Greece on a Death spiral?

[Jason]

greece has been bailed out...

Greece has received one dollop of loans it won't repay, and is now expecting a second dollop. This second dollop has not been supported by one Eurozone country (Slovakia) which will not be paying up, making the contribution of the others that little bit bigger.

The problem is that these two loans or subsidies don't bail Greece out. The Eurozone hasn't bailed Greece out, just paid the most pressing debts. Greece needs comparable loans/subsidies for the next few years. And the Eurozone is going to have more and more problems agreeing the loans/subsidies. Fault lines include less willingness to pay (following Slovakia) and the increasing realisation that the money is not a loan, rather a subsidy (and therefore illegal). Then there's the skeletons rattling in the Greek closet. Is the Eurozone prepared to fund a big Greek military which sees EU ally Turkey as the threat? Is the Eurozone prepared to fund new pension revelations?

 

[dandelion]

A lot of nonsense is spoken about pensions. We, and I expect they, could afford a pension age of 60 or any arbitrary number if we chose. We dont choose, because if you spend it one way you cant spend it another. On the whole I believe what I have heard, mostly here (quite high standard of discussion here), that the problem is one of expectations in Greece, what people have been led to believe they will get and can afford. This, with the unfortunate concurrent would slump caused by US banks making their expectations even more unrealistic. The eu has decided it has to bail out Greece for presentation reasons of general embarassment (though also of confidence in the eu and euro) and practical reasons relating to where all that debt is placed and what consequences would flow from default. Untill and unless the default problem has been defused, there is no choice but to keep on paying. But it is a question of least worst option, and the greeks need to have a care that the balance doesnt swing to letting them go bust. Once the banks have been shored up. But no one has convinced me that Greece would be anything short of mad to abandon the euro, which seems to be the only good card in their structural portfolio. A better use of the money might be to prop up the people, rather than the government, but as with Pakistan, it is not turmoil in Greece which bothers us, but the external ripples.

 

[Jason]

With the Euro the best case scenario for Greece is a generation of poverty. Just about everything the country owns above the very basics will have to go on loan repayment for 30 years+. If the Eurocrats give themselves another treaty so that Greece can legally be subsidised for the next decade or three then Greece will have de facto lost their independence. The ECB/Germany would run the country, with the "Greek" police keeping order for the true rulers. Greece would be a colony - and the people would still be poor.

Outside of the Euro Greece can make fast progress. They simply default on the loans and wipe the slate clean. A weaker currency will lead to a boom in tourism and exports. The Greek parliament gives itself special powers to manage the legal fallout. For Greece there is very little down side. A fiat currency would stabilise somewhere - I heard at about 40% of the present level of the Euro.

The Eurozone desperately wants a solution for Greece, even to the extent of calling the present subsidies loans. But the Euro is killing Greece. It isn't just that leaving the Euro is the best option for Greece; rather leaving the Euro is a moral imperative for the Greek government.

 

[Drifterwood]

Really? Even with a Greek partner? I have a German friend who owned a house there in the 70's and made a killing when she sold it mid 90's. She bought a huge place here with the proceeds.

I was always under the impression that previously, a non Greek national could only own up to half a Greek property. But then, precisely what Greek Law is and how it is interpreted has always been subject to "interpretation". :wink:

 

[Drifterwood]

Jason, you are making at least two errors.

First, the situation in Greece is not proof that the European model does not work. It is proof that the Greek system within the European model does not work. You are effectively trying to say, change the 95% because the 5% does not work. Wrong way round.

Secondly, the official figures upon which you build your doomsday scenario are irrelevant. I would guess that 50% of Greek households have unknown sources of income and that perhaps 75% fiddle their taxes at one level or another. If the Greeks had a culture and system more like the Germans, then the ratios would be completely different and probably show that Greece was in a better situation than the US or UK.

The question is whether the Greeks, and particularly the younger generation have the will to oust the old system and it's politicians.

 

[eurotop40]

Jason, you are making at least two errors.

First, the situation in Greece is not proof that the European model does not work. It is proof that the Greek system within the European model does not work. You are effectively trying to say, change the 95% because the 5% does not work. Wrong way round.

...

This is the terrible situation nationalistic people in the UK as well as in Switzerland etc. have to cope with: they realize that there might be models that are superior to their old fossilized privileges and beliefs. So they are trying with all their forces to destroy any possible "competing" system (which is what also the old Soviet Union tried to do).

 

[Jason]

Maybe I'm not being clear. Of course the EU model is (somewhat) better is better than the endemic corruption of the Greek system. But in purely practical terms we have to deal with where we are now, and what is being done right now cannot work. An EU solution that might work would be to suspend Greece from the Euro, let it function for a few years on some temporary currency, then rejoin the Euro. The feel is that every Greek Euro should be worth something like 40 Euro cents. The Greek sovereign debt would need a comparable haircut. Such a repositioning would get Greece into a position where it is possible to be a good EU nation. An alternative EU solution would be an injection of funds around 150% of the total value of the Greek economy - as a gift, not a loan. If the EU comes up with either of these practical solutions (and only the first has any chance of happening) then the EU has found a way forward. What is not acceptable is the present effort going into an impractical solution which cannot work.

In passing the Greek system is of course full of corruption and bad practice and beyond defense. So too is the EU. The European Commission can't get the auditors to sign off its accounts. While Greece clearly falsified its accounts, the EU equally clearly turned a blind eye to this. Yes Greece has endemic corruption, financial mismanagement and profiteering by a political class - so too does the EU. It is a matter of degree. The EU isn't quite as bad as Greece.

 

[Jason]

This thread is (inevitably) full of points of view. Maybe a statistic helps.

The spread between Greek and German bonds has jumped up again and is now (Wednesday) at 932 basis points. This compares to the worst ever position on May 7th of 965 basis points, a level which sparked panic. Today Greece has to pay 9.32% more for its bonds than does Germany.

Conclusions that I suggest are objective and can be drawn from this market position are:
* Greek bonds are junk bonds.
* The European Financial Stability Facility has failed to give any degree of comfort to the markets, at least as far as Greece is concerned - we are back where we were before it happened.
* The bank stress tests have failed to give any degree of comfort to the markets.

Very soon we must see another frantic round of Eurocrat activity. Greece now needs another programme of the magnitude of the European Financial Stability Facility.

Also today we've seen Ireland downgraded by Standard and Poor. Oraganisations that try to predict the future decisions of the ratings agencies (like BBH FX) believe there are likely to be other downgrades: along with the usual suspects the list now includes France.

 

[Drifterwood]

I do not share your faith, Jason, that the "market" is the measure of all things. The irony being that the market always has to be wrong in some people's opinion to facilitate trading. Trading is more important to those running the market than the object of that market.

In my opinion, you are saying that a car is a write off because the tyres are bald. I would say, change the tyres. Alternatively, PM when your tyres are bald and I will buy your car at a write off price.

 

[7773]

I was always under the impression that previously, a non Greek national could only own up to half a Greek property. But then, precisely what Greek Law is and how it is interpreted has always been subject to "interpretation". :wink:

As I have been told, a non-Greek national could buy property but had to form a 'company' of at least 3 people, where the others were Greek nationals.

That law changed some years ago & you can buy independantly now - which allowed me to own a house & live in Greece :biggrin1:

 

[Jason]

A recent "Comment" in the FT is informative:

FT.com / Comment / Opinion - Brazilian fiscal lessons for Greece

The tone of the article is that a Greek default is inevitable, but not just yet, and that what the world is doing right now is building a "firebreak" so that the Greek contagion may not spread too far. It concludes:

"The best solution for Greece at the moment is to push on and get as much done as it can, while the money from the IMF/EU programme shields it from the judgment of the markets. Restructuring is more likely to make sense in a year or so, assuming that the budget is definitively heading into surplus. Market gurus say this is what most investors are expecting in any case. Politically, unburdening itself of debt can then be portrayed as ridding Greece of a dysfunctional past.
In the meantime, the rest of Europe can get on with building a firebreak. Portugal and Spain can pursue austerity. The banks holding Greek debt can either seek to offload it, or raise enough capital to insulate themselves against a restructuring. The 2001 sovereign default of Argentina, Brazil’s dysfunctional neighbour, had been so long prefigured that investors had been able to prepare.
Should Greece restructure? Very likely, but not yet. Painful though it is, struggling under a debt burden and an IMF programme has some advantages, and Mr Papandreou’s government needs to seize them."

 

[Drifterwood]

So it's not a death spiral then?

 

[Jason]

So it's not a death spiral then?

The EU/IMF bailout means that Greece will crash on a schedule rather than when the markets dictate. The activity of EU financiers right now is frantic. There is a matching activity among politicians to say that there is no problem.

WHEN Greece defaults it will have pushed through many necessary reforms. Who knows, Greeks might even be paying taxes and working to a retirement age comparable with the rest of the world! So yes there is a way forward for Greece. But the Euro will be dead for Greece and Greek sovereign debt will get a short back and sides.

The forthcoming default is being managed. My reading of the financial press - and in the end it is just my reading - is that the time of Greek default will be the time that Germany, France, BeNeLux and Austria will revalue out of the Euro onto a Northern Euro - and accept a significant level of fiscal union. The rump Euro - Spain and Italy the two big economies - will have sufficient firewalls in place to avoid Greek contagion. The devaluation of their currency will provide a way forward for their social and economic problems.

 

[Drifterwood]

I'll take that as a no.

I'll bet you almost anything you like, Jase, that your last paragraph is wrong. My reason being, trhat with all due respect, Greece is neither big enough nor important enough to derail the bigger picture. It is your distatste for the bigger picture, that IMO, stops you from seeing this.

 

[Jason]

I guess the answer Drifterwood is that time will tell.

I suppose I see Greece as a catalyst to a big change rather than the underlying cause. As you point out Greece just isn't big enough to derail the whole Euro project on its own (so agreement here) - and if the other 15 Eurozone nations were doing fine I suspect a solution would have been found by now. The bigger picture - as I see it - is the problem in what we are now politely calling the "peripheral" nations of Italy, Spain, Portugal and Ireland - and two of these are big economies. Arguably another problem for the Euro project is that the UK is not in - maybe the additional economic weight of the UK could have helped. And the weaknesses of the world financial system is causing more stresses. But we are where we are.

And you are quite right Drifterwood, I find the bigger picture distasteful. A new EU settlement - an inner core with their fiscal and currency union, an outer rim with clearly safeguarded national independence including sovereignty over fiscal policy - looks to me like a much better world, one which more closely reflects the will of the people of Europe and one which has soul. I think the historians of the future will make much of the democratic deficit of the EU and see the Lisbon Treaty as forced through in defiance of the will of the people of the EU by an arrogant and self-serving bureaucracy. The misery inflicted on the people of Greece by the EU - and the other "periphery" nations - is not acceptable. In my view the EU project has already failed because it is doing more harm to people than good. There is a moral imperative to move on from the disaster of 40%+ youth unemployment in Spain, or southern Italy degenerating into poverty and crime, or Greece asked to follow stringent austerity policies that won't work, or Ireland given an unsustainable boom and a very painful bust. That moral imperative is best expressed in a new treaty, one that establishes a two-speed EU.

 

[Drifterwood]

What we need Jason, IMO, is a multi speed Europe, rather than what has been sold, namely, we're all as affluent as the Germans now. Countries needed to develop their natural place, rather than the failed attempt to engineer overall prosperity. The US Federal model is much better IMHO because it allows for internal market forces. Euro "socialiasts" never really get this, or worse think that they can make the river flow the other way.

 

[Jason]

Drifterwood, I AGREE WITH YOU!

I suppose I should stop now. But where's the fun in that? My thought is that the EU will at first talk of a two-speed Europe, then multi-speed will be the next stage. We are starting to see a lot of Franco-German fiscal harmonisation (none of it much reported) so that a Franco-German fiscal and monetary union is looking very likely indeed, with economic governance - in effect forming one nation state. Presumably BeNeLux and Austria will join in. Initially Europe is going to be two speed - this centre block (dare I call it Charlemagnia?) and the rest.

If we are looking at multi-speed I see Spain, Portugal and Italy as being in harmony (perhaps with Slovenia too) as a Mediterranean-speed Europe. Poland, Czech Rep, Slovakia, Hungary, Baltic States might be another. SE Europe (Greece, Bulgaria, Romania) is another rational group. As is the Nordic nations. Of course whether nations like each other is another issue, but economically they may group together.

The UK of course falls in logically with Ireland. In a multi-speed EU the speed adopted by the UK (if it reflects the will of the people) would be full speed reverse.

 

[Drifterwood]

The UK of course falls in logically with Ireland. In a multi-speed EU the speed adopted by the UK (if it reflects the will of the people) would be full speed reverse.

Only whilst the argument for most is misrepresented as being about sausage content.

And I disagree :biggrin1:, we should be with Germany and France, and we should all live with the Euro as all the individual States live with the US$.

 

[Jason]

And I disagree :biggrin1:,

What a relief! The world is normal again.

Save our Sausages!

Bangers and Mash land :BoomSmilie_anim: Foreign parts (here be frogs)

 

[D_Tully Tunnelrat]

So it's not a death spiral then?

Perhaps a death loop is a better frame of reference.

Greek debt needs to be given a haircut, but the national and EU bureaucrats are afraid to confront the banks. Since the "stress test" for many euro banks was merely window dressing, any forced write downs would probably push some banks over the edge. Forcing banks to do the same with Spanish debt would surely cause a wave of bank nationalization all across Europe. And more bailouts. I haven't even read/heard how they will raise the money for the EU bail out fund, or how those monies can be used.

A North-South split does offer a way for Europe to address it's internal trade imbalances, but, as has been discussed here many times before, the only way to make that work is with some form of integrated political union (a north-south polarity...), with the accompanying taxes, (the EU already has mind numbing levels of bureaucracy), for without it, you cannot have economic Federalism.

Even though Germany is the hale fellow of Europe's economy now, it is only emerging from 10 years on its' sick bed. The German mandated austerity measures for other EU countries may make the other countries take Germany's place in the hospital. A decade is a terrible thing to waste. In the case of Japan, it's been two.

There are faster ways to get one's house in order. The Swedish model of bank nationalization, and subsequent privatization, which was successful within two years, cost far less than the US, or EU bail out programs (who's sum totals are yet to be calculated...) rarely gets mentioned. Similarly, GM, with it's debt relieved, is now very profitable. Why have banks become the sacred cows of the developed world?