Sunday, April 01, 2012

Yes, the EU crisis continues

Mohamed El-Erian, CEO of the investment firm Pimco, warns in The Greek debt drama has merely paused for an interval Financial Times 03/13/2012 that despite the recent additional bailout funds, Greece is still in serious shape with unsustainable debt loads even under optimistic assumptions:

This difference relates to Greece’s ability to deliver on its part of the bargain – particularly an additional dose of heavy austerity at a time when youth unemployment is already 51 per cent and the economy is contracting at a rate of seven per cent a year. Even if socially and technically feasible, the upcoming elections in Greece will introduce yet another element of complexity.

Going beyond the next few weeks, it is highly likely that the Greek bailout will again be found wanting. Were it to be fully implemented – highly unlikely – the result would still be an unsustainable debt stock of 120 per cent of gross domestic product in 2020. With such a prospect, new private capital will not engage in Greece, robbing the country of the oxygen needed for investment, growth, competitiveness and jobs.

No wonder markets are already pricing in a significant probability that Greece will have to again restructure its debt. And the next round is likely to be a lot messier. Talk about "PSI 2" is already accompanied by growing awareness of "exit risk" (the possibility that Greece will have no choice but to exit the eurozone to restore competitiveness and growth). [my emphasis]
Spain and Italy are much bigger risks at the moment than Greece to the eurozone. But no one can really say what event may finally trigger the first exit(s) from the euro.

What last week’s debt reduction deal really delivers is a bit more time for others to reposition for the next, more disruptive, act in this unfolding Greek drama. For European policymakers, this means even more urgent building of firewalls to protect countries such as Italy and Spain, continuing to strengthen the core through better fiscal and political integration and forcing banks to raise capital. For investors, it is about reducing their exposure not only to another default by Greece, but also the risk of the country’s exit from the euro.

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