Sovereign debt bubble thread

[Admiral Yi]

That people will look back in a hundred years and wonder how governments (Germany) could be so stupid as to let this happen.

What a truly odd thing to say.

[Neil]

It does have that terrifying WW1 feeling about it though.  That people will look back in a hundred years and wonder how governments (Germany) could be so stupid as to let this happen.

You wonder, don't you?  Will history blame the modern Germans for not standing together with the shitty parts of Europe, despite the fact that they've profited heavily because of their shittiness?  Or will they wonder at how the Germans ever got into bed with people so worthless in the first place, since it would inevitably fail?

[Admiral Yi]

You wonder, don't you?  Will history blame the modern Germans for not standing together with the shitty parts of Europe, despite the fact that they've profited heavily because of their shittiness?  Or will they wonder at how the Germans ever got into bed with people so worthless in the first place, since it would inevitably fail?

The way you say stand together with the shitty parts of Europe suggests it's just a matter of the right attitude and sufficient empathy.  Germany is a large economy but her resources are not infinite.  There's no way she can underwrite the debt of Italy, Spain, Portugal, and Belgium combined, and she can't afford to assemble bridge loans for countries that aren't serious about putting themselves on a long term sustainable track.

[Neil]

You wonder, don't you?  Will history blame the modern Germans for not standing together with the shitty parts of Europe, despite the fact that they've profited heavily because of their shittiness?  Or will they wonder at how the Germans ever got into bed with people so worthless in the first place, since it would inevitably fail?

The way you say stand together with the shitty parts of Europe suggests it's just a matter of the right attitude and sufficient empathy.  Germany is a large economy but her resources are not infinite.  There's no way she can underwrite the debt of Italy, Spain, Portugal, and Belgium combined, and she can't afford to assemble bridge loans for countries that aren't serious about putting themselves on a long term sustainable track.

Germany has already tied itself to the shitty parts of Europe.  German prosperity is a direct result of the shittiness and subhuman, backwards, mouthbreathing retardation of places like Italy, Spain and Portugal.

[Fireblade]

Well, it's not like Germany doesn't have a history of tying itself to worthless nations to further its own ends.

For example, see: Hungary.

[Sheilbh]

Germany could support Eurobonds - or the Commission's 'Stability Bonds' - to cover at least part of the Euro-zone government debt.

Similarly it's mainly German attitudes towards the ECB that have led it to be, in Martin Wolf's phrase, 'the magnificently orthodox central bank of a failed currency union'.  The ECB should be lender of last resort - but there are genuine legal objections to that - but surely they could be launching QE and making purchases on the secondary markets?  The irony is that in setting up the Euro the Germans specifically demanded an extreme independence for the ECB - it has to endure far less oversight than most central banks - to avoid political pressure for devaluation.  Instead we've got an ECB that is actually politically cautious of stepping beyond the German, Bundesbank tradition.  And it needs to.  I've hope for Draghi though, he's already cut interest rates at least.

Incidentally more worrying than Belgium or the periphery is the spread that's no emerging on 'safe' Northern Eurozone countries like the Netherlands and Finland.  This isn't about profligate countries any more it's about whether Europe wants the Euro.

There's no way she can underwrite the debt of Italy, Spain, Portugal, and Belgium combined, and she can't afford to assemble bridge loans for countries that aren't serious about putting themselves on a long term sustainable track.

What makes you think they're not serious?  With the exception of Belgium which is in a unique position due to not actually having a government.

[Admiral Yi]

Germany could support Eurobonds - or the Commission's 'Stability Bonds' - to cover at least part of the Euro-zone government debt.

What difference would that make?  It's still a charge on the credit of the still credit-worthy EU members.

Similarly it's mainly German attitudes towards the ECB that have led it to be, in Martin Wolf's phrase, 'the magnificently orthodox central bank of a failed currency union'.  The ECB should be lender of last resort - but there are genuine legal objections to that - but surely they could be launching QE and making purchases on the secondary markets?  The irony is that in setting up the Euro the Germans specifically demanded an extreme independence for the ECB - it has to endure far less oversight than most central banks - to avoid political pressure for devaluation.  Instead we've got an ECB that is actually politically cautious of stepping beyond the German, Bundesbank tradition.  And it needs to.  I've hope for Draghi though, he's already cut interest rates at least.

I'm willing to be proved wrong, but a central bank that buys up distressed debt nonstop hardly fits my image of a grim Teutonic inflation fighting central bank.

What makes you think they're not serious?  With the exception of Belgium which is in a unique position due to not actually having a government.

Greece is clearly not serious.  Spain appears to be serious.  It remains to be seen if Italy is serious.

[Neil]

What makes you think they're not serious?

I don't see any of them ending democracy anytime soon.

[Sheilbh]

What difference would that make?  It's still a charge on the credit of the still credit-worthy EU members.

Not really, the Commission's proposal sugggested that even Germany would be paying lower interest.  Again I think this requires treaty changes - and almost certainly some pushing to far greater fiscal union, as Merkel wants - but there is I think a workaround option of partial Eurobonds that wouldn't require any renegotiations. 

The combination of that and ECB actions, with EZ states actually contributing to the EFSF (I understand the last deal still hasn't been implemented) - would help save the Euro for now.  But then there'd need to be treaty renegotiations and I don't know how they'd go or, if they succeeded, how we'd get an Irish 'yes' vote far less approval of the German Constitutional Court

I'm willing to be proved wrong, but a central bank that buys up distressed debt nonstop hardly fits my image of a grim Teutonic inflation fighting central bank.

Exactly.  We've got a German Central Bank, we need an Anglo0-Saxon one.

Greece is clearly not serious.  Spain appears to be serious.  It remains to be seen if Italy is serious.

What's your basis for these views?

[Sheilbh]

I don't see any of them ending democracy anytime soon.

To be fair two of them have governments appointed by Germany and Eurocrats

[Admiral Yi]

Not really

Exactly.  We've got a German Central Bank, we need an Anglo0-Saxon one.

You must have misunderstood.  I said the opposite.

What's your basis for these views?

What the various countries have done in terms of cutting spending and raising revenue.

[Sheilbh]

How can it be a charge if everyone's paying less?

Edit:  And joint liability's the bit that's currently illegal under the treaties.  So the countries would still be responsible for their own debt.

You must have misunderstood.  I said the opposite.

What's makes you think the ECB's been Anglo-Saxon?

What the various countries have done in terms of cutting spending and raising revenue.

Okay.  So what have those countries done that make you think they're not serious?

[Admiral Yi]

How can it be a charge if everyone's paying less?

Someone borrows the money, someone has to pay it back. Or default and fuck their credit.

What's makes you think the ECB's been Anglo-Saxon?

Like I said, all the bond purchases.

Okay.  So what have those countries done that make you think they're not serious?

Greece has consistently missed targets on tax collection and privatization, for starters.  Italy under Berlusconni put together a pro forma austerity package.  The market is telling them they need to do more.

[Sheilbh]

Someone borrows the money, someone has to pay it back. Or default and fuck their credit.

Eurobonds would enable refinancing of, I think, up to 60% of GDP as a Eurobond which would have some form of guarantee from other countries - but not an outright guarantee, treaties don't allow that - and that debt would be senior to any other debt the country takes on.  Any subsequent debt would come with a market rate.  That option would make a huge difference for a country like Spain - or even Italy where there's still the large institutional domestic purchasers.  It would also make a large difference more generally for the number of countries who are adopting constitutional debt caps.

Like I said, all the bond purchases.

The bond purchases are sterilised.  The ECB is legally forbidden from buying government bonds from government - like the Fed and the BofE have been - they can buy them from the secondary market, but not if they can be legally interpreted as helping the government.  So when the ECB has made bond purchases, they've successfully drawn down liquidity of an equal amount.  Generally they've been pretty strict on keeping net money the same - motivated by a fear of Germany, motivated by a fear of inflation and a fundamental disagreement with loose monetary policy.

I don't think this crisis would have been so bad had the ECB behaved as the Fed or BofE would have. The ECB's increased their assets by about half the amount the Fed and BofE have with QE and bond purchases - and even that peaked in December 2008.  It would represent a massive shift in ideology for the ECB to proceed with all the bond purchases - God willing they will - and long-term it probably requires treaty amendment.  But immediately we need something like QE2 and some unsterilised bond purchases.

Greece has consistently missed targets on tax collection and privatization, for starters.  Italy under Berlusconni put together a pro forma austerity package.  The market is telling them they need to do more.

Well their asset valuation of some of the privatisations have always struck most people as ambitious in the current climate.

More importantly though the Greeks have consistently done what they promised in terms of tax collection and spending cuts.  They've had less effect than they were meant to - and than in every case the IMF suggested they would - because the recession's been consistently underestimated by the ECB, IMF and Commission.  That's different from missing targets through a lack of seriousness.

I agree it's difficult to take the Berlusconi government serious.  But I think Italy is more linked to Spain and the Netherlands and Finland.  The fears are above all based on whether there's the political will to save the Euro.  If Eurozone leaders can't take the sort of steps necessary to save Greece what hope the rest of them?  Yields are returning to pre-Euro averages.

[Iormlund]

You wonder, don't you?  Will history blame the modern Germans for not standing together with the shitty parts of Europe, despite the fact that they've profited heavily because of their shittiness?  Or will they wonder at how the Germans ever got into bed with people so worthless in the first place, since it would inevitably fail?

The way you say stand together with the shitty parts of Europe suggests it's just a matter of the right attitude and sufficient empathy.  Germany is a large economy but her resources are not infinite.  There's no way she can underwrite the debt of Italy, Spain, Portugal, and Belgium combined, and she can't afford to assemble bridge loans for countries that aren't serious about putting themselves on a long term sustainable track.

If Germany finds itself in the position of bailing out most of those countries (and especially Italy and Spain) is in no small part because of her gross mismanagement of this crisis. If she had acted swiftly and unambiguously at the start of the crisis we wouldn't be right here now. Instead she focused on finding time for German money to divest from risky assets while the contagion spread. The one thing markets won't tolerate is doubt, and Merkel could hardly have done a worse job on that front.

Now everyone thinks Germany will happily stand aside as it all burns and thus everyone, solvent or not, is on the hook.
I was very optimistic in the beginning, but I think we're long past the point of no return by now. Austerity is soon going to trigger a second round of recession in Europe and the US that will make all efforts to rein on deficits fail.