Sunday, February 21, 2010

Greece Not Out of the Woods Yet

Recently Greece’s monetary woes have caused havoc with the Euro and financial markets around the world. What happened? Due to years of unrestrained spending, falsely reported economic statistics, cheap lending and a failure to implement financial reforms, Greece was badly exposed when the international recession hit.

Greece’s national debt of $413.6 Billion is larger than the country’s economy, with some predicting that it will reach 120 percent of 2010 gross domestic product (the market value of all final goods and services made within the borders of the country in the year). Greece's credit rating, the assessment of its ability to repay its debts, has been downgraded to the lowest in the eurozone, meaning it will likely be viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise. The Greek government of Prime Minister George Papandreou, which inherited much of the financial burden when it took office late last year, has already scrapped most of its pre-election promises and must implement harsh and unpopular spending cuts. The government has implemented austerity measures aimed at reducing the deficit by more than $13.7 billion. It has hiked taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector pay cuts and applied tough new tax evasion regulations. Predictably, there have been warnings of resistance from various sectors of society. Farmers have begun blockading roads to demand greater government subsidies, while on February 10; workers nationwide staged a one-day strike closing airports, government offices, courts and schools. More strikes are expected to follow.

The Prime Minister said in an interview with BBC television broadcast today that "at this point we don't have a need for borrowing, our borrowing needs are covered until mid-March," in response to a question on whether there would be any new Greek bond issuance next week."Even though there are austerity measures and they do hurt, we have the support right now for the austerity measures which is around 50 to 60 percent of the population, and the government also has that support," Papandreou said.

Papandreou said European Union partners should continue to offer political support to Athens as it battles to get its public finances back onto a sustainable path." Let us together with the EU authorities, the Commission and the European Central Bank, let's sit down, let's look at how our progress is doing, how we're doing in the stability and growth plan that we have tabled," he said. "We're on target, beyond target on January statistics so we're doing well. If we do need extra measures, we will take extra measures in order to reduce our deficit this year by 4 percent. We're ready to do so if necessary." Papandreou said that while Greece was not asking for financial support from EU partners, it did need strong political backing as it battled to restore its credibility with financial markets. This was particularly important for Greece to be able to borrow at lower interest rates than it was currently facing, he said. "We need the help so that we can borrow at the same rate as other countries, not at high rates which undermine our ability to make the changes we need to make," he said.

Greece faces many challenges: the domestic debt crisis, loss of confidence in its ability to manage fiscal affairs, and the loss of competitiveness with its northern neighbors – especially with Germany. Despite these obstacles, EU partners have made a solemn pledge to support the country, and in the end Greece will be rescued, if it needs to be, due to substantial business, political and banking interests.

C. Cohn

Sources: Associated Press, Reuters

Monday, February 8, 2010

Bankruptcies Spike in '09: Wall St., Main St.

In an effort to deter consumers who abuse the system and recklessly run up debt and walk away without a scratch, the Prevention and Consumer Protection Act of 2005 was signed into law. Capital Hill's new bankruptcy act was comprised of a much higher bar for determining eligibility to file, higher fees and the inability to walk away from credit card debt. The act also extended the "7-year" abatement period before filing a second time to "8 years", as well as mandatory credit counseling and debt management workshops. On average, bankruptcy filing in the United Stated was as much as 1.1 million annually, but it was widely believed on Capital Hill that tougher bankruptcy laws would bring that number down significantly. No surprise that there was a spike in consumer filings prior to the passing of the law in October of 2005 , which clearly indicated consumers were rushing to file to avoid having to deal with the tougher laws. Although stats showed a slight dip in filings, it was short lived. The recession, which we now know really started as far back as 2007, fueled a steady increase in bankruptcy filings. By the first quarter of 2009, consumer bankruptcies were up as much as 32 percent.

Sadly for corporations, the story is even worse. In 2008 corporations filing for bankruptcy increased 74% over the previous year. To make matters worse, 2009 was also a horrific display of corporate carnage with 249 (publicly traded) corporations filing for some form of bankrupcompanies who filed, did so under a pre-structured package. It’s rightfully assumed that pre-structured bankruptcies are viewed less pessimistically by shareholders and creditors. So it should be no surprise that industry analysts and rating firms, such as Moody’s and Standard and Poors, view structured bankruptcies more positively as well. Accordingly, public corporations see this as a proactive step toward damage control. This also explains why pre-structured bankruptcy filing jumped 300% in the past 24 months. It’s the corporate strategy that neutralizes negative perceptions, while buying time to dig out of the financial ditch. If this recession has taught us anything, it has taught us that "time" is a corporation's biggest ally. Perhaps if Lehman Bros. had been able to hang on another 4 months, it might have been able to sneak onto the bailout line for a little life support. Click for Part 2

K. Reilly