Is Greece the Next Iceland?

by Ian Mathias.

“There are times in a nation’s history that define it for decades, for generations to come. This is such a time.”

That’s true for most countries in the world right now, but likely more for Greece than anyone else. The quote above comes from Prime Minster Papandreou, who made an emergency speech last night. Just as Rob Parenteau forecast yesterday, the focus of the world has turned to the Greeks.

Pinned under a 12.7% budget deficit-to-GDP ratio, at monetary odds with other EU nations and recently targets of sovereign credit downgrades, Papandreou and his people are scrambling. Last night, he promised to reduce that same ratio to 3% (the limit under EU laws) by 2013. The plan: Cut spending where convenient and soak the hell out of the rich. Greece will soon have higher taxes, probably across the board, but most notable will be a 90% tax on bonuses in the financial industry and the introduction of a capital gains tax. Ironically, in the same breath, he promised to fight corruption and tax evasion, both crimes that will likely rise in the wake of more government confiscation.

Will it work? The market says no. The difference in yield between Greek and German bonds was 229 basis points before Papandreou spoke. Soon after, it was 252 bps.

“Some professional investors are already attracted to this widening spread in Greek and German bonds,” Rob Parenteau adds, “and they are finding encouragement from the restrictive policy measures announced in the past week or so. But it strikes us as too early to wade into the fray. We would not go so far as to predict Greece will default, nor would we go so far as to suggest the euro is about to come undone, but we do believe the pressures and the pushback that are going to be brought to bear on a number of European nations will put a serious question in the minds of investors who may have convinced themselves in recent months that the euro was a contender for snatching the reserve currency status of the U.S. dollar.”

Greece’s total debt to GDP ratio is currently over 112%.

Ian Mathias is the managing editor of Agora Financial's Income Franchise, where he writes and researches about retirement, dividend and fixed income investing. Much of his work is featured in The Daily Reckoning and Lifetime Income Report, Agora Financial's flagship income investing advisory.  

Previously, Ian managed The 5 Min. Forecast, a fun, fast-paced daily look into the future of global markets and macroeconomics. He's also worked in public relations, where media outlets like Forbes, AP, Yahoo! and MSN Money have syndicated his writing. If he's not at work, you'll probably find Ian on a bicycle, racing up and down the "mountains" of Baltimore County. Ian has a BA from Loyola University in Maryland. 

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