Monday 13 July 2015

Bailout for Greece or Europe?

Bloomberg reports today that European leaders have given Greek Prime Minister Alexis Tsipras three days to enact their main demands to keep alive chances of getting another bailout, failing which Greece's continued membership in the currency union would be in jeopardy.

Leonid Bershidsky thinks that financially, a bailout still makes sense for Europe. "In total, the potential losses from a massive Greek default appear to outweigh the pain of investing another 53.5 billion euros over the next three years," he wrote in his Bloomberg column last week.

John Hussman appears less sure.

In his latest commentary today, he wrote that the jump in the prices of Greek government debt last week on hopes of an 11th hour agreement for a bailout by the European Union still left Greek bonds priced to reflect a default probability of 100 prcent at every maturity. "The jump only reflected an increase in the amount that bondholders evidently expect to recover in default," he wrote.

"While a can-kicking bailout is still possible, it’s not at all clear that it would be desirable for anyone in the longer-run," he added.

Hussman warned: "Beyond Greece, the greatest concern is the fact that much of the Greek debt burden is held by financial institutions that have inadequate capital buffers. The largest European banks today have higher gross leverage ratios than similar U.S. financial institutions did at the peak of the housing bubble."

Which means that even if Europe failed to bail out Greece, it may still have to bail out its financial institutions.

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