War Room 06/23

Eurozone Debt Crisis

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EuroZone Crisis = Confusion

WSJ - Greece in Bailout Talks With 'Troika'

Bloomberg - Geithner Says EU Leaders Failing to Speak With Unity on Greek Crisis

CNBC - Germany Softens on Greece

Washington Post - Europe heaves sigh of relief as Greece survives trust vote

NY Times - Argentina's Default Offers a Cautionary Tale for Greece

The Media has pulled this in all directions.

PIIGS debt (as % of GDP): Worse than Argentina at time of default

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

20

40

60

80

100

120

140

160

Greece

Italy

Ireland

Germany

Source: World Economic Outlook, April 2011, International Monetary Fund

Argentina’s debt at time of default:

65%

Greek Bond Yields compared to PIIGS

Source: Financial Times, June 23 201

Greece

Ireland

Portugal

Spain

Italy

France

Germany

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00%

Bond Yields – Greece 2011 vs. Argentina 2001

Dec-00

Dec-00

Dec-00

Dec-00Jan

-01Jan

-01Jan

-01

Feb-01

Feb-01

Mar-01

Mar-01

Mar-01

Mar-01

Apr-01

Apr-01

Apr-01

May-01

May-01

May-01

Jun-01

Jun-01

Jun-01Jul-0

10%

5%

10%

15%

20%

25%

30%

35%

40%

Jan-10

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10Jul-1

0Jul-1

0

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Dec-10Jan

-11

Feb-11

Mar-11

Apr-11

May-11

Jun-110%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Yields on Argentina’s bonds during the 2001 crisis…

… compared to yields on Greek bonds – creeping up more gradually, but headed toward the same result.

Source: Bloomberg

Why Greece will default

• Greek financial situation is worse than Argentina in 2001 (Argentina defaulted)

• 70% of Greek debt is foreign-owned, making default more palatable domestically

• Greece simply not competitive at current Euro exchange rates – but default would enable devaluation

• Ratings agencies have declared that any major modification to debt terms will meet default criteria (managed default)

Three potential outcomes

• Euro Crisis Averted – Greece has an efficiently managed default, leaders get it on the right track (a la GM), and keep Greece on the Euro, giving an example for the other PIIGS nations

• Greece defaults in Isolation – Greece defaults, falls out of the Eurozone as a martyr, starts printing its own devalued currency, and leaders keep the other troubled PIIGS nations on the Euro and salvage their debt situation

• Eurozone collapse – Greece defaults, leaders fail to contain the situation (a la Lehman), and the PIIGS nations follow Greece’s lead, falling out of the Euro, going back to their own currencies, causing a run on the Euro