The Economy

Respite from a Greek Tragedy

June 20, 2012

This weekend's vote in Greece ended favorably for people worried about a Greek departure from the EU and the assumed ensuing chaos. The pro-bailout, stay-in-the-EU, conservative New Democracy party came in first. They will need to form a coalition government, but EU leadership and world markets responded favorably to the news. The New Democracy will ask for a new bailout plan as they battle 22% unemployment and threats of civil unrest, but I believe the European Commission, the European Central Bank, and the International Monetary Fund will give them some breathing room. That breathing room is likely to come despite a frowning Germany.

The bond market responded favorably to the news. The yield on 10-yr Greek bonds fell to 24.95% from 31.17% on May 31. The nation cannot afford those borrowing costs for long. Greece has a lot of work to do if a viable economy and therefore, a viable borrowing market, are going to develop. This weekend's vote by the people of Greece is an important step in the right direction.

The good news in the bond market for Greece was not as favorable for Spain. The yield on 10-year treasuries climbed to 7.19%. Anything above the symbolic 7% is considered problematic. The bond market apparently did not take kindly to the fact that Spain's banks have been cooking the books for years through a mechanism called dynamic provisioning. The non-standard accounting trick provides for the understatement of profits in good years. The unreported profits are then shifted into troubled years to counter-balance losses. The obvious problem is that losses are masked, and nobody really knows how bad things are. The business world, which includes investors, hates uncertainty. It is no wonder yields moved above 7%. I do not believe this will last very long. The shock will wear off, the EU Commission will sigh heavily and shake their mighty heads in dismay, and then the needed $125 billion will start coming in.

About the Author

Alan Beaulieu Blog | President

One of the country’s most informed economists, Alan Beaulieu is a principal of the ITR Economics where he serves as President. ITR predicts future economic trends with 94.7% accuracy rate and 60 years of correct calls. In his keynotes, Alan delivers clear, comprehensive action plans and tools for capitalizing on business cycle fluctuations and outperforming your competition--whether the economy is moving up, down, or in a recession.

Since 1990, he has been consulting with companies throughout the US, Europe, and Asia on how to forecast, plan, and increase their profits based on business cycle trend analysis. Alan is also the Senior Economic Advisor to NAW, Contributing Editor for INDUSTRYWEEK, and the Chief Economist for HARDI.

Alan is co-author, along with his brother Brian, of the book MAKE YOUR MOVE, and has written numerous articles on economic analysis. He makes up to 150 appearances each year, and his keynotes and seminars have helped thousands of business owners and executives capitalize on emerging trends.

Prior to joining ITR Economics, Alan was a principal in a steel fabrication company and also in a software development company.