Debt, The EU, And Greece

3QuarksDaily has some very interesting observations:

http://www.3quarksdaily.com/3quarksd...

(I can't hotlink that because of the dashes, sorry.)

As yet another act in the world economic drama concludes, and another troop of actors prepares to take the stage, the basic point of the play is being lost. As speculative manias overtake other countries and/or other assets, and as instances of fecklessness and fraud feed the public demand for vengeance, we are overlooking the fact that we are living through the most massive redistribution of wealth rich societies such as ours have seen since the Gilded Age at the end of the 19th Century. The massive debts of private capital are being socialized. States are taking on society’s debts at a rate not seen since the Second World War. They are creating public debt to pay off or at least absorb the debts arising from asset crashes, bank and brokerage failures and near-failures, and massive unemployment triggered by recession. Banks and other financial institutions could not carry their own debt, so now the government is carrying it for them, either directly or by providing them with new credit at no cost with which they can become profitable again. The banks and other brokerage institutions have effectively cleaned up their balance sheets with newly created public debt, while the U.S. and European central banks have laundered their bad debts.

The rest of it is talking more about the actual Greek bailout, and that particular quote isn't terribly relevant to this specific situation, but it's just so damn good that I wanted to repeat it.

Malor wrote:

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.

Ireland was in a far worse position in the '80s and got out of it by the late '90s. Of course we then embarked on massive economic expansion (Celtic Tiger is was called) and let our economy overheat far too much which has us in a different hole now but the fact remain we did get out of the original hole far quicker than many predicted. Greece can do the same. What they need to do like we did is grow their GDP and reduce public expenditure. It takes pain but it is possible.

If the Greeks just paid their taxes and gave up their pensions then this would go away.
IMAGE(http://graphics8.nytimes.com/images/2010/05/02/weekinreview/02marsh-image/02marsh-image-custom1.jpg)

The focus on Greece is the story, not the reality.

goman wrote:

If the Greeks just paid their taxes and gave up their pensions then this would go away.

How long before we are saying the same about the US?

I find it amusing (at least as amusing as it can be, seeing as how my retirement is linked to it) that this Greek tragedy has been causing the stock market to act like it's on a teeter-totter. One day the market is up 100+ points on the "easing of worries" and then the next it's back down 100 due "more worries".

goman wrote:

Graph

Ireland's debt is about €80 billion, not €867 billion. That graph seems full of errors. Even if we did take it at face value, it leaves out what deficits the countries are running, how high their debt is to their GDP and their cost of borrowing nor does it address the fundemental problem that the Greeks cannot be allowed to default on their debts. I might say that it was produced to garner a certain reaction.

Look goman, I'm not some evil right wing Thatcherite. I describe myself as a social democrat or champagne socialist if I'm feeling cheeky. I support minimum wages, the welfare state, public schools and hospitals but I also accept I have to pay for them with my taxes and those taxes have to cover the state expenditure. The Greeks quite simply cannot afford their welfare state and who are what is forcing the issue is entirely moot.

Axon wrote:
goman wrote:

Graph

Ireland's debt is about €80 billion, not €867 billion. That graph seems full of errors. Even if we did take it at face value, it leaves out what deficits the countries are running, how high their debt is to their GDP and their cost of borrowing nor does it address the fundemental problem that the Greeks cannot be allowed to default on their debts. I might say that it was produced to garner a certain reaction.

Look goman, I'm not some evil right wing Thatcherite. I describe myself as a social democrat or champagne socialist if I'm feeling cheeky. I support minimum wages, the welfare state, public schools and hospitals but I also accept I have to pay for them with my taxes and those taxes have to cover the state expenditure. The Greeks quite simply cannot afford their welfare state and who are what is forcing the issue is entirely moot.

Those are dollars not Euros. But even with that explanation, it does not jive with your numbers. This is because it is both governmental debt and private debt. Since neoclassicals and the cohorts in the Monetary Union ignore private debt they did not and do not see this asset inflation and resultant debt deflation.

I think you need to read some Post-Keynesian economics, Modern Monetary Theory to be specific, and you will realize that taxes do not pay for that stuff, but productivity does.

Gotta wonder how much deficit spending it took to build both Death Stars.

goman wrote:

Those are dollars not Euros. But even with that explanation, it does not jive with your numbers. This is because it is both governmental debt and private debt. Since neoclassicals and the cohorts in the Monetary Union ignore private debt they did not and do not see this asset inflation and resultant debt deflation.

I think you need to read some Post-Keynesian economics, Modern Monetary Theory to be specific, and you will realize that taxes do not pay for that stuff, but productivity does.

Its still doesn't change the fact that those figures are not comparing like with like. Ignoring all that, I'm at a loss as to what you are driving at. Explain it to me like I'm a five year old as I fail to see how it solves Greece's problem or is some how not a problem.

Axon wrote:
goman wrote:

Those are dollars not Euros. But even with that explanation, it does not jive with your numbers. This is because it is both governmental debt and private debt. Since neoclassicals and the cohorts in the Monetary Union ignore private debt they did not and do not see this asset inflation and resultant debt deflation.

I think you need to read some Post-Keynesian economics, Modern Monetary Theory to be specific, and you will realize that taxes do not pay for that stuff, but productivity does.

Its still doesn't change the fact that those figures are not comparing like with like. Ignoring all that, I'm at a loss as to what you are driving at. Explain it to me like I'm a five year old as I fail to see how it solves Greece's problem or is some how not a problem.

It is not about Greece. It is about the Euro and all the banks that have financed in the Euro.

If the austerity measures go through, it will not help Greece or the Euro. That package is extremely deflationary. I am not the only one saying it but many economists are also saying it.

http://www.businessweek.com/news/201...

If the current bailout is put in place, it will be enough to meet their immediate financing problems not only this year but for the next year or two,” Goodhart said. “The problem is that it doesn’t meet their adjustment problems. It doesn’t deal with the problem the Greeks, in part from having too large a deficit and too large a debt ratio, are very uncompetitive and if they actually cut back the deficit as fast as is being required they’re just going to go into appalling deflation.

http://www.nakedcapitalism.com/2010/...

But the focus on the Greece trigger is masking a bigger and more complicated set of issues. The supposedly successful rescue of the global financial system was achieved by making sure bank investors took no pain. That was a dangerous decision: it promoted moral hazard (risk capital, like shareholders and bondholder, are supposed to take losses when businesses come a cropper) and kept the incumbents in place, assuring that there would be no change in any of the firms that had driven themselves off the cliff. The rationales were many: there wasn’t enough time to wind down a dealer, the banks were too interconnected to permit any major one to fail.

Like I said when I posted that graph. Greece is the story, not the reality.

There are 2 ways to fix this mess. Of course they are doing it the 3rd way.

The 2 ways

More Integration -
Yes this means that the Germans are going to used as collateral for Greece debt. It is basically saying Euro debt is euro debt. Not country debt.

Less integration -
This means that Greece leaves the Euro and goes back to the Drachma. That way they can depreciate their local currency and not have to go into sever deflation.

Ah I see where you are coming from. First and foremost this is about saving the Euro, absolutely. I don't think anyone is denying that. To put it more accurately, Germany was asked if it was prepare to but itself on the block for the currency. Short answer, it is. So the Euro will survive for the foreseeable future.

Secondly, nobody said they were looking to save Greece from a steep recession but only save them from defaulting and driving up the lending rates of Portugal, Spain, Italy and Ireland which in turn could bankrupt them and effectively ending the euro with very serious repercussions for the region. This was basically to stop the rot. Will it work? We will have to wait and see.

Just to be clear, helping Greece was never the objective. Only stopping them from defaulting was.

Moving on to the piece about moral hazard, I don't disagree but what was the alternative? The problem is there isn't one. Greece leave the euro? Nope. Greece default on its debt? Nope. The ECB and EMU throw the entire rulebook out the window panicking investors further? Well, partially. The Germans finance a much better standard of living for the Greeks? Nope. Or am I missing something?

Edit;

goman wrote:

There are 2 ways to fix this mess. Of course they are doing it the 3rd way.

The 2 ways

More Integration -
Yes this means that the Germans are going to used as collateral for Greece debt. It is basically saying Euro debt is euro debt. Not country debt.

Less integration -
This means that Greece leaves the Euro and goes back to the Drachma. That way they can depreciate their local currency and not have to go into sever deflation.

Intregration won't happen fast enough to save Greece even if every parliament in the eurozone agree to it tomorrow and even if it did, Greece would be forced to enact almost the same reforms. Probably more, when I think about it.

Leaving the euro would result in every Greek citizen going down to there bank, withdrawing their cash and sending it abroad. The capital flight would be enormous. Like I said above, only Germany can leave the euro because the new Deutsch Marks would be more valuable. Everyone else's new currency would be cheaper. The new Drachma would be worthless and they would still have to trade with the eurozone and have all their debt in euros. Its simply not an option and not going to happen.

The real problem is that they're living way beyond their means, and have been doing so for so long that their debts are basically unpayable.

There just aren't any good solutions at that point. Good solutions don't exist. Deflation, while painful, will preserve more underlying wealth than inflation, so that's the path they should take. It's far less popular, but they will hit bottom and rebound much faster. With inflationism, it takes much longer to hit bottom, and that bottom is total disintegration of the economy, which won't happen under a deflation.

They may THINK it has, but the core of their economy will survive a deflation.

Essentially, inflation is the path of lying to your creditors. Deflation is the path of being honest. Economic outcomes are always best when all players are honest, even in terrible times.

Malor wrote:

The real problem is that they're living way beyond their means, and have been doing so for so long that their debts are basically unpayable.

There just aren't any good solutions at that point. Good solutions don't exist. Deflation, while painful, will preserve more underlying wealth than inflation, so that's the path they should take. It's far less popular, but they will hit bottom and rebound much faster. With inflationism, it takes much longer to hit bottom, and that bottom is total disintegration of the economy, which won't happen under a deflation.

They may THINK it has, but the core of their economy will survive a deflation.

Essentially, inflation is the path of lying to your creditors. Deflation is the path of being honest. Economic outcomes are always best when all players are honest, even in terrible times.

Nice of you to excuse the mess the bankers made. Without their Credit there is no Debt. Without restructuring the banking sector your magical deflation cure is just a spiral for more deflation.

So where is hyperinflation? (It is impossible with so much private debt) It is only possible with too much public debt and the loss of productivity and the loss of the ability to tax.

Axon wrote:

Ah I see where you are coming from. First and foremost this is about saving the Euro, absolutely. I don't think anyone is denying that. To put it more accurately, Germany was asked if it was prepare to but itself on the block for the currency. Short answer, it is. So the Euro will survive for the foreseeable future.

Secondly, nobody said they were looking to save Greece from a steep recession but only save them from defaulting and driving up the lending rates of Portugal, Spain, Italy and Ireland which in turn could bankrupt them and effectively ending the euro with very serious repercussions for the region. This was basically to stop the rot. Will it work? We will have to wait and see.

Just to be clear, helping Greece was never the objective. Only stopping them from defaulting was.

Moving on to the piece about moral hazard, I don't disagree but what was the alternative? The problem is there isn't one. Greece leave the euro? Nope. Greece default on its debt? Nope. The ECB and EMU throw the entire rulebook out the window panicking investors further? Well, partially. The Germans finance a much better standard of living for the Greeks? Nope. Or am I missing something?

Edit;

goman wrote:

There are 2 ways to fix this mess. Of course they are doing it the 3rd way.

The 2 ways

More Integration -
Yes this means that the Germans are going to used as collateral for Greece debt. It is basically saying Euro debt is euro debt. Not country debt.

Less integration -
This means that Greece leaves the Euro and goes back to the Drachma. That way they can depreciate their local currency and not have to go into sever deflation.

Intregration won't happen fast enough to save Greece even if every parliament in the eurozone agree to it tomorrow and even if it did, Greece would be forced to enact almost the same reforms. Probably more, when I think about it.

Leaving the euro would result in every Greek citizen going down to there bank, withdrawing their cash and sending it abroad. The capital flight would be enormous. Like I said above, only Germany can leave the euro because the new Deutsch Marks would be more valuable. Everyone else's new currency would be cheaper. The new Drachma would be worthless and they would still have to trade with the eurozone and have all their debt in euros. Its simply not an option and not going to happen.

About Point 1. Germans need to let go. Let the Euro depreciate. There will be no hyperinflation. Mainly because there is just too much debt. Instead they want their pound of flesh from the Greeks. Higher taxes and lower wages during a recessions makes recessions worse and less likely the Greeks will be able to pay back the debt.

About Point 2. By decree the Greek Government could say that they will back all conversions of Euro to Drachma. So there would be no need for a run on banks. Also people will be paid in Drachmas not Euros. So again why would the Greek people want to hoard Euros? They would be worthless in Greece. Also if the bankers want to get paid they will go along with this. The capital flight scare tactic is nonsense. People are making money in Greece (tourism). Why would they throw that away?

Also if they just let the situation go the 3rd way (in between) then Capital Flight and nonpayment of debt happens anyway.

Sweden had similar issues back in the early 1990s. Too much debt. But since they owned their own currency devaluation took care of most of their debt issues without draconian deflationary austerity measures.

Nice of you to excuse the mess the bankers made.

The Greeks took on those debts knowingly. That's not the fault of the bankers. If they default, the bankers will be hurt, but they're supposed to have the expertise to avoid lending to bad borrowers.

Without their Credit there is no Debt. Without restructuring the banking sector your magical deflation cure is just a spiral for more deflation.

Up to a certain point, sure... deflation does have a vicious spiral to it, just like the "virtuous" cycle of inflationism and debt issuance. But it bottoms out in the same way that inflationism will, barring rules changes and ever-more extreme interventions by the central authority. Eventually, you get down to the really solid parts of the economy, and those survive, like the ancient old-growth redwoods in a forest fire.

So where is hyperinflation? (It is impossible with so much private debt) It is only possible with too much public debt and the loss of productivity and the loss of the ability to tax.

Well, you're starting to see inflation in a lot of the numbers now, most likely from the Fed's monetization of a trillion plus in mortgages, plus all those zero-interest loans. The headline inflation numbers are as untrustworthy as ever, but it's creeping into the PPI and other measures. It's not like you go from a near deflationary crash to hyperinflation overnight. Further, I expect more deflationary waves in the future, as the new lies we're telling become more obvious -- and we'll keep picking up the game and telling bigger lies. Over the long term (say, two decades), there's really two ways that can go... either we have a deflationary wave that's too strong for the central authorities to overcome, and the economy crashes, or they manage to destroy the various currencies through inflation, and the world economy is completely ruined, turned into a smoking crater.

Eventually, they're going to run out of promises to make, and they'll have to either default or resort to outright money printing, instead of taking on debt. That's when you'll see hyperinflation. But while it's just debt issuance, you don't see that much inflation, because it's not creating tons of money yet. It's just setting up the endgame where they will have to do that.

Getting nasty over there - a couple of people were killed when a petrol bomb was thrown into a bank.

The bodies of two women - one pregnant - and a man were found inside the Marfin bank branch on Stadiou Avenue in central Athens. They were among 20 people working there when the petrol bomb was thrown. Most of the employees managed to escape the fumes as the flames took hold, but the three found their way blocked as they tried to escape to the roof and they suffocated.

Prime Minister George Papandreou told MPs in parliament the killings were a "murderous act". "Nobody has the right to violence and particularly violence that leads to murder. Violence breeds violence."

But one of the protesters told the BBC it had been the fault of the police, whose "brutality" had led to the escalation. "It's something tragic but I think that the responsibility in the last instance lies with the government because the government unleashed a tremendous amount of police violence against a huge demonstration," Panayotis Sotiris said.

Linky.

goman wrote:

About Point 1. Germans need to let go. Let the Euro depreciate. There will be no hyperinflation. Mainly because there is just too much debt. Instead they want their pound of flesh from the Greeks. Higher taxes and lower wages during a recessions makes recessions worse and less likely the Greeks will be able to pay back the debt.

About Point 2. By decree the Greek Government could say that they will back all conversions of Euro to Drachma. So there would be no need for a run on banks. Also people will be paid in Drachmas not Euros. So again why would the Greek people want to hoard Euros? They would be worthless in Greece. Also if the bankers want to get paid they will go along with this. The capital flight scare tactic is nonsense. People are making money in Greece (tourism). Why would they throw that away?

Also if they just let the situation go the 3rd way (in between) then Capital Flight and nonpayment of debt happens anyway.

Sweden had similar issues back in the early 1990s. Too much debt. But since they owned their own currency devaluation took care of most of their debt issues without draconian deflationary austerity measures.

Malor pretty much sums up my feelings regarding the first point.

The second point is easily answered by pointing to Argentina in 2001 as an almost carbon copy of what will happen only the Greeks will have all their debt still in euros which will be an order more valuable that the New Drachma. Also, the Greek government issuing decrees to private banks to switch all their euro deposits to Drachma to me sounds completely far fetched and laced with impracticalities. Even if they could, the euro would remain quite valuable in Greece (I fail to see how a currency backed by Germany as worthless) and the New Drachma would be pittance. It would amount to economic suicide and its a given fact. Once in the euro, you hang on for all you got (unless your Germany :)).

As for your example about Sweden, its not apples with apples. Sweden was at the centre of a growing EU and a very different climate. However your contention that devaluation solved their problems is provably false. The Swedes constructed a "bad bank" to buy up the bad assets at a reduced rate from the private banks in order to take them off the books. Once the private banks were happy to start lending again the bad bank started to sell the assets back onto the open market and in the end the bad bank made a profit. The downside to this path is the government has to put up a huge amount of capital in the first place, the very thing the Greeks cannot do. Ireland is copying the Swedes model with NAMA, by the by, so it'll be interesting to see how useful having the ability to devalue your currency is in the long run.

Oh and this notion that having your own currency is some class of nirvana is strange to me. When we had the punt, my father would save as much money in sterling and dollars as he could. Having your own currency is great if you are a huge economy, outside of that not so much. It's certainly no cure all.

I hate to say it but I do hope those three deaths will have a sobering effect in Greece. Its only money.

Malor and Axon - Debt deleveraging is deflationary, not inflationary. Hence no inflation will happen.

About Sweden - You are correct. The Swedes fixed their financial sector also. But the Europeans now are not. They did the same thing the American banks did else there would be no Housing Bubble in Spain, Greece, and the rest of the Emerging European countries. It was a worldwide phenomenon because banks were making money hand and fist doling out Credit to people with a pulse.

So if Europeans (Euroland and beyond) want to fix their problem, they still need to rethink their financial sector and not just blame the Greeks and Spanish for this mess. Also the Euro needs to devalue, ie let inflation happen. It will probably help Greece, Ireland, Spain, and Germany, more than a bailout and the austerity measures will.

How will it help Greece, Ireland, and Spain - It makes the debt more manageable.

How will it help Germany - It makes their exports cheaper.

Euro devaluation is not going to happen. No chance that all members of the EMU will ever agree on that. Also, good luck finding new creditors after devaluation, they would sure be happy to loan you money again after you pull a rug from under them. And most of the countries will need new credit.

Also regarding the effect on debts: Spain, Portugal, France and other countries also have some bonds denominated in USD, so euro devaluation would actually make those more expensive.

Germany says "Ja". That's it, done deal. Now the real fun and games begin. This will be the deciding issue in the EU for the next year if not decade.

You know, I heard again on the BBC that they're doing the Greek bailout 'to protect the Euro', but I don't see how A leads to B. If Greece defaults, and a bunch of Euros disappear from bank ledgers, that will make Euros stronger, not weaker. Am I missing something?

If Greece defaults the lending rate for the others PIIGS (Portugal, Ireland, Italy, Greece and Spain) could go up. Now Portugal and Ireland can be bailed out but out of the four only Portugal and Ireland are showing willingness to cut their cloth to suit their measure easing the risk of requiring a bailout. Spain and Italy are not. If Spain or Italy have to be bailed out the only way they could be is to print a serious amount of cash. At that point the Germans pull the nuclear option and pull out for the simple reason that they can and everyone else cannot. Europe descends into chaos.

Could this all happen? Maybe not but would you be willing to take a punt on it. (excuse the pun )

Hmm, well, if that's how it would play out, then Germany is throwing itself into a fire to save a piece of paper. If the other countries in its economic union refuse to live within their means, that will inevitably suck the wealth out of the one economy that does.

That's true but Germany is an export led economy by a huge margin. It could survive getting out but it would be left with a much smaller market. On this very point goman is very much correct. Like I said above, Germany can swallow Greece, Portugal or Ireland. Spain or Italy not so much. To boil it down, Germany and France are really trying to protect Spain and Italy by stopping the rot well before it reach them.

As far as the ability to live within means issue, I've said repeatedly in this thread, the only answer to that is the beginning of a federal system where budgets are approved by the ECB. Any other way will mean the euro will fail.

As it stands now, I'm genuinely very worried. The bailout does not seemed to have worked but it might be a reaction to the British election. The next few weeks are pivotal.

To boil it down, Germany and France are really trying to protect Spain and Italy by stopping the rot well before it reach them.

The rot is the excessive spending. Bailing out Greece is just treating symptoms without treating the real cause, if that's their true motivation.

Malor wrote:
To boil it down, Germany and France are really trying to protect Spain and Italy by stopping the rot well before it reach them.

The rot is the excessive spending. Bailing out Greece is just treating symptoms without treating the real cause, if that's their true motivation.

Yes and that's why Greece had to impose austerity budgets to get the bailout. As for dealing with it in a more proactive fashion, that could well define the region politically for a lifetime and the process has already begun.

Edit: And it looks like we will hear some details by tonight. The rhetoric coming out of Brussels has notably changed as well. This is all buying time, however. There needs to be some tough decisions for every country in Europe. Some have already done it but others must do as well.

Malor wrote:
To boil it down, Germany and France are really trying to protect Spain and Italy by stopping the rot well before it reach them.

The rot is the excessive spending. Bailing out Greece is just treating symptoms without treating the real cause, if that's their true motivation.

I too am afraid that this will not save Greece, only postpone its inevitable demise. Too bad that Commission was so soft when the Stability and Growth Pact was being breached all around. Now it has to prove that it can tame overspending of the countries.

Well that exceeded my expectations. Basically a €750 million loan guarantee has been issued by the 16 eurozone countries and the IMF to fend off further speculation. Its not great but they have resisted calls to start printing money which is a line I hope they don't cross. I know, Aetius, I know Buying government bonds from weak countries isn't prudent but it does at least have something of value being traded.

Like I said above, this is all buying time. If the PIIGS don't change their ways, things could be hairy. I might suggest that if you are following this thread this piece from Today with Pat Kenny on RTE1 was excellent this morning. Moore McDowell is someone I have a metric ton of respect for and has been quite accurate in his predictions for as long as I can remember. Very level headed discussion about the issues at play here.

That's an excellent audio link, by the way. One of the two economists thinks they should be printing money, the other thinks that's a bad idea, but they both agree about the particulars of what's being done here and what it means.

In short: what's happening here is that the ECB is using its infinite creditworthiness to back Greece, and presumably Spain and Portugal. They are not printing money to fund these guarantees; they are selling off other assets and bonds of their own, and using the proceeds to buy government debt. This won't cause inflation yet, because they're moving money from the market into the pockets of these governments.

The trap here is: will these countries, now that they're not under as much pressure, be willing to undergo the near-cataclysmic structural changes it will take in order to get solvent again? Portugal has made it sound like they're willing to do whatever it takes, but I'm not sanguine about the others. If they fail to make huge structural changes, the ECB will end up being forced to print money to pay back the people who bought their bonds, because they won't be getting the money they expect from the governments in question. And that will be inflationary, eventually.

What this does is give them some breathing space; the open question now is whether they're willing to get out the hot irons and start cauterizing the bleeding. My experience with politicians suggests that they will not actually fix their problems, and that this will start a long slow slide into fiscal irresponsibility all over the EU, but we'll see how it goes.

The Commission will publish the plans tomorrow but the broad details so far are if you have to access these loans, the cuts and tax hikes will be made for you. So either you'll manage your economy properly or the ECB will do it for you.