Archive for May, 2012

Grexit – a few figures

I am betting that Greece will not exit Euro soon. Despite tons of news everyday, I selected only a key figures to form my ongoing assumptions and would monitor a few data to see if situation is getting worse.

Over the past two weeks, there are a lot of people estimating the odds of Greece exiting the Euro in the next few months, some puts the probability from 50-80%. Stock market crashed as a result. This kind of stuff is scary, and when scary stuff comes with hard-to-estimate probability, people tend to over-estimate the probability. (It’s proven by a lot of studies).

The latest 4 polls in Greece are showing that the popularity of the pro- and anti-austerity parties are neck-to-neck. So there is 50% (if pro-austerity parties win) chance that everything will go back to normal quickly and another 50% that the situation is more complicated. There would be a lot of negotiations in that case about how to carry out the austerity and bailout. (so the chance of exit is 20-30%? max 50%)

Some economists estimate that the cost of Grexit to Eurozone is EUR 400-1,000 billion, that is more than the ~300 billion debt of Greece due to contagion (to Italy, Spain and others). The good news is that there is solution space. It takes less money to save Greece than to let it falls and suffer from the costs afterwards. I hope those figures are correct. So, if Greece is going to bankrupt and exit Euro, it won’t pay the debt, and those debt is held by central bank(s) of Eurozone, why kill the debtor?

Most importantly, some forecasts put the primary deficit (excluding interest payment) of Greece at 1-2% of GDP (not sure how correct it is). The key for a company to survive is that it could generate cash in the future, otherwise, it’s worth more dead than alive. While the 150% GDP debt figure is tough to solve as well as the 5-6% interest to GDP figures every year, some creditors may need to take a hit, but this is far better than letting Greece default and exit. Any plan of debt reduction, interest deferral, Marshall plan could help.

This is a very long term problem and I bet that now is not the time to end it yet.

However, any analysis that involvement the participation of human are difficult as people are not acting as rational as economist have expected. Long story short, I think the key items to monitor are the ongoing survey of Greece election, bond yields of Spain and Italy as well as news of bank run, which could create a lot of uncertainty and could be self-fulfilling.

On the other hand, Greece not exiting is also not the end of story, market looks like will continue to be volatile for a long time.

PS: since I am fully invested, so I may be biased…it looks tough to have a clear mind as long we have positions in the market…


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May 2012