The losses on the CDS contracts pale in comparison to the 100 million euro haircut that Greek bondholders will suffer. Most of the losses will impact the large Greek banks as they hold around half of Greece's sovereign debt. Luckily, the European Central Bank has opened the spigot and is lending money at near zero percent to member banks to keep them well capitalized. Other European banks should be able to absorb Greek losses as they have had years to build up their loan loss reserves in anticipation of such a credit event. Many have already written down the value of their Greek debt by as much as 75%, so they should be able to make it through the next few weeks without needing to raise additional capital.
Greece's future
So now what of Greece? The country was forced to make draconian cuts in government spending to secure the 130 billion euros, which should plunge the country further into an economic depression. Greek GDP fell 7% in 2011 and is in total free fall. General unemployment just hit 21% and youth unemployment just hit 51%. Both are expected to rise as the nation is forced to fire thousands of government workers to pay off its debts. Greece is now using nearly all of the cash it takes in from taxes to service its debt. If the country continues in this current state with no outside economic stimulus, it should burn through that 130 billion euros in no time. A third bailout seems inevitable.
But there are some things Greece can do to raise some more revenue. For starters, it can finally get serious about selling off state assets. From excess land to utilities, the Greek government has a large portfolio of assets that can be liquidated. That money can be used to create job training programs or could be used as grants for small businesses. This will help grow the economy, which should bring in more revenue to help the country service its debts.
In addition to selling assets, the Greeks should be seeking more grants from the EU and its neighbors and forgoing any new debt. This past weekend, Greek officials said that they would be seeking 1 billion euros in financing from the European Investment Bank. But more debt seems like a mistake. After all, while the restructuring did chop 100 billion euros off the nation's debt load, it also added 130 billion euros of fresh debt. In effect, the debt swap simply shifted Greek debt out of private hands and into public hands. The net effect on the Greek economy is basically the same, in fact, it's worse, as it adds another 30 billion euros to the pile. Greece needs growth, not more debt.
The eurozone members can either watch Greece limp along and come begging for another bailout in a year or so, or they can do something to stabilize the situation. For example, Greece is entitled to 20 billion euros in EU structural fund grants from 2007 to 2013, of which they have used just 8 billion euros. The EU should release the remaining 12 billion euros to Greece immediately to help the country invest in some job-stimulating ventures. While 12 billion euros will barely move the needle in some economies, it could make a mark in Greece.
But eventually Greece will need more grants to help stimulate its economy. That means that its northern eurozone neighbors will need to open their wallets and actually give instead of lend money to Greece. While that may be politically unpopular, especially in the Netherlands where talk of leaving the euro has been growing, it may be the best hope to keep the eurozone together and finally put an end to this seemingly never-ending crisis.
