Sovereign debt bubble thread

[MadImmortalMan]

Might be a good idea to make structural policy changes that attract foreign investment to offset the public surplus. Since the export-competitiveness angle will take too long, and the state has lost the ability to operate in the bond market.

[Crazy_Ivan80]

Might be a good idea to make structural policy changes that attract foreign investment to offset the public surplus. Since the export-competitiveness angle will take too long, and the state has lost the ability to operate in the bond market.

that's nigh on impossible for Greece. the rest of their economy is so closed off to outsiders that you'd have to be insane to even invest there. Sometimes it appears as if the whole of greece is a closed shop employer (or how do you call those companies where the union has such a grip on employment that you can't get in without being a member?)

[Tamas]

Seems to me that based on all your discussion, the conclusion is just about remains the layman simple one: Greece's setup (economy and politics) was never meant to produce the kind of life they have been giving themselves, and it WILL collapse back to the shitty levels it was supposed to be at, no matter what.

[Iormlund]

Even if Greece were a more open economy, there's no way it could live off exports.

Take a look at Spain. We've seen dramatic increases in exports for the last couple years, yet they cannot offset the rest of the economy crashing down.

Furthermore, foreign investment is not taking flight just because the market is closed. You'd have to be insane to invest in peripheral countries unless you can secure loans from their banks to avoid currency convertibility risk -- but those banks are bleeding deposits themselves and can only count on the ECB to keep liquid, so they cannot lend and still meet leverage targets.

[Iormlund]

Seems to me that based on all your discussion, the conclusion is just about remains the layman simple one: Greece's setup (economy and politics) was never meant to produce the kind of life they have been giving themselves, and it WILL collapse back to the shitty levels it was supposed to be at, no matter what.

Greek private debt is actually very low. With proper reforms and management (ha!) Greece would have no problem maintaining their living standards.

[The Minsky Moment]

Why do we need to assume this?  The first place a lowering of unit labor costs should show up is the current account.  Lower the price of an Aegean vacation.  Lower the prices of olives and Authentic(tm) feta cheese.

Tourism - which is in fact an important source of earnings - is acually down quite substantially.  Not 100% clear why, but the potential cost benefit is watered down by the fact that Greece is still on the euro and the fact that a big part of travel expense - air fare - is not going to be much lower if at all.

Agriculture - not as an significant export earner for Greece as you might think.  The fact that the EU ag market is rigged via CAP obviously doesn't help with that.

The single biggest export item for Greece is actually refined petroleum products, for which lower labor costs doesn't have that big an impact.

What would really help of course would be currency adjustement but that isn't possible.

Overall the current account has nonetheless improved quite a bit but it is still very negative.

[The Minsky Moment]

Of course GDP will shrink if there is public saving. That's taking a 1:1 number off the GDP calculation for every euro in spending decrease. Why is that bad? Besides, Greece is not in a state of public saving.

If GDP goes down then revenue goes down so reducing the deficit becomes like running on a treadmill that accelerates whenever you try to go faster.  Question is whether you will get to the button before getting thrown off or having a heart attack.

Right now interest on the outstanding debt is over 60 percent of the deficit and with interest rate divergence that will only get worse - that is another factor ramping on speed on the treadmill.  So even if Greece got into primary balance, it would still be screwed.

To my mind this  is a ludicrous situation - the EU clearly has the resources to help Greece out of the hole without breaking a sweat.  Insisting on unrealistic conditions like Euro 50 billion in privatization receipts or suddenly evolving a highly trained cadre of fiscal administrators armed with a fully functional and integrated IT system overnight is absurd to the point of cruelty.  And while the Greeks bear responsibility for getting into this mess - there is plenty of moral hazard to go around - recall that Greece was voted into the eurosystem despite open acknowledgment of abject  failure to meet criteria on the theory that it didn't matter because their economy was so small.  The core nations then took advantage of Greece's integration into the euro and the fixed exchange rate to make billions exporting goods; core banks, backed by their local central banks, happily extended unlimited trade credits without any concern for the consequences.

Might be a good idea to make structural policy changes that attract foreign investment to offset the public surplus

International capital markets are currently dominated by risk aversion so this is not a propitious time for a high risk debtor to try to attract foreign funds.

[MadImmortalMan]

The last time Europe had to save Greece's finances, their fiscal policy was dictated from London and Paris for fifty years.

[The Minsky Moment]

I can think of another analogy.

Back in the 1980s the US had something called the savings and loan crisis.
This was and is still recalled by most people to have been an "American" banking crisis.
The reality was that the crisis was actually very strongly concentrated in Sun Belt - the vast majority of the losses were in just a few states, and Texas in particular.
The solution to the crisis was that the FDIC stepped in protect all the deposit holders and RTC was created to take on the bad assets and work them out.
Basically the rest of the country bailed out the Sun Belt.  it just happened as a side effect of our federal system.  I suppose someone could have said - hey screw Texas, they got into this problem, let them get out of it and started on about moral hazard.  But that was never seriously raised because the reality is the US has a national financial system, and it is only as strong as the weakest link.

The EU has to decide whether it is really serious about being a single economic and financial bloc or not.  Greece is just a litmus test.

[Neil]

Come to Laramie.

He said health coverage.  That rules out the US.

[MadImmortalMan]

I can think of another analogy.

Back in the 1980s the US had something called the savings and loan crisis.
This was and is still recalled by most people to have been an "American" banking crisis.
The reality was that the crisis was actually very strongly concentrated in Sun Belt - the vast majority of the losses were in just a few states, and Texas in particular.
The solution to the crisis was that the FDIC stepped in protect all the deposit holders and RTC was created to take on the bad assets and work them out.
Basically the rest of the country bailed out the Sun Belt.  it just happened as a side effect of our federal system.  I suppose someone could have said - hey screw Texas, they got into this problem, let them get out of it and started on about moral hazard.  But that was never seriously raised because the reality is the US has a national financial system, and it is only as strong as the weakest link.

The EU has to decide whether it is really serious about being a single economic and financial bloc or not.  Greece is just a litmus test.

I think it's politically likely that at least some of the northern states will leave the union if that happens. WAG, Finland leaves before Greece does.

[MadImmortalMan]

Another analogy would the the US States in the 1840s.

[Iormlund]

I think it's politically likely that at least some of the northern states will leave the union if that happens. WAG, Finland leaves before Greece does.

That's the best possible outcome right now.

[alfred russel]

To my mind this  is a ludicrous situation - the EU clearly has the resources to help Greece out of the hole without breaking a sweat.  Insisting on unrealistic conditions like Euro 50 billion in privatization receipts or suddenly evolving a highly trained cadre of fiscal administrators armed with a fully functional and integrated IT system overnight is absurd to the point of cruelty.  And while the Greeks bear responsibility for getting into this mess - there is plenty of moral hazard to go around - recall that Greece was voted into the eurosystem despite open acknowledgment of abject  failure to meet criteria on the theory that it didn't matter because their economy was so small.  The core nations then took advantage of Greece's integration into the euro and the fixed exchange rate to make billions exporting goods; core banks, backed by their local central banks, happily extended unlimited trade credits without any concern for the consequences.

On the other hand, there are a lot of small countries in Europe. Greece can be helped without too much expense, but then the same can be said about Belgium, and Portugal, and Ireland. And some the eastern europeans, such as the Baltics, have come under considerable stress recently. Those aren't remote textbook fears of creating moral hazard, they are problems that are here now, and even if you convince German voters to give Greece an open checkbook, what about all those other countries?

The eurozone is either going to need to operate by having the EU (or some other transnational body) with a strong hand in fiscal decisions, or the EU needs to stay out. What I am certain will never work is to have spending entirely controlled by the nation with other nations covering losses if a debt crisis comes up.

[Admiral Yi]

Overall the current account has nonetheless improved quite a bit but it is still very negative.

Then obviously Greek demand needs to be reduced and exports made more competitive.