View Full Version : Why Greece Will Default For Sure

5th April 2010, 08:03 AM
This is not going to end well for the Euro.

Why Greece Will Default For Sure

Wolfgang Münchau, of Eurointelligence, shows how it's obvious Greece will default, based its current course.

It doesn't take rocket science to do the math.

Basically, Greece has a budget deficit before interest payments of 7.9% right now. At the same time it is paying about 6% on its marginal debt (any debt it issues today, and actually the value is a bit higher right now for ten-year bonds).

In order for Greece to simply stop increasing its total outstanding debt, it thus has to achieve a primary budget surplus of about 7.44% if interest payments are not to push the budget into deficit, according to Mr. Münchau. This is assuming the economy doesn't grow. If the economy can manage 2% growth, then Greece needs a 4.96% budget surplus just to tread water. Note that Greece's economy is actually contracting right now. If it continues to contract, then a budget surplus well above 7.44% will be required just to keep total debt from increasing. (not even bringing debt down)

Now given that Greece currently runs a huge budget deficit, of 7.9% as mentioned above, the adjustment required to curb total debt growth is equal to the deficit plus the required surplus.

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5th April 2010, 04:20 PM
Yep, the ole 'outgo exceeds income' delimma. The real question is when.