The Big Fat Greek Debt

Greece’s debt problem first reared its ugly head in the markets last December, when records revealed that the nation’s deficit ballooned to almost €300 billion. Since then, the EURUSD has high-dived from the 1.5100 level and plunged by 1500 pips and counting! In fact, analysts have already referred to this prevailing debt condition as a “ticking time bomb,” giving rise to fears of a region-wide bankruptcy in the euro zone.

So far, the Greek government accumulated a mountain of debt amounting to around 110% of its economic output over the years. Several credit rating companies have already issued downgrades on Greece’s sovereign debt, making it all the more difficult for Greece to secure additional funds. Even worse, Greece’s brothers in the euro zone seem unwilling to extend a helping hand.

In the past weeks, ECB head honcho Jean-Claude Trichet has repeatedly tried to calm investors by expressing confidence that Greece would be able to handle their debt problems on their own. But based on the recent runs of risk aversion, it seems that investors think otherwise.

Meanwhile, G7 leaders also tiptoed their way around this issue in their latest meeting. At the recent summit, European officials made a noticeable effort not to mention anything remotely close to the words “bail-out.” In denial much? To me, keeping their silence on the issue only emphasized how much Greece’s situation is becoming a bigger problem.

As the problem drags on, concerns on Greece’s financial stability continue to heighten, putting the heat on Greek officials to get up and do something about it. How they are going to fix this mess is still hazy for now but what we know for certain is that they will not be asking nor accepting any type of outside help. How come? Imagine what would happen to their investors’ confidence if Greek officials start admitting that the nation’s debt problem is unsolvable internally!

Just yesterday, in an interview done by Bloomberg, Greek Finance Minister Papaconstantinou (in case you’re wondering, I don’t know how to pronounce that either) reiterated that Greece can handle the problem by themselves and that they have no interest at all in calling for outside help. According to him, seeking for external financial support would exacerbate the whole situation as it would create more fear in the markets. Yields on its sovereign debts will surely soar and their bonds would almost certainly lose its value and trade below par.

Still, there’s no use denying that Greece is in such a deep mess. Estimates show that Greece’s deficit could swell to 12.7% of its yearly GDP. And do you know what the EU’s ceiling is? It’s only 3% of the country’s GDP! Aside from borrowing from other countries, the only other thing that the government can do is to jack up their tax collection. However, doing this would further slow its ailing economy. Unless the ECB and the Greek officials find an ingenious solution to its current circumstance, the euro could eventually find itself underwater.