap Aggregate)            -0.29%            +2.29%          +2.72%
US Government Bond (BarCap Gov 1-5 Yr)  +0.03%          +1.42%         +1.46%
Cash (ML 3Month T-Bill)                                +0.01%          +0.04%         +0.08%

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