EU Ponies Up Trillion Dollar Rescue

[Jason]

Hilaire - it has been a real achievement of the political discussion in the UK / EU topics that we've all remained very polite (in contrast to some of the US politics discussions)and I'm sure that you are doing the same. So that's great.

 

[Jason]

Even under the IMF program, the Greek debt will reach 150% of GDP in three years, and you will need GDP growth of 7-8% for forever just to pay the increased debt. Even with both of these conditional programs, Greece is effectively insolvent. Better to restructure the debt now. A haircut of 50% would be about right.

Given that the Angela Merkel effectively lost control of one house of the German Parliament/Bundestag because she supported the much smaller bailout of Greece. What will the reaction of the Westphalians be when they are asked to pay even more to bail out Greece? This new bailout package may never be ratified, even if Greece meets all the conditions required to meet each next bailout payment, as it still needs to clear 14 parliaments in order to be law.

Did you seen the strain on Sarkozy, and Merkel's faces? They looked almost as exhausted as Clegg and Cameron post their election campaign.

Oh, and by the way, 53% of the IMF's contribution which has been calculated at $230B-320B will be paid by the US. So the US helping to save the EU.

Exactly.

The EU is very good at announcing done deals when they are not truly done deals. The Lisbon Treaty does not in itself provide the legal framework for this action. Yes there has been agreement by the nation states of the Eurozone and at this moment they are all acting in agreement. But they can change their mind. Merkel, Sarkozy et al have got their deal, but will face a backlash at home and reneging by nation states. It is one thing to agree to pay out and even pay out some money; it is another to cause poverty in your own country to pay out the lot.

A haircut on Greek debt is of course needed. I would say between 50% and 70%. But of course this would be a body-blow to the Euro. Either Greece leaves the Euro or the whole Euro would be (substantially)weakened. So right now Greeks suffer with the imposition of an austerity programme that will not work all to prop up the European ideal. For that matter there is a case for light trim for Portugal, Spain, Italy and Ireland.

 

[D_Tim McGnaw]

Exactly.

The EU is very good at announcing done deals when they are not truly done deals. The Lisbon Treaty does not in itself provide the legal framework for this action.

That's mostly because the Lisbon treaty had very little to do with the Euro, the mechanisms which allow this agreement are pre-existing in nature and unchanged by the Lisbon treaty.

Yes there has been agreement by the nation states of the Eurozone and at this moment they are all acting in agreement. But they can change their mind. Merkel, Sarkozy et al have got their deal, but will face a backlash at home and reneging by nation states. It is one thing to agree to pay out and even pay out some money; it is another to cause poverty in your own country to pay out the lot.

Of course they can change their minds, but that would be the case no matter what, the issue is how likely are they to change their minds, and if they risk destroying the entire Euro-zone economy by reneging on it I suspect this bailout wont be as hard a sell as as you think. I think it's unlikely the bailout will cause actual poverty in the countries financing it, I suspect you might be exaggerating for rhetorical effect there.

A haircut on Greek debt is of course needed. I would say between 50% and 70%. But of course this would be a body-blow to the Euro. Either Greece leaves the Euro or the whole Euro would be (substantially)weakened. So right now Greeks suffer with the imposition of an austerity programme that will not work all to prop up the European ideal. For that matter there is a case for light trim for Portugal, Spain, Italy and Ireland.

This doesn't make much sense, if austherity measures wont work what on earth would be the point in trimming debt? Unless you're actually recommending that Portugal, Spain, Italy and Ireland cut borrowing, and continue to spend at current levels or levels prior to the current crisis? How would that work?

 

[D_Tully Tunnelrat]

This doesn't make much sense, if austherity measures wont work what on earth would be the point in trimming debt? Unless you're actually recommending that Portugal, Spain, Italy and Ireland cut borrowing, and continue to spend at current levels or levels prior to the current crisis? How would that work?

Well, it is in effect declaring a form of bankruptcy in that you are stating that you cannot pay all the debts you incurred. The benefit of which is that you are given relief, and there are many ways to do this, cut the amount of debt, extend the length, reduce the rate, etc. However, the debtor nation is then tarred, and will always command a risk premium in the markets, if the can get funding. On the plus side, austerity measures for the national budget and people would be reduced, and the nation can resume a more normal economic cycle sooner.

 

[D_Tim McGnaw]

Well, it is in effect declaring a form of bankruptcy in that you are stating that you cannot pay all the debts you incurred. The benefit of which is that you are given relief, and there are many ways to do this, cut the amount of debt, extend the length, reduce the rate, etc. However, the debtor nation is then tarred, and will always command a risk premium in the markets, if the can get funding. On the plus side, austerity measures for the national budget and people would be reduced, and the nation can resume a more normal economic cycle sooner.

That would of course be fine if Greece, Italy, Spain, Portugal (I don't include Ireland in this list because the evidence is that Ireland is probably good for its debts) were not in the euro, being in the euro it becomes a collective problem. The austerity measures, especially in Greece's case are absolutely necessary, and the rest of the Euro-zone countries also have a responsibility towards countries like Greece with regard to helping them pay their debts.

The Euro created a massive collective economic zone, that carries certain burdens as well as certain perks and benefits.

 

[Jason]

Greece needs to declare bankruptcy - for the good of its people. Probably also Portugal, Spain and Italy. Ireland is on the cusp.

But within the Euro they cannot declare bankruptcy. So their people suffer for the political ideal of European integration - an ideal which the people of the countries don't even want. Indeed the Eurozone is a framework which suggests that the Eurozone as a whole must stand or falls. If this really is the case - a big if - it has to fall.

The present deal is not a solution. Right now the hurt to people in Greece and elsewhere is substantial. And the Euro is on a slow slide both in value and prestige. We need a solution.

 

[D_Tully Tunnelrat]

That would of course be fine if Greece, Italy, Spain, Portugal (I don't include Ireland in this list because the evidence is that Ireland is probably good for its debts) were not in the euro, being in the euro it becomes a collective problem.

This can still be done whilst in the EU/eurozone. It is an admission of failure, and thus is to be avoided, but in Greece's case, the only other way out is to leave the euro. I know very little about Ireland's finances, other than the austerity measures there seem to be working, so far.

 

[D_Tim McGnaw]

Greece needs to declare bankruptcy - for the good of its people. Probably also Portugal, Spain and Italy. Ireland is on the cusp.

The good of Greece's people would be served by having the future investment risk reputation of a country like Argentina? Hardly.

So their people suffer for the political ideal of European integration - an ideal which the people of the countries don't even want. Indeed the Eurozone is a framework which suggests that the Eurozone as a whole must stand or falls. If this really is the case - a big if - it has to fall.

Exactly who says that "the people of the countries don't even want" European integration and why is neceassary for you to make the connection between the political idea of European integration and the current economic crisis as though the the one causes the other?

Greece would be getting bugger all to help it with it's finances if it were outside the EU and the Euro, within it it will receive the necessary funds. Without the EU Greece would be a total basket case, and have little or no assistance from anyone.

The present deal is not a solution. Right now the hurt to people in Greece and elsewhere is substantial. And the Euro is on a slow slide both in value and prestige. We need a solution.

The hurt, as you put it, to the citizens of Greece has less to do with the Euro and more to do with their near criminally irresponsible and inept government which lied to the world and the EU about the extent of its incompetence.

Currencies don't have "prestige" they have value only, and this slow slide you speak of is essentially a fevered dream of euroskeptics and jingoist nationalists, unfortunately (or fortunately depending on one's position in all this) it has next to nothing to do with real economics.

Who do you mean by "we" btw?

 

[D_Tim McGnaw]

This can still be done whilst in the EU/eurozone. It is an admission of failure, and thus is to be avoided, but in Greece's case, the only other way out is to leave the euro. I know very little about Ireland's finances, other than the austerity measures there seem to be working, so far.

It can be done while Greece remains within the Euro-zone, however the repercussions for the rest of the countries in that zone would be too damaging. I'll say it again, the Euro is a monetary collective, and yes we can all collectively take the rap for Greece's total economic incompetence or we can move to cauterize the problem by buying up Greece's debts and limit the overall effects on the entire Euro-zone, if the Greeks have to learn to be more responsible in the process well frankly that sounds like a good thing to me.

 

[Jason]

Who do you mean by "we" btw?

Those who value the happiness of real people higher than political ideologies. Those who value freedom above dictatorship.

Greece is hurting. People are unhappy. There is unrest. There have been deaths. All this is in the name of a political ideology. Of course Greece had criminal leaders. But we cannot punish a whole people because of the wrongdoing of their leaders.

Spain has a different sort of misery. With unemployment at 20% and youth unemployment (the under 25s) at well over 40%, Spain has a lost generation, a generation deprived of aspirations to stable employment and the chance to take a part in their society. Portugal is in a broadly similar position. Italy's problems simmer under the surface but are increasingly taking shape in terms of a north-south divide which could tear the country apart.

The EU is hurting people in pursuit of an ideology of European integration that few want. Where there have been referenda the people have spoken against this integration, and been over-ruled by their political masters. Its institutions suffer from a democratic defecit and its commission from endemic corruption.

We, the people, have the democratic right to be heard.

 

[D_Tully Tunnelrat]

It can be done while Greece remains within the Euro-zone, however the repercussions for the rest of the countries in that zone would be too damaging.

Actually it would not be too damaging. What is damaging is the bureaucratic wrangling from which the EU cannot ever wrest itself, because it was not set up to make decisions quickly, or unilaterally, something every fully integrated human system requires in times of crisis. Consensus building tho' laudable is protracted, and fraught with quid pro quo for which there is neither money, nor time. This results in delays which the market, when confronted with decisions to throw good money after bad, discerns as weakness. The market balks, or reduces/stops lending. This inflames social unrest, and creates broken promises, as politicians back track, loosing face. Regrettably in the case of Greece, this has already lead to deaths.

If the fate of all European nations are tied, then to punish the Greeks, after ignoring their transgressions for 10 years, is to punish all of the EU, which is what will cause ultimately the greatest damage to the fiscally innocent. Were Greece allowed to restructure its debt (for which private bankers would have to bear the brunt, or seek their governments bailouts), we could see a positive outcome, as occurred in Mexico, and Brazil (both under the IMF, who is basically re-structuring Greece's economy, not the ECB) when they both ran into major debt issues 12 years ago. No restructuring, no devaluation, or fiscal stimulus, and only more and more austerity, will sorely tempt default (think Argentina), which given the numbers Greece has to work with (which I spelled out in another thread - debt to GDP of 150% in '12 after the austerity measures) will regrettably be the most probable outcome. Buying time can work in many situations, but given the construct of the eurozone, and Greece's fiscal dilemma, this is likely not one of them. All of these funds are hypothetical because they are conditional, due to extensive review processes, and 14 parliamentary votes (should they all result in positive votes), before any monies are released. It's a very dodgy construct.

 

[dandelion]

Greece is hurting. People are unhappy. There is unrest. There have been deaths. All this is in the name of a political ideology. Of course Greece had criminal leaders. But we cannot punish a whole people because of the wrongdoing of their leaders.

3 deaths in a riot? Thats not much. People die because there are bad road signs and they have a crash. people die because the health service which could have saved them didnt have enough money. If the Greeks spent some of that money they borrowed on health, then it has already saved lives which otherwise would have been lost. People will die early because they arent allowed to retire at 50 or whatever it was. You cannot measure this sort of difficulty like that. People will die whatever happens.

Spain has a lost generation, a generation deprived of aspirations to stable employment and the chance to take a part in their society.

I enjoyed the 80s and being one of Maggies millions, personally. Theres way too many people earning way too much for their own good. Society needs to scale back the hours worked and the pointless economic turnover in disposable goods. But perhaps my beliefs on that are due to my own experience? Dangerous to the current economic paradigm if people start to learn working 50 hours a week and getting rich is no guarantee of a happy fulfilled life.

We, the people, have the democratic right to be heard.

So lets cut employment, cut house prices, cut big salaries, cut foreign military adventurism, cut waste, cut energy consumption, cut bureaucracy and volume of legislation, cut the crap in politics.

 

[Jason]

So lets cut UNemployment, cut house prices, cut big salaries, cut foreign military adventurism, cut waste, cut energy consumption, cut bureaucracy and volume of legislation, cut the crap in politics.

More or less what our new UK government will be doing.

The deal between Con and Lib Dem is a great example of cutting the crap. Heads have been knocked together. Sense has prevailed.

House prices and salaries are set by market forces. Governments should establish suitable foundations. A cap on migrants is a start in getting sane house prices. That said these two are difficult areas. I'm reasonably sure we are looking at double digit house price inflation for the next few years (and I think it is a bad thing) and if the next election really is 2015 then I think we could see house prices nearly double their present levels.

 

[dandelion]

More or less what our new UK government will be doing.

I think were all enjoying ourselves today!

The deal between Con and Lib Dem is a great example of cutting the crap. Heads have been knocked together. Sense has prevailed.

Maybe...

House prices and salaries are set by market forces. Governments should establish suitable foundations.

Id agree to that: Government ought to be establishing many more house foundations, plus the houses on top. The main market force applying to house prices is that government has intervened in the market to restrict available building plots. A classic example of total market distortion by government, with admittedly unintended but nonetheless disastrous consequences. Government also intervenes in the employment market, by importing cheap unskilled labour, through its education policies, by the power balance it imposes between employer and employee. All in all, little is down to simple market forces.

A cap on migrants is a start in getting sane house prices.

How so?

I'm reasonably sure we are looking at double digit house price inflation for the next few years

I'm not. Im rather concerned we may be in for double digit house price deflation. Thats the risk.

if the next election really is 2015 then I think we could see house prices nearly double their present levels.

If they are then the economic crisis will be the dog which didn't bark. They announced once again today that unemployment was down...and that employment was down. The euphemistic 'Econnomically inactive' was once again up.

 

[Jason]

.

How so?

Prices are set by supply and demand. We have a static supply - very little building, no prospect of a quick change, plus very restrictive building regulations (which most of us want). We have rising demand through population increase. Therefore the fundamental, underlying trend is upwards. Any reduction in demand (less people in the country) will tend to reduce the rate of price increase by changing the fundamentals.

I know there are a multitude of other factors affecting house prices. But everything right now is pushing upwards. Mortgage costs are low and as banks start lending more readily (as they will) mortgages become easier to get. There are more people that want to use a property as a store of wealth, so more demand. Depreciation of sterling will make it that much easier for foreign buyers. We now have a framework for the City of London to feel happier and good performance in the City is looking more likely than not - and more money therefore flooding into the London + SE England property market.

I'm not saying this is right but I do think it is happening, and the ability of any government to do much about it is very limited.

 

[dandelion]

Prices are set by supply and demand. We have a static supply - very little building, no prospect of a quick change, plus very restrictive building regulations (which most of us want). We have rising demand through population increase. Therefore the fundamental, underlying trend is upwards. Any reduction in demand (less people in the country) will tend to reduce the rate of price increase by changing the fundamentals.

No, I dont think so. Prices are not set by supply and demand. Prices are set by how much any purchaser can afford to pay. The way it works is you work out the maximum amount you can possibly pay and then go see what you can get for that amount. Prices are set by the amount of money available to the public to spend, because they are spending every penny they can get hold of.

The classic example of this was when the conservatives withdrew morgage tax relief. One day, your mortgage qualifies for 10% tax relief. The next, it doesnt. One day the average house price is £100,000, the next its £90,000. (roughly) Precipitated a total market collapse. This is exactly the reason removing stamp duty doesnt help. If stamp duty disappears, then you can afford an extra £5000 available to spend on the property, so you spend it. If you want to push down property prices, then increase stamp duty (etc). But it wouldnt help people, they are still spending the same amount (though there would be more tax to pay off the national debt)

Bringing in extra poor workers isnt going to make much difference to price, because they havnt got any money to push up the price. It just means everyone gets squeezed in more, particularly the migrant workers. What really pushes up the price is too many rich people.

Incidentally, if you want to help the poor, you might as well build mansions as studio flats. Build a new mansion and some rich man will move into it, releasing his smaller mansion for someone else, and so on until finally the first time buyer gets a freed up studio flat. Same price, just everyone in the chain gets a slightly better home.

Mortgage costs are low and as banks start lending more readily (as they will) mortgages become easier to get.

Why do you say this? Eventually perhaps, but by all accounts the credit crunch hasnt hit here yet. The government is still running up debt on our behalf like crazy. Interest rates are going to rise.

There are more people that want to use a property as a store of wealth, so more demand. Depreciation of sterling will make it that much easier for foreign buyers.

Foreign buyers ran for cover. I dont think theyve come back.

We now have a framework for the City of London to feel happier and good performance in the City is looking more likely than not - and more money therefore flooding into the London + SE England property market.

well yes, we have a resurgence of bank bonuses. Perhaps thats what has been fueling the property recovery in the SE. So is there going to be a sovereign debt crisis or not, and as I said, what happens when the new government starts withdrawing billions of pounds from the economy? The housing market is currently on life support and someones coming to switch it off.

 

[D_Tully Tunnelrat]

I would have to agree with Dandy. Debt bubbles are inherently deflationary, and the UK cannot afford any more debt cum stimulus. That means less jobs, and immigrants. God forbid you start to monetize the debt, or start the printing presses, however unlikely under a Conservative government, but necessity is the MOI. Should that occur, housing prices will surely double, but be worth less in constant pounds.

 

[dandelion]

I would have to agree with Dandy. Debt bubbles are inherently deflationary, and the UK cannot afford any more debt cum stimulus. That means less jobs, and immigrants. God forbid you start to monetize the debt, or start the printing presses, however unlikely under a Conservative government, but necessity is the MOI. Should that occur, housing prices will surely double, but be worth less in constant pounds.

Jason has long been proposing inflation as the way out of Greece's debt problem. Its a handy way to cut the value of everyones debt while maintaining the numerical house price and thus avoiding a wave of defaults. The position of the housing market hasnt really changed, experts still believe property is over valued compared to national buying power despite the modest falls in our recent recession.

The new government seems to be ideologically inclined to cut debt sooner, though the scale is pretty modest. The bank of england also seems to be getting worried about the ability to finance the debt in light of worsening world debt conditions and so agrees. Well see. Is there to be a world funding crisis, or not?

 

[Jason]

Jason has long been proposing inflation as the way out of Greece's debt problem.

Greece needs extreme measures. I'm at the stage of seeing default as almost certain - still to play for is exactly when, and whether it is within or outside the Euro.

In the UK a modest increase in the rate of inflation might not be such a bad thing. But only a very modest increase.

 

[D_Tully Tunnelrat]

Is there to be a world funding crisis, or not?

Sadly I think not.