Beware of Greeks......

[eytonxav]

Potential for some more international economic chaos:

Athens Mulls Plans for New Currency: Greece Considers Exit from Euro Zone - SPIEGEL ONLINE - News - International

 

[Gone4Good]

Exit from the Euro is generally seen as impossible because it would lead to massive failures in the banking system.

However, if default and massive banking failure are already baked into the cake, as they might be in the case of Greece, than exit from the Euro becomes a viable option because they'll bear most of the same penalties anyway. And leaving the Euro may look increasingly attractive if the ECB continues its policy of price stability for Germany and deflation for the periphery.

And maybe that is what is going on here. Greece is shooting a warning shot in the ECB's and Germany's direction. "Stop the hard money policies or . . .

"Given its 27 percent share of ECB capital, Germany would bear the majority of the losses," the paper reads.

 

[FUEGO]

I think somebody is just talking to soften up the euro and make their exports more competitive.

 

[FIREd]

The anti-Euro movement is gaining momentum. The anti-Euro candidate is leading the polls for the 2012 presidential election in France. The Germans are not particularly happy about footing the bill for the spendthrifts in Southern Europe. And Southern Europeans don't have much liking for the austerity measures dictated by Berlin.

 

[bulletbiter]

The Germans are not particularly happy about footing the bill for the spendthrifts in Southern Europe. And Southern Europeans don't have much liking for the austerity measures dictated by Berlin.

Don't forget that Ireland is not in southern Europe.......and Italy, which IS in southern Europe has not needed a bailout.

 

[FIREd]

Don't forget that Ireland is not in southern Europe.......and Italy, which IS in southern Europe has not needed a bailout.

Thanks for the geography lesson...

 

[bulletbiter]

Thanks for the geography lesson...

You're welcome......just making sure we don't start generalizing.

 

[haha]

You're welcome......just making sure we don't start generalizing.

Good luck with that.

Ha

 

[Gone4Good]

Don't forget that Ireland is not in southern Europe.......and Italy, which IS in southern Europe has not needed a bailout.

And lets not forget that Ireland was held up as the model of fiscal rectitude with a low Debt / GDP and fiscal surpluses (as was Spain) before the banking crisis. Folks have used the Greece example to push an ideological narrative that doesn't really fit with all of the facts. Fiscal mismanagement at the Federal level has less to do with many of these stories than fiscal mismanagement of banks and households - but that story doesn't fit into anyone's agenda so it doesn't get told. Instead we hear constantly about Greece with the implication that their story is representative of the rest of the European Union's troubled economies. It isn't.

Here's Debt / GDP for Ireland. See how fiscally irresponsible they were, cutting Debt / GDP to 25% before the crisis. How is it that nobody talks about what is really happening with the economy?

 

[Meadbh]

Here's Debt / GDP for Ireland. See how fiscally irresponsible they were, cutting Debt / GDP to 25% before the crisis.

Yes, but the problem was irresponsible lending by banks, and the government's unwise decision to bail them out: Irish bank Senior Debt and Subordinated Debt outstanding February 2011

 

[Gone4Good]

Yes, but the problem was irresponsible lending by banks, and the government's unwise decision to bail them out: Irish bank Senior Debt and Subordinated Debt outstanding February 2011

Agreed. But of two possible unwise decisions, the one that let banks grow unfettered with lax oversight was the far more consequential one. Once Ireland's bank balance sheets were allowed to get bigger than the national GDP, and once it became clear the asset side of the ledger was garbage, the country was left with no good options. Letting them fail may have been the better choice, although that is far from clear. The result of that would have looked a lot like Iceland only much, much worse because of excessively tight monetary policy (for Ireland) driven out of Berlin. Iceland, after a sharper fall, is looking better than Ireland but that is largely due to a massive currency devaluation - an option not available to Ireland unless it left the monetary union.

But that isn't the story we hear. Mostly we hear about profligate federal spending and welfare states.

 

[Ed_The_Gypsy]

The Germans are not particularly happy about footing the bill for the spendthrifts....

You realize that all of this was inevitable. The concept of the Euro was fantasy, that every country would behave themselves. When everyone has responsibility, no one has responsibility.

 

[Gone4Good]

You realize that all of this was inevitable. The concept of the Euro was fantasy, that every country would behave themselves. When everyone has responsibility, no one has responsibility.

There is a lot of economic research into what constitutes an optimal currency area, and Euroland fell short on a number of key points: high barriers to labor migration and a lack of a central fiscal agency, are two biggies. There are reasons why the US common currency seems to work better for 50 states than the Euro does for its member countries. You can see it in the fact that Nevada, which had a real estate bubble and banking crisis similar to Ireland's, doesn't look at all like Ireland. One reason is that the Federal Government is responsible for dealing with miscreant banks in Nevada whereas Ireland is on their own.

 

[deserat]

Don't forget that Ireland is not in southern Europe.......and Italy, which IS in southern Europe has not needed a bailout.

Yet.....

 

[chinaco]

If they do... it will probably make travel to Greece very very cheap.

It has been on my travel list for a long time!

Greek 10-year bond yields and the cost of insuring the country’s debt against default rose to all-time highs at the end of April amid speculation about a debt write-off or an extension of repayment timelines. Standard & Poor’s cut Greece’s long-term sovereign credit rating by two levels yesterday to B, five notches below investment grade. The rating may be lowered further, S&P said.
...
Yields on two-year Greek notes fell 28 basis points to 25.3 percent at 2.33 p.m. in Athens today after hitting a record last week. The 10-year yield fell 28 basis points to 15.4 percent, up from 12.4 percent at the start of the year

Greek Fund Industry Head Warns Debt Restructuring Would Devastate Economy - Bloomberg


Apparently the people with CDS will clean up!

 

[Gone4Good]

Greek Fund Industry Head Warns Debt Restructuring Would Devastate Economy - Bloomberg

And an alternative view . . .

Why Greece Should Reject the Euro

The experience of Argentina at the end of 2001 is instructive. For more than three and a half years Argentina had suffered through one of the deepest recessions of the 20th century. Its peso was pegged to the dollar . . . The Argentines took loans from the IMF, and cut spending as poverty and unemployment soared. It was all in vain as the recession deepened.

Then Argentina defaulted on its foreign debt and cut loose from the dollar. Most economists and the business press predicted that years of disaster would ensue. But the economy shrank for just one more quarter after the devaluation and default; it then grew 63 percent over the next six years. . . . Within three years Argentina was back to its pre-recession level of output

 

[Gone4Good]

It's also worth noting that austerity isn't working . . .

After a year of cost reductions and tax increases, Greece’s 10-year bond yields more than 15 percent, twice the rate at the time of the bailout a year ago.

And Portugal . . .

The steps the government says will tame the euro region’s fourth-biggest budget deficit will lead Portugal's economy to contract 2 percent this year, twice the previous forecast, Finance Minister Fernando Teixeira dos Santos said on May 5.

A similar phenomenon is true most everywhere else austerity was tried.

Meanwhile we have an entire political party advocating similar tight money and fiscal contraction for the U.S. as a recipe for growth. Scary.

 

[haha]

And an alternative view . . .

Why Greece Should Reject the Euro

This is interesting, but Greece may be a different ball game from Argentina. Argentina is a resource economy, and it cut loose its debt just about when the world started demanding crazy amounts of food, fiber, and ores. Argentina has usually had poor governemnt, as has Greece, but at least Argentina has much to sell to the world beyond olive oil and ruins.

I cannot say whether walking away from the Euro and the community would work for them or not, but as a standalone country, they are going to be a poor country. Some countries, like some people, are likely better off trying to stay on welfare.

Ha

 

[Gone4Good]

This is interesting, but Greece may be a different ball game from Argentina. Argentina is a resource economy, and it cut loose its debt just about when the world started demanding crazy amounts of food, fiber, and ores.

You can look to Iceland as another possible example . . . no sovereign default but massive banking default and a huge devaluation. Except for fish and geothermal (which can't be exported) Iceland lacks any real natural resources. And yet here is the country's balance of trade stats . . .

The bigger problem for Greece is that they don't have a currency of their own any longer. Argentina simply walked away from its dollar peg and Iceland walked away from its Euro peg. Greece would have to reintroduce the Drachma, which would be challenging under normal circumstances. Having to do it in conjunction with a sovereign and banking crisis might be impossible.

 

[Ed_The_Gypsy]

Regardless of the causes, high unemployment distresses me.

It is not good social policy to have large numbers of desperate citizens.

Even if it becomes cheap to visit Greece or Portugal or Spain, I would be quite wary of increased opportunistic crime against visitors. It depends on the country. Iceland I would not worry about.

 

[Gone4Good]

Bringing us full circle, this is how Greece leaves the Euro (Greek Restructuring a 'Horror'). . .

Bank of France Governor Noyer’s remarks put him in line with ECB Executive Council members Juergen Stark and Lorenzo Bini Smaghi as well as Bundesbank President Jens Weidmann. All of them have said the Frankfurt-based ECB may stop accepting Greek sovereign debt as collateral if euro-area governments proceed with a plan to extend Greece’s debt repayment schedule.

It works like this - Greece can't repay it's debt and is forced to restructure. The ECB stops accepting Greek sovereign debt as collateral, which causes a full-scale banking crisis in Greece. Faced with the collapse of its banking system, the 'penalty' for leaving the Euro drops precipitously. Greece imposes capital controls, repudiates its debt, and introduces a devalued currency.

The ECB comments look like a 'return-fire shot across the bow' at Greece for suggesting restructuring. The only thing is, the ECB is shooting a water pistol. What good is threatening financial ruin on a country who's only choice is between competing versions of financial ruin?

 

[clifp]

I think what is most amazing about the Greek mess is how quickly events have unfolded. Three years ago Greek 10 year bonds were yielding under 5%. Even 1 year ago they were under 8% now they are at 16% now.

I wonder what will happen to US Bond yields when the RMB replaces/supplements the dollars as the worlds reserve currency.