Debt, The EU, And Greece

Axon wrote:

I'm going to keep this simple because I feel I'm now repeating myself. Greece lied to the ECB.

If that's true, then they have been lying since 2006, and before. There's a difference between someone lying to you, and you burying your head in the sand so that you can't be told the truth. The signs have been there for decades that Greece isn't being financially responsible, even before they joined the EU (which they also lied about, and the EU knew about).

WSJ[/url]]
The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

The EU and the ECB should not have been in the dark about Greece's problems. Either they were incompetent (which I don't believe) or they were willlingly ignoring what was right in front of them because it was politically expedient.

Now that the ECB knows the full scale of the problem it is trying to stave off sovereign default by Greece and at the same time get Greece's spending in order. I fail to see where the EU or the ECB is allowing Greece to run up a tab for free.

How is the EU going to "stave off sovereign default"? By giving Greece money at extremely cheap rates. If they gave them money at market rates, it would merely make things worse. Factoring in inflation, the bailout money would essentially be free.

That is a whole other debate but what you are proposing would quickly drive a country or region into depression.

No. Greece caused a depression with their spending habits. The only question is whether it happens now (painful) or later (more painful). The bailout will only make things worse, if it happens.

You'll find that the eurozone also limits your debt as well as deficit so while you are allowed to run both there are boundaries.

Rules that have been repeatedly bent and broken by many countries. In fact, to bail out Greece, the EU and the ECB would be breaking their own rules ... again.

I've already said that article is from a year ago and it was a prediction. Ireland is not running the highest deficit in the EU and that article never even state that. And the EU is the 27 members not the 15 of the Eurozone. Here is an article from February 3rd, 2010 over a year later because of the measures we have taken. And the FT can hardly be described as either being predisposed to the Irish or the EU.

You're right. It's not the highest, it's just one of the highest, and that article is from only four months ago. If there's a 3% of GDP limit on deficits, why is Ireland able to run at 12% and project 14% for the next year? And I'll bet they keep extending the deadline as long as is necessary. A limit isn't a limit if it's not enforced.

As for where the money is coming from, Germany's current account. Why do you think the media over here are hanging on Merkel's every word?

EUObserver[/url]]
France expects its overall public deficit to reach 8.2 percent of GDP in 2009, rising to 8.5 percent in 2010. Germany - the euro area's biggest economy - expects its deficit to swell from 3.7 percent of GDP this year to 6 percent in 2010.

Germany and France are also running deficits beyond the 3% limit. They don't have the money to give. Where is the money coming from?

And just to repeat; The money is coming from Germany. Greece hid its problem from the EU, EC and ECB. Ireland is already getting rewarded by the markets for its budgeting. The ECB doesn't print money, nor allows unlimited deficits or debts but does allow countries to run then for a time.

Most of the countries in the EU are far past the 3%-of-GDP rule. None expect to be back under it for years, if ever. Germany is borrowing 10% of their GDP this year to stay afloat themselves. Where is the money coming from?

How is the EU going to "stave off sovereign default"? By giving Greece money at extremely cheap rates. If they gave them money at market rates, it would merely make things worse. Factoring in inflation, the bailout money would essentially be free.

As long as they're giving them 'real' money -- that is, currency that has been either taken through taxation or borrowed from the broader market, it's not that big a deal, as long as the borrowing levels are sane and the borrowing governments aren't themselves running permanent deficits. It's not ideal, but if they actually FIX Greece, it wouldn't be a long-term problem. It would, however, be a big long-term problem if they bailed them out and then didn't fix them.... if they're just being enablers for stupidity, that's bad all around. If they put themselves into a weaker position financially, while Greece continues its spendthrift, irresponsible ways, there's absolutely no merit to the bailouts.

If, on the other hand, they're printing money to give to Greece, that would be bad up front; the side effects would be much, much worse. That's a terribly toxic way of avoiding problems without actually fixing them. They become less visible when papered over, and they fester.

Much of the question really revolves around: are the EU countries turning into mini-United States, running perma-deficits? If so, the long-term consequences will be dire. But given how badly the world economy got screwed up by the US and Wall Street, a few years of borrowing isn't that unreasonable. If they fail to get the debts paid back down, however, they could easily start down the same slope that we're on here.

In other words, it could end up being really dismal for them, but it's not an automatic lock that it's a bad idea. It all depends on what they do in future years. I will observe, however, that once a country is in deep deficit, it is very, very difficult to get out of it, because the economy becomes dependent on the borrowed money for normal functioning.

It's an easy path to start down, without visible consequences in the beginning, but it's a tough one to escape.

Aetius wrote:
Axon wrote:

I'm going to keep this simple because I feel I'm now repeating myself. Greece lied to the ECB.

If that's true, then they have been lying since 2006, and before. There's a difference between someone lying to you, and you burying your head in the sand so that you can't be told the truth. The signs have been there for decades that Greece isn't being financially responsible, even before they joined the EU (which they also lied about, and the EU knew about).

WSJ[/url]]
The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

The EU and the ECB should not have been in the dark about Greece's problems. Either they were incompetent (which I don't believe) or they were willlingly ignoring what was right in front of them because it was politically expedient.

Now that the ECB knows the full scale of the problem it is trying to stave off sovereign default by Greece and at the same time get Greece's spending in order. I fail to see where the EU or the ECB is allowing Greece to run up a tab for free.

How is the EU going to "stave off sovereign default"? By giving Greece money at extremely cheap rates. If they gave them money at market rates, it would merely make things worse. Factoring in inflation, the bailout money would essentially be free.

And now we are getting to the nub of the issue. The EMU has no mechanism to enforce its rules. That is really what is being discussed here. What we are seeing is the birth pangs of a federal system in Europe.

Just to address the Greece issue quickly, since they joined the EMU, the government changed repeatedly with each incumbent blaming the previous one and promising to clean up its act. The ECB was aware of a problem but during a time of cheap credit and low interest rate, the political capital to pressure the Greeks into action wasn't there. Now it is. Frankly, no one believed that anyone would be so reckless or to be more exact, the Northern Europeans could not conceive of a country being that reckless.

But back to the bigger point and one that Malor touches upon. We are seeing a federal Europe take form but not in the image of the US. The EU, ECB or EMU has nowhere the reach the US federal system has nor can it without a whole series of treaties which frankly are highly unlikely to happen anytime soon. What we will probably see is greater fiscal control of the economies around Europe by the ECB. France and Germany set a bad example during the early years of the euro and one suspects that they will now look to add stricter controls on the EMU, Germany especially who have passed a law outlawing deficits from 2014.

So, watch this space. There is already talk that Greece is going to cut wages and up taxes further, much in the same way the Ireland did in December. By making those demands and Greece adhering to them you are setting precedents. Precedents that could well be the foundation of a system that will have to be police more effectively. Interesting days ahead. In a months time (March 16th) we will know more.

That is a whole other debate but what you are proposing would quickly drive a country or region into depression.

No. Greece caused a depression with their spending habits. The only question is whether it happens now (painful) or later (more painful). The bailout will only make things worse, if it happens.

Another debate. And Greece is going to be bailed out. What is being discussed it what they have to do to get bailed out. They are not getting a free lunch.

You'll find that the eurozone also limits your debt as well as deficit so while you are allowed to run both there are boundaries.

Rules that have been repeatedly bent and broken by many countries. In fact, to bail out Greece, the EU and the ECB would be breaking their own rules ... again.

I agree with the first part but I don't see what you are getting at in the second. The EMU is only saving itself by saving Greece. Greece will be forced to reduce its deficit over the coming years in order to get in line with the rules of the system. If you want it to do that in one year, you are being unrealistic.

You're right. It's not the highest, it's just one of the highest, and that article is from only four months ago. If there's a 3% of GDP limit on deficits, why is Ireland able to run at 12% and project 14% for the next year? And I'll bet they keep extending the deadline as long as is necessary. A limit isn't a limit if it's not enforced.

Dealing with the past, Ireland ran a surplus for nearly a decade. Google the "Celtic Tiger" for some information on that. What happened here is we've had a collapse in tax revenues due to the way our tax system is structure combined with the huge increases in public spending during the boom. That 12% deficit occurred almost overnight.

Read this BBC article, not articles predicting what the Irish would do or what might occur. That article you cite is from November, our budget was in December in which massive cuts were made to our expenditure. Our deficit is set to be 11.6% this year, aiming for 2.9% in 2014. Stop quoting me articles that are based on incorrect or out of date data. Look, here is a link to the highlights of the post budget press conference.

While I do have a lot of time for Brian Lenihan, I and many have no doubt that the ECB was whispering in is ear during the drawing up our budget. The ECB could enforce its limits in the case of Ireland, the question now is can it do it elsewhere?

As for where the money is coming from, Germany's current account. Why do you think the media over here are hanging on Merkel's every word?

EUObserver[/url]]
France expects its overall public deficit to reach 8.2 percent of GDP in 2009, rising to 8.5 percent in 2010. Germany - the euro area's biggest economy - expects its deficit to swell from 3.7 percent of GDP this year to 6 percent in 2010.

Germany and France are also running deficits beyond the 3% limit. They don't have the money to give. Where is the money coming from?

And just to repeat; The money is coming from Germany. Greece hid its problem from the EU, EC and ECB. Ireland is already getting rewarded by the markets for its budgeting. The ECB doesn't print money, nor allows unlimited deficits or debts but does allow countries to run then for a time.

Most of the countries in the EU are far past the 3%-of-GDP rule. None expect to be back under it for years, if ever. Germany is borrowing 10% of their GDP this year to stay afloat themselves. Where is the money coming from?

My understanding is Germany can borrow from the markets far easier than the rest of Europe can. So in the case of Greece, who is 2.5% of the EU's GDP, Germany can just right a cheque for them and borrow the cash far cheaper than Greece can from the greater financial markets. I'll happily put my hands up here and admit that I have limited understanding on how this functions but publications like the FT and the Economist seem OK with it and are certainly not crying foul. They both have anti-EU tinges to them and one would suspect they would love to stick the boot in if they could.

To address you point about deficits, surely you noticed the recession going on and the attempt to avoid outright depression. Germany is running a deficit now but that's no proof it will in the future

Edit: Sorry about the delay in response. Moving house, work and studying at night combined with a lack of steady internet access mean it can take me some time to get back to a discussion. I'm just grateful for my 3G connection.

Greece proposing a third round of cut and tax rises.

Another article here about the euro rising against the dollar now;

The Greek government approved an austerity package of tax rises and spending cuts worth 4.8bn euro, hoping to convince financial markets that it can pay off its debts and persuade European leaders it is doing enough.

Greece has pledged to reduce its deficit from 12.7% - more than four times eurozone rules - to 8.7% during 2010.

The measures to be announced on Wednesday include raising VAT to 21% from the current rate of 19%, and cutting civil servant bonus payments during holidays - which has annoyed union leaders.

I feel sorry for the Greeks and the adjustment they will have to go through but in the long run it will stand to them. On a wider issue, looks like the Germans are calling the shots. Fine by me. They seems to know what they are doing. As for the euro, my faith in it has been vindicated.

Just in case some do see it, there is an interesting graph in one of the articles. These figures are a little out of date given what Ireland and Greece have done recently but it gives you a better understanding of the "sick men" of Europe.

IMAGE(http://newsimg.bbc.co.uk/media/images/46891000/gif/_46891454_govts_in_debt02_466gr.gif)

So now Greece is out of the teeth of the bond markets, care to take a stab who is next?

They're doing the right thing, but it's gonna hurt. A lot.

Within a year or so, you'll probably start to see knock-on effects in the Greek economy, because the wealth they're sucking out to pay old debts is money that's not available in the general economy... which in turn will lower tax receipts and require more tax increases and spending reductions, causing more pain and so on. Eventually they'll hit bottom, but it could be a few years, and the Greek people are going to be pissed.

Not being able to print money is the key driver here; this is saving Greece a hell of a lot of long-term pain, by forcing them to accept much less of it it in the short term.

Malor wrote:

They're doing the right thing, but it's gonna hurt. A lot.

I only hope that the people of Greece understand this. If you give a mouse a cookie, he's going to ask for a glass of milk; he isn't going to be understanding when you have to take his cookie away to feed the cat instead. Freezing public sector pay, raising VAT, lowering pensions, and all these sorts of things are already provoking ire just over being proposed — what happens when they're actually enacted?

As an aside, I really hate the use of the GDP figure as a measure of debt (well, I'm opposed to the GDP figure in general, but that's another topic), because it grossly underestimates the real problem. We've got to be able to find a better measure of economic well-being versus debt.

Axon wrote:

So now Greece is out of the teeth of the bond markets, care to take a stab who is next?

I think it's almost certain that Italy will be the next big "surprise". The country is a non-transparent mess for years now and Berlusconi's rule certainly doesn't help it. He's exactly the kind of politician that won't ever do anything unpopular - meaning no serious fiscal consolidation, no decrease of public spendings, no public wage cuts etc. And Italy desperately needs that.

Minarchist wrote:

As an aside, I really hate the use of the GDP figure as a measure of debt (well, I'm opposed to the GDP figure in general, but that's another topic), because it grossly underestimates the real problem. We've got to be able to find a better measure of economic well-being versus debt.

While it has its drawbacks, it has an advantage of being readily comparable to other countries. Plus a trend line from historical data is actually meaningful - shows you how the debt fares in comparison to GDP change. I'd say it's a quite handy figure for a quick comparison. When it's too out of whack it's a signal to investigate it further - which is exactly what EU does right now.

wanderingtaoist wrote:
Minarchist wrote:

As an aside, I really hate the use of the GDP figure as a measure of debt (well, I'm opposed to the GDP figure in general, but that's another topic), because it grossly underestimates the real problem. We've got to be able to find a better measure of economic well-being versus debt.

...a trend line from historical data is actually meaningful - shows you how the debt fares in comparison to GDP change. I'd say it's a quite handy figure for a quick comparison. When it's too out of whack it's a signal to investigate it further - which is exactly what EU does right now.

I must respectfully disagree. The mere fact that debt is included in GDP makes it ludicrous to try and compare the two. If the government borrows money and then spends it on infrastructure, handouts, or what have you, that money is included in GDP. It's then included again when the recipient (say a highway paving company) spends it on equipment. It's then counted again when the equipment company pays its employees, etc. etc. So what we have is a circular measure. The "debt" part of "debt vs. GDP" is easy enough to quantify, but that figure is included in GDP too, and is impossible to quantify due to the systemic and repeating nature of it. It grossly inflates the GDP, and makes things look far better than they are. In addition, it doesn't account for actual wealth, just active spending, so you have truly bizarre examples like the canonical example of the aftermath of Hurricane Katrina. Billions of dollars of wealth were destroyed in that hurricane, labor and resources were displaced, and it generally had a wrecking-ball effect on the economy. But it actually made the GDP go up, because of the spending to rebuild. It was a huge net loss for the country, but the GDP didn't reflect that. Here's a brief overview that also includes the laughable CPI and Unemployment numbers. This one is slightly more in-depth and stays more purely on-topic, but is a headier read. From the latter:

...included in the level of GDP is the economic activity that is resultant from the debt driven consumption. If we then view the idea that debt is '14 pc of GDP' we encounter a problem. What is being measured is the proportion of debt in relation to economic activity that is itself, in part, driven by debt. The economic impact of that debt is itself difficult to quantify....More borrowed money results in more activity in the economy such that the measure of the economy becomes a measure of the borrowing against output that includes activity from previous borrowing. The big question here is how a measure that does this might be an indicator of the sustainability of borrowing?

The scary part is that even with the grossly inflated GDP, the links Axon provided show that Greece and Italy are over-leveraged by greater than 100% of GDP, which is astounding. The real figure, then, measured against actual wealth created by that economy is probably closer to 300%.

The idea that this measure is one of the most important measures in shaping fiscal and monetary policy is deeply disturbing. In particular, GDP is falling in an environment when there is an explosion in government borrowing. If it were possible to strip out the impact of the government borrowing from these figures, then the situation of the absolute borrowing versus the absolute output without the borrowing would reveal a very, very ugly picture.

Great post, now I really get what you saying, Minarchist. Pretty ugly, I didn't think about that in that much depth.

wanderingtaoist wrote:

Great post, now I really get what you saying, Minarchist. Pretty ugly, I didn't think about that in that much depth.

No worries, I also took those numbers at face value until a few years ago when I noticed some things just didn't add up, then dove in for some light (ha!) reading on the subject. And yeah, the tortured machinations that those numbers go through before being presented to the public are indeed scary. Politicians know we would throw them all out on their asses if we knew the truth, so it's certainly in their best interest to hide them.

In regards to your comment that it's an easily comparable statistic, I would refer you to the first article I posted above. If you read all the way down, near the bottom he goes through a pretty amazing series of events that hits pretty much every president from JFK to Dubya to show exactly how America's GDP has been skewed. I don't know for sure, but I'm guessing that every country has walked a different road down that path; some may even still be honest (right...). At any rate, comparing GDP between countries may be apples to apples for all I know, but I think it's probably more likely that it's as far-fetched as apples to camembert cheese.

Politicians know we would throw them all out on their asses if we knew the truth, so it's certainly in their best interest to hide them.

Which means that, by hiding the problems, we can't fix them while they're still small and easy to deal with.

wanderingtaoist wrote:
Axon wrote:

So now Greece is out of the teeth of the bond markets, care to take a stab who is next?

I think it's almost certain that Italy will be the next big "surprise". The country is a non-transparent mess for years now and Berlusconi's rule certainly doesn't help it. He's exactly the kind of politician that won't ever do anything unpopular - meaning no serious fiscal consolidation, no decrease of public spendings, no public wage cuts etc. And Italy desperately needs that.

I'll sencond wanderingtaoist's analysis, and add that the same underhanded back-room borrowing that was going on in Greece was and is going on in Italy as well (and other places). I also do not think that Greece is out of the woods yet, since they are still going to need to roll over a lot of debt, and they aren't going to like the prices they'll be looking at.

Axon said he feels sorry for them, and I do too. However, it's important to keep in mind that their problems are self-inflicted - no one forced them to borrow so much money. They were happy with the boom they created by borrowing and spending, and now they are dealing with the bust and the pain that comes with it. Maybe next time they will have a better understanding of the debt trap and avoid it.

I feel really bad for the people on the street.... how on earth are they supposed to figure this stuff out when even the financial experts in the EU missed it?

Malor wrote:

I feel really bad for the people on the street.... how on earth are they supposed to figure this stuff out when even the financial experts in the EU missed it?

I feel badly too. I read Krugman's book on depression economics. The most scary part of these things is that average people are powerless.

Even people without personal debt and a high savings rate will have their money stolen from them through hyperinflation.

It is amazing how a select few can harm the lives of millions of people. Wealth and power have truly become too concentrated. How it is fixed, I have no idea.

And none of them will be responsible.

Minarchist and others

Debt and GDP can be a good barometer of economic well being and how things are going.

But you are missing the forest from the trees if you do not include Private Debt. Government Debt is puny compared to outstanding private debt.

Also what matters is not necessary debt itself, but the change in debt. Just like change in Growth equals "growing" economy. The change in debt means something also.

Spending = Income - Savings + Change in Debt

Aggregate Demand = GDP+Change in Debt

This is why during the past 10 years we saw savings rate fall. At the same time debt growth, especially private, has gone through the roof. This comes from the same phenomena. Bank Lending.

Goverment Debt/Stimulus has not reversed this trend and like most, I actually think most Government Spending is not good investment. But I also see that asset speculation were not good investments either.

Asset Speculation is where most Private Debt went. Else we would not have defaulted.

So what I am trying to say is don't throw away these tools, but actually try to understand them.

Greg wrote:
Malor wrote:

I feel really bad for the people on the street.... how on earth are they supposed to figure this stuff out when even the financial experts in the EU missed it?

I feel badly too. I read Krugman's book on depression economics. The most scary part of these things is that average people are powerless.

Even people without personal debt and a high savings rate will have their money stolen from them through hyperinflation.

It is amazing how a select few can harm the lives of millions of people. Wealth and power have truly become too concentrated. How it is fixed, I have no idea.

Well, depression and hyperinflation is exactly what the ECB wants to avoid. Greece will have to adjust and they are in for a tough few years but once they become competitive again they do have the worlds largest market to trade with. It'll be bad but it will be a whole heap better than the alternative.

Let's face it: Greece has been on the brink of bankruptcy several times in the past century, their "recovery" will just mean passing a few unpopular decisions (higher taxes etc.) to get them into acceptable enough shape. They have to solve a lot of underlying problems (huge and inefficient bureaucracy, other obstacles to enterprises, sizable gray economy, corruption) to kick them into higher gear.

The Greek debt market just imploded. Bailout or not, it's time to put up or shut up for the EU.

Aetius wrote:

The Greek debt market just imploded. Bailout or not, it's time to put up or shut up for the EU.

For those of you who want to view it, the filter edited out a letter in that link. Check the URL when you click and fix the asterisk, it works then.

Minarchist wrote:
Aetius wrote:

The Greek debt market just imploded. Bailout or not, it's time to put up or shut up for the EU.

For those of you who want to view it, the filter edited out a letter in that link. Check the URL when you click and fix the asterisk, it works then.

Argh! When will the oppression end!

I don't understand that. What does it mean?

From my (limited) knowledge, it means:

Greece will have a much harder time borrowing money, and therefore, paying for things. Like contracts, pensions, and salaries. This could take the form of Greece still borrowing, but having their future budget shrink horribly as a larger portion of their revenues goes to pay interest on their debt, or them not borrowing at all and running out of cash. Imagine what happened in California last year, except for an entire country. People getting IOU's instead of money. Or are outright told the money they are owed will never come. Either way, further budget cuts for Greece.

Worst case scenario, the government collapses as people's confidence in their ability to govern deteriorates. They then potentially dissolve all debt owed as the gov't that owed it is no longer in existence, which triggers a massive scare on the bond market for other countries, and the dominos fall for another worldwide financial crisis. Again, worst case scenario

The EU/IMF could choose to provide them funds at a rate lower than what the bond market will bear, but that's still up in the air I think.

They put up it seems. Don't doubt for a second here that there will be tighter control, even direct intervention, over Greece's budgets are part of the deal. It's the worst kept secret here in Ireland that the ECB is calling the shots. Fine by me. The problem for Greece is where our Government were given a framework to work within, the rumours are German ministers are actually dictating policy.

I don't feel one bit sorry for them. Lying about your finances for a decade and then expecting Germans to foot the bill was never going to fly. The moment Germans realised that they are upping their retirement age to 68, like many in Europe, Greece wanted to keep theirs around 60-62. That was completely beyond the pale so wait and see what the Greeks had to agree to in order to get this money.

Didn't find it in the article, but in Belgian news yesterday they said that the EU interest rate would be 5% instead of the 7.5% they're getting from regular channels right now. Belgium would provide 1 billion euro (if necessary).

dejanzie wrote:

Didn't find it in the article, but in Belgian news yesterday they said that the EU interest rate would be 5% instead of the 7.5% they're getting from regular channels right now. Belgium would provide 1 billion euro (if necessary).

I've also seen 5% cited - though it should be noted that no actual decision on the bailout has been made yet, and Greece has not officially requested it. I'm thinking they are going to try to wait it out a bit and see if they can get a better deal, as 5-6% would still be a problem for them.

Yep, five percent is a pretty high interest especially for a country with a debt higher than their GDP (in simplified terms, five percent of GDP would go just to pay the interest, with their budgetary expenses equal to 40 percent of GDP that means some 13 percent of budget would be only interest payments). And the thing is that they have to borrow because there are maturing debts to be repaid in the coming months and the country doesn't have money for that.

OK, it seems confirmed that Greece will be getting 30 billion euros from EMU members at five percent. That is about a tenth of their GDP. Also, they need to repay debts of 54 billion euros just this year, so the crisis is not over yet.

Greece has bowed to market pressures and is now officially calling for immediate help. IMF officials should be there tomorrow.