The date: 9 February 2010. Let me explain.
I was going through my archives to figure out when I first started saying Greece would default and it made for interesting reading as a chronology of the sovereign debt crisis. For me, the pivotal post that signalled default was inevitable was the one entitled “Video: Stiglitz and Hendry debate the Greek bailout” from 10 February 2010. It was from a broadcast the night we learned of the debt concealment in Greece.
One of the larger problems in the unfolding meltdown in Greece is the fraud apparently perpetrated by past Greek governments to conceal their true levels of debt. This is having a very adverse effect on Greek credit spreads to (German) Bunds.
10-year Greek bonds are trading at 6.67%, while German 10-years are at 3.14%, a full 353 basis points lower. The increasing spread owes not to inflation, but to sovereign credit risk – and the hidden debt is front and centre in this fiasco.
Take a look at the video from that post below. I’ll follow it with a brief chronology.
After the fraud and the Newsnight video, it was really game over. It would be nice to think I was 100% clairvoyant even in early 2010. But, when Hendry was telling Newsnight that Greece was bust in February 2010, I believe I honestly thought Greece could hang on if they made draconian cuts and were aided in the interim by the EU. My recollection when I started reviewing the archives of what I was thinking 20 months ago is that Greece was in trouble, but that it could get out alive if it hit the panic button and was helped over the austerity hump by fiscal transfers from the EU.
So I hit the rewind button and here is the post chronology I saw:
Pre-sovereign debt crisis phase
- 19 January 2009: The Eurozone and the spectre of banking collapse – “I am sceptical as to the economic benefits of the Eurozone. In my view, the Euro has always been more of a political construct than an economic one… My take on events is that a number of countries within the Eurozone will face banking crises, starting with Ireland. At that point, leaving the Eurozone will make no sense because the damage has already been done… Ireland must threaten to leave now if it wants to maximise any EU help it expects to receive, before the scope of other EU banking crises become apparent. Weakness in the financial sector has infected all of the Eurozone members. I have mentioned that Austria has a weak banking system… But, there is even growing evidence that Germany too has a fragile banking system. To be clear: this is an ‘every nation for itself’ strategy pitting Eurozone members against each other, where those nations savvy enough to request help sooner are likely to benefit at the expense of others. The question is whether the Germans would go along with this. If they do not, tensions will rise and that will change the calculus for Portugal, Italy, Ireland, Greece, and Spain. I don’t have a view on this as yet because the situation is still evolving. However, I lean toward believing the Eurozone will remain intact even while individual nations or banking systems collapse.”
- 30 October 2009: Portugal and Greece downgrades have silver lining in the reach for yield – This was pre-Dubai World, the event that ushered in the sovereign debt crisis. It was a warning to investors that some euro zone sovereigns were getting weaker. The risk seeking return crowd saw a silver lining somehow and decided to pile in while more prudent investors went ‘zero weight’ these bonds.
Sovereign debt crisis begins with Dubai World
- 27 November 2009: The bust in Dubai and exogenous shocks – I wrote “By now you have heard that Dubai World, the investment company, has asked its creditors for a six-month delay in repaying its debt… This is what is commonly referred to as default.” I remember specifically being concerned about the Baltics and Nordic bank exposure to them. I mention the Baltics as a contagion worry in the article. Nothing about Greece though.
- 30 November 2009: New Citigroup maven Buiter warns of sovereign debt delusion – You can always count on Willem Buiter to put things in the right perspective! He warned: “It is clear that nations whose public debt is mainly denominated in domestic currency and whose central bank is either not very independent or can be make dependent by the government of the day are likely to choose inflation and exchange rate depreciation over default as a way out of fiscal-financial unsustainability…the ECB will not monetise the government debt and deficits of small European Area member states.” There it is: the first indication that Portugal, Ireland, and Greece had to cut like mad or face default.
- 8 December 2009: Video: Fitch downgrades Greece to BBB+ as violence erupts. The ratings agencies pile on as indications begin that Greece will not be able to cut. And we already know they will not receive a backstop for full monetisation. Default starts to become a legitimate concern.
- 9 December 2009: Buiter: “It’s Five Minutes to Midnight for Greece” – Willem Buiter again. Notice my first line in this post: “Incoming Citigroup Chief Economist Willem Buiter believes Greece still has it within their means to prevent a national default.” That tells you the prevailing view was that Greece had enough opportunity to get its fiscal house in order.
- 11 December 2009: Standard Bank says Greece and Ireland may leave Eurozone – Even so, some already felt Greece was insolvent and had to leave the euro zone. My view at the time was: “There are a lot of policy remedies that can take place before it reaches this point.” I think this was the right view. Here we are 22 months later and Greece still hasn’t had a technical default.
- 13 December 2009: Greece risks financial Armageddon while Ireland makes cuts – this marks the beginning of the Greek debt crisis. Before, Greece was the worst of many debtors but roughly equivalent to Ireland, for example. After this point, Greece became the singular focal point of all euro zone debtors. “Over the past five years [in Ireland] the spread had averaged about 40bps. Now it is 170bps… the situation in Greece is worse than it is in Ireland. The debt levels are higher. The spread to German bunds (214bps) is higher, and the budget cuts are not yet forthcoming. For signs of stress, I look to Greece before I look to Ireland.”
- 1 February 2010: If PIIGS Could Fly – Niels Jensen acts here as if Greece can make the grade when he writes “When I was in Zurich with John [Mauldin] last week, I bumped into the famous Swiss investor, Felix Zulauf, who pointed out to me that Greece has in fact been in default in 105 of the last 200 years, so never say never. Having said that, Greece cannot be allowed to default, as the implications would be catastrophic. Bond investors would immediately pick apart the next country in line, and it is almost certainly going to be one of the other PIIGS – Portugal, Italy, Ireland or Spain. Bailing out Greece is just about manageable, but having to save all of them would overwhelm the EU. Swift action must therefore be taken, moral hazard or not.”
Post-Greek debt concealment discovery
- 9 February 2010: Debt concealment in Greece – In retrospect, this marks the date when in retrospect Greece had reached a point of no return. Yes, there were always more remedies. But the debt concealment issue meant the only remedy possible was austerity and liquidity. There would be no fiscal transfers for this ‘cheating’ debtor.
- 9 February 2010: The Germans will not bail out Greece – I see this post as a bad call. The Germans have bailed out the Greeks time and again. My thinking was that the debt concealment issue marked a point of no return for bailouts. If Greece wanted to save itself, it would need to make cuts without a bailout. Instead, this day marked a point of no return for Greek solvency. Notice the weasel clause at the end: “I see it as unlikely that any deal – bailout via the EU, IMF bailout or backdoor help via quasi-fiscal measures from the ECB – can be reached unless Greece agrees to austerity measures.” The title tells you my thinking. The weasel clause, as I am now calling it, was just CYA nonsense I wrote when I realised I had been too categorical. Bottom line: I was wrong and I will write no more weasel clauses.
- 10 February 2010: Video: Stiglitz and Hendry debate the Greek bailout – Hugh Hendry verbalises what we know know to be true on the night that the debt concealment has been uncovered.
- 21 February 2010: Is AIG the main CDS insurer for Greek government debt? – This is the first time I got an inkling that credit default swaps would be a key issue in Greece.
- 23 February 2010: Greek death spiral hits bank credit ratings. What should the EU do? This post is noteworthy because it is the first time I mention a policy path which was eventually used. We can debate whether using it this early instead of waiting would have worked. But I now think 9 Feb 2010 was the date when that went out the window. “I say the EU should enforce an austerity plan (moral hazard prevention) via the IMF (credibility) in exchange for both a one-time fiscal transfer (economic destruction safeguard) and access to an IMF emergency aid fund (contagion safeguard).”
- 23 March 2010: Anticipating Eurozone collapse – I think this is the first time where I said that some euro zone country would eventually default, most likely Greece. “still bet on a sovereign default within the Eurozone as the most likely outcome; that’s the writing on the wall, Eurozone economic collapse – particularly in Greece, Spain and Ireland. But a double dip of some sort would hit Germany as well”
First Greek crisis package
- 25 March 2010: Europe puts the loaded gun on the table but no bailout – The first EU Greece deal “The deal which European leaders have now struck is the best we could have hoped for given the political constraints for everyone involved. The 16 countries in the eurozone have agreed to a contingent aid package of loans and IMF assistance and supervision. The Greek Prime Minister expressed satisfaction with the result, largely hammered out by the French and the Germans before the EU summit.”
- 9 April 2010: Fitch downgrades Greece to BBB- with a negative outlook
- 27 April 2010: Merkel may force banks to take haircut on Greek debt – This marks the first time I saw a mention of the German government thinking about a Greek default. “Two weeks ago, we were considering the options including True Fiscal Austerity… few are talking about True Fiscal Austerity as a solution anymore. It’s now either a default or restructuring within the euro-zone or a break-up of the euro-zone (and default or currency devaluation). This is a signal that things have deteriorated significantly.”
- 27 April 2010: Poll: Will Greece default? – Credit Writedowns readers say yes, Greece will default – overwhelmingly.
First Greek bailout package: Austerity
- 2 May 2010:The bailout for Greece is in – The first bailout package for Greece: ‘The EU-IMF package came in at 110 billion euros (80 from the EU and 30 from the IMF). It is designed to seeGreece through to 2014 for the stability and growth pact 3% deficit hurdle, not 2012 as had been anticipated by many.”
- 6 May 2010: Hugh Hendry talking Greek and euro banker bailout on CrossTalk – “The inimitable Hugh Hendry is the most well-known of the guests and suggests Greece needs to leave the eurozone, default, devalue. The banks would take a massive haircut.”
27 May 2010: Hugh Hendry ‘I would recommend you panic’
- 31 Mar 2011: The Irish stress tests and euro zone options: monetisation, default, or break-up – “Greece has a solvency problem. The Irish banks have a solvency problem that has become the Irish government’s solvency problem. Portugal and Spain have liquidity problems. The austerity and the defaults will be negative for growth in the periphery but will also boomerang to infect the euro zone core. Growth across the euro zone and in the UK will be weak. That’s my take on the situation.”
- 14 April 2011: S&P reckons 50-70% haircut for Greek debt restructuring, weakening euro – “the German finance minister and S&P both suggested that the risk of Greek debt restructuring has risen and may indeed be the most likely outcome. S&P, for example, envisions a 50-70% haircut with a 1-in-3 chance of default”
- 24 May 2011: Greece will eventually restructure – I think this is the first time I can see where I said that Greece specifically would definitely default. “At a minimum, a soft restructuring – that is to say, a voluntary reduction of interest rates and an extension of maturities – will happen sooner than later under the EFSF facility. While this is necessary, it will certainly not be enough. Eventually, principal reduction will occur.”