Slipping on Greece

It’s not causing a panic this time, but Greece is nearing default.

The weakest member of the Euro just had its debt downgraded again. S&P lowered the rating on Greek bonds to B from BB-. Moody’s also has them listed for a downgrade. A year ago in March the IMF announced an aid package for Greece totaling $160 billion dollars, and the European authorities outlined a rescue fund worth over $1 trillion. This calmed market fears at the time.

Well, they’ve come back now, and Greece on the verge of a rescheduling, restructuring, or default. The economy remains in recession and private parties are unwilling to fund it, even short-term. Greek 2-year bonds now yield about 25%. But don’t expect to earn that if you buy them. The country is reportedly mulling ways to restructure their debt without triggering the payment provisions on the Credit Default Swaps outstanding.

In the meantime, they’ve put various items up for sale: the Athens Airport, the Public Power Corporation, and other economic entities. No islands are listed. Predictably, labor unions oppose privatization, fearing job cuts. The union at the power company is threatening to cut of electric supply during the summer tourist season.

Privatization is a great way to improve economic efficiency and productivity growth. Private investors have an economic reason to invest in the right amount and type of technological innovation; they’re less likely to hire cronies for make-work spots; they’re more likely to explore ways to expand into new markets. But they’re a lousy way to plug a deficit. Imagine plugging a shortfall in your family budget by selling one of the family cars. The real problem is their structural deficit.

It’s unclear how this will play out. Greece might leave the Euro. Whatever happens, the Greek author Heraclitus had it right: character is destiny.

Douglas R. Tengdin, CFA
Chief Investment Officer
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