Edward Harrison is the founder of the finance site Credit Writedowns and a former career diplomat, credit guy and technology executive. Ed just started the subscription newsletter Credit Writedowns Pro this year focusing on global macro investing ideas as well as outcomes from the global financial crisis and the European sovereign debt crisis.
Pre-sovereign debt crisis phase
- 19 January 2009: The Eurozone and the spectre of banking collapse – “I am skeptical as to the economic benefits of the Eurozone. In my view, the Euro has always been more of a political construct than an economic one… My take on events is that a number of countries within the Eurozone will face banking crises, starting with Ireland. At that point, leaving the Eurozone will make no sense because the damage has already been done… Ireland must threaten to leave now if it wants to maximize any EU help it expects to receive, before the scope of other EU banking crises become apparent. Weakness in the financial sector has infected all of the Eurozone members. I have mentioned that Austria has a weak banking system… But, there is even growing evidence that Germany too has a fragile banking system. To be clear: this is an ‘every nation for itself’ strategy pitting Eurozone members against each other, where those nations savvy enough to request help sooner are likely to benefit at the expense of others. The question is whether the Germans would go along with this. If they do not, tensions will rise and that will change the calculus for Portugal, Italy, Ireland, Greece, and Spain. I don’t have a view on this as yet because the situation is still evolving. However, I lean toward believing the Eurozone will remain intact even while individual nations or banking systems collapse.”
- 30 October 2009: Portugal and Greece downgrades have silver lining in the reach for yield – This was pre-Dubai World, the event that ushered in the sovereign debt crisis. It was a warning to investors that some euro zone sovereigns were getting weaker. The risk seeking return crowd saw a silver lining somehow and decided to pile in while more prudent investors went ‘zero weight’ these bonds.
Sovereign debt crisis begins with Dubai World
- 27 November 2009: The bust in Dubai and exogenous shocks – I wrote “By now you have heard that Dubai World, the investment company, has asked its creditors for a six-month delay in repaying its debt… This is what is commonly referred to as default.” I remember specifically being concerned about the Baltics and Nordic bank exposure to them. I mention the Baltics as a contagion worry in the article. Nothing about Greece though.
- 30 November 2009: New Citigroup maven Buiter warns of sovereign debt delusion – You can always count on Willem Buiter to put things in the right perspective! He warned: “It is clear that nations whose public debt is mainly denominated in domestic currency and whose central bank is either not very independent or can be make dependent by the government of the day are likely to choose inflation and exchange rate depreciation over default as a way out of fiscal-financial unsustainability…the ECB will not monetise the government debt and deficits of small European Area member states.” There it is: the first indication that Portugal, Ireland, and Greece had to cut like mad or face default.
- 8 December 2009: Video: Fitch downgrades Greece to BBB+ as violence erupts. The ratings agencies pile on as indications begin that Greece will not be able to cut. And we already know they will not receive a backstop for full monetisation. Default starts to become a legitimate concern.
- 9 December 2009: Buiter: “It’s Five Minutes to Midnight for Greece” – Willem Buiter again. Notice my first line in this post: “Incoming Citigroup Chief Economist Willem Buiter believes Greece still has it within their means to prevent a national default.” That tells you the prevailing view was that Greece had enough opportunity to get its fiscal house in order.
- 11 December 2009: Standard Bank says Greece and Ireland may leave Eurozone – Even so, some already felt Greece was insolvent and had to leave the euro zone. My view at the time was: “There are a lot of policy remedies that can take place before it reaches this point.” I think this was the right view. Here we are 22 months later and Greece still hasn’t had a technical default.
- 13 December 2009: Greece risks financial Armageddon while Ireland makes cuts – this marks the beginning of the Greek debt crisis. Before, Greece was the worst of many debtors but roughly equivalent to Ireland, for example. After this point, Greece became the singular focal point of all euro zone debtors. “Over the past five years [in Ireland] the spread had averaged about 40bps. Now it is 170bps… the situation in Greece is worse than it is in Ireland. The debt levels are higher. The spread to German bunds (214bps) is higher, and the budget cuts are not yet forthcoming. For signs of stress, I look to Greece before I look to Ireland.”
- 1 February 2010: If PIIGS Could Fly – Niels Jensen acts here as if Greece can make the grade when he writes “When I was in Zurich with John [Mauldin] last week, I bumped into the famous Swiss investor, Felix Zulauf, who pointed out to me that Greece has in fact been in default in 105 of the last 200 years, so never say never. Having said that, Greece cannot be allowed to default, as the implications would be catastrophic. Bond investors would immediately pick apart the next country in line, and it is almost certainly going to be one of the other PIIGS – Portugal, Italy, Ireland or Spain. Bailing out Greece is just about manageable, but having to save all of them would overwhelm the EU. Swift action must therefore be taken, moral hazard or not.”
Post-Greek debt concealment discovery
- 9 February 2010: Debt concealment in Greece – In retrospect, this marks the date when in retrospect Greece had reached a point of no return. Yes, there were always more remedies. But the debt concealment issue meant the only remedy possible was austerity and liquidity. There would be no fiscal transfers for this ‘cheating’ debtor.
- 9 February 2010: The Germans will not bail out Greece – I see this post as a bad call. The Germans have bailed out the Greeks time and again. My thinking was that the debt concealment issue marked a point of no return for bailouts. If Greece wanted to save itself, it would need to make cuts without a bailout. Instead, this day marked a point of no return for Greek solvency. Notice the weasel clause at the end: “I see it as unlikely that any deal – bailout via the EU, IMF bailout or backdoor help via quasi-fiscal measures from the ECB – can be reached unless Greece agrees to austerity measures.” The title tells you my thinking. The weasel clause, as I am now calling it, was just CYA nonsense I wrote when I realised I had been too categorical. Bottom line: I was wrong and I will write no more weasel clauses.
- 10 February 2010: Video: Stiglitz and Hendry debate the Greek bailout – Hugh Hendry verbalises what we know know to be true on the night that the debt concealment has been uncovered.
- 21 February 2010: Is AIG the main CDS insurer for Greek government debt? – This is the first time I got an inkling that credit default swaps would be a key issue in Greece.
- 23 February 2010: Greek death spiral hits bank credit ratings. What should the EU do? This post is noteworthy because it is the first time I mention a policy path which was eventually used. We can debate whether using it this early instead of waiting would have worked. But I now think 9 Feb 2010 was the date when that went out the window. “I say the EU should enforce an austerity plan (moral hazard prevention) via the IMF (credibility) in exchange for both a one-time fiscal transfer (economic destruction safeguard) and access to an IMF emergency aid fund (contagion safeguard).”
- 23 March 2010: Anticipating Eurozone collapse – I think this is the first time where I said that some euro zone country would eventually default, most likely Greece. “still bet on a sovereign default within the Eurozone as the most likely outcome; that’s the writing on the wall, Eurozone economic collapse – particularly in Greece, Spain and Ireland. But a double dip of some sort would hit Germany as well”
First Greek crisis package
- 25 March 2010: Europe puts the loaded gun on the table but no bailout – The first EU Greece deal “The deal which European leaders have now struck is the best we could have hoped for given the political constraints for everyone involved. The 16 countries in the eurozone have agreed to a contingent aid package of loans and IMF assistance and supervision. The Greek Prime Minister expressed satisfaction with the result, largely hammered out by the French and the Germans before the EU summit.”
- 9 April 2010: Fitch downgrades Greece to BBB- with a negative outlook
- 27 April 2010: Merkel may force banks to take haircut on Greek debt – This marks the first time I saw a mention of the German government thinking about a Greek default. “Two weeks ago, we were considering the options including True Fiscal Austerity… few are talking about True Fiscal Austerity as a solution anymore. It’s now either a default or restructuring within the euro-zone or a break-up of the euro-zone (and default or currency devaluation). This is a signal that things have deteriorated significantly.”
- 27 April 2010: Poll: Will Greece default? – Credit Writedowns readers say yes, Greece will default – overwhelmingly.
First Greek bailout package: Austerity
- 2 May 2010: The bailout for Greece is in – The first bailout package for Greece: ‘The EU-IMF package came in at 110 billion euros (80 from the EU and 30 from the IMF). It is designed to seeGreece through to 2014 for the stability and growth pact 3% deficit hurdle, not 2012 as had been anticipated by many.”
- 6 May 2010: Hugh Hendry talking Greek and euro banker bailout on CrossTalk – “The inimitable Hugh Hendry is the most well-known of the guests and suggests Greece needs to leave the eurozone, default, devalue. The banks would take a massive haircut.”
- 27 May 2010: Hugh Hendry ‘I would recommend you panic’
- 31 Mar 2011: The Irish stress tests and euro zone options: monetisation, default, or break-up – “Greece has a solvency problem. The Irish banks have a solvency problem that has become the Irish government’s solvency problem. Portugal and Spain have liquidity problems. The austerity and the defaults will be negative for growth in the periphery but will also boomerang to infect the euro zone core. Growth across the euro zone and in the UK will be weak. That’s my take on the situation.”
- 14 April 2011: S&P reckons 50-70% haircut for Greek debt restructuring, weakening euro – “the German finance minister and S&P both suggested that the risk of Greek debt restructuring has risen and may indeed be the most likely outcome. S&P, for example, envisions a 50-70% haircut with a 1-in-3 chance of default”
- 24 May 2011: Greece will eventually restructure – I think this is the first time I can see where I said that Greece specifically would definitely default. “At a minimum, a soft restructuring – that is to say, a voluntary reduction of interest rates and an extension of maturities – will happen sooner than later under the EFSF facility. While this is necessary, it will certainly not be enough. Eventually, principal reduction will occur.”
- 10 June 2011: Can Greece CDS Trigger A European Lehman? – It took a while but Greek CDS made a return as a real issue. “In my view, a CDS trigger could produce a Lehman-style event, yes. Moreover, only a hard restructuring – meaning principal reduction would actually have any meaningful impact on peripheral CDS or interest rates. So, I expect the euro zone periphery to continue to remain under stress until we reach that point. The policy response and appreciation of the CDS variable will be crucial in limiting downside risk.”
Second Greek bailout package: Soft restructuring
- 21 June 2011: Stuffing bondholders in Greece and Ireland – “To my mind, this all speaks to the overriding need for policy makers to ascertain who is illiquid and who is insolvent and to as demonstrably as possible subject the insolvent and the solvent to the most differential treatment one can muster. At the end of the day, what people want to know is who is insolvent and who isn’t. Once they know, they can fight over who takes the losses. And those creditors that cannot take the losses will have to be recapitalised or resolved. Everyone else gets to live another day.”
- 10 July 2011: Why Greece will be cut loose – “Now that Italian bonds are getting crushed and contagion is clearly spreading to the core, Greece will have to be cut loose”
- 21 July 2011: The Eurozone debt crisis statement – This is the second bailout and third definitive Greek solution.
- 22 July 2011: What the European Greek debt deal means – “Greece is insolvent and any plan that doesn’t recognize this concretely is just a stop gap on the road to eventual credit writedowns. I suspect this is yet another swag for political reasons. The banks are undercapitalised and the ECB’s Trichet wanted no part of a default. Sarkozy, Merkel and Trichet hammered out a deal that involves this selective default swag that can be positioned however these leaders want to their respective political and market constituencies.”
- 23 July 2011: Willem Buiter: The EU must increase the size of its bailout fund
- 23 July 2011: Felix Zulauf on the inevitability of further crisis in Europe – “My expectation is that Spain and Italy will be perceived as the new Ireland and Portugal, meaning they will now be stressed permanently – the spread to bunds will be permanently elevated at levels that are almost unsustainable for economic growth. The right way to deal with this is for the ECB (not the under-powered EFSF) to provide liquidity. Earlier, I suggested the ECB targeting the Italian-Bund spread at 200bps would be an effective way to go about this. But given the politics of the matter, that will never happen.”
- 11 September 2011: Germany is preparing for Greek bankruptcy – “German Finance Minister Wolfgang Schäuble (CDU) is preparing for a bankruptcy in Greece, according to to SPIEGEL sources. Finance ministry officials are playing through all the scenarios which could arise in the event of a default in the country. There are basically two variations of a Greek bust. In the first, the country remains inside the monetary union. In the other, it leaves the Euro currency, and reinstitutes the drachma again.”
- 12 September 2011: Greece default risk now 98%
- 19 September 2011: German banks need recapitalisation of 127 billion: report
- 28 September 2011: Issing: Greek 50% haircut, euro zone exit; euro bond fans ‘gravediggers of stable euro’
- 11 October 2011: Juncker: It may not be enough even if Greece defaults with 60 percent haircut – “When asked whether they were discussing a debt reduction of 50 to 60 percent in the case of Greece, Juncker said , “we’re talking about more.” He does not rule out a debt haircut, but one should not think that will be enough.”
- 22 October 2011: Leaked Greek bailout document: Expansionary fiscal consolidation has failed – “Point 1. A. on the first page is a pretty open and blatant admission that expansionary fiscal consolidation (EFC) has proven to be a contradiction in terms, at least in Greece. Moreover, there is a serious policy incompatibility problem, at least over the intermediate term horizon, with efforts at internal devaluation (ID) – that is, attempting nominal domestic private income deflation in order to improve trade prospects when one has a fixed exchange rate constraint.”
- 23 October 2011: Greece in debtor’s prison – “The goal is for creditors to Greece to get as much out of the Greek government as possible before they default. These brazen attempts to heap the lion’s share of the losses onto Greek taxpayers and citizens will eventually backfire and lead to a disorderly outcome… Note, one new proposal developed by the German consulting company Roland Berger and dubbed the Eureka proposal, is really an asset strip; it is based on having the ECB seize Greek assets for sale to pay off creditors. I find these kinds of policy proposals completely counter productive because they will only awaken a justified sense of economic nationalism in Greece, making the likelihood of a nasty and disorderly default greater.”
Third Greek bailout package: Hard restructuring
- 27 October 2011: How the latest emergency euro summit addresses the sovereign debt crisis – “I could be wrong but I see this as the last major bailout package Europe will be able to get through. When the fiscal trajectories in the periphery deteriorate, bond markets will react negatively. If Italy and Spain are involved in the contagion, the EFSF may not be large enough to meet these requirements and this will trigger another crisis, the outcome of which is unknown. Will the ECB step in. I think they will have to or we will see a deep Depression.”
- 27 October 2011: Europe has just eviscerated the sovereign CDS market
- 28 October 2011: Video: The Euro Bailout Explained – For those of you wondering what’s just happened in Europe, here is an animated explanation.
- 31 October 2011: Greek referendum could mean CDS Greek default trigger
- 17 June 2010: Chart of the day: Exposures to Greece, Ireland, Portugal and Spain
- 26 November 2010: Chart of the Day: Deficits in the European Periphery
- 26 November 2010: More Charts on Debt in Europe, Germany and the Periphery
- 6 May 2011: Here’s How Much German Banks Are on the Hook To The Periphery For
- 23 June 2011: Chart of the Day: European bank exposure to Greece
- 24 June 2011: Fitch: Here’s How Much European Banks Are Exposed to GIPs
- 22 July 2011: Countries most exposed to Greece
- 1 March 2010: The roots of the European sovereign debt crisis go back thirty years – “The story began in March 1979, more than thirty years ago – before Greece was a member of the EU. This was when the ECU (European Currency Unit), the precursor to the Euro, came into being.”
- 29 April 2010: Rosenberg objects to the all bailouts all the time mentality we see with Greece – “The euro-zone shouldn’t really exist. It is poorly designed operationally and its members’ economies are completely unharmonised. The Brits had better thank their lucky stars Gordon Brown kept Tony Blair from railroading them into this thing. The euro-zone is a political construct forced through against the will of the people”
- 5 May 2010: How Belgian debt, Italian anarchy and Greek profligacy lead to economic chaos in Europe “A core of the Benelux states of Belgium, the Netherlands, and Luxembourg along with France and Germany would have suited the Germans just fine. But, the Belgians had a huge amount of debt – over 100% of GDP. That was a problem, particularly because it allowed the unstable Italians an entree into Euroland. The Germans looked at the Italian Lira as a soft currency and wanted no part of a currency union with the Italians. The Italians seemed to have a different governing coalition almost every year. They were completely incapable of reining in spending and had a weak currency as a result. However, Italy was a founding member of the EU. So, once you let the Belgians in, with their huge debt to GDP burdens, you had to let the Italians in too. And, once you let the Italians in, well, you had to let in the Spaniards, Portuguese, Greeks and pretty much everyone else.”
- 29 November 2010: Three options for the euro zone: monetisation, default, or break-up – “We are now seeing euro zone divergence as investors are becoming increasingly aware of the different risk profiles within the euro zone core. But even France and Austria have worsened here. Finland, Austria, France, Germany, and the Netherlands are probably the core of the less indebted nations… Could we see a union of these nations along with Luxembourg, Cyprus, Slovenia and Slovakia (and maybe Estonia) but leaving out two of the founding members of the EU? I doubt it seriously. So, either the euro zone dissolves entirely or it remains intact and creates more mechanisms that bind it together. I still think it will be the latter. My view is that some combination of monetisation and default is the most likely scenario for Europe.”
- 28 September 2011: On Greek Haircuts – “Now, obviously I am a eurosceptic and have been saying here for over three years that not only is the euro zone too big, but that the EU itself is too big as well. Here’s my view. When thinking about economic nationalism, it should be clear that Europe’s enlargement strategy in both the EU and the euro zone has put together countries which have very different economic profiles. Doing so was always going to create tension in a major economic downturn… Breaking up the euro zone at this juncture would have untold negative economic consequences both in the core and in the periphery. So when I discuss the euro zone, I suggest ways the euro zone can best remain intact during this crisis.”