Greece and euro still dead

Greece and the issue of sovereign TBTF

There is an an assumption now in financial markets that however country-level short-term politicking pans out in the Eurozone, Greece can count on access to funds that will allow it to avoid default over the next few weeks and months.

But next year and the year after remains another matter. In fact, gross Greek funding requirements through to the end of 2012 run to €110bn – and almost three-quarters of that is to cover redemptions.

Neither the IMF – nor ordinary Germans, French or Italians – are going to want that particular bill. For Greece, longer-term issues of solvency and the threat of a debt restructuring have not gone away.

The bounce today will be temporary. The trend for the euro versus the U.S. dollar and gold is down, government actions are just interruptions of the major trend. Greece's problem is not solved until the country can return to the debt markets, and none of the bailouts solve the problem, they only treat the symptom of high interest rates.

Finally, consider that the Greek banks may be deteriorating as everyone focuses on the government's credit: Eric Sprott: Weakness Begets Weakness: from Banks to Sovereigns to Banks

One aspect of the Greek situation that has been obscured by all the recent political wrangling is the crisis’ impact on the Greek banks. Although the banks were supposed to be rock solid after all the government-injected capital they received (not to mention zero-percent interest rates and generous lending terms from the European Central Bank), data shows that Greek bank deposits have fallen 8.4 billion euros, or 3.6 percent, in two months since December 2009.2 With no restraints on capital flows within the European Union, Greek savers are free to transfer their assets elsewhere.

Given that bank deposit guarantees in Greece are the responsibility of the national government rather than the European Central Bank, we suspect Greek citizens are pulling money out of their banks because they question their government’s ability to honour its domestic deposit guarantees. We envision Greek depositors asking themselves how a government that can’t raise enough money to stay solvent can then turn around and guarantee their bank deposits? It’s a fair question to ask.