Bond Ratings Continue to Plummet in Greece

Even with the cooling of the flames in the EU and the agreement to establish austerity in Greece, the bond rating indices don’t seem to fully compromise with the plan.  News last Friday reports the drop in the Moody rating, going from “C” to “Ca”.  This comes only a week after S&P dropped Greece’s rating to what they call “selective default”.  Both of these rating companies agree that they believe there will be further problems to pursue Greece, even with approximately 70% of the bonds due to be forgone.  

Through this whole debacle, the question that everyone seems to want to know is when the EU is willing to let go and let Greece default.  As we have discussed in my economic forecasting course, the avoidance of Greece’s default may just be a way to avoid a total collapse of the European and global economy.  By holding off and making sure investors see what is going to happen, there will be more control in the spending within the individual countries surrounding Greece.  

Another article brought to the attention of BBC News is the thought of leaving the EU and being able to control their currency.  The first point that is made is the devaluation of the currency itself.  The biggest problem with Greece has been its inability to control the value of its currency.  When the currency is pinned to the standard in all of the Eurozone, whenever problems occur in the country, the easiest way besides devaluation would involve cutting wages, part of austerity.  Unfortunately, people aren’t too keen on that idea.  At this point in Greece’s economy, there is truly no other choice but cutting wages and government spending.

The article continues to explain the process of creating a new currency.  When announced, there would be a grace period in which the currency would have to be produced and put into the system in an orderly fashion.  The process may end up catastrophic.  I believe by what we have seen already, with riots over austerity, the citizens of Greece won’t be pleased by having new currency that will likely be worth less and less the minute they get their hands on the currency.   However, what other choice will Greece have?  The enormous amount of pressure that has built up over the past few years could very well be nearing an end, and unfortunately, I can’t imagine the situation ending well.

References:

1. Bowlby, Chris. “What if Greece had to Get a New Currency?”. BBC News. http://www.bbc.co.uk/news/business-16981897 
2. “Credit Ratings: How Fitch, Moody’s and S&P Rate Each Country”. The Guardian. http://www.guardian.co.uk/news/datablog/2010/apr/30/credit-ratings-country-fitch-moodys-standard 
3. “Moody’s Warns of Greece Default Despite Debt Deal”. BBC News. http://www.bbc.co.uk/news/business-17238523

Part 1 of 3: Big Steps to Baby Steps for Greece's Economy

Greece is finally making progress.  After two days of rioters (around 15,000) protesting the current stance in Greece, austerity has been planned in the first of three steps to a second bailout in three years.  CNN has reported that Greece will now move forward to avoid a 14.5B Euro bond default due in March.  As of now, the total amount of debt is 130B Euro.  Prime Minister Lucas Papademos believes the austerity package will push Greece out of its problems.  However, this comes at the cost of potentially 15,000 state worker's jobs, lowered budget, and a 22% reduction in wages.

With the second bailout in the last few years, many question whether Greece should jump ship and leave the Euro.  Chief Global Economist Erik F. Nielsen reports the dangers that would follow Greece if they try to leave the Eurozone.  Nielsen believes that in the short run the EU will be harmed, however, can overcome the loss in the long run.  Greece is a different story.  He believes they will struggle to recover in both scenarios, and the short run will cause a further drop in Greece's economy. 

For the EU, short run struggles would make sense if Greece chose to leave.  With countries (including Germany) putting tons of credit to support Greece bonds and investments, the picture of not getting paid back would create shocks throughout Europe and the global economy.

It should be interesting to follow up on the next two parts of the bailout process. Greece may almost come out of the woods, but with Italy, Portugal, and Spain experiencing economic woes, we likely haven't seen the end of the Eurozone crisis.

References:

1. Stoukas, Tom. “Rioters Burn Buildings as Greek Parliament Votes on Cuts”. Bloomberg. http://www.bloomberg.com/news/2012-02-11/papademos-appeals-to-greeks-on-eve-of-vote-as-party-leaders-back-austerity.html
2. Rooney, Ben. “Greek Parliament Approves Austerity Package”. CNN Money. http://money.cnn.com/2012/02/10/markets/greece_vote/index.htm