Another Black Swan Might Be Hatching

By Inya Ivkovic, MA — The Financial World According to Inya column

It is becoming more and more obvious that the proposed Greek bailout is only dealing with the tip of the iceberg. What lurks underneath the surface could give birth to another Black Swan, just like the one that was hatched by the subprime mortgage market back in 2007 and just like the one that Nassim Taleb describes in his book aptly titled The Black Swan.

On Monday, Standard & Poor’s slashed Greece’s sovereign debt down into junk, as well as downgraded Portugal’s to single-A minus rating. Both events resulted in investor panic and a rush to exit doors. Don’t blame it on Standard & Poor’s, though. All that the rating agency did was acknowledge the fact that debt problems in struggling European countries is not going away and that it is seriously eroding Europe’s already strained recovery.

In few short days, Greece’s emergency rescue package went from a solution to a serious problem to a temporary band-aid, the purpose of which was merely delaying the inevitable — the time of reckoning in Athens. I have been warning about countries like Greece potentially hatching new Black Swans for months now. But it does not take a rocket scientist to figure out that whatever EU partners have scrambled to put together for Greece is nowhere near enough to address the country’s insurmountable structural problems, huge debt, unendingly weak labour market and no light at the end of the tunnel.

The issue of long-term debt, carried by some European countries, is a heavy burden indeed, which might in the end crush some of them, slowing or halting completely Europe’s recovery, and very likely the rest of the world’s, too.

How much money have Greece’s EU partners pooled together? Roughly $60.3 billion. Regardless, it will not be enough and will likely force Greece to restructure its mushrooming debt, if for no other reason than to lower borrowing costs that are currently devouring almost 25% of total revenues that Greece government earns on an annual basis.

As a result, banks and financial institutions will have to take haircuts on high-yielding bonds they loaded up on not so long ago. Further exacerbating Greece’s ability to collect revenues is chronic tax avoidance and resistance of public servants to budget cuts impacting their wages and benefits.

Still, there is little Greece can do other than adopt radical cost reduction measures, overhaul its pension system and social safety programs. However, such measures could be either coming too late or be impossible to enforce, or both. The result is a bleak forecast for a number of EU partners that perhaps should start considering a prolonged U-shaped recovery the best case scenario.

It is becoming more and more obvious that the proposed Greek bailout is only dealing with the tip of the iceberg. What lurks underneath the surface could give birth to another Black Swan, just like the one that was hatched by the subprime mortgage market back in 2007 and just like the one that Nassim Taleb describes in his book aptly titled The Black Swan.

On Monday, Standard & Poor’s slashed Greece’s sovereign debt down into junk, as well as downgraded Portugal’s to single-A minus rating. Both events resulted in investor panic and a rush to exit doors. Don’t blame it on Standard & Poor’s, though. All that the rating agency did was acknowledge the fact that debt problems in struggling European countries is not going away and that it is seriously eroding Europe’s already strained recovery.

In few short days, Greece’s emergency rescue package went from a solution to a serious problem to a temporary band-aid, the purpose of which was merely delaying the inevitable — the time of reckoning in Athens. I have been warning about countries like Greece potentially hatching new Black Swans for months now. But it does not take a rocket scientist to figure out that whatever EU partners have scrambled to put together for Greece is nowhere near enough to address the country’s insurmountable structural problems, huge debt, unendingly weak labour market and no light at the end of the tunnel.

The issue of long-term debt, carried by some European countries, is a heavy burden indeed, which might in the end crush some of them, slowing or halting completely Europe’s recovery, and very likely the rest of the world’s, too.

How much money have Greece’s EU partners pooled together? Roughly $60.3 billion. Regardless, it will not be enough and will likely force Greece to restructure its mushrooming debt, if for no other reason than to lower borrowing costs that are currently devouring almost 25% of total revenues that Greece government earns on an annual basis.

As a result, banks and financial institutions will have to take haircuts on high-yielding bonds they loaded up on not so long ago. Further exacerbating Greece’s ability to collect revenues is chronic tax avoidance and resistance of public servants to budget cuts impacting their wages and benefits.

Still, there is little Greece can do other than adopt radical cost reduction measures, overhaul its pension system and social safety programs. However, such measures could be either coming too late or be impossible to enforce, or both. The result is a bleak forecast for a number of EU partners that perhaps should start considering a prolonged U-shaped recovery the best case scenario.