Debt, The EU, And Greece

As if said, the real story is what conditions are attached to these loans.

wanderingtaoist wrote:

Greece has bowed to market pressures

If they had bowed to market pressures, they would have stopped borrowing money. That's what you do when the price gets too high. This isn't bowing to market pressure, it's a blatant attempt to avoid market consequences - they are trying to politically game the other EU countries into supporting the Greek spending habit.

Aetius wrote:
wanderingtaoist wrote:

Greece has bowed to market pressures

If they had bowed to market pressures, they would have stopped borrowing money. That's what you do when the price gets too high. This isn't bowing to market pressure, it's a blatant attempt to avoid market consequences - they are trying to politically game the other EU countries into supporting the Greek spending habit.

Or the bond buyers should have stopped buying Greek Bonds.

goman wrote:

Or the bond buyers should have stopped buying Greek Bonds.

That's precisely what is happening. That's why yields are going up, because the bonds are considered too risky to buy at lower returns. Even so, the trade is drying up.

Aetius wrote:
wanderingtaoist wrote:

Greece has bowed to market pressures

If they had bowed to market pressures, they would have stopped borrowing money. That's what you do when the price gets too high. This isn't bowing to market pressure, it's a blatant attempt to avoid market consequences - they are trying to politically game the other EU countries into supporting the Greek spending habit.

Actually, the Greeks have been and are being forced to reduce expenditure. The country has been pretty volatile since the first rounds of cuts and the funds are there only on the proviso that the Greeks are prepared to solve their problem. The Greeks may have tried to game the EU, I've seen no proof of that over the last few months, it certainly hasn't worked.

This may prove to be an important day for the euro. What we know now is the euro is not going to fail much to the disappointment of many. Germany has clearly proven it will back it and that alone guarantees its future. However, what we have seen is German voters already protesting out that while they retire at 65, Greek public workers retire at 55 which Germans will now subsidize. German voters are going to dictate retirement policy in Greece. That is what has occurred here and what the story should be about.

Axon wrote:
Aetius wrote:
wanderingtaoist wrote:

Greece has bowed to market pressures

If they had bowed to market pressures, they would have stopped borrowing money. That's what you do when the price gets too high. This isn't bowing to market pressure, it's a blatant attempt to avoid market consequences - they are trying to politically game the other EU countries into supporting the Greek spending habit.

Actually, the Greeks have been and are being forced to reduce expenditure. The country has been pretty volatile since the first rounds of cuts and the funds are there only on the proviso that the Greeks are prepared to solve their problem. The Greeks may have tried to game the EU, I've seen no proof of that over the last few months, it certainly hasn't worked.

Ummmm ... what do you think getting a bailout is? The Greeks have spent themselves into a hole, and are now asking for below-market-rate loans from the EU. That is essentially handing free money to the Greeks. Their "austerity measures" amount to little more than raising taxes and cutting small slices out of ridiculously huge benefits. The tax increases are unlikely to be effective because taxes are already so high in Greece - most of their effect will simply be absorbed into lower purchases, which will hurt their economy even more. It's important to understand that the Greek government is only trying to reduce their deficit, not balance their budget and pay back their loans - all they are doing with these EU loans is buying time. Even if they do get their deficit back below 3% (very improbable, since they've never been that low), they will still be borrowing more and more money to pay off their previous debts. The Greeks have demonstrated that they have no will to pay those loans back and have repeatedly tried to hide their problems, and that's the risk the market is pricing into their bonds.

In short, the market is telling the Greeks that they are done borrowing. If the EU then gives them money, all the EU is doing is making things worse, like giving alcohol to a drunk. Sure, for a while it might be nice, but they'll be back for more - it doesn't solve the underlying problem. The Greek government is going to burn through the loans, probably in less than a couple years, and then they'll be right back at the table with the same structural problems, demanding more to avoid "destroying the Euro". At some point, the EU is going to have to say no. When they do, they'll be hundreds of billions of dollars further into the hole that is Greece, and their losses will obviously be greater.

Aetius wrote:
Axon wrote:
Aetius wrote:
wanderingtaoist wrote:

Greece has bowed to market pressures

If they had bowed to market pressures, they would have stopped borrowing money. That's what you do when the price gets too high. This isn't bowing to market pressure, it's a blatant attempt to avoid market consequences - they are trying to politically game the other EU countries into supporting the Greek spending habit.

Actually, the Greeks have been and are being forced to reduce expenditure. The country has been pretty volatile since the first rounds of cuts and the funds are there only on the proviso that the Greeks are prepared to solve their problem. The Greeks may have tried to game the EU, I've seen no proof of that over the last few months, it certainly hasn't worked.

Ummmm ... what do you think getting a bailout is?

Never said it wasn't. Its the conditions that are attached to the bailout that's the factor. As long as we aren't printing more money to fund this, and were not, I'm OK with this.

Aetius wrote:

The Greeks have spent themselves into a hole, and are now asking for below-market-rate loans from the EU. That is essentially handing free money to the Greeks. Their "austerity measures" amount to little more than raising taxes and cutting small slices out of ridiculously huge benefits. The tax increases are unlikely to be effective because taxes are already so high in Greece - most of their effect will simply be absorbed into lower purchases, which will hurt their economy even more. It's important to understand that the Greek government is only trying to reduce their deficit, not balance their budget and pay back their loans - all they are doing with these EU loans is buying time. Even if they do get their deficit back below 3% (very improbable, since they've never been that low), they will still be borrowing more and more money to pay off their previous debts. The Greeks have demonstrated that they have no will to pay those loans back and have repeatedly tried to hide their problems, and that's the risk the market is pricing into their bonds.

In short, the market is telling the Greeks that they are done borrowing. If the EU then gives them money, all the EU is doing is making things worse, like giving alcohol to a drunk. Sure, for a while it might be nice, but they'll be back for more - it doesn't solve the underlying problem. The Greek government is going to burn through the loans, probably in less than a couple years, and then they'll be right back at the table with the same structural problems, demanding more to avoid "destroying the Euro". At some point, the EU is going to have to say no. When they do, they'll be hundreds of billions of dollars further into the hole that is Greece, and their losses will obviously be greater.

And what would the alternative cost?

Axon wrote:

Its the conditions that are attached to the bailout that's the factor. As long as we aren't printing more money to fund this, and were not, I'm OK with this.

We'll have to disagree on that - as I understand it, the details of exactly where the money is coming from aren't clear yet (or at least, I haven't seen them). Given that the ECB is heavily involved in the discussion, I'm pretty certain that they will, in fact, borrow this money from the ECB, which will "create it" to facilitate that borrowing. If Germany and France try to float bonds to support their lending, that could have pretty catastrophic effects that I'm pretty sure they want to avoid. And, since both countries are also running serious deficits, they don't have the cash to loan either.

And what would the alternative cost?

For the rest of the EU, very little in the short term as long as Greece does the right thing, which is reducing spending to below their income, halting borrowing, and going on a diet. Whether or not the Greeks can accomplish that is doubtful, however, which means that the costs will be paid both by the Greek government, and the rest of the EU in damaged currency. That cost is high, but the more they bail out countries that can't manage their own finances, the worse it will get. Getting out now is going to hurt, a lot. Getting out later might not be possible without destroying the EU, and indeed that point might already be past.

A good course to follow right now would be to give the Greeks an ultimatum: drop your spending to a level where you can sustain your current debt, and cease all borrowing. Otherwise, we kick you out of the EU. That will help the Greeks deal with their internal problems, and if their people decide they don't want to be a part of the EU any more, so be it.

Aetius wrote:
Axon wrote:

Its the conditions that are attached to the bailout that's the factor. As long as we aren't printing more money to fund this, and were not, I'm OK with this.

We'll have to disagree on that - as I understand it, the details of exactly where the money is coming from aren't clear yet (or at least, I haven't seen them). Given that the ECB is heavily involved in the discussion, I'm pretty certain that they will, in fact, borrow this money from the ECB, which will "create it" to facilitate that borrowing. If Germany and France try to float bonds to support their lending, that could have pretty catastrophic effects that I'm pretty sure they want to avoid. And, since both countries are also running serious deficits, they don't have the cash to loan either.

Well, we'll have to stop this part of the discussion there then. The ECB cannot print more money, its against its own regulations and the Germans will go ape if it did. As for the borrowing, anyone can still borrow from the bond markets its just that for Greece the rate would be so high as to bankrupt the country. The rest of the eurozone will now borrow the money for Greece and give it to them on the proviso that they enact serious reforms, not just France and Germany although they account for the lions share.

If you happen to believe the ECB will just print money in secret, then I cannot argue against that other than to say it would be reckless in the extreme.

Aetius wrote:

For the rest of the EU, very little in the short term as long as Greece does the right thing, which is reducing spending to below their income, halting borrowing, and going on a diet. Whether or not the Greeks can accomplish that is doubtful, however, which means that the costs will be paid both by the Greek government, and the rest of the EU in damaged currency. That cost is high, but the more they bail out countries that can't manage their own finances, the worse it will get. Getting out now is going to hurt, a lot. Getting out later might not be possible without destroying the EU, and indeed that point might already be past.

A good course to follow right now would be to give the Greeks an ultimatum: drop your spending to a level where you can sustain your current debt, and cease all borrowing. Otherwise, we kick you out of the EU. That will help the Greeks deal with their internal problems, and if their people decide they don't want to be a part of the EU any more, so be it.

Just to point out, no one can be kicked out of the EU, that is against EU law. Governments do have a mechanism to leave the EU thanks to the recent Lisbon Treaty so the ultimatum cannot be given but taking your point on a whole what you are outlying is exactly what the EU has just done, its just not fast enough for your liking.

Lets just for arguement sake say Greece does all what you want in the next fiscal year, do you have any idea what the fallout would be not just for Greece but for the region. What happens in Cyprus? What about a population of 11 million who are legal to work anywhere else in the EU? Do you have a handle on how bad such a reduction that quickly would be for the country? Will it lead to mass unemployment further reducing the tax take and starting a brain drain from the country? What about the euro itself? Will the Greeks just default on their debt causing a new wave of short selling on Spain, Portugal, Ireland and Italy bonds? And so on, and so on. The cost to the region could be seismic.

This is why the eurozone and the other EU members are doing what they are doing. No one is happy about it but the fact of the matter was the mistake was to allow the Greeks to join in the first place (Edit: The eurozone and not the EU, I mean). Once in, it seems this eventuality was going to happen sooner or later. But like I said, read what the governments are saying around Europe.

BBC[/url]]
The Netherlands has already said it will wait to hear full details of the plan before putting the necessary legislation before its parliament.

It is among those European countries looking for further austerity measures from Greece before they commit to bailout money.

Senior officials in Germany's governing coalition have indicated that they are willing to help Greece as long as "strict conditions" are met, despite describing financial help as a "last resort".

French Finance Minister Christine Lagarde has also pledged to "hold Greece accountable" for any financial help.

However, demands for even harsher cuts in Greece would almost certainly be met with domestic opposition.

The Greeks are in for a tough decade whatever happens but that has to be balanced with the well being of the people as well. Reducing the country to something akin to Ireland in the '80s doesn't help anybody.

I'm not saying Greece shouldn't reduce its expenditure and pay down its debt (or just out grow it like everyone else does) but doing it as quickly as you want will destroy the country. The country in depression will require more funds than we are leading now to get them out of that hole so it makes sense to intervene now and not later. As long as the intervention has strings attached, just like Ireland in the '80s and Britain in the '70s, I'm OK with that because the EU has gotten really good at it.

The next nominee for the "Do It Like the Greeks" award: Portugal.

Axon wrote:

Well, we'll have to stop this part of the discussion there then. The ECB cannot print more money, its against its own regulations and the Germans will go ape if it did.

Wikipedia[/url]]The primary objective of the ECB is to maintain price stability within the Eurozone, or in other words to keep inflation low. The Governing Council defined price stability as inflation (Harmonised Index of Consumer Prices) of below, but close to, 2%.[4].

The only possible way for the ECB to maintain inflation is to print money, so you'll have to explain how the ECB cannot print more money - those two things are not reconcilable. Our Fed is essentially the same - they create money as needed to pursue their policy goals.

As for the borrowing, anyone can still borrow from the bond markets its just that for Greece the rate would be so high as to bankrupt the country. The rest of the eurozone will now borrow the money for Greece and give it to them on the proviso that they enact serious reforms, not just France and Germany although they account for the lions share.

And what do you think will happen when the bond buyers know that those loans will not be paid back by the Greeks? This transfers the Greek risk onto the Germans and the French taxpayers - it doesn't make the risk go away. That risk will be priced in, one way or another.

If you happen to believe the ECB will just print money in secret, then I cannot argue against that other than to say it would be reckless in the extreme.

I don't think it'll be in secret, I think it'll be right out in the open because it's their job. Otherwise, why are they even involved?

Aetius wrote:

Just to point out, no one can be kicked out of the EU, that is against EU law. Governments do have a mechanism to leave the EU thanks to the recent Lisbon Treaty so the ultimatum cannot be given but taking your point on a whole what you are outlying is exactly what the EU has just done, its just not fast enough for your liking.

It's exactly what the EU has not done, which is the problem.

Lets just for arguement sake say Greece does all what you want in the next fiscal year, do you have any idea what the fallout would be not just for Greece but for the region.

Yes, I do. It will be very, very hard, for everyone. Unfortunately, that's the best alternative left, since the EU did not rein in Greece when it had the chance.

Will the Greeks just default on their debt causing a new wave of short selling on Spain, Portugal, Ireland and Italy bonds? And so on, and so on. The cost to the region could be seismic.

Yes. Unfortunately, attempting to bail Greece out will only make the quake stronger in the end. It is not the short selling that is causing this problem, it is Greece's (and others) inability to be fiscally responsible.

The Greeks are in for a tough decade whatever happens but that has to be balanced with the well being of the people as well. Reducing the country to something akin to Ireland in the '80s doesn't help anybody.

And how does permitting the Greek government to borrow and lose even more money help the situation in any way?

I'm not saying Greece shouldn't reduce its expenditure and pay down its debt (or just out grow it like everyone else does) but doing it as quickly as you want will destroy the country. The country in depression will require more funds than we are leading now to get them out of that hole so it makes sense to intervene now and not later. As long as the intervention has strings attached, just like Ireland in the '80s and Britain in the '70s, I'm OK with that because the EU has gotten really good at it.

It's not as quickly as I want. Do I want the Greeks to crash their economy? Of course not. But that decision was made years ago, when the Greeks decided to borrow a ton of money and hide it from the EU. Should they get it over with as quickly as possible? Definitely. They can't stop it now, it can only be delayed - and the price of the delay will go up asymptotically. Intervening now will do nothing but permit the Greeks to continue making things worse, accelerate the problems, and put the rest of the EU on the hook for hundreds of billions of dollars that they don't have. There isn't a way out of this that doesn't include a depression. The only questions is how bad, and how long. They can take their medicine now, or they can string it out for years and make it far worse. If the EU bails them out, they are looking at option 2.

From Bloomberg:

The central bank could eventually start accepting all government debt regardless of its rating and revive last year’s policy of lending unlimited amounts for periods up to a year so as to support the region’s banks, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc.

What Cailloux calls the “nuclear option” of the ECB purchasing government bonds is also attracting attention among economists. While the ECB is prohibited from buying assets directly from authorities, it can do so on the secondary market.

“We need 300 billion euros of purchases and then the problem goes away overnight,” said James Nixon, co-chief European economist at Societe Generale SA.

I can hear the thumping of the printing press from here.

Aetius wrote:

From Bloomberg:

The central bank could eventually start accepting all government debt regardless of its rating and revive last year’s policy of lending unlimited amounts for periods up to a year so as to support the region’s banks, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc.

What Cailloux calls the “nuclear option” of the ECB purchasing government bonds is also attracting attention among economists. While the ECB is prohibited from buying assets directly from authorities, it can do so on the secondary market.

“We need 300 billion euros of purchases and then the problem goes away overnight,” said James Nixon, co-chief European economist at Societe Generale SA.

I can hear the thumping of the printing press from here. :)

Neither of them have anything to do with the ECB or its policy. As for the other comment about inflation, the point is to keep inflation low by not printing money. This rule was put in by the Germans after their experience during the '30s and many EU citizens are happy its their. Why are you having a problem grasping this fact. Yes there will be a lot of lending but it is, as you exactly pointed out, priced risk so it cannot go on forever, which is a good thing. It's forcing many governments across Europe to reduce their spending and up taxes even if they are politically weak, Ireland and now Portugal are the clear examples.

And if you think the EU isn't being tough on the Greeks you are not reading the news over here. Its national headline stuff right across the continent with it on the front page of every news organisation's site right now. You should be actually supporting Merkel stance right now, as many Europeans are. The writing is on the wall for the Greeks right now and the Germans are going to get huge social reforms from the country that will help it close its deficit and pay down its debt.

I've said it further up in this thread, the discussion is not about the financial aspect as that is really a factor of how harsh the Germans are going to be. What the real discussion is are we seeing the seeds of a federal system in Europe and are the people in that system happy to be there.

Axon wrote:

Neither of them have anything to do with the ECB or its policy.

Huh? The ECB buying bonds doesn't have anything to do with the ECB or its policy?

As for the other comment about inflation, the point is to keep inflation low by not printing money.

That's precisely the opposite meaning of what a 2% inflation target means. To maintain such a target, the ECB must print money. That's how inflation happens. If they actually didn't want inflation, they wouldn't be targeting a 2% inflation rate.

Why are you having a problem grasping this fact.

What fact? How is it possible to fend off inflation by intentionally creating it?

Yes there will be a lot of lending but it is, as you exactly pointed out, priced risk so it cannot go on forever, which is a good thing.

Sure it can - if the ECB accepts poor collateral for the loans, like the Fed did, plenty of money can be created without missing a beat. And Greek bonds are about the poorest collateral available right now short of accepting blank paper.

It's forcing many governments across Europe to reduce their spending and up taxes even if they are politically weak, Ireland and now Portugal are the clear examples.

What's forcing the spending reductions and the tax increases is that the countries spent and borrowed too much money. Now they are dealing with the results of those decisions. Yes, being unable to devalue their currencies doesn't allow them the easy out, but it just means the pressure will build to devalue the Euro as the problems bring in more countries.

And if you think the EU isn't being tough on the Greeks you are not reading the news over here.

*shrug* No one is talking about just letting the Greeks hang - which is precisely what needs to happen.

What the real discussion is are we seeing the seeds of a federal system in Europe and are the people in that system happy to be there.

From here it doesn't look like the Germans are happy about this at all, so that's a curious statement. If Merkel goes ahead with the bailout, she will probably lose power.

Aetius wrote:
Axon wrote:

Neither of them have anything to do with the ECB or its policy.

Huh? The ECB buying bonds doesn't have anything to do with the ECB or its policy?

As for the other comment about inflation, the point is to keep inflation low by not printing money.

That's precisely the opposite meaning of what a 2% inflation target means. To maintain such a target, the ECB must print money. That's how inflation happens. If they actually didn't want inflation, they wouldn't be targeting a 2% inflation rate.

Why are you having a problem grasping this fact.

What fact? How is it possible to fend off inflation by intentionally creating it?

Where are you getting that fact from? The ECB primary policy is "to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term." Not maintain inflation artificially high but to keep it from rising above 2%. You do that by keeping controlling interest rates and not printing money. Some inflation is natural so around 2% is seen as the sustainable and acceptable level for the long term.

As for the buying of bonds, Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc and James Nixon, co-chief European economist at Societe Generale SA who have nothing to do with the ECB and in fact have skin in the game after reckless lending over the last decade. At least Google Jean-Claude Trichet and quote me what he has been saying.

Yes there will be a lot of lending but it is, as you exactly pointed out, priced risk so it cannot go on forever, which is a good thing.

Sure it can - if the ECB accepts poor collateral for the loans, like the Fed did, plenty of money can be created without missing a beat. And Greek bonds are about the poorest collateral available right now short of accepting blank paper.

But you are assuming that is what will happen. Pressure is on in Germany for the private German banks you help create this mess in Greece help in the bailout but we shall have to see what happens. Lets not argue over a hypothetical.

It's forcing many governments across Europe to reduce their spending and up taxes even if they are politically weak, Ireland and now Portugal are the clear examples.

What's forcing the spending reductions and the tax increases is that the countries spent and borrowed too much money. Now they are dealing with the results of those decisions. Yes, being unable to devalue their currencies doesn't allow them the easy out, but it just means the pressure will build to devalue the Euro as the problems bring in more countries.

Ireland, Greece and Portugal are a tiny percentage of the EU's GDP, Germany and France could bailout all three country and not break a stride. What is going on is trying force the rules of the EMU.

And if you think the EU isn't being tough on the Greeks you are not reading the news over here.

*shrug* No one is talking about just letting the Greeks hang - which is precisely what needs to happen.

No, its precisely what you would like to see happen because it fits your political ideology. Greece can restructure its debts, get rid of some of there incredibly healthy entitlements and enact some reforms in labour and grow its way out of the economy. Destroying the country is not the best option here for anybody.

What the real discussion is are we seeing the seeds of a federal system in Europe and are the people in that system happy to be there.

From here it doesn't look like the Germans are happy about this at all, so that's a curious statement. If Merkel goes ahead with the bailout, she will probably lose power.

You miss my point. German aren't happy about the bailout and the fact that Greece was allowed to get to this point. So what will have to happen is the policing will have to change and there is already talk that the ECB will in future approve national parliament's budgets. That right there is the seeds of a federal state. Is it good or bad thing is another discussion.

To maintain such a target, the ECB must print money. That's how inflation happens.

That's not actually the only method. Many of the modern financial instruments end up affecting the economy in much the same way that money does... house price inflation, for instance, was driven by securitization. The Fed's backing was a very important part of that process, but their actual injected money didn't directly fuel it to the degree you might expect. Their implied guarantee of stability was the critical part, more than the actual dollars they shoved out the door. (there were plenty of those, too, don't get me wrong, but that guarantee was what allowed the huge pyramid schemes to happen.) The same dollars got recycled over and over between houses and loans. Loans coming from the financial markets weren't limited by the dollar supply in the same way that bank loans are.

One of the big problems there is that the debt issued to create these securities also set up a deflation trap later on.... the supply of faux dollars to buy houses increased, so houses went up, so more paper got written on the houses, and so on. House prices exceeded real market values by substantial margins, in many cases because they had been going up so much. Once it peaked, it reversed into a vicious backward spiral, where price setbacks destroyed paper, which destroyed pricing, which destroyed more paper, and only massive monetization (money-printing) by the Fed, to the tune of more than a trillion dollars in mortgages, stopped that process of adjustment back to mean.

I don't know if it's actually happened, but it would be quite possible to see systemic prices going up, even sharply, in years when there wasn't any new base money being added to the system. But, without new money being added, prices should eventually subside.

Some inflation is natural so around 2% is seen as the sustainable and acceptable level for the long term.

Actually, over the long term, barring intervention from a central authority, it appears the natural outcome of an economy is very, very slight deflation. Businesses get more and more efficient at making goods, and that slightly overcomes the increased scarcity of resources as they're consumed. There haven't been too many periods of sufficient stability to measure, but prices in 1900, for goods that still existed, were very slightly cheaper than they were in 1800....while, of course, people had a lot more money. However, this completely glosses over the huge economic disruptions mid-century, when prices were zooming all over like a cat on crack.

After thinking about the Greece thing for awhile, I figured out another way of looking at it. They've gone off their local currency and onto the Euro, so they're being forced to deal with their fiscal improprieties for the first time. Moving from a dishonest currency regime to a (locally) honest one is not an easy thing to do. In a way, because they don't control the money supply, it's a bit like going onto a gold standard. It's not as good, because the ECB will still be manipulating the currency to get outcomes they want, but with them not being joined at the hip anymore, it should be markedly better for them.

So, for what it's worth, I think it's a good idea to help ease their transition into fiscal sanity. If that doesn't happen, a lot of people are going to be in terrible financial distress, and it's really not their fault... their prior governments were completely fraudulent, and how the hell are you supposed to deal with a government that's lying to you? Going onto the Euro and having the fiscal changes imposed on them should give them a solid foundation they can start building on again. I'm fine with easing the transition. They're doing the right thing, finally, and helping them get there seems like the right thing to do.

It also strikes me that creating the money from nothing might be okay, in this one instance. The benefits from a fiscally-responsible Greece would be profound; that's a big economy. And while it would be much, much better to borrow the money from the market, instead of from the ECB, even printing it might be worthwhile for this specific case.

However, I'm not seeing many signs from Greece that they're really serious about this budget thing, and it sounds like the people are already getting infuriated. If the problems don't get well and truly fixed, printing money will inflict long-term consequences for an inadequate benefit.

Axon wrote:

What fact? How is it possible to fend off inflation by intentionally creating it?

Where are you getting that fact from? The ECB primary policy is "to maintain price stability. The ECB aims at inflation rates of below, but close to, 2% over the medium term." Not maintain inflation artificially high but to keep it from rising above 2%. You do that by keeping controlling interest rates and not printing money. Some inflation is natural so around 2% is seen as the sustainable and acceptable level for the long term.

No, sorry, inflation is not natural at all - see what Malor wrote. The natural state is deflation, with the rate depending on how fast the economy grows. "Controlling interest rates" is controlling interest rates on ECB loans, which is the source of money creation (yes, central bank policies can result in additional money creation, but it is the central bank that makes it possible). When I say "printing money" I mean the exact kinds of policies and loans that the ECB uses to maintain that 2% inflation rate.

At least Google Jean-Claude Trichet and quote me what he has been saying.

Jean-Claude Trichet[/url]]“Speculation on more and more elevated sovereign risk has been one factor behind spreads being driven to very high levels,” Trichet said. “This is why it was very important that the heads of state and government declared” on Feb. 11 “that they were ready to ‘take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole’.”

That is a man who does not grasp the situation. It is not the speculators who are causing the problem, but rather the Greek government's irresponsible borrowing and spending.

Jean-Claude Trichet[/url]]European Central Bank President Jean-Claude Trichet and Dominique Strauss-Kahn, managing director of the International Monetary Fund, told lawmakers in Berlin yesterday that the move would “undermine market confidence so much” that a Greek bailout would “take longer and cost that much more,” a German politician who was briefed by the officials said.

In this quote he's talking about making the private banks participate in the bailout. He's right, but for the wrong reasons. The private banks should take their losses on Greek bonds, rather than be forced to double-down on bad investments.

Mark Gilbert[/url]]Politically, the EU seems unwilling to contemplate such an amputation. So the gangrene will spread.

You know what’s coming next. ECB President Jean-Claude Trichet will recall his comments earlier this month to the Kellogg School of Management in Illinois, when he said “crisis management requires agility and innovation to meet the idiosyncrasies of a specific crisis.” He’ll bend and twist the rulebook to come up with some way for the central bank to start buying government bonds in the market, capping the yield increases seen this week in an effort to halt the contagion.

In other words, Trichet has done everything except actually come out and say that he wants to directly monetize the bonds. He can't do that, because it's against the rules, but it is not at all a fringe belief that he will find a way to do so - similar to how our Fed is not currently directly monetizing treasuries, but instead is working several back-door deals where they instantly buy up treasuries from the "open market" or buy up worthless assets at inflated prices. All of these things are "printing money" - creating money where there was none before.

But you are assuming that is what will happen. Pressure is on in Germany for the private German banks you help create this mess in Greece help in the bailout but we shall have to see what happens. Lets not argue over a hypothetical.

Yep, we'll see. Trichet is opposed, and that makes me think it's not going to happen, despite what the Germans want - the German government has been ignoring public opinion on this for years.

Ireland, Greece and Portugal are a tiny percentage of the EU's GDP, Germany and France could bailout all three country and not break a stride. What is going on is trying force the rules of the EMU.

Can Germany and France bail out the UK? The numbers might work, but I don't believe they'll be able to assemble the political will necessary, when they are having a hard time with Greece.

No, its precisely what you would like to see happen because it fits your political ideology. Greece can restructure its debts, get rid of some of there incredibly healthy entitlements and enact some reforms in labour and grow its way out of the economy. Destroying the country is not the best option here for anybody.

You're making three assumptions: 1) the Greek government will enact the reforms necessary to make the fundamental changes they need without financial pressure, and 2) that such an action would destroy the country, and 3) kicking the can down the road will make the problem easier to deal with. I disagree on all three. The short-term pain is a relatively small price to pay for an economy that is corrected to something that resembles reality, instead of sputtering along for years trying to prove that they can borrow their way out of a debt problem. You can't grow your way out of a debt problem if you continue deficit spending that is wildly in excess of any possible growth!

If the bailout occurs, what will happen is that the Greeks will immediately stop cutting - the political pressure against the cuts is intense right now, so there will be a lot of rhetoric and not much action. The Greeks will know that the EU can be manipulated into bailing them out, and thus the incentive will be to continue bailouts as long as the EU is willing. They will negotiate, and draw things out as best they can while avoiding the cuts that must be made. They will do their best to present themselves in the best light while hiding their real financial state as much as possible, similar to what they've been doing. It will go on until the EU says NO. The EU can avoid this trap by simply saying no right now. If they don't, the long-term cost is going to be as much as the Greeks think they can get.

Malor wrote:

It also strikes me that creating the money from nothing might be okay, in this one instance. The benefits from a fiscally-responsible Greece would be profound; that's a big economy. And while it would be much, much better to borrow the money from the market, instead of from the ECB, even printing it might be worthwhile for this specific case.

I want to highlight this quote. If the money is created, what are the incentives? Once Greece gets they money, they know two things: that the ECB can and will create money for them, and that this route is much easier politically than actually dealing with their financial problems. This removes their incentive to solve the problem, while at the same time connecting them to the money spigot directly - which gives them buying advantages over the rest of the EU (the closer you are to the inflation, the more it benefits you). That would be a catastrophic decision, as the Greeks have demonstrated time and again that they are unwilling to be financially responsible. They will milk the EU for everything they can get. I've already seen estimates of up to 700 billion euros for the total bailout, and those numbers will not be going down.

I haven't been following up on this topic but it's hard to miss on the news.

I read an interesting article yesterday interviewing Avi Tiomkin who also wrote The demise of the Euro in Forbes 2 years ago.

He's extremely pessimistic about the EU's plan to "save Greece" and claim It wouldn't work because the side effects may cause Greece to become politically unstable (pre WWII politically unstable).

You could be right, Aetius. It really depends on how tough the EU is in imposing structural reforms. If they aren't willing to be hardline assholes about it, it'll end up being a slow disaster. If they're willing to get out the hot irons and start cauterizing to stop the bleeding, no matter how much the patient screams, the bailout could save Greece and substantially improve the EU's outlook.

I'm not familiar with the actual aid package on offer, so I don't know how tough they're willing to be about it. But I do think, overall, helping them is the right solution, because going onto the Euro was such a positive step for them. But if they bail out without being tough... what a mess that's going to be. But by the time the problems from it get serious, which might take a decade, people will forget that the EU and Greece are having the problems because of the bailout. People just aren't very good at sussing out delayed cause and effect. And among the few who do know, there will be plenty of apologists that will say that it would have been worse if we'd forced them to balance their own budget. At every bailout step, the immediate pain will always look worse than the long-term pain, so the cycle of bailouts and apologia will continue.

The number of ways governments simply refuse to admit they don't have enough money to do what they want to do amazes me. Political reality and fiscal reality are very different things. Look at the ongoing clusterf*ck in California. They didn't solve anything last year, and absolutely nothing has happened in that state to examine the problem and start serious structural reforms. They just stole a bunch of money from their cities to balance their books, and then completely dropped the issue until the next budget cycle.

Think of how impossible it would be to fix ANYTHING in California, if they could print money.

Axon - Some of the problems are Greeks inability to control their deficits. But a lot of it is also the speculators. Then there is the deficit spending automatic stabilizers that happen during recessions. This is the worst time to go hard ass on the Greeks.

So Greeks choices are high inflation or depressionary deflation. They do have a middle ground but that would take control of the Euro away from the Germans and bring it back to the member states.

Spain was deficit neutral during the boom. Now their deficits are what 12% of GDP. The problem is that the Germans are so focused on low inflation that they do not understand that during recessions deficits do happen and it is okay.

IMAGE(http://static.seekingalpha.com/uploads/2010/2/14/saupload_krugman_chart_3.png)

The problems are not country deficits but rather too much private debt. High deficits are a symptom not the cause.

http://seekingalpha.com/article/1885...

Aetius wrote:

No, sorry, inflation is not natural at all - see what Malor wrote. The natural state is deflation, with the rate depending on how fast the economy grows.

Deflation as long as there is no input from a central authority. The amount governments spend in Europe easily creates 2% inflation. And the ECB does not have the reserves in lend that much to the eurozone or the EU.

Aetuis wrote:

Jean-Claude Trichet[/url]]“Speculation on more and more elevated sovereign risk has been one factor behind spreads being driven to very high levels,” Trichet said. “This is why it was very important that the heads of state and government declared” on Feb. 11 “that they were ready to ‘take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole’.”

That is a man who does not grasp the situation. It is not the speculators who are causing the problem, but rather the Greek government's irresponsible borrowing and spending.

Aetius wrote:

Jean-Claude Trichet[/url]]European Central Bank President Jean-Claude Trichet and Dominique Strauss-Kahn, managing director of the International Monetary Fund, told lawmakers in Berlin yesterday that the move would “undermine market confidence so much” that a Greek bailout would “take longer and cost that much more,” a German politician who was briefed by the officials said.

In this quote he's talking about making the private banks participate in the bailout. He's right, but for the wrong reasons. The private banks should take their losses on Greek bonds, rather than be forced to double-down on bad investments.

Mark Gilbert[/url]]Politically, the EU seems unwilling to contemplate such an amputation. So the gangrene will spread.

You know what’s coming next. ECB President Jean-Claude Trichet will recall his comments earlier this month to the Kellogg School of Management in Illinois, when he said “crisis management requires agility and innovation to meet the idiosyncrasies of a specific crisis.” He’ll bend and twist the rulebook to come up with some way for the central bank to start buying government bonds in the market, capping the yield increases seen this week in an effort to halt the contagion.

In other words, Trichet has done everything except actually come out and say that he wants to directly monetize the bonds. He can't do that, because it's against the rules, but it is not at all a fringe belief that he will find a way to do so - similar to how our Fed is not currently directly monetizing treasuries, but instead is working several back-door deals where they instantly buy up treasuries from the "open market" or buy up worthless assets at inflated prices. All of these things are "printing money" - creating money where there was none before.

Dealing with the issue about printing money, all you have is Mark Gilbert's opinion. I don't see Trichet or the Germans, who are calling the shots here, even hinting at it. I'm going to be clear here, as long as the Germans are underwriting the euro the ECB will not print money. If it does, I will eat my hat.

Aetius wrote:
Aetius wrote:
But you are assuming that is what will happen. Pressure is on in Germany for the private German banks you help create this mess in Greece help in the bailout but we shall have to see what happens. Lets not argue over a hypothetical.

Yep, we'll see. Trichet is opposed, and that makes me think it's not going to happen, despite what the Germans want - the German government has been ignoring public opinion on this for years.

Merkel is very popular, where are getting that from? (Curious)

Aetius wrote:
Ireland, Greece and Portugal are a tiny percentage of the EU's GDP, Germany and France could bailout all three country and not break a stride. What is going on is trying force the rules of the EMU.

Can Germany and France bail out the UK? The numbers might work, but I don't believe they'll be able to assemble the political will necessary, when they are having a hard time with Greece.

I think you meant Spain (UK not in eurozone). Yep, Spain would be the end of the euro and that eventuality is not worth thinking about. That's why this bailout has to happen.

Still, the UK is the next option for speculators and the next government in Britain knows that.

Aetius wrote:
No, its precisely what you would like to see happen because it fits your political ideology. Greece can restructure its debts, get rid of some of there incredibly healthy entitlements and enact some reforms in labour and grow its way out of the economy. Destroying the country is not the best option here for anybody.

You're making three assumptions: 1) the Greek government will enact the reforms necessary to make the fundamental changes they need without financial pressure, and 2) that such an action would destroy the country, and 3) kicking the can down the road will make the problem easier to deal with. I disagree on all three. The short-term pain is a relatively small price to pay for an economy that is corrected to something that resembles reality, instead of sputtering along for years trying to prove that they can borrow their way out of a debt problem. You can't grow your way out of a debt problem if you continue deficit spending that is wildly in excess of any possible growth!

If the bailout occurs, what will happen is that the Greeks will immediately stop cutting - the political pressure against the cuts is intense right now, so there will be a lot of rhetoric and not much action. The Greeks will know that the EU can be manipulated into bailing them out, and thus the incentive will be to continue bailouts as long as the EU is willing. They will negotiate, and draw things out as best they can while avoiding the cuts that must be made. They will do their best to present themselves in the best light while hiding their real financial state as much as possible, similar to what they've been doing. It will go on until the EU says NO. The EU can avoid this trap by simply saying no right now. If they don't, the long-term cost is going to be as much as the Greeks think they can get.

Like I said above, the EU is based on giving out structural funds to countries in order for them to become more competitive in the market. Ireland is the poster boy of that policy. What the EU has learned from decades of that policy is how to give out funds but with strings attached. I really wouldn't worry about that, there will have to be quid pro quo.

goman, I happen to agree with much of what you are saying but the Greeks signed up for the euro with their eyes wide open (lied to get in) and cannot be allowed to contaminate the eurozone by defaulting and hiking up the lending rates of Portugal, Spain, Ireland and Italy. I agree its is completely unfair that speculation can exacerbate the problem but we have to deal with the world as it is and not as we wish it were. The simple choice is the Greeks suffer pain or we all do. The latter was never going to happen.

That article you linked summary was

So essentially the issues is this one. Spain's economy will not recover, and return to growth till Spanish products become more attractive in price terms, and this only means one thing: some sort of internal devaluation is inevitable, and all the talk about an exclusively fiscal correction is simply an attempt to get rid of the smoke without going to the trouble of extinguishing the fire which is producing it.

Basically what he is saying that Spainish, and by extension us and the Greeks, have to get wages down in order to get competitive. I list you some of the perks that Greek public workers get;

  • Women retire at 55
  • Extra months pay at Easter and Christmas (14 months pay)
  • Hairdressers retire at 53 (dangerous job)
  • Very healthy pensions and welfare payments

Thats just a few. Quite simply they are the authors of there own destruction and we can debate who are what dealt the final blow the reality is we have to clean up the mess.

Thankfully just restoring their public expenditure to sane levels gets them a long way out of this problem.

Axon wrote:
  • Hairdressers retire at 53 (dangerous job)
  • .

    Greek women want to look blonde. Fake blonde hair = peroxide. Peroxide is toxic.

    One country that is looking great in this is France. They are letting the Germans be the ones with sticks. Yet if there is a bailout, their banks will be saved as well.

    Axon wrote:

    Dealing with the issue about printing money, all you have is Mark Gilbert's opinion. I don't see Trichet or the Germans, who are calling the shots here, even hinting at it. I'm going to be clear here, as long as the Germans are underwriting the euro the ECB will not print money. If it does, I will eat my hat.

    You might want to get a fork. Looks like Trichet chose indirect monetization via a collateral guarantee. Expect this to be extended to the other countries in short order.

    goman wrote:

    One country that is looking great in this is France. They are letting the Germans be the ones with sticks. Yet if there is a bailout, their banks will be saved as well.

    From our vantage point the Germans look to be our protectors. If they wanted to, the Germans could take their ball and go home leaving the rest of Europe in a heap. The Greeks are certainly not getting painted as some put upon entity who is getting bullied by the banks or the larger members of the eurozone.

    Aetius wrote:
    Axon wrote:

    Dealing with the issue about printing money, all you have is Mark Gilbert's opinion. I don't see Trichet or the Germans, who are calling the shots here, even hinting at it. I'm going to be clear here, as long as the Germans are underwriting the euro the ECB will not print money. If it does, I will eat my hat.

    You might want to get a fork. Looks like Trichet chose indirect monetization via a collateral guarantee. Expect this to be extended to the other countries in short order.

    Indeed he has. Not happy. They are saying this is an emergency policy with a relaxing of the rules for Greece who just miss out of being able to do this but you are right, Aetius, if they start to do this with other countries the rules will be broken.

    I'm still trying to get all the information on both sides of this but if this is the worst of it I'm still OK with it. Not delighted but I never was. This is just a fire fighting procedure.

    Axon wrote:
    goman wrote:

    One country that is looking great in this is France. They are letting the Germans be the ones with sticks. Yet if there is a bailout, their banks will be saved as well.

    From our vantage point the Germans look to be our protectors. If they wanted to, the Germans could take their ball and go home leaving the rest of Europe in a heap. The Greeks are certainly not getting painted as some put upon entity who is getting bullied by the banks or the larger members of the eurozone.

    If the Germans went home, who would they sell to? The German capitalists need consumers more than the Greeks need them. #2 exporter in the world.

    This is all about keeping the Euro strong. But that is a fools errand if they are going to make the incomes of other country citizens go down. Their own exports will obviously also go down because of lack of demand. So I see this bailout and the imposed austerity measures as deflationary, that will keep Europe in a recession. And not be the savior of the Euro.

    PS - German taxpayers will not have to pay for this. Investors will.

    The Greeks cannot afford there expenditure, deflationary or not. Borrowing in order for them to carry on piling on debt would be a disaster and there is no way you could sell that proposition do the rest of the eurozone. Not the Council of Minister, the ECB or the IMF. Besides, Greece only makes up for 1.5% of the EU's GDP. It could disappear tomorrow and Germany would be just fine. Same with Ireland which is why we acted to prove to the Germans we were worth protecting.

    You are correct in saying it about protecting the euro for their benefit as well as everyone else in the eurozone but that doesn't mean that every country can act like a kid in a candy store and expect the Germans to bail them out. The very point is the Greeks not only lied in order to get into the eurozone but then repeatedly lied about the state of their accounts in order to avoid sanctions by the ECB. At some point that comes a cropper and we are at it now.

    Yes in a perfect world you can follow the Keynesian model and pump money into the economy to inflate it but Greece has no more money to spend and has run out of creditors. Are you seriously suggesting that another countries taxpayers should fund the Greeks extravagant entitlements (even by Europe's standards) because unless they get it that way their country will slip into a severe depression and those same entitlements will just disappear anyway. Germany is saving the Greeks from something far worse than a few wage cuts and retirement age hikes and they should be grateful for it.

    I might point out that the eurozone (not Europe btw) is not in recession. Germany with the aid of France pulled us out of that last year.

    I'll repeat, the debate here is not around Greece and its finances. Its not around the size of the bailout and the sanctions. The real discussion is the classic way in which the EU evolves, usually in sudden spurts. All across the EU people are calling for tighter controls within the eurozone and what forms they will take. A situation like Greece can never happen again and for those steps to be taken the seeds of a Untied States of Europe will have to be sown. If not, then the euro is doomed to fail and if so the federalist will have to come out of the closet and the real fun and games begin.

    What I'm reading is that the bailout packages don't impose enough discipline, and that the deficit will simply grow more slowly post-bailout. They'll cut the deficit, but they won't actually eliminate it. Greece needs to run balanced books for twenty or thirty years, with high tax rates, to dig themselves out of this mess, and it doesn't look like there's the political will to do that.

    Aetius' scenario of chain bailouts, with no end in sight, is looking more and more likely.