What will happen to Greece?

[dandelion]

Greece will need subsidy from the EU.

Sound of bankers rubbing their hands together in glee?

The idea that Greece can repay a loan is just not credible - Greece can't. But I don't see how the EU can make this sort of subsidy either. It is a Lisbon Treaty breach as well as politically impossile in a Germany coming up to an election.

Bankers know that too. An excellent time to put pressur on govenments to screw more money out of them.

We need courageous political leadership.
(Yes, it's that bad.)

Bankers sent to jail for treason? Banks nationalised? Print some real money instead of the funny bank loan bond money we have now?

 

[Drifterwood]

Sound of bankers rubbing their hands together in glee?


Bankers know that too. An excellent time to put pressur on govenments to screw more money out of them.


Bankers sent to jail for treason? Banks nationalised? Print some real money instead of the funny bank loan bond money we have now?

I am glad that I am not the only one to see the irony in all this.

Banks create a massive problem by being allowed to take fractional reserve lending to stratospheric levels and then turn round and put the boot in on Greece for borrowing about what they earn each year.

It's a mad fucking world. If I was a banker I would consider hiding in SSwitzerland for a while.

 

[eurotop40]

They won't be safe for long here either...

 

[Jason]

Greece is fast running out of options. It may be kicked out of the Euro (no-one is quite sure how to do this, but Eurocrats are good at finding ways). Everyone else may leave - and the German press right now is so anti German subsidy that the prospect of Germany leaving is realistic. Assuming a Drachma was launched at one Euro = one Drachma it could be expected to devalue 50% to 70%. Curiously if Greece had stayed out of the Euro a devaluation of 5% a year against the Euro for 10 years would have been pretty much what would have been expected, which comes out to about the same, though the problem of course is it all happening at once.

If Greece stays in the Euro and is not subsidised both during May (when subsidy for E9bn is now essential) and for many years to come then Greece will default. This means it tells its creditors who hold Euro-denominated bonds that they can't have their money back now, or they will only get a percentage back, or they will get nothing back. The Greek economy will stop functioning. In these circumstances the IMF sets the budget, makes loans, and the currency devalues. The level of austerity that would be needed to balance the budget is beyond possible implementation for Greece.

We are then into uncharted territory. Most likely is that the IMF will require Greece to float its own currency, and as this is an IMF requirement Greece can do it with fewer legal problems than if it did it of its own accord or if the Eurozone did it. This is a sort of solution though very messy in terms of implementation. If however nothing happens - if a Eurozone country defaults and no solution is found - then the markets will assume that all Euro denominated financial products have a far higher level of risk. We are already seeing the start of this. Why would anyone invest in Portugal right now? Or even Spain? And there must be doubts about Italy too, and Ireland, and Belgium. And if I have two equally good investment opportunities, one in Germany and one in Norway, right now I will go for Norway. The do nothing option is that a Greek default would trigger defaults in Portugal, Spain, Italy and perhaps in every country in the Euro zone. If the Eurozone does not actually find a solution (rather than just muddling along) there will be no Euro.

The issues for Britain are interesting. We will get lots of fall out. But if investors are worried about the Eurozone they have to put their money somewhere. If there is confidence in Britain the investment will go into our industry and our jobs. If they are not it will flow out as quickly. Investors - or speculators if you prefer - have overwhelming indicated that they would have no confidence in a hung parliament. For the UK the choice is vote Conservative or vote for financial collapse.

Has anyone yet woken up to the implications of Spanish Bank Santander on every British high street? As this is trading in Britain it will be covered by our guarantees in the event of a Spanish banking crash so UK savers will get their money back - but after a time and up to a limit. Santander are clearly feeling the problems already as in order to get money in they are having to offer market leading interest rates. Their cash ISA is probably the best rate in the UK right now - and that is a real cause for concern.

 

[SilverTrain]

I'm concerned and anxiously await developments (hopefully, solutions ).

 

[798686]

Seems like it's going to get pretty rocky for a while. Not sure whether eurozone members will want to foot 2/3 of a 120bn bailout over 3 years - especially not Germany.

I think it's all quite a firm reminder that the UK has been better off keeping the pound. Had we been inside the euro in the current situation, would we be in a much similar position to Greece at al, with no way of rectifying things?

I wonder if keeping the eurozone (and eventually the EU) as a strictly Christian club, will have any bearing (however small) on decisions such as whether to bail Greece out, or to facilitate their exit from the euro (and eventually the EU?).

 

[Jason]

I don't think the Europhiles had truly ever considered the probability (as the bookies now feel it is) that a Eurozone country will exit the Euro. The Lisbon Treaty means that an exit from the Euro is also an exit from the EU (though maybe this can be fudged). And I really don't think the Europhiles have any long-term plan now.

Had the UK been within the Euro we would have been unable to follow a policy of quantitative easing and would have been forced to borrow much more. Our expors would have been hit by an exchange rate too high. Basically we would have been in the position Greece is in about a year ago. We would also now be in line with Germany et al to pay large sums to Greece (and Portugal, and Spain, and any other nation that needs them). For the UK, being outside the Euro is an enormous benefit.

EU expansion must now be on hold. The only mechanism for expansion is a treaty which incorporates the incoming nation within the Lisbon framework, which includes the Euro - but right now it is unthinkable for a new country to join the Euro. I think Turkey's chances of joining have now been pushed into the next century.

 

[Jason]

The aid package to Greece that we all thought had been negotiated a few weeks ago and which was to have been (re-)negotiated this week will now in fact be announced Saturday evening (that's the schedule anyway). Market expectations are that Greece will be granted a package.

The austerity measures required are very severe. Today The Guardian reported that the average retirement age in Greece is now 53 and the IMF wants an average of 67. Greeks already have pay cuts, sales tax rises, unemployment rising fast - this and lots more to come. Can any society stand this without falling to bits? Should it even try? Are the unions morally right to be taking to the streets on this issue?

Greece has the May Day bank holiday this coming Monday - as most of Europe. As discussed earlier in this thread (just before Easter) if a country wanted to leave the Euro then a bank holiday weekend is the time to do it as the extra day of market closure gives that little bit more time for administration. And I've noted with interest that the announcement on the bailout package is scheduled for Sat evening. Presumably it will be that there is a bailout. But if there isn't it would give around 60 hours of complete closure of everything before Tuesday morning.

 

[dandelion]

The austerity measures required are very severe. Today The Guardian reported that the average retirement age in Greece is now 53 and the IMF wants an average of 67.

So what is average retirement age in the UK? And in the banking profession?

Greeks already have pay cuts, sales tax rises, unemployment rising fast - this and lots more to come. Can any society stand this without falling to bits? Should it even try?

Are you suggesting the greeks should help us all out by committing suicide or that they should all just move elsewhere, say to England?

Are the unions morally right to be taking to the streets on this issue?

An odd question, surely, you wax lyrical. The proper question must be whether it is in the best interest of their members. I wouldnt think so, but I dont know exactly what they are protesting. Perhaps against the lies of politicians who promised what they could not deliver?

if a country wanted to leave the Euro then a bank holiday weekend is the time to do it

well if i wasnt already protesting at being lied to id be throwing bricks if someone stole all my euros over the weekend and replaced them with worthless paper. Sounds a sure recipe for total anarchy. Besides, it makes no difference to the national debt which would still be owed in euros. Trying to pay this would instantly destroy the new currency. The problem is an inability to pay and this would not change.

 

[Jason]

You ask some specific questions Dandelion:

* I don't know the average retirement age in UK today - I imagine late 50s. IMF would suggest for UK immediate equalisation of male and female at late 60s and presumably an average pushed to early to mid 60s. Women get the biggest change.

* I'm suggesting that the Greek government should put its people first - above the European ideal. A government's duty is to its people. In order to avoid a situation which may degenerate into civil war the Greek government should act - now.

* Strikes are an economic catastrophe and in my view very rarely justified. But in this case the strikes are about preservation of a society and a way of life in the face of a damaging political ideal. Yes I think the argument is a moral one. Is an identity, a lifestyle, a nation worth taking direct action to preserve?

* A Greek crash out of the Euro would go hand in hand with a default on Euro debts. In theory a country could offer to pay them back later or pay a proportion, but in this case I think Greece would just default. Greece walks away from her debts, refuses to pay, blames the EU. A new currency is floated on parity with the Euro, which would decline almost instantly to maybe 30%-50% of the Euro value. Greeks are paid and buy goods in this currency. Exporting is suddenly easy. Tax falls (because there is no debt repayment). Imports are expensive of course.

The EU would have very long meetings about this event. Very long ones. They would do lots of talking and produce lots of reports. Presumably Greece would be forced outside the EU, but there would be trade with Greece notwithstanding. The one true sanction - invading Greece with an occupying army to force its people to work harder and longer for less - just isn't going to happen. The problems for the EU are enormous. Maybe the Eurozone would pick up the debts. For Greece it is a solution.

 

[faceking]

Who will protect the sheep, I ask?

 

[dandelion]

You ask some specific questions Dandelion:

* I don't know the average retirement age in UK today - I imagine late 50s. IMF would suggest for UK immediate equalisation of male and female at late 60s and presumably an average pushed to early to mid 60s. Women get the biggest change.

Given we are in a recession so there arent any jobs, that would be (say) 500,000 people who do not retire and do not get state pension but also 500,000 people who cannot get the jobs vacated by the retirees, who thus claim unemployment benefits. Given that the retirees probably also have private pensions and would be paying tax on these pensions, spending the money, etc, which is otherwise locked up in their pension funds, is this really a benefit to the government tax take in short or even medium term?

* I'm suggesting that the Greek government should put its people first - above the European ideal. A government's duty is to its people. In order to avoid a situation which may degenerate into civil war the Greek government should act - now.

They may perceive that their best interest is to remain firmly in the EU, where they can flee to other countries and get jobs, and can be sure their personal savings remain in a solid currency, the euro. You find it surprising that some countries like the EU?

* A Greek crash out of the Euro would go hand in hand with a default on Euro debts. In theory a country could offer to pay them back later or pay a proportion, but in this case I think Greece would just default. Greece walks away from her debts, refuses to pay, blames the EU. A new currency is floated on parity with the Euro, which would decline almost instantly to maybe 30%-50% of the Euro value. Greeks are paid and buy goods in this currency. Exporting is suddenly easy. Tax falls (because there is no debt repayment). Imports are expensive of course.

That last just a teeny tiny difficulty? Why bother with a new currency, just default in the old one. Makes no difference, except your citizens still have savings with real value...

The EU would have very long meetings about this event. Very long ones. They would do lots of talking and produce lots of reports. Presumably Greece would be forced outside the EU, but there would be trade with Greece notwithstanding. The one true sanction - invading Greece with an occupying army to force its people to work harder and longer for less - just isn't going to happen. The problems for the EU are enormous.

So why not just do absolutely nothing? Why is it our business? Nothing changes about trade. Why should it. Nothing changes about Eu, except maybe Greece defaults on its eu payments too. Can Greece really balance its budget if it defaults? if so, sounds good to me.

 

[dandelion]

Who will protect the sheep, I ask?

The best reason for propping them up, I would think. Magnanimity usually pays in the long run.

 

[Drifterwood]

Tax the Banks who want to lend at 32%, 98% on their profits.

Two can play at this game, some seem to have forgotten this.

Europe needs to tell these bastards to fuck off.

 

[dandelion]

Hmm. governments seem to be in the habit of expressing figures as % of GDP, which effectively masks the actual cash amounts we are talking about. One figure for greek debt is 400 billion dollars. Its not clear to me what interest rate they would be paying on that now. budget deficit seems to be about 10% of GDP, which seems to be about 350 billion dollars, so the shortfall is around $35 billion. So possibly interest payments as yet do not make up a significant part of the deficit. However, if matters reach the point where they do, then it would seem Greeces best option would be to default. The currency is not going to collapse as a result because its the euro!

In other words, its quite questionable whether this is a problem for Greece or a problem for the world. The info I found said that Greek bond issues were well oversubscribed, so wherever this money comes from, people are sill falling over themselves to lend to Greece. There seems to be quite a lot of comment that the ratings agencies are useless and incapable of determining true risk. Rather, they are part of the problem in creating artificial crises, which bankers seem more than happy to exploit by lending as much as they possibly can at the boosted interest levels. So Greece ought to borrow as much as it can, rack up a cash balance, and then default entirely. Meanwhile, it wouldnt hurt to economise as much as possible on the presumption that free cash is going to stop.

So it might be that whats needed is for eu/world countries to talk Greece into agreeing not to default, because it is in their interest and against Greece's interest.

When I say world, I mean world. Where is this money coming from? Is it coming from bankers being paid on commission for the quantity of national debt they buy up? That would explain why they keep lending despite worsening risks. Does any of this sound like the US property crash which stopped the world economy in its track just recently when someone finally defaulted? If that analysis is correct, then the world has no option but to prop up Greece, Spain, Uk, etc. Not to do so is a world disaster. For this reason too, Greece ought to spend, spend, spend, because people will be forced to bail it out. Maybe the Greek anti-cut protestors are correct. It is in their interest not to cut the budget yet.

The implication of this analysis is that countries should give some thought to a possibility of a world debt crash. If banks are going to become insolvent, then the best plan is to draw out as much money as possible. Rack up a vast debt before the crash comes because you are never going to have to pay it back. I have found a new solution to the UK debt crisis! All three UK parties have decided to default!

If a wave of national defaults got started there would be no option but to nationalise and refinance the world banking system. Quite interesting. We all start again with balance sheets wiped clean. We just might save the world from global warming, and 3/4 of the world population from death within the next century. Maybe thats a good deal. Maybe we should be paying attention to Japan, which seem to be running along quite happily despite breaking all the accepted rules.

The euro isnt quite big enough yet, but wouldnt it be nice to be able to shelter within it when the crash comes?

 

[Drifterwood]

Hmm.

The euro isnt quite big enough yet, but wouldnt it be nice to be able to shelter within it when the crash comes?

You'll be giving Jason hemorrhoids.

Life and banking is serious. You can't just treat it like a big game that keeps going round and round. What if the Solar System were to work like that?

 

[798686]

Who will protect the sheep, I ask?

They can all come to Wales. We've got a great track record. :wink:

 

[Jason]

Dandelion - I'm NOT arguing in favour of the idea of putting the UK retirement age up immediately, just saying that that is what the IMF has in mind if and when. As you rightly point out we have a lot of unemployment and right now it would just reduce state pensions payments and increase unemployment benefits payments. Were the IMF to do it it would be alongside wage reductions (aimed at creating more employment). Lets hope we never get there.

***

A bond is sold in the form "Greece promises to pay the bearer E1m in 2020". An auction sets the price it is sold at, which will be a lot less than E1m. The interest is not paid year by year; rather all is paid when the bond matures. In 2020 Greece must redeem the bond by paying the bearer E1m (so Greece must have the money then) and may immediately borrow another E1m, which might mean issuing a bond with a face value of E2m due in 2030. Bonds simply move the cost to some future date, and governments trying to spend to bribe an electorate just love them. Gordon Brown's bonds will come back to haunt us in the UK for many years to come. Greece is paying the price now for money borrowed mostly within the last decade. Now the bonds are maturing and Greece does not have the readies to repay them. Greece must raise the money at any price.

Once interest rates get into double digits the value today of a 10 year bond is a tiny fraction of its face value. Market confidence in the country being able to repay such bonds falls. Once the chance of repayment is put at 50% or less by the ratings agencies they are "junk" bunds (it is a technical term). Very many investors just won't touch them. They become an interesting punt for the small investor (or gambler) as there is the potential for big returns if they do utimately pay up. Greece got into a position where a E1m bond maturing in one year was selling at about E750,000, and even on these terms (30% or so interest) Greece couldn't sell them.

The Euro is governed by treaties that are opaque and which just haven't envisaged the idea of a Eurozone default (a ghastly oversight from those drawing up the treaties). Quite what would happen in any given circumstance is not clear. However the idea of Greece defaulting and staying within the Euro is a non-starter. Basically the international banking system would refuse to accept Euro payments from Greek banks because they would not be regarded as Euros anymore. Euro notes have serial numbers which indicate the country of issue - Greek ones would not be accepted.

Most likely is that we have a package announced this weekend (now on Sunday I hear) which buys a bit more time. But the Greek problem is terminal. Very soon we seem to be looking at:
a) Greece forced out of the Euro and possibly out of the EU also (legally the two are linked). The world financial system takes the knock from Greece - once separated from the Euro this is a problem for the world but not a catastrophe.
b) A southern Euro for Spain, Portugal, Italy and Ireland trading at about 80% of the Euro. This sort of level would be adequate devaluation to stabilise these economies. It also has to happen at the time of a Greek default, otherwise the domino effect will hit these countries.
c) A northern Euro for the rest.
d) The above as just an interim solution. I imagine the intention would be to reunite the Euro. However there would also be pressure for further splits. Why should Ireland go in with Club Med, countries not its big trading partners? Why Italy with Iberia? Why should Germany prop up a northern Euro? Why should France and Finland use what would feel very like a German currency? This is seriously messy. Right now the Euro is not the place to be.

 

[dandelion]

the idea of Greece defaulting and staying within the Euro is a non-starter. Basically the international banking system would refuse to accept Euro payments from Greek banks because they would not be regarded as Euros anymore. Euro notes have serial numbers which indicate the country of issue - Greek ones would not be accepted.

You seem to have a rather different view of the euro to me. I have always believed that when Britain was forced out of ERM by dodgy bankers, the solution was a magic buton which would transform every paper pound into a paper euro. If the two are one, then it is impossible to trade one against the other. Scottish and Irish banks print pounds, but the exchange rate is irrevocably linked. They are pounds by another name. Just so euros issued by Greek banks. They are simply agents for the euro central office. So long as they dont commit fraud by printing paper they are not entitled to (I have no idea if this is even technically possible) there is absolutely no problem with the currency.

You dont seem to grasp this. Money is a medium of exchange and the Greeks happily have a good one, one of their few assets. Obviously you wish the euro destroyed, so it isnt surprising that you propose to do exactly that. A currency which suddenly decided some of the notes in circulation would not be honoured is no currency at all. Notes might have been issued with Greek imprinting, but they are euros. Maybe I have some, obtained in France. Maybe you have some, from a trip to Germany. They are interchangeable. An arab prince with a suitcase full of Greek notes is not going to be very impressed that his petty cash is not useable because he happened to get it in Greece. Any such action would destroy the euro, so it isnt going to happen.

Aside from this aside, you dont addres this issue of why the Greeks would want to swap good euros for worthless paper. The Greek economy would be in pandemonium now with literally worthless paper if it had its own currency. Greece would be a little island of Drachma not useable anywhere else. Everyone would be using euros anyway.This isnt a polite agreement to slightly adjust currency value to boost trade. Its an organised exercise by bankers to make money from Greeces difficulties. Greece has benefitted from being in the euro and will continue to do so.

You havnt explained why a defaulted Greece is bad for the euro. So Greece defaults, so what? What about this situation would make the rest of europe want Greece to stop using euros? The debate at the moment is not about saving Greece so as to save the euro. Its about saving Greece so as the save the world economy. The question is whether it is to the advantage of the other european states to finance Greece's deficit. As its immediate neighbours and EU partners, they have a vested interest, and it has always been part of the EUs aim to be redistributive and strengthen its weaker members. Not out of kindness, but because trade with a strengthened partner will eventually produce a profit.

As they say, you are proposing a bond traders wet dream.

 

[Jason]

If Greece is allowed to default (now inevitable if not subsidised by the Eurozone for say a decade) then the reasonable conclusion is that other Eurozone countries would be allowed to default. The risk premium on bonds issued by these countries must become greater making them more expensive. A Greek default would lead to a Portuguese default (without robust Eurozone action, which must actually happen before a Geek default if it is to work). The domino effect is very powerful. Spain, Italy and Ireland seem pretty certain casualties.

If Greece defaults - a 100% default - and (hypothetically) does not leave the Euro then every nation using the Euro must also default. If any Eurozone nation can get away with such a thing and remain in the Euro then the whole Euro is valueless - so the international money markets will reason, and money flows using pre-writen computer programs, not human intervention. In fact the circumstance of Greece defaulting and remaining within the Euro breaks so many laws that the banks would stop trading in Greek "Euros" - in effect Greece would be told tat its Euro denominated accounts were in "Greek Euros". And yes Dandelion if you have some Greek Euro notes get rid of them - in this circumstance they would become "Greek Euro" or "New Drachma" (and pity every shopkeeper in Euroland having to look at note serial numbers for every transaction).

There is a grey area around debt restructuring and partial default, but not a very big grey area.

The Scottish example is interesting. The big change would come if Scotland were given the right to issue its own bonds. At such a time (with the Greek tragedy in our minds) I expect an agreement would be drawn up which saw the Pound Sterling and Pound Scots on a fixed peg with the possibility of a floating peg (the Irish Punt solution for many years) or free floating. It would not be hard to set up a system which allowed this flexibility if it were ever needed while keeping a single currency. Scotland would issue sovereign debt denominated in Pounds Scots.

Greece has already committed fraud by de facto printing money. They have sold bonds issued against the national accounts of Greece (which we now know to be a fraud). Those bonds were sold for Euros. Had the buyers known the accounts were dodgy they would not have bought the bonds (and if the accounts had been corrected would have bought bonds for much less, maybe half price). Greece's crime is just a clever version of putting a Euro note in a photocopy machine.