While Athens burns, the Greek Parliament has finally approved.A troika-imposed austerity package necessary for the right for consideration to receive a second bail-out package since 2010.
While the press trumpets every move and muttering, we here at ACM Partners thought it best to look behind the headlines, panic, and paranoia and, as we’ve been doing since as early as last June, really examine where the world stands.
Let’s first look at the numbers (as I did on RTTV this past weekend):
- The European Union has pushed Greece to pass an austerity package that includes a total of €3.3B in cuts, including the slashing 15,000 public worker positions and 22% from off the minimum wage (dropping it from €751 to €600 per month). (Keep in mind that cutting public sector jobs in Greece is akin to the United States forsaking capitalism. It simply isn’t done.)
- These cuts are necessary for Greece if it wants to be considered “ready” to receive a second (€130B) bailout in two years.
- The first bailout came in at €110B in 2010, with the understanding that Greece would, prior to the €4.5B debt payment date of March 2012, significantly cut public spending and curb its debt-to-GDP ratio to 120% by 2020.
- By 2010, Greece’s debt-to-GDP ratio hit 143%. It jumped 17% in 2011, hitting 160%.
- This second bailout – available only if deemed sufficient by Europe’s powers-that-be – targets a Greek debt-to-GDP of 120% by 2020, though economists expect the “real ratio” to be closer to 136%, even with the most severe of austerity cuts.
Of course, regardless of whether or not the troika approves these austerity cuts and Greece makes its €14.5B debt payment in March, the Greek crisis highlights severe structural issues ready to rupture across both the European and global economy. Let’s look at what’s ahead, default or no:
- €130B May Not Be Enough: Tax evasion in Greece alone is said to cost the country at least €13B annually. Combine this with a shrinking workforce and a general contraction in the global economy, and where do we find any specific growth drivers that will drive Greece over the “debt finish line?” The €130B may stave off default for now – and in time for the artificial March, 2012 deadline – but, as European leaders have been telling the markets for nearly 2 years now, bailouts do not guarantee default’s averted. Greece may still drive off an economic cliff.
- “Germany, you’re not the boss of us!”: Obviously, Germany’s taken a significant and necessary role in driving this process. Interestingly, German leaders appear to be using financial reality to drive not only savings, but also market reform. After all, the country with no minimum wage and an efficient manufacturing sector is now telling Greece to cut minimum wage and privatize more of its economy. Look for this to cause severe political problems for both Greece and the EU in the future.
- Shrinking Economy, Social Unrest: Should the austerity package pass, the troika, experts say we’ll see a 4-5% decrease in the Greek economy, as opposed to the currently predicted -2.8%. As much as economists and market observers focus on leverage, Greek citizens will feel these cuts the contraction of the economy immediately, a reality that will lead to inevitable social unrest and migration.
- Eastern Europe Is Screwed: While Greece hasn’t officially defaulted Eastern Europe is already feeling the pain of the Greek crisis. Should Greece default, however, Eastern Europe could well plunge into a severe depression; Romania alone does 22% of its banking through Greek banks, while Greek banks control nearly 1/3 of Bulgaria’s total assets. A Greek default – and inevitable “bank holiday – simply devastates Eastern Europe for years (if not a decade) to come.
- Russian Instability: Greece’s economic contraction – and the inevitable economic shockwaves across Eastern Europe – will mean a sharp decrease in energy consumption. This, in turn, will result in a decrease in revenues for energy-producing Russia, a country whose citizens are already rioting in discontent in the streets of Moscow. Look for greater political and social instability in that region, as the Greek/EU crisis continues.
- No-Growth United States: Despite the press’ proclamations that the United States is back on the road to growth (!), the Greek/EU crisis will ultimately lead to a contraction in the American economy. The EU accounts for approximately 20% of all American exports. The inevitable economic maelstrom that’s coming will cut demand for US goods, inevitably shrinking American exports dramatically. Furthermore, the EuroZone is the biggest market for U.S. companies with direct investment. Consequently, with the inevitable shocks that will soon hit the EuroZone, look for whatever growth the United States has in 2012 to stall.
- Revolution In China?: Ok, so maybe thing aren’t THAT drastic. But with the European Union as China’s top trade partner, news that exports from China to the region dropped 3.2% this January from last year’s is bad news for a country with an already-slowing economy. Demographic issues, combined with a discounted populace unhappy with a stratifying economy, could lead to severe political instability in this seemingly “untouchable” economic miracle.
Good luck Greece. And the world. You’re going to need it.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]
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