As the smoke from the fires of the Greek debt crises rose a few months ago, various authorities (the European Central Bank, the International Monetary Fund (IMF) and assorted "major" (Germany, France, UK) authorities came together to put together a package. Domestically, Germany had to convince its voters that this was "not a bailout" but rather some sort of debt restructuring programme that wouldn't be inimical to the German taxpayer. A curious highwire macroeconomic trapeze act, if there was one.

The bottom line of this package, call it what you may, seems to be, as many seen through the obfuscation and euphemisms that follow, to allow Greece enough time to refinance its debt. Predictably, this hasn't fooled anybody, even if speculators are for the time being held at bay.

Implosion

What is increasingly clear is that substantive budgetary cuts are needed in Greece to bring public expenditure under control, but paradoxically, what this is likely to do is that the budget deficit to GDP ratio most probably will worsen. This is because the tax revenues from various sources will dry out as the aggregate demand collapses due to the reduced level of services. As of now, Greece has a deficit of around 16 per cent of GDP, while the public debt is around 135 per cent of GDP. In essence, had this been a country in Africa or Asia, one ought to not have been surprised if the calls to substantially devalue its currency would have risen.

However, in the case of Greece any devaluation can only come through across the board wage cuts. Some estimates put that expected wage cut at around 25 per cent. Clearly a demand of riotous proportions; in order to remain within the euro zone. As the details of the package emerge forth some of the critical components are likely to come under greater scrutiny and face resistance from Greece's strong left parties. One of the critical provisions is that Greece would be provided with "at market interest rate" loans, instead of at a "below market rate" deal as any meaningful bailout effort ought to do. The result is, as New York University Professor Nouriel Roubini perspicaciously notes, that the fears of another set of self-reinforcing crises are unlikely to be staved off.

All of these point to the possibility that there is likely to be some sort of implosion in the euroland courtesy of Greece. What exactly it would mean is clear. Many European banks will have to adjust earnings in the months, over and above what they have done the past few months. For the conspiratorially minded it shouldn't come as a surprise if one finds that the present bailout package has been orchestrated with the blessings of various banks, who will now have time to readjust their positions, and reduce exposure to Greece.

The purported export path for Greece is that "exports" will lead the way. Yet, as any mediocre observer of European economics will tell you, that is well, a miraculous state of affairs, in this environs. As data reveals, nearly 64 per cent of Greece's export income was derived by the EU's 27 countries. For other equally precariously poised countries such as Spain and Portugal, the numbers vary from 70 to 75 per cent of exports solely to the euro zone.

Full-blown tragedy

All of this leads us to ask, where can one park one's money in the debt markets? And one set of countries is clear. Sovereigns with low deficits and medium levels of growth, on average; and high levels of corporate growth. As manager of the world's biggest bond fund Bill Gross points out countries such as Germany and Canada. Further, for the slightly more adventurous, the possibilities offered by emerging market bonds, who have fairly little debt (compared to their European peers) is one way out. A more pessimistic school, led by historian Niall Ferguson and investor Marc Faber, argues that the greatest of trouble is yet to hit, that is with the US economy to hit the reefs, a global rise in inflation and the declining value of global bonds is writ large by the macroeconomic Gods.

Whatever it may be, the half-written Greek debt-play now resembles a farce. The markets are betting on a full blown tragedy by the time governments are done writing it.

 

(The columnist works for a major European investment bank in New York City. You can follow his tweets at: http://twitter.com/ks1729)