Eurozone Sovereign Debt Crisis part 2 - Ireland

[dandelion]

Id suspect that if things are so bad the irish wanted to join the uk, in the uk things would equally be so bad that no one would want them. You miss the point that every currency in the world is damaged goods. That is why banks continue to invest in any of them. The money has to go somewhere so it is a question of the least worst. Would you suggest a flight to the zimbabwe dollar? I'll grant the Irish idea has an amusing irony, but make sure you pack some spare skyhooks.

 

[Drifterwood]

"Probably inevitable" . Good to see that George hasn't lost his touch.

Greece should be and may be demonstrating against the unsustainable endemic corruption rather than austerity. Frankly if there weren't so many grace and favour appoitments in the public sector, and bribes because the taxation system is shot to pieces, there would be no need for austerity.

 

[Jason]

Endmic corruption in Greece should be eradicated - but that's a thirty year project. In the meantime Greece has to find a system which can function alongside endemic corruption. The old system in Greece (as in Italy and to some extent in Spain and Portugal) was annual inflation of 8-15%, plus comparable annual devaluation of a free floating currency. Of course the corrupt got rich, but it kept the show on the road and gave a degree of prosperity to everyone.

Many world economies are damaged goods with unsustainable debt levels, but I don't see that most of the currencies themselves are damaged. They are tools which are being used in ways which include quantitative easing with the inevitable devaluation. The only major currency that is damaged is the euro - because someone with the influence of Soros can offend against language by saying someone leaving is "probably inevitable", or the Telegraph can call in the zombie currency. The euro may be a long time dying but IMO it is utterly finished - markets don't forgive. The Czech Crown, Polish Zloty are examples of currencies that are looking to be much more enduring than the euro.

 

[dandelion]

The only thing damaged by the greeks possibly leaving the euro is their own credit worthiness. Your objections to the euro all seem to be centering on it being a stable, firm currency which holds it value so is a good medium of exchange. Your objection is that Greece needs a bad currency. Your solution, in fact, is that they should throw over use of a good currency and accept inflation, corruption and a general might-makes-right approach to wealth distribution. The British lesson hard won was that inflation is not a solution. The solution, the only solution, to the Greek problem is a general acceptance that corruption cannot continue and a realistic approach to wages. This is not easy to accomplish but there will be chaos whatever route you take until it is. If it is clear that buying time for Greece just will not accomplish this, then it is time for a drastic lesson. But as already hashed over, those giving the lesson need to be careful the lesson is not felt more by them than Greece. So I think Greece will get its money.

 

[Jason]

The bean counters have been looking at voting intentions for the Greek austerity vote. The prediction is that it will pass - by ONE vote.

Now it is quite possible to imagine that the EU threats-and-intimidation squad will be working overtime between now and the vote. My guess is that it will pass, and by more than one vote, but I'm only guessing. That said it only takes one of the wavering Socialists to come out clearly on the no side with an impassioned speech reminding MPs of the last German invasion and they could still get a no vote. Or one of the intimidated to come clean and say "I'm being blackmailed, but I'm going to vote as I believe anyway". It is all in the balance.

The story is that the Eurozone has drawn up a plan B, which is in two parts. Part one is the Eurocrats solution of another vote - change the terms of what is required and get the Greek parliament to vote again. As I write this it occurs to me that if anything this must strengthen the resolve of those considering voting no and make a no vote a bit more likely. However the real revelation is part two of the Eurozone's plan B: defend Spain. Implicitly they see Ireland and Portugal as indefensible, and realise that in the event of a no vote the markets will go after Spain (as well as Ireland and Portugal).

Dandelion - Greek creditworthiness is already at zero. They are not paying their debts, the ECB is. Greece indeed needs a form of might-makes-right to hold its society together. For Greece, inflation is part of the cure - internal devaluation (cutting wages) isn't practical, so instead inflation devalues them.

 

[dandelion]

Wasnt hitlers rise to power in part credited to hyper inflation following Germanies inability to pay debts imposed on it by other countries? On that basis I suppose the good news would be that Greece is quite small so unlikey to be able to invade much territory.

 

[Jason]

Of course excessive inflation is a bad thing, but it can also be the least bad of several bad options. The challenge in Greece is to get wages to 30-50% of their present level, which is the level their economy can sustain. No conceivable prices and income policy will do this - internal devaluation almost never works, and certainly never at this level. Greece needs devaluation to reset all the prices in its economy. Yes this will be inflationary and will tend to lead to unemployment - but lower prices will promote exports, discourage imports and therefore boost employment. Properly managed Greece can see a period of inflation (which is a problem) without unemployment and be in a position to build from there.

The inter-war problems of Germany are not comparable. The Versailles settlement made Germany liable for reparations which its shattered economy could not pay, bringing about an economic collapse, including hyper-inflation and the rise of the nazis. Greece is not liable for reparations, nor is devaluation expected to bring about hyper-inflation.

 

[MercyfulFate]

Greece's austerity demands forcing them to sell off to private corporations, will be their end.

 

[Drifterwood]

Endmic corruption in Greece should be eradicated - but that's a thirty year project.

Rubbish. It is far more easily achieved than your armageddon theories of civil war and the collapse of the Euro.

It's the road to fiscal union.

 

[Drifterwood]

Greece's austerity demands forcing them to sell off to private corporations, will be their end.

One side of the coin.

Either the State sells off State's assets because the State has fucked up, or the State keeps the State's assets and forces the people to devalue their assets because the State fucked up.

This will be the real cause of bullets flying but no doubt the Papandreou twat will have run back to the US by then.

 

[dandelion]

Greece's austerity demands forcing them to sell off to private corporations, will be their end.

Forcing people to sell assets when they will never get value for those asets is not likely to win many friends. Its a fire sale so they wont get much and anything they do get will go on the debts...which would otherwise eventually be written off. Cant help thinking any politician proposing such a daft course would get slaughtered, and possibly literally if it comes to it.

 

[dandelion]

well now, heres an interesting comparison. The BBC just ran a program discussing US debt. Which is out of control. The US will not do what is the simple requirement, increase taxes and cut spending. It is of course true that this is a bad time for it, but the US has failed systematically to do so through good and bad. They said that in the Clinton years the US could have reached zero debt. Since then taxes have been systematically cut, expenditure on home security has gone through the roof, there have been some very expensive wars, the small matter of trying to fix a problem over some bankers selling duff securities. On the expenditure side, there are vast unspoken commitments to welfare, health and pensions. The BBC seemed to reckon matters are not yet desperate but its getting close and no sign of a fix yet.

So, what happens if Greece defaults and it starts to cost the US? Might a Greek (et al) default actually have the effect of destabilising US finances enough that it is the dollar which collapses?

As I said before, what counts as a good currency is the best amongst some bad choices.

 

[Jason]

Dandelion makes two consecutive posts - and I agree with both of them! This is shocking stuff!

The US is playing the "too big to fail" game. The ratings agencies are slow to downgrade nations, especially a nation with the economic importance of the USA. Yet the USA is on negative watch - basically this means take action or the agencies will be forced to downgrade. And this would be a financial storm, pushing up US debt costs and forcing a lot of tax rises and a lot of austerity. The prudent course of action is to have modest tax rises and modest austerity now, rather than a more extreme version to achieve the same end after a downgrade.

I don't think that Greek default would/will have much direct impact on the USA, but the train of events that such a default sets in train may well impact the USA. The debts of the USA are enormous, yet the USA is servicing them and in terms of the fundamentals of its economy can continue to service them. The risk is the massive market surges that may be created by a EuroZone meltdown.

US policy is:
Plan A - try to cajole the EU to sort things out (influence mainly through IMF)
Plan B - a group of central banks to work in tandem to safeguard the currencies and national solvency of all of them.

Obama's present policy of tax and spend is high risk and makes no sense without Plan B in place. Plan B looks as if it would/will work - but if it is ever applied it will change the world.

 

[Drifterwood]

but if it is ever applied it will change the world.

The world is changing irrespective.

Strangely, the UK policy of manipulating internal markets to make its people gradually poorer is probably the best of a bad lot. As Vince Cable said, we don't have much of a choice, but then what do you tell the people. Whether our politicians and bureaucrats will then effect a massive reduction in their own influence within our economy is another matter.

Greece doesn't have this choice, they need to sort out the mess that is their public administration.

The US shows that size gives you more breathing space, though we can see the disquiet that this is creating in some of her own citizens on this site. What Jason doesn't want is a fiscal union which will either buy this US style luxury or as I hope, create a sustainable model for the already changed reality of this world.

 

[Jason]

Something amiss here - after agreeing with Dandelion I'm now agreeing with Drifterwood!

Been watching some of the horrible scenes from Athens. Polls indicate that the Greek government has at most 20% support while the austerity measures have something under 25% support. I'm all in favour of politicians offering leadership, including passing measures which don't have 50%+ support, but the Greek government is in a special league of non-support - the measures they are proposing don't reflect the will of the people they represent and cannot be regarded as democratic. Additionally if the government does pass them it is just a paper exercise and will not happen.

Greece seems lacking in leadership, be it from government, opposition or the indignant. The EU seems similarly lacking. The world desperately needs events to be managed. Greece passing fictitious austerity policies - assuming they go through - may buy a few weeks' time but achieves nothing else. We need a managed default fo Greece, complete with exit from the euro. And we need comparable managed processes for Ireland and Portugal. Then we need the euro split into northern and southern euros so as to support Spain and Italy - and inevitably at a later stage we need national currencies. It is not now the case that the euro might fail - it has already failed. It is in the same position as the Titanic after it had hit the iceberg but before it sunk. We need to recognise the reality and do what we can to provide lifeboats and rescue ships, not muddle on with politically-motivated, failed policies. And in partcular we sholdn't add misery to the Greeks and others for the sake of the euro-integrationist dream of the Brussels politicians.

Right now I don't know whether it is best if Greece passes its budget and buys us all a bit of time (but is anyone using that time?) or rejects the budget and brings matters to a head. I suspect the EU would be so desperate that it would fund Greece even with the budget not passed.

 

[MercyfulFate]

The IMF bailout is a joke. It will damage the poor and bolster rich corporations, the Greek people are right to be against it.

 

[TomCat84]

Obama's present policy of tax and spend

WTF does this mean anyway? Tax and spend?

 

[Jason]

"Tax and spend" as a phrase probably has more resonance in the UK than the USA, where it is shorthand for fiscal mismanagement - it became a set phrase in the 1970s. The ratings agencies have pointed out that the US budget is not in balance - to get it right probably needs lower spending and higher taxes (the Austrian school approach). However there is an argument that even more spending and even lower taxes would stimulate growth (a version of Keynesian theory). The point of the phrase is not to say Obama should have taxes set higher/lower or spending higher/lower, just that his tax and spend is not in balance. This is what the ratings agencies are saying about the USA.

********
A second Greek bailout from the ECB/IMF will certainly damage the poor and bolster rich corporations (including the crooks). This is a fact of life when a country goes broke. Whatever now happens the Greeks are in a mess where it will take a generation - maybe 30 years - to get back to where they were before it all went wrong, and the poor will be the worst hit. IMO that it will hurt the poor and benefit the crooks is not a reason for opposing a bailout. The reason to oppose it is that it cannot work and will actual make the problems worse when in a few months time Greece needs a third bailout, making the poor yet poorer.

 

[dandelion]

That would be making the germans poorer? presuming that these bailouts never get repaid and are just added to the yet to be defaulted debt? Party..party...party!

 

[dandelion]

I though a policy of 'tax and spend' was one where you tax a lot so you can spend a lot. Not what has been happening in the US which has been leaving out the 'tax' side of this balance. I presume the economic principle behind this is that there is a benefit in forcing people to spend, whic you do by taking the matter out their hand, taxing away their money and spending it for them on something useful. Makes sense to me.

Yesterday the news was carrying stories that in the UK disposable income had fallen by a record amount. Just looking at a random webpage (telegraph) it is predicting 4% inflation, 2% drop in disposable income on top of a 1% drop in disposable income last year. By contrast during the recent financial difficulties, UK disposable income actually rose, mainly because of the fall in general interest rates. I wouldnt dare mention that recent government cuts have largely not taken effect yet (though these might be figured into the calculation). Then there will be further problems because of Greece et al. Hey, its sunny, Im going to the beach before it gets sold at a knock down price to the chinese.

If there is one silver lining in this, it might be that the one huge money pit in the Uk is property. If this pushes down property prices further then it might in itself be a good thing but also take up some of the drop in spending so the real economy is less affected.