By Robert Elman on March 25, 2010

The  “Canary in the coal mine,” is Greece, but is there an “ Elephant in the room?” Greece, like most of the PIIGS (Portugal, Italy, Ireland, Greece and Spain) has spent in a profligate manner, and has been less than humble in its demeanour. As you will later read , Greece’s dealing with her partners have been brought into serious question.

Greece became a member of the EU in 1993 with the signing of the Maastricht Treaty. There were very clear stipulations regarding Debt to GDP, Capital accounts, deficit to GDP and so on.

It appears as though Greece engaged the services of Goldman Sachs (then under the tutelage of Henry Paulson) to create a currency swap, where Goldman would ostensibly swap  $10 billion in debt for a $1 billion credit.

This event, long thought to have occurred, has been confirmed, only recently, by Ben Bernanke, Chairman of the U.S Federal Reserve.

In Greece we have a country that has reputedly been in debt for 105 of the past 200 years, views the payment of taxes, not as an evil, but as some event meant for others. In the most recent filing, which has been made public, only six taxpayers, out of some 10 million people, declared income greater than $1 million. Need we say more? Presently engulfed in a most serious economic crisis, where they have violated most of the economic tenets set by Maastricht, and seeking aid from  Germany, Greek opposition members had the temerity to state that the Germans should pay WW11 reparations before criticizing their country over its gaping fiscal deficits.

Well hello! Have they forgotten the $115 million Deutschmarks paid to Greece in 1960?  When a deutschmark, was a deutschmark. Fortunately, the Greek economy is bit of a pimple on an elephants’ backside. However, if there was a conspiracy of deception, (a la AIG, Lehman, Merrill etc) where else has it  taken place? We can all remember, not that long ago, when “the subprime problem, was  not a problem, “ that is was completely manageable, and would be contained. We are still witnessing the deleveraging in the global economic scene, where lending has been constrained, savings increased, and debt slowly being repaid. We are now speaking of Sovereign wealth. That could pale some of the corporate bailouts.

In my opinion, Greece will not fold, Germany will come to her rescue. There will be demands made within the next two weeks, which will set the course for Greece to follow, or perhaps face stewardship. In any event, the bailout funds will go to the Greek Banks and not the Government Now for the Elephant in the Room. Can you hear my castanets or the flamenco taps? Yes, I am speaking of Spain. Spain, where the sunsets are magical, the food abundant and  full bodied, like it’s beautiful senoritas, but I digress. Spain’s current fiscal deficit is in the same range as other members in the “Club Med,” but Spain’s GDP is in a stratospheric level when compared to Greece. Greece’s GDP is about 239 billion euros while Spain’s while Spain’s is about  the same size as Canada’s, at about 1.2 trillion euros. Currently, the unemployment rate has surpassed that psychological barrier of 4 million. The EU doe not enjoy the privilege of  (or curse) of being bale to print money. To counteract the effects of the global recession, Spain went on a spending binge, ran up huge deficits, and, yes, had to borrow a great deal of money.

However, because Spain has always been seen, as a stable, productive, and diversified economy, their credit spreads have always been quite narrow (That means lower interest rates than economies with wide credit spreads).

 But according to a large American financial money manager, Bridgewater, that situation  may be history. “ We do a lot of work estimating what a country’s spreads should be, in light of its cash flows, asset values, debt etc. Based on these criteria, we judge Spain’s actual credit spread to be just about the narrowest to what it should be, on the basis of its  fundamentals.i.e the spread is 1.4% and we would assess the fundamentals warrant it  to be 6.5% on the basis of the fundamentals alone.” In other words, if Bridgewater is correct, and they have a stellar reputation, it would be most difficult for Spain to be able to pay the interest on money borrowed, if the spreads did widen to the levels that Bridgewater portends.

The Elephant is looming quite large. Stay tuned.


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