Greece's hidden debt soaring

[Ognir]

The Greek debt tragedy currently unfolding -- the country's on-balance-sheet debt is 13 times its gross domestic product -- may be just the tip of the iceberg.

More troubling, according to a report out last week, is the off-balance-sheet debt owed by the country, and its fellow, over-indebted nations Portugal, Italy, Ireland and Spain, the so-called PIIGS, representing the five-nation acronym.

The off-balance-sheet debt, where countries guarantee the debt of private developments, many of which had gone bust, could multiply the problem many times -- putting further pressure on the euro, the report said.



 Gordon Long, founder of a private venture-capital fund, said in an investor note that there is more than $600 trillion in notational value in the global derivative market, with $437 trillion of it tied to interest rate swaps.

"Any credit event could trigger a cascading event," Long wrote in the report. "It does not have to be default; it could be a downgrade in swap contracts that would do the trick for a collateral call. Something is going to cause it to topple, whether it's a situation in Dubai, Greece or New Jersey."

With this as a backdrop, is it any wonder that the US dollar has been on a strong run since last November against the euro and the British pound? Also, gold versus the euro has risen 16 percent in the same time frame.

Major investors also have a record number of future bets that the euro will depreciate against the dollar over the short term.

"The next 12 months could be very dramatic for the Eurozone," said Robert Chapman, publisher of "The International Forecaster."

" I am seeing many sovereign defaults for the PIIGS as well as in Eastern Europe and the former Soviet satellite countries running into 2011," Chapman added.

International finance-industry estimates have Dubai's sovereign debt load, thanks to the off-balance-sheet debt, exploding to nearly four times its originally reported $80 billion, as other government-backed projects have gone bad after Dubai World's default in late November.

If the off-balance-sheet debt continues to come due, expect the euro to continue to fall in value and the US dollar to gain power. That will, in turn, hurt US companies looking to export goods.

How Greece's off-balance-sheet problem grew is a tragedy in itself. For example:

* In 2005, Greece wanted to develop a Mediterranean beachfront location for tourists but didn't want to float infrastructure bonds to pay for the development because its debt load was over the ceiling threshold set by the EU. So it brought in a Wall Street bank, like Goldman Sachs, which suggested it establish a Special Purpose Vehicle.

* This SPV in essence allowed the public development company to finance the infrastructure project with the Greek government guaranteeing the debt. The project moved forward with no impact on Greece's credit rating -- until the housing economy went south and the developer declared bankruptcy. Greece now has to add the debt to its balance sheet.

So when this scenario is played out a thousand times across the Eurozone, the bond ratings of the sovereign countries are lowered, thereby increasing their borrowing costs and eventually leading to a possible default.

This is how the Greek debt has grown 12 times over the initial numbers it had on the books with the European Union. Iceland and Dubai are the test studies for how the Europeans may deal with the idea of socializing private debt through public funding.

Dubai World's default, which had government backing, put the world on notice that sovereign credit-worthiness was a concern.

And just yesterday, Icelanders overwhelmingly voted "no" in a referendum on a $5.3 billion deal to compensate Britain and the Netherlands for deposits lost in a collapsed Icelandic bank. With daily riots in Greece over government tax policy changes, this may end poorly.

PIIG(ing) out

Portugal, Italy, Ireland Greece and Spain are among the European nations suffering under large sovereign debt loads.

* Countries took Wall St.'s advice and backed private construction debt for infrastructure projects.

* After project contractors go bankrupt the debt burden falls to the guarantor, which is the country.

* Country's ability to borrow is constrained by higher loan costs due to increased debt limits.

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