Professor’s Comments Greece 2/20/17

Posted by OMS  at February 20th, 2017

Students should watch what happens in Greece this week.  Representatives of the country are scheduled to meet with creditors from the Eurozone and the IMF to negotiate the release of another tranche of the $91 Billion bailout loan agreed in 2015.  If the tranche is not forthcoming, Greece could default on its debt by July.

The European creditors, led by Germany’s Angela Merkel, are at loggerheads with Christine Lagarde and the IMF, mostly over the payback terms.  The Europeans are demanding more tax hikes and pension cuts as a condition to release of the funds.

So far, the budget-slashing policies and reforms required by European creditors have done little to revive growth in Greece, leaving the country even more dependent on the three international bailouts the country has received since 2010.  But now that the Europe is dealing with a post Brexit environment, and the possibility of even more members leaving the EU, the question of releasing the money to Greece is back on the table.

Part of the problem in Greece is the black market.  The austerity measures imposed by the creditors are compelling once law-abiding Greeks to go off the books. Greece’s black market is estimated at 20 to 25 percent of the gross domestic product, as more people have stopped reporting their income to avoid paying taxes that, by some estimates, have risen to 70 percent of an individual’s gross income. Yikes!

As of last month, unpaid taxes in Greece have soared to 95 billion euros, up from 76 billion euros two years ago.  Most of that is considered uncollectable. 

The last time Greece went to the loan window (July 2015), it rattled world markets.  Now matters are considerably worse.  Unemployment is still at 23 percent, but the Greek people are already taxed to the limit, and don’t have much more to give.  Just within the last two months, more than 21,000 self-employed workers and small firms have shut down.

The debt to GDP ratio in Greece is now over 1.8.  With a ratio that high, the loans will likely never be paid back.  When a country can’t print money, owes 1.8 times what it produces, and its citizens are being taxed at 70 percent, it’s no wonder why the EU is concerned about giving the Greeks more money.  The country is bankrupt!

All this almost guarantees yet another Greek monetary crisis.  In the months that led up to the previous crisis, the Euro fell hard.  EUO, the inverse Euro ETF rose from 18 to 28.  With EUO is back on the Dean’s List, it will be interesting to see if something similar happens again.

Also, on Friday, TLT replaced TBT on the Dean’s List.  This is something that tends to happen when a monetary crisis develops in Europe.  Scared European money starts to leave Euro bonds and move into U.S. Treasuries.  The indicators on TLT are not on a Buy Signal yet, but they’re getting close.  The VTI is now at 46.5 and heading up.  IF the indicators start to turn up, the current Hockey Stick pattern suggests the 200-day moving average at 126. 5 will be tested.  The chart suggests even higher prices beyond that, but IF the Fed starts to unwind its bond portfolio, it could put a lid on additional gains. 

It’s something to think about with the markets closed today.

Enjoy the President’s Day Holiday.

That’s what I’m doing,

h

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