Eurozone Sovereign Debt Crisis part 2 - Ireland

[dandelion]

Interesting today to hear someone stating that spains economy is in better shape than Britains. The difference in their apparent difficulties was put down to quantitative easing. It was observed that when the ECB starts printing money the crisis will be over. With unlimited liquidity all the banks can be bailed out. The real question is which path to choose, either europe as a whole taking on sovereign debt, or europe as a whole agreeing for the presses to roll. In the end, if no other solution is forthcoming the ECB will be forced to print money. Despite protestations, that is what it has already in effect been doing. The ECB is charged with preserving the stability of the Euro as its top priority, so once printing becomes the least worst option, that is what they must do. Rather akin to Obama's reserve power to raise the US debt ceiling, which he refrained from using because the ultimate crisis did not materialise. But speculators beware, because this will happen.

Now, a real question is whether Greece can establish a balanced budget even if all its debts are written off.

 

[eurotop40]

...
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.

I see you use very authoritative sources (Bush = idiot / Bush environment = bastard liars).

 

[eurotop40]

The Italian problem is high levels of debt and no credible plan to deal with it. ...

What sort of information do you rely upon to say that it's not credible? Again filtered through the Anglo-Imperialistic lenses?

 

[Jason]

The definition of a credible plan is one which the markets find credible. They do not find Italy credible. This is why bond yields are at 6% despite ECB intervention.

Italy needs a clear will to implement:
* Retirement at 67 or higher
* tax rises, probably sales tax first of all
* substantial and deep public sector cuts
* cuts in state benefits

The markets will not accept that it is correct to borrow to invest during a debt crisis, Rather Italy must practice austerity and accept the resulting economic slowdown. The reality is the last ten years have seen Italy go on a spending spree that will impoverish future generations. Italy must get a lot poorer.

To some extent a change of government might help. Italy appears to have a buffoon and sexual predator as their PM. However it is very far from clear that the opposition have the will to come up with something better, while a group such as the Northern League seems more interested in playing domestic politics than in finding a solution.

****
A former Bush senior financial aide - I've forgotten her name but it's in this thread somewhere - is a reasonably prominent source. The Swedish press appear to have a comely separate source for their rumour - that the DMs are printing in Sweden. As rumours go this one is interesting in that it has two separate sources, neither frivolous. It is also interesting that Germany didn't issue a denial. Arguably Germany would be remiss not to have a plan B in case the euro collapses. Whatever anyone thinks about probabilities a euro collapse is now something which is a possibility. Worst case scenario is that markets move against Italy causing a very rapid Italian collapse.

****
I've just realised that the proposed new Greek haircut is going to be presented as voluntary on the part of the banks. I cannot even imagine the arm twisting that is going on. Dear bank president, we want you to forget about your legal obligation to shareholders and volunteer without discussing with your shareholders to take a 50% hit. But by calling it voluntary it won't be a default and therefore the legal consequences of a Greek default will not have to be taken. In the world of EuroSpeak Greece will not have defaulted - just those nice bankers have volunteered out of the kindness of their hearts to let Greece off half.

there are going to be some very difficult bank AGMs. Bankers are supposed to be responsible to their shareholders, not to back room deals by EZ officials.

 

[dandelion]

I hardly think the banks will agree from the kindness of their hearts! They know damn well that without government help they will be bust the day after a Greek full default. In the interests of their shareholders they have no course except to do exactly as they are told. Now, explaining to their shareholders why they bought so many Greek bonds might be more difficult.

It is interesting you are suggesting Italy must cut back, whereas the UK government has done far from this and is even reluctantly contemplating increasing government spending to stimulate the economy. So how do these two cases compare?

 

[Jason]

In general in a debt crisis borrowing to spend is a disaster (contrast a routine downturn in the business cycle where moderate borrowing is pretty much required). However there is a possible exception when economic growth is higher than bond yields. Both UK and USA have low bond yields, so they've met half the requirement. However both have growth that is only just positive. Probably neither should borrow to invest. However if bond yields are under 3% and a nation believes it could borrow and invest and get 3%+ growth and do this without spooking the markets, well maybe. It would be high risk.

UK is in a better position than Italy and the medicine isn't quite as horrible. UK policy is really about slowing the rate of growth of expenditure (which hurts) not cutting expenditure (which is agony). Italy must do the latter. As must Spain and now France.

There are EZ banks with Greek debt and no need of a state bailout. Why should they agree a voluntary cut? If it is a compulsory cut they can claim on their CDS insurance. Indeed if all banks claimed on CDS for Greek default then it would be the insurance industry bailing out the banks, not the nations and the EZ. What we're seeing is how determined the EZ is to preserve the fiction that Greece is not defaulting even though it is. Legally they cannot handle a Greek default within the euro.

 

[Perados]

mmmmhh you realy switch with your argumentation...
Sometime the problem is the to high debts then everything else then the debts are more importent and now the debts are the problem again... Please decite
Cause to start every week again from beginning is boring

And the bush gov sayd so? You mean in 2008? Where no one talked about greece? Or at the beginning of 2009 where everybody talked about safing the banks? Bouth to early to speculate about the DM... I dont beliefe it

 

[Perados]

and italy has to pay now for NEW debts 6%... It will take 7 years till italy has to pay for all there debts 6%... So what
No need of 6% growth atm... And allway think about

Interest MINUS inflation... What means a growth of 3% will be nessesary

 

[Jason]

6% on 10 year bonds can be sustained by a nation for only a very short time. The longer it goes on the lower the credit rating, and therefore the higher the bond yield. Italy's position of 6% even with ECB intervention is truly shocking. However past defaults - Greece, Ireland, Portugal, Hungary, Argentina, pretty much all have found that the point of no return is 7%.

The euro-saving policy soon to be announced will be backed by ECB interventions. It will take a few days, even a couple of weeks, for markets to stabilise. If it has worked it will have shifted some risk from Italy and Spain to France and Germany. Therefore Italian and Spanish yields should fall, French and German rise. And if it truly works it I'll continue to work.

If it doesn't work Italian bonds will tip over 7%. Buy baked beans. This spells disaster.

The point is that we will all know soon whether it has or has not worked - the bond markets will tell us. If it hasn't worked people won't be able to get their money out of the euro quickly enough. It really is make or break. The Eurofudge option is that it works just well enough to buy a few more weeks, but there isn't going to be another last chance meeting.

 

[Perados]

there it is... A 50% cut for greece without a greek bankrubt

And you will be default as soon as the intrests reache 7%? Didnt knew that britain was default from 1970 till 1995... 25years your interests were higher then 7%

You cant compare greece ireland or argentina just by this... Argentinas debts were in dollar. Italies debts are in euro... There own currency

 

[Drifterwood]

Dandy, yes I most certainly include the last UK labour Government as a paragon of mismanagement.

The Public Sector in the UK since 2002 have worked less hours, had more holidays, unbelieveable benefits (sickness etc), gold pensions with like for like top ups, and been paid more than the Private Sector. It is totally unsustainable at 47% of the economy. I do not know all the details in other European Countries, but for example civil servants could retire on full pensions in Greece after 20 to 25 years service. Completely bananas.

I do not think it is correct to call it austerity in the Public Sector, it is a question of regaining some sanity.

 

[dandelion]

Dandy, yes I most certainly include the last UK labour Government as a paragon of mismanagement.

I was thinking of the current UK government, which admittedly is following the same spending plan as the last government. Likewise, the conservative party endorsed the spending plans of the previous labour government at the previous election. I am waiting to hear the present government say it is unrealistic to return to the growth rate seen over the 10 years pre crash. There hasnt been any growth in the UK stock market since 2000, maybe that is a more realistic indicator.

The Public Sector in the UK since 2002 have worked less hours, had more holidays, unbelieveable benefits (sickness etc), gold pensions with like for like top ups, and been paid more than the Private Sector.

Do you mean that such benefits have been withdrawn from the private sector, thereby in fact also throwing more cost onto the public sector? I dont know how pay rates compare, but top rates in government do seem to be following top rates in the private sector. Perhaps the rest of the pay scales are pro-rata?

It is totally unsustainable at 47% of the economy.

but why? Thats like saying its unsustainable to have an economy based 47% on any one industry. It might be, it might not. There are all sorts of different things provided by government which are regarded as essential to society.

 

[eurotop40]

there it is... A 50% cut for greece without a greek bankrubt

And you will be default as soon as the intrests reache 7%? Didnt knew that britain was default from 1970 till 1995... 25years your interests were higher then 7%

You cant compare greece ireland or argentina just by this... Argentinas debts were in dollar. Italies debts are in euro... There own currency

L'euro: la nostra moneta!

 

[dandelion]

There are EZ banks with Greek debt and no need of a state bailout. Why should they agree a voluntary cut? If it is a compulsory cut they can claim on their CDS insurance. Indeed if all banks claimed on CDS for Greek default then it would be the insurance industry bailing out the banks, not the nations and the EZ.

Are you saying insurance companies and banks are all completely independent organisations? I rather thought they were frequently the same. Irrespective, someone is out of pocket hundreds of billions of euros. I am quite surprised given the nature of the market that it is still possible to insure against these losses at all. Supposedly UK banks have already accepted the 50% writedown.

What we're seeing is how determined the EZ is to preserve the fiction that Greece is not defaulting even though it is. Legally they cannot handle a Greek default within the euro.

Hmm. where there's a will there's a way. I agree they are trying to keep it neat.

The news this morning was quite upbeat about having found a solution to the problem. I'm not convinced. The trouble with news is it tends to be insufficiently opinionated these days, just reporting. So reporting gloom one day becomes as extreme as reporting salvation the next. Before this can be called solved we need to see credible plans to return to solvency from everyone. I have yet to see one from anyone. (certainly including the UK).

 

[Jason]

:fest30:

Dandy, yes I most certainly include the last UK labour Government as a paragon of mismanagement.

ROFL :biggrin1:

I wouldn't have though it possible to include the last Labour government as a paragon of anything! But you've managed it!

*****

So we have our solution. The euro is saved! Let's sing Ode to Joy and march off into the Euro-socialist never-never land!

In fairness I suppose it is about as good a result as could have come out of the meeting. It won't work for long. But it will work for a few months. The precedent of playing with the idea of what is and is not a default is very dangerous. Greece writes off half its debts but keeps the fiction that it is NOT a default. Well, well. The markets will give the EZ a few weeks of grace while people make money, then the euro will be under attack. Let's hope Merkel et al are actually managing this process and have a plan B.

The new worry is the extent to which China and others are buying into euro-denominated bonds and assets. There are two sorts of issues:
* This gives China a degree of political influence. In particular the EU will tone down criticism of human rights abuses in China. This is an issue of ethics. In Europe Realpolitik might require turning a blind eye to massive abuse by the Chinese state, but ethics requires that all speak out.
* China has an enviable sovereign debt position, but problematic non-sovereign debt, an out of control banking system which exists because of illegal practices, basically loan sharks and gangster extortion. China is funding it's euro purchases through dirty debt, ultimately through the gang that extorts money from some unfortunate through violence. The Chinese state preserves the idea that these practices are illegal, though widely tolerated. It is using euro denominated bonds as a way of laundering its dirty washing.

Some people approach business and finance as if ethics can be forgotten. This should not be the case. In my view the EZ's treatment of the Greek people as second class people whose prosperity and dreams can be sacrificed for the greater good of a political ideal is ethically wrong. The new idea of accepting Chinese influence and laundering China's dirty money created by some of the worst human rights abuses on the planet is also IMO ethically wrong. So too is Switzerland's aggressive devaluation of the CHF which may have helped Switzerland but has hurt Japan. IMO the EZ (+Switzerland) has become an ethical wrong.

 

[Perados]

shure its not the end we have to rearange the EZsystem... But this would mean less power for britain - so you wount like it. Cause there will be a way more cleare borderline between EU and EZ...

AND wasnt it britain who asked china to buy there bonds at the beginning of summer, or am i wrong?

but its not only china who sayd it will buy... Its also brasil india and russia...
And as more they buy now as more they must buy in the future, if its go wrong...

And please explain me the 7% border again and use britain as an example

And you blame swiss that they MAYBE did something thats good for them but not for japan? Isnt it britain that trys to leave the EU in there biggest crisis? So PLEASE look at first at yourself bevor you start to call other non ethic...

 

[dandelion]

Had a trader just on who was asked to explain how come the euro and pound are pretty much pegged. he replied that each was as bad a bet as the other right now. However, he predicted that next year the pound will fall significantly compared to the euro as the UK situation worsens.

The present 'solution' would seem to be to divvy up a bit more cash which will come from government borrowing. Still the only alternative I see would be for the ECB to print money.

This is not a problem which can be solved by any possible action by Greece, staying in euro, defaulting, leaving the ez, leaving the euro, increasing spending or cutting spending. Greece's debts will not be repaid by Greece and the only possible action if Greece was cut loose would be for it to default totally. There might be some scope for future payments should the country recover eventually, but not now.

The issue therefore is how to solve the problems this causes for other trading partners of Greece. Principally this is expressed as bust banks all over europe. A compromise has been agreed whereby Greek bonds will keep half their nominal value and banks will be bailed out one way or another for the remaining loss. This is being funded by more bonds issued by different EU countries.

We now await developments. As I understand it, the ECB is quietly easing quantitatively in the background but effectively this is being held in reserve. The policy decided on seems to be that Government borrowing will continue to fund the bailout untill it cannot. Then we will move to QE in earnest as the final resort. There seems to be considerable agreement that QE is an unstoppable blockbuster which will solve the crisis. However it is antithetical to the founding concepts of the euro, so we havnt seen it much so far.

That all seems quite reasonable. Anyone know of any feasible alternative?

 

[Jason]

My best guess is that in the next 6-12 months pound/euro exchange rates will approach parity. This reflects on the one hand weaknesses in the UK economy (Dandelion will tell me off if I say it is dire, but it is) + UK quantitative easing, and on the other the massive level of artificial support for the euro. However I think the pound is a reasonably safe bet for broadly keeping most of its value while there is a significant downside risk for the euro.

The 7% threshold is for bond yields on benchmark 10 year bonds. I'm not aware of a bit of economic theory which explains why this is the tipping point, but almost every default has demonstrated this to be the tipping point. Iceland was the exception, but Iceland went from solvent to default in a couple of weeks and I don't think they even tried to issue bonds. The UK has not had 10 year bond yields of 7% since the 1970s, when the UK did indeed (part) default and take IMF help.

Italy is likely to test the resolve of the EZ. For a few weeks bond yields will probably fall because of ECB support. Then the yields will rise. Italy needs an austerity programme comparable to Ireland and Greece, and not a single Italian politician appears to be advocating this. Therefore the markets will push the yields up. Italy has to roll over a lot of debt - this is a big problem. The ECB is not practicing QE; rather it is spending up to allocated funds. I just don't see how Italy could be bailed out. Given that very few countries are in position to contribute it would mostly fall to Germany. Maybe a new 10% income tax plus increasing the retirement age by 5 years, plus sales tax increase - this is the sort of magnitude of support that would be needed.

So yes we have a solution for a little while. Probably. Worst case scenario is that markets wake up in a few days, decide it is all smoke and mirrors, and panic. Best case is that it buys perhaps a year of time.

 

[dandelion]

buys a year? no, I dont think so. i cant say what will be the next move and when, but I think what is being bought here is a grudging agreement to difficult things. Once this is all over there will definitely be greater integration of the eurozone which will make it stronger than before the crisis. As will hutton was arguing last week, I can see the Uk joining said euro in the relatively near future, after it recovers from the collapse of the financial sector.

 

[Drifterwood]

The sweet smell of fiscal and political harmony.

Yep, smells like shit to me too. One buy off after another.

Though I agree, the UK pound will be below the Euro in two years. The UK needs to decide what it is they actually offer the world.