Europe's Populist Left

[Sheilbh]

Let's get something straight.  The Greek economy would not be rolling along blissfully in the absence of Troika-imposed austerity.  In 2010 Greece had a debt/GDP of around 120% and was running an annual deficit of 14% of GDP.  They then revealed that their books were cooked and the bond market said no fucking way I'm going to lend to these guys.  Eliminating a deficit of 14% overnight was going to be "austere" and was going to cause economic collapse regardless.  The Troika softened and delayed that collapse by allowing Greece to finance deficits that they otherwise would have been unable to.

Their primary deficit was a little lower than that. And only 11% of the bailout (around €27 billion) was spent in Greece as opposed to returning to their creditors.

I think had they followed the normal IMF route of default, but no devaluation because they're in the Euro and support while they reform and cut their budget it would've been less difficult than the past 6 years.

Edit: However that does ignore the effect of contagion which would've been an issue in 2009-10. There could very well have been the disorderly collapse of the Eurozone.

Edit: Also from the tweeters I follow who are market people there seems to be very high confidence that there will be a deal.

[alfred russel]

I am thinking more about general attitude towards lending than this specific case.

Consider this.

The shareholder is the least protected "creditor" of the company. He only gets paid if the company generates profit. The price for this is the fact that he has the biggest influence on decision making.

The bank is one of the best protected creditors. If the borrower company goes bust, bank debts are usually rank very high in the hierarchy - normally after employee wages and taxes.

Now, over the last decades, bank loan market moves towards much great control of lenders over borrowers - to the point that lenders have often control comparable to shareholders. But they continue to enjoy much better protections.

Now, the Troika is comparable in that it imposed conditions on Greek government that are comparable to those that can be made usually only by "shareholders" - i.e. the people of Greece. But they insist that their debt should get priority over debts Greece has towards its own people.

Martinus, I'm lost as to where you are going with this. In the examples you give of private companies, the "protections" of the debt holders are basically a preference to receive assets when the company is liquidated.  Greece isn't going to be liquidated.

The power the troika has over greece has very little to do with debt agreements or other legal arrangements. It comes from the fact that Greece needs to borrow, and the troika is the only plausible source of funds at the moment.

[Sheilbh]

Yes over reforms. Over fiscal policy to an extent but there is also the fiscal pact which is now part of EU law and why countries that aren't lending from the Troika are also having to cut their budgets far faster than they need to - such as the Netherlands, France and Italy.

[Admiral Yi]

Not necessarily. There isn't a magical number that is suddenly unsustainable, there's a range of factors. I think the biggest problem Spain and Italy have in terms of their debt is deflation. Their relatively small deficits are very much secondary.

I believe Italy's debt/GDP is around 120%, i.e. around where Greece was when they went in the shitter.  Spain's was small, something like 40%, but that was before the bank recapitalization and not including provincial debt, which I believe Madrid legally guarantees. 

In terms of fiscal space I think these are ultimately political judgements and if Europe wants to avoid dealing with Tsipras, Iglesias, Adams and Grillo then they should maybe start supporting Samaras, Rajoy, Kenny and Renzi.  If your policies lead to a collapse in social provision by the state, a severe recession and increasing debt I have limited pity for crying about how unfair it is to creditors.

I'm unaware of anyone crying for creditors.  I did point out that Souvlaki's claim that Germans had nothing to worry about was untrue.  That's not crying.

Calling it fiscal space instead of increased deficits doesn't change the basic math of increasing debt/GDP.

[Admiral Yi]

Their primary deficit was a little lower than that. And only 11% of the bailout (around €27 billion) was spent in Greece as opposed to returning to their creditors.

So what and so what?  This doesn't change anything that I wrote.

I think had they followed the normal IMF route of default, but no devaluation because they're in the Euro and support while they reform and cut their budget it would've been less difficult than the past 6 years.

Default is not the "normal IMF route."  I have never heard of a single case of the IMF suggesting that a program country default, and it has certainly never been included as a formal program condition.  As far as I am aware not a single program country from the Asian crisis of 98 defaulted/renegotiated.

[Sheilbh]

I believe Italy's debt/GDP is around 120%, i.e. around where Greece was when they went in the shitter.

Possibly even higher. Italy also has the world's third biggest bond market (after the US and Japan) and is running a substantial primary surplus, they should need minimal borrowing and their debt has very long maturities for the Eurozone.

Their big problem is the effect of deflation and recession on their debt, which means that despite increasing their primary surplus ever year their debt-to-GDP is really escalating. It's also worth remembering that from every analysis I've read Italy is the country that would benefit most from leaving the Euro, support for the Euro is now polling at 40% and several opposition parties are calling for a referendum on staying in the Euro. Those are also considerations in terms of fiscal space. They should, I believe, also benefit quite a lot from QE.

Spain's was small, something like 40%, but that was before the bank recapitalization and not including provincial debt, which I believe Madrid legally guarantees. 

It was about 35%. With regional and banking debt they're still only at about 95% now.

I'm unaware of anyone crying for creditors.  I did point out that Souvlaki's claim that Germans had nothing to worry about was untrue.  That's not crying.

How so?

Also I think the Germans, Dutch and Finnish governments are the ones doing the crying, not you.

Calling it fiscal space instead of increased deficits doesn't change the basic math of increasing debt/GDP.

By fiscal space I don't necessarily mean increasing spending, I think the consolidation required under the Fiscal Pact should be loosened in light of the economic situation and the levels of reforms undertaken. That ECB paper agrees and says it's legally allowed and is judged by the Commission.

More generally, politically and this is all politics not economics now, the creditor governments should do more to support pliable debtors if they want to avoid a situation like Greece or, the nightmare, Italy.

[Sheilbh]

So what and so what?  This doesn't change anything that I wrote.

So I think the impact of cutting their budget by 9% - excluding their default - would've been less than the current 6 years of recession, 2 years of deflation, collapse of living standards by 40% and primary public spending cuts of well over a quarter per capita.

Default is not the "normal IMF route."  I have never heard of a single case of the IMF suggesting that a program country default, and it has certainly never been included as a formal program condition.  As far as I am aware not a single program country from the Asian crisis of 98 defaulted/renegotiated.

I always thought the IMF insisted on default and devaluation before they got involved?

[Admiral Yi]

By fiscal space I don't necessarily mean increasing spending, I think the consolidation required under the Fiscal Pact should be loosened in light of the economic situation and the levels of reforms undertaken. That ECB paper agrees and says it's legally allowed and is judged by the Commission.

OK, I get the semantic nuance now.  Fiscal space means they can keep on running their current deficits (Spain's was 6% last time I checked) and they don't have to meet fiscal targets.

Doesn't change anything I wrote.  Each year of 6% deficits means one year closer to unsustainability.

[Admiral Yi]

So I think the impact of cutting their budget by 9% - excluding their default - would've been less than the current 6 years of recession, 2 years of deflation, collapse of living standards by 40% and primary public spending cuts of well over a quarter per capita.

Please explain why you think this.

I always thought the IMF insisted on default and devaluation before they got involved?

Definitely not on default.  Floating a fixed exchange rate or a managed peg is often (always?) a condition, and devaluation always follows a float.

[Sheilbh]

Doesn't change anything I wrote.  Each year of 6% deficits means one year closer to unsustainability.

Then why are they still paying so little on their debt?

Please explain why you think this.

Why don't you think it? I'm not sure what to say.

Definitely not on default.  Floating a fixed exchange rate or a managed peg is often (always?) a condition, and devaluation always follows a float.

Okay. Do you think that, given the IMF always cares about debt sustainability, that had they been interested in Greece rather than the banks (as in their minutes of May 2010) and devaluation wasn't on offer that default would've been an option for them?

[Admiral Yi]

Then why are they still paying so little on their debt?

I think financial repression is playing a big role.  Banks have increased capital requirements, and sovereigns, by law, get counted at par in capital.  Any borrowing from the discount window also has to be collateralized with sovereigns.

Not sure that explains it all though.  It's a bit of a mystery, frankly.  Would you lend Spain money at 2%?  I woudn't.

Why don't you think it? I'm not sure what to say.

The anti-austerity argument runs that decreasing spending created the collapse.  Yet the bailout allowed Greece to spend money it otherwise would not have been able to.  Greece didn't achieve primary surplus right away as far as I'm aware.  Thus the bailout mitigated the collapse.

Okay. Do you think that, given the IMF always cares about debt sustainability, that had they been interested in Greece rather than the banks (as in their minutes of May 2010) and devaluation wasn't on offer that default would've been an option for them?

Greece is a sovereign.  Default has always been and will always be an option.

[Sheilbh]

I think financial repression is playing a big role.  Banks have increased capital requirements, and sovereigns, by law, get counted at par in capital.  Any borrowing from the discount window also has to be collateralized with sovereigns.

I'm not sure about the legal point. The ECB decides what it accepts as collateral and what it doesn't - see the decision to not accept Greek government debt as collateral earlier in the week (though even before then it was only accepted at 60% of value).

Not sure that explains it all though.  It's a bit of a mystery, frankly.  Would you lend Spain money at 2%?  I woudn't.

My theory is that debt isn't the issue. It's always been about the structural problems of the Eurozone that are ultimately monetary not political. The key shift was after Draghi's speech:


It's worth remembering that he didn't plan to say 'whatever it takes'. That was ad-libbed after he'd had a meeting with bankers in London and was surprised and alarmed at their views on the collapse of the Euro.

The anti-austerity argument runs that decreasing spending created the collapse.  Yet the bailout allowed Greece to spend money it otherwise would not have been able to.  Greece didn't achieve primary surplus right away as far as I'm aware.  Thus the bailout mitigated the collapse.

No. They went from around 9% to 4% primary deficit in the first year. It took them two years to start running a primary surplus.

My view is that the bailout was always founded on false premises. The basis of all of its projections were wrong and woefully optimistic - hence the IMF's subsequent mea culpa over the fiscal multiplier. It consistently overestimated economic growth and inflation, which meant it consistently overestimated debt sustainability. Because of that and because of the very high primary surplus required (4.5% indefinitely) I think it's dragged the crisis on for these six years.

I think they would've been better off defaulting, but I'm not sure and I also don't know if they'd have been better off staying in or leaving the Euro. Now I think they'd definitely be better off defaulting, should probably stay in the Euro but not necessarily fear leaving.

[Admiral Yi]

My legal point was about capital requirements.

How does your theory account for current Greek yields of 14%?

I agree that early default would have been preferable.  However, that doesn't impact my statement that the bailout mitigated, instead of caused, the collapse.

[Sheilbh]

My legal point was about capital requirements.

Sorry I misunderstood I thought you were saying sovereign debt, by law, gets counted. Which in the Eurozone it doesn't. The ECB and EBA determine that.

How does your theory account for current Greek yields of 14%?

Doubts over whether Greece is going to stay in the Eurozone. They were at around 5% about six months ago. Would you lend to the Greeks at that rate?

I agree that early default would have been preferable.  However, that doesn't impact my statement that the bailout mitigated, instead of caused, the collapse.

Mitigated for the first couple of years, but then prolonged and exacerbated it for the next 4.

[Admiral Yi]

Sorry I misunderstood I thought you were saying sovereign debt, by law, gets counted. Which in the Eurozone it doesn't. The ECB and EBA determine that.

What's an EBA?  You're saying the ECB and [unknown acronym] decide whether a given sovereign counts in capital?  OK.  Didn't know that.

Mitigated for the first couple of years, but then prolonged and exacerbated it for the next 4.

Fair enough.  Which is the same effect more fiscal space would have.