Eurozone Sovereign Debt Crisis part 2 - Ireland

[Drifterwood]

It is the Central Bank's third installment of Quantitative Greasing that will ruin the economy for good.

Greasing as opposed to Greecing :smile:?

Maybe this has been the problem all along.

John Travolta for IMF president.

Ruin for good. That is a strange expression, don't you think?

 

[Jason]

We're around 24 hrs from announcement of the plan that will save the euro.

And I'm not doubting that they will announce something. But I think we can already say that the very best case scenario is that it buys a few more weeks of breathing space. The key problems are:
1) Italy. Italy expects EZ support while it continues with policies which Italy cannot fund. In effect Italy is demanding subsidy. This is an example of the problem of monetary union without fiscal union.
2) The Merkel-Sarkozy split. The only thing that has been holding the EZ together has been rule by Merkozy. Yet now there is a fundamental split between the needs of France and Germany, and I don't think either have the political power to take on their own home-grown critics.

I guess we've all accepted that Greece will default - just the size of the scalping still to be announced. The previous default was voluntary and therefore in Eurospeak not a default (!) but this one will be a default. It is of course illegal, and I still don't see how they are going to avoid being sued in every court in the EZ. But why let the law get in the way of a good euro fudge? The new problem IMO is that the markets are going to move against a failure to find a proper solution for the euro. Somewhere there is a tipping point where investors decide that the gains from euro-denominated investments just don't make it worth risking exposure to a euro catastrophe. Right now what incentive is there for a US or Japanese investor to put their money in the EZ?

 

[Perados]

i think what we will see is the end of berlusconi within the next 2 weeks...

 

[798686]

They probably need to put ALL mechanisms into place to save the euro:
Recapitalisation of the banks (seems to be agreed?), increase in EFSF to $1tr, Greek debt reduction (50%), and a rough timetable of increased eurozone fiscal integration (tax harmonisation, eurobonds, etc?) to stabilise the area?

I agree with Cameron over the referendum, incidentally. We need one eventually, but now is not the time. Best thing to do currently, imo, is to stabilise the eurozone, agree to further integration for them, and regain UK independence piecemeal for the moment.

 

[Jason]

Hey Joll

Agreed they need all the mechanisms you have set out. But since they started talking on Friday the Italian government has moved to the brink of collapse, and so they have a whole new lot of problems they didn't know they had. So they need a whole new lot of mechanisms no-one has yet thought of. And assuming they don't tomorrow come up with a REAL, DETAILED proposal to save the euro the markets are going to slaughter the EZ. So that's a whole new lot of problems and new mechanisms needed.

Italian 10 year bonds are around 6% yield. This is very very very close to the point of no return where Italy must crash. Certainly there is no way back from 7%. To regain its balance Italy needs strong leadership to push through immediately Irish style austerity. Yet Italy has a government which may well fall and has rejected austerity. I think we are looking at an Italian collapse in a couple of weeks, and that's it for the euro.

Tomorrow is last chance saloon for the EZ. And I think Sarkozy and Merkel know they cannot make it work.

Cameron IMO was a prat in the way he handled the issue - all he had to do was let MPS have a vote then ignore it. In a few weeks' time the world will be different. It is even possible there won't be an EU to leave.

 

[Perados]

italy will not collaps... Not within the next two years, and then only if they dont do anything... But the gov will change very soon and then the reformations will come.
I hope
Europe doesnt need a united tax politic... Its more the spending that we have to integrate... Same age for retirement, spendings for unemployments (in rate)... Support for families... The hole sozialcare...

And by hell no eurobonds... Cause then the mediteranien states will never start to reform...

And britain cant become independent from europe... The european economies are to importent for britain. No matter what the british wants

And for the rest... Lets wait and see what they will deliver us tomorrow... I also dont think that it will be the ultimate solution... But france has to move cause germany wount any more...
Its selfmurder for every politican when germany has to pay more then the 211billion... But till the end of the year i also believe that the efsf will be bigger then 1trillian

And yes we have to recapitalise the banks... And thats for more then the 100billion

And for me very importent: its has to be forbidden that the ECB buys anything from the efsf... Otherwise the efsf wouldnt make sens and we could start eurobonds

 

[798686]

I feel sorry for Cameron - normally I'd sympathise with the referendum vote, just would seem counter-productive at the mo.

Yeh, Italy's a mess. Didn't know the yield was as high as 6%. Hasn't their debt now reached 113% or gdp or 1.8 tr euros??

I guess they need to use each and every possibly mechanism at once, to calm the markets and shore up the euro. Is it even possible now to piece together a package of such overwhelming force that the markets would be convinced (prolly would have been several months ago)?

Integration timetable might go someway towards it, despite the fact it would require treaty changes. Odd that I'm supporting integration these days - but it's on the proviso that it's eurozone only, and simultaneously eases the way for Britain to extricate herself.

 

[Perados]

and why is it possible that there isnt an EU in a few weeks??? Is there a meteor on the way to the earth and will crash on europe? Even IF the euro would fail, it doesnt mean the end of the EU

And by the way nice bulge jason...

The most importent question for europe is how will chinas economy perform in the next year...

 

[Jason]

Is it even possible now to piece together a package of such overwhelming force that the markets would be convinced (prolly would have been several months ago)?

No:frown1:

What they now have if proposed around last December would probably have worked. December/ New Year is when they passed the point of no return.

In financial terms they now need a sum so great that it really is impossible. National debts are leveraged by banks and cannot be supported by mere nations.

Some sort of delaying tactic is possible. €1trillion enables the ECB to buy duff bonds for a few months, possibly. But the markets won't be calmed for long, if at all. The markets are giving very serious consideration to a collapse of Italy.

We are pretty much at decision time. IMO either Germany leaves the euro very soon (Friday? Friday week?) and there is a managed collapse of the euro, or there is a disorderly collapse of the euro within a few months. I hope the rumours that the DM banknotes have been printed are true.

The UK debate on leaving the EU is IMO close to irrelevant.

******
Angela Merkel summed it up as "if the euro fails, Europe fails". The EU is based on the Lisbon Treaty which puts the euro in such a central position that the organisations of the EU all fail if there is no euro in which to conduct their business. There is no system for simply discounting Lisbon and going back to Maastricht, or going back to the ECU.

 

[Drifterwood]

This debate has been going on for so long that I almost forget what I think.

I am not interested in chicken-licken-sky-falling-down politics.

What are the big issues that Europe has to resolve? In no particular order.

1/ Irresponsible financial management by some countries whose leaders find it easier to spend other fucker's money rather than live in reality.

2/ Divergent economies without any real central balancing, by which I mean mainly the strength of Germany to make money in and out of the Eurozone without enough reciprocation. We need to look at the US model in this respect.

3/ Too much borrowing exacerbated by the toxic US Sub Prime Fraud.

4/ Too much entitlement in the Public Sector. You do not create a vibrant economy by having more than 40% of GDP spent in the Public Sector.

Europe's leaders need to deal with these issues, or fuck off preening their egos in the public light. Yes, you Berlusconi. Fuck off.

 

[dandelion]

Agreed they need all the mechanisms you have set out. But since they started talking on Friday the Italian government has moved to the brink of collapse, and so they have a whole new lot of problems they didn't know they had.

I see you remain 'glass half empty' over anything EU. The current Italian government is perceived as part of the problem, so changing it must be part of the solution.

Italian 10 year bonds are around 6% yield. This is very very very close to the point of no return where Italy must crash.

There is no such thing as a point of no return. The whole financial system is an unstable see-saw but it has continued to rock horrifyingly for centuries. It will be nudged back. The good aspect of crises is that frequently people will not act until they have no choice. Then, the world is full of these financial organisations who have now positioned themselves to make a load of money from this forthcoming crash. What they need is someone to go round talking up the crisis? Now who do I know who is good at that?

Cameron IMO was a prat in the way he handled the issue - all he had to do was let MPS have a vote then ignore it. In a few weeks' time the world will be different. It is even possible there won't be an EU to leave.

Obviously then he does not agree with your analysis. He thinks Britain will be dealing with other EU members for the forseeable future. The only level on which a EU referendum makes sense at this point is if you happen to be a politician trying to make personal advantage over the issue. In the national interest it is utterly insane to be talking about leaving at a moment of golden opportunity. Or, taking a lead from some of the more pessimistic here, at a moment when we are desperately in need of friends because if we do not hang together, we will most certainly hang separately.

 

[dandelion]

What are the big issues that Europe has to resolve? In no particular order.

1/ Irresponsible financial management by some countries whose leaders find it easier to spend other fucker's money rather than live in reality.

Like the UK? A general failing of all politicians who are professionally obliged to be optimistic. But it is also a failing of the professional advice politicians receive. UK expenditure assumed a certain guaranteed growth rate which has turned out to be unachievable. Greece enjoyed a boom and while it might have been artificial, who was saying so previously?

2/ Divergent economies without any real central balancing, by which I mean mainly the strength of Germany to make money in and out of the Eurozone without enough reciprocation. We need to look at the US model in this respect.

No, I dont agree. This is not essential to the crisis. The Eu allows free movement of people, goods and money. Being poor may not be nice, but it is perfectly liveable if you do not have unreasonable expectations.

3/ Too much borrowing exacerbated by the toxic US Sub Prime Fraud.

entirely agreed. Anyone planning to fix this? No, didnt think so.

4/ Too much entitlement in the Public Sector. You do not create a vibrant economy by having more than 40% of GDP spent in the Public Sector.

Cant agree. No one has produced a coherent explanation why public sector providing necessary services is any different to private sector. The main difference is that the public sector does this in a redistributive way, which means taking from the rich and giving to the poor. If you do not believe in this happening, then I guess you oppose a public sector. The rich have nothing to gain from a big public sector but everyone else does. This is just a question of whether you believe redistribution is desireable or necessary. Several people here have complained that the entire problem with the Eu is that it is not redistributive, and the reason sovereign states work is because they are!

In financial terms they now need a sum so great that it really is impossible.

apparently economists do not agree. Someone just said europe is better placed as a whole than is the US. What it is not, is coordinated.

What they now have if proposed around last December would probably have worked. December/ New Year is when they passed the point of no return.

I dont agree. It is perfectly true that financial markets are betting on failure, because that is what they do. It is certainly a huge part of the problem that banks have a vested interest in creating crises because they make money on transactions. Any kind of transaction. Collapses give huge opportunity to make money for someone, and for the ringmaster banks to get a guaranteed cut. The reason this crisis is creeping on is not because of a failure to produce some package but because the underlying problem keeps growing. All that is really happening is the extent of the crash 3 years ago becomes more clear. The only solution we have so far, officially, is growth. Growth isnt going to happen. Barring that, it may be possible for europe as a whole to finance the currently required borrowing if it does so as a whole. This seems politically unlikely, but Germany will eventually have to choose between personally guaranteeing europe's debts, or quantitatively easing them away by printing money. Neither solution is acceptable to Germany, so we wait to see which they will take finally. My bet is that the impasse will continue until the ECB decides it has no choice as last resort to print, print print. It has the power to rewrite its own rules in such an emergency.

The third option which you favour is that europe's financial system collapses entirely. Your favoured suggestion of Germany leaving the euro wouyld undoubtedly precipitate this, because it would signal once and for all that Germany would not help anyone else. However, Germany too could not survive the collapse of the rest of europe. Its a non-starter. It would destroy britain too.

 

[eurotop40]

I see you remain 'glass half empty' over anything EU. The current Italian government is perceived as part of the problem, so changing it must be part of the solution....

It is interesting how apparently conservative people like Jason are so sensitive to the Italian leftist propaganda and find that a conservative italian government must go. Silly analysis indeed or insufficient knowledge.

 

[Jason]

The Italian problem is high levels of debt and no credible plan to deal with it. Right now Italian 10 year bonds yield 5.98%, and that is with ECB intervention. Italy has copious debt roll over requirements in the next few months. No political party in Italy seems to be suggesting a plan to deal with this problem.

Quite how high yields can go without a nation's economy crashing is a judgement call. For Greece, Ireland and Portugal it was around 7% which prompted bailouts to avoid a crash. But the Italian 6% would already be well over 7% without ECB intervention. The theory of the ECB intervention was that it gave Italy a few weeks in which to push through austerity. Well this hasn't happened. In theory the ECB could keep propping up Italy for up to a few months, but the cost is huge, and Italy is still refusing austerity.

The massive funds now being discussed are designed to stabilise EZ banks following a Greek default. They are not designed to prop up Italy, nor are they big enough so to do. Italy cannot be bailed out. Markets are beginning to factor in an Italian default. There is money to be made until it actually happens, but an Italian default is of a different order to Greece.

What we need is for politicians in Italy and in the EZ to catch up with the markets.

 

[798686]

What are the big issues that Europe has to resolve? In no particular order.

1/ Irresponsible financial management by some countries whose leaders find it easier to spend other fucker's money rather than live in reality.

2/ Divergent economies without any real central balancing, by which I mean mainly the strength of Germany to make money in and out of the Eurozone without enough reciprocation. We need to look at the US model in this respect.

3/ Too much borrowing exacerbated by the toxic US Sub Prime Fraud.

4/ Too much entitlement in the Public Sector. You do not create a vibrant economy by having more than 40% of GDP spent in the Public Sector.

Europe's leaders need to deal with these issues, or fuck off preening their egos in the public light.

I think this is probably what Mervyn King meant when he said the new solutions would buy time, but the underlying probs remain unresolved - especially problem 2.

Not sure about problem 1 - could have been partially avoided if Ireland/Spain etc had been able to raise interest rates when their economies overheated. And the ECB policy over the past ten years, favouring Germany, allowed Greece, etc to get themselves into debt to buy German goods. That's heavily simplified, I know, but Germany is partially having to hand back money countries paid them for exports they couldn't afford.

 

[dandelion]

Im afraid I still dont see the difficulty over divergent economies. Talking in the context of the euro, that is. All it means is that people in a slower economy are not as rich as those in a more productive economy. So what? If they want to be richer there is no easy fix, but it is necessary to produce goods more cheaply so they compete. If Greeks price themselves out of the market it is no ones fault but the Greeks. The only difficulty I see is if people start pretending their economies are not divergent or that somehow automatically because they use the same currency as Germans they can expect a German standard of living. Germany would still have been making money from Greece whatever currency they were using. Greece managed its affairs badly and then suffered the american bank crash. This was not due to either the euro or German salesmen. Most european countries are not far behind them in the bungled management stakes. There has been a world deception which we all willingly entered into where we believed we were richer than we are.

 

[Perados]

loool i never heared about the rumor that germany is allready printing DM again... Thats ridiculous... Dont know where u get your informations at

But more interresting; italien media report that berlusconi steps back till the end of year and new votes till march...

And merkel says mutch when the day is long, there is no reason why the EU should ends when the euro didnt last... Thats just a argument to get the germans to pay as mutch as possible... The same thing as: germany profits at most from the euro till now... Thats a lie... But she use it to let us pay

Merkel is the worst kanzler we could get for this crisis

 

[Jason]

If they want to be richer there is no easy fix, but it is necessary to produce goods more cheaply so they compete. If Greeks price themselves out of the market it is no ones fault but the Greeks. The only difficulty I see is if people start pretending their economies are not divergent or that somehow automatically because they use the same currency as Germans they can expect a German standard of living.

I agree this, but draw a different conclusion.

Greece indeed needs to become competitive, which means getting down their prices (labour costs, taxes on industry). This needs a resetting downwards of hundreds of thousands of prices in an economy. There are both institutional blocks to this - particularly trades unions - but also very human factors in that no-one wants to go first. There are no examples of internal devaluations which have worked - basically they don't work. Prices and Incomes policies which have the more modest goal of reducing inflation have limited success - only limited.

While internal devaluation doesn't work, external devaluation does. It is very effective, very quick, and can even be relatively painless. The Greek economy pretty much has an assumption of a few percent pa written into it. We've had a decade or more when that hasn't happened, and Greece needs a massive devaluation to catch up. I know the talk is still of keeping Greece within the euro despite a big haircut - as well as being illegal this cannot work for Greece. Hence the sense that Greek people are being treated as expendable. The EZ is unethical in it's treatment of Greeks.

Italy's problems will not be solved by Berlusconi going. No political group in Italy appears to have embraced austerity. Berlusconi's promised departure may buy a bit of time - not much though.

The printing of DMs was leaked by the former financial aide of President Bush. The story also leaked in Sweden, where their press had the story that they are being printed in Sweden.

 

[dandelion]

The Uk ceased to be the sick man of europe in the 70s/80s because of a change of perception by people. The UK was doing a Greece until it finally was forced to confront its spiral of decline. The solution was to accept that real wages would fall and that productivity, ie as in industrial practices, must rise. A classic example was the long running struggle by the newspaper industry where a closed shop of compositors were the only people allowed to set the words in type to be printed. If the shop stewart had a cold, then the paper could not be printed that day. This had not one tiny thing to do with the value of the pound, theres little export demand for uk newspapers. The entire newspaper industry was only saved after year long closures over industrial disputes and a process where eventually the compositors were sent packing.

Contrary to what you argue, I'd say the only reason Britain recovered was because of falling internal labour costs. Unless the need for this is accepted then a devaluation of the currency just gives rise to inflation, and further wage demands to balance them out. No benefit at all. The Uk swore off inflation after its last experience but is now fast becoming an addict again. germany has had even sharper lessons in inflation. Both the UK and Germany concluded that the only sure course was a currency which has a stable value. Exactly what the euro provides, even for countries such as Greece which would be unable to create their own secure currency. I do not fancy keeping my savings in Lewis pounds, thank you. All this talk about Greece abandoning the euro has just further undermined confidence in the country. Which is probably why various parties have been pushing the concept. The euro is a net gain for the little man in europe and a net loss for banks. It is a net gain for the little man against governments which overspend out of control. It starts to break the automatic link whereby a government can simply appropriate private assets.

Obviously taxation represents another drain on companies but there is nothing special about the fact companies have overheads and this particular one is a payment to government. I agree with you that if it is too expensive to operate, then companies cannot do so. In general however, this isnt the case in the UK.

Interesting news that some portugese MEPs have been proposing a cut in their expenses. Their original proposal has been watered down to a 5% cut in their automatic expenses allocation, which members get without having to provide any accounts. Nigel Farage (UKIP) has naturally given it support, but almost all other MEPS have been told to oppose it. As a gesture, when many civil servants are facing wage cuts across europe it is impeccable. As a gesture to reform unaccountable expenses systems it is entirely sensible. Wont happen. Rather stupid, but if MEP acknowledged the principle they ought to face cuts too, then the idea might get applied to home parliaments too. Cameron proposing MP expenses cuts?

 

[Jason]

In the 70s and 80s in the UK real wages came down - not the actual figures on people's pay chits. In effect the UK used inflation to help reset wages. At the same time the value of sterling fell, which meant UK wages were lower in real terms.

While the UK experience of the 70s and 80s was messy there were economic tools to permit necessary reforms. Greece today might indeed be like the UK in the 70s, but Greece does not have the advantage of inflation and devaluation as a way to reset prices.

Greece is now fast becoming ungovernable. Austerity must be reigned in. A default of 60% achieves nothing for Greece. The debts left will have a higher rate of interest attached to them than the debts of 18 months ago - Greece still cannot pay. A 60% default gives a bit of time for the EZ banks, but the ultimate default will be 100%. Additionally Greece will need some form of subsidy to rebuild it's economy, perhaps from the IMF. And this still won't work without devaluation. The politicians now at last seem to have accept Greek default as inevitable - what they have yet to accept is that Greece leaving the euro is also inevitable. What puzzles me is that they seem set to have a true default within the euro and trigger all the legal mess this will cause.

*******

MEP expenses of course should come down. The whole cost of EU institutions needs a massive reduction.