A bailout deal for Greece has finally been reached and it will be implemented this week. Basically, the bond holders of Greek debt submitted their bonds worth €177.2 billion and received €55.8 billion in new bonds back—a roughly 70% haircut for the bondholders.
Now that the agreement has been reached, the European Union has agreed to provide Greece with the next sum of bailout money, to the tune of €130 billion. However, this money will not be paid all at once. It will come in installment payments from the European Union. The first installment is this month, at €5.9 billion, while April’s payment will be €3.3 billion.
The European Union is providing this money in installments, because it wants to monitor Greece to ensure it meets its bond payment targets and implements austerity measures in its laws to meet the targets.
The oddity is that these targets set by the European Union are based on fantasy.
Greece has to further cut welfare payments, its defense budget, pharmaceutical spending, and restructure central and expenses at local governments in order to meet the European Union’s target. Of course, we all know what restructuring means: job cuts and cuts in wages.
Now the European Union is saying that if Greece follows its prescription, and cuts 5.5% of GDP further, it will meet its debt payment targets for 2013 and 2014. The European Union is basing its assumptions on Greece’s GDP being zero in 2013, and growing slightly in 2014.
Well, dear reader, let’s look at Greece’s GDP over the last few years:
2008 GDP: 0.2%
2009 GDP: -3.3%
2010: GDP -3.4%
2011: GDP -6.9%
So now Greece is expected to show flat GDP in 2013 and Greece’s economy will some how grow again in 2014?
Let’s remember, dear reader, that in spite of these trials Greece is facing, it is part of a European Union that is in a worsening recession, which means that any hope Greece has of growing is further being held back by the recession in the European Union.
I suspect that, as economic numbers from Greece come in later in 2012, it will be obvious to everyone that Greece will not be able to make the bond payment targets set by the European Union in 2013 and 2014. Worse, the additional cuts demanded by the European Union will cause more protests in the streets, as the unemployment situation deteriorates further due to the new cuts.
The European Union crisis has not gone away, dear reader. It will start again very soon as the European Union has solved nothing with Greece. In the meantime, the stock market moves higher, seemingly unworried…
Where the Market Stands; Where it’s Headed:
Many factors are working against the stock market rally—but there’s one important one. The number of stock market advisers bullish on stocks has declined significantly, which bodes well for the stock market. As I have been saying all along, we are in a bear market rally that will bring stocks higher, luring investors back into stocks before the next phase of the bear market gets underway.
What He Said:
“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S.housing market, the economy, and the stock market. There’s no escaping the carnage headed our way, because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time that Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying “…the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”