Rudiger Dornbush once said: “The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought, and that’s sort of exactly the Mexican story. It took forever and then it took a night.”*
He was referencing the Mexican Default of thirty-three years ago. That was 8/12/1982. I still recall the helicopters taking off from all the downtown banks at once. At that time, I was in the credit department of a unit of Lloyds Bank. We had just come back from lunch. Man, did we run back to the office. We all knew what it was about. The best parties in town were always held by the guys on the Latin American loan desks. You didn’t have to be smart to know foolish by sight.
Today may be one of those days you tell your kids about.
While the news focus was on the nonfarm payroll jobs report today, something far more interesting was happening.
The brinkmanship between Germany and Greece came to a boil. Germany has made it clear. There won’t be an adjustment to the debt levels of Greece, even if they cannot pay them. “We don’t do bridge loans.” was spoken by Eurogroup president Jeroen Dijsselbloem, as Germany’s Merkel and France’s Hollande were reportedly in Russia trying to defuse Ukraine tensions. (Apparently, they didn’t notice Ukraine floating their currency to float, the hryvnia. Unsurprisingly, based on black market levels, it promptly dropped almost 50%.)
The standard process of a bankruptcy is the coming to an understanding by both parties (borrower and lender) as to what can be paid back. When the original amounts cannot be paid, then the borrower can lose control of the collateral or business.
However, in countries, it is different.
There really isn’t a bankruptcy court for many of the loans (this does not apply to loans from the private sector). Corporate bonds and commercial loans usually proceed into the court that is specified in the loan or bond documents. Governments usually renegotiate, at least they have in the last thirty or so years. They either forgive principal or extend maturities.
Prior to that, countries would occasionally invade to get paid back.
As best as we can tell, Germany wants Greece out of the EU. Greece by itself is economically insignificant. What is significant is – if they do leave – they’ll be the first to leave the modern EU. That makes them a precedent for other countries in similar predicaments.
The newly elected government of Greece has already gone and met with the government of Russia. Greece will need funding if the EU cuts off their access to credit. Russia knows this.
For $500 million to $1 billion, Russia can make the exit of Greece from the EU a success. That is peanuts. Russia spent $51 billion on the Sochi Olympics.
If – and this is a big if – Russia advances Greece enough money that they can successfully exit the EU intact then they will have severely weakened NATO and the EU; the damage may be beyond repair. As each country leaves, the remaining debt burden becomes more troublesome to those remaining. Those earliest to leave, get the best deal.
If Poland, Hungary, Czechoslovakia, Spain and Italy too will exit when (not if) they realize they could be left behind in worse shape. That would place much of the noncollectable debt on the shoulders of France and Germany. Some analysts estimate this is over $300 billion just for Germany.
As we have said in client meetings, Greece is just a small crack in the ice. But if others follow, the EU as an entity is done. Political positions are being fueled by ignorance and excessive egos. This could be recorded as the greatest unforced error in the history of diplomacy.
Fifty years of work, ruined. A new cold war started.
All for the price of peanuts.
* As quoted by Michael Pettis 10/7/2012 via ZH