Sovereign debt bubble thread

[Sheilbh]

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.

I agree.  Let's not forget that some of the deals at Eurosummits were effectively delayed for German regional elections, which indicates why I think a lot of the blame should go to Merkel.

I was listening to Stephen King, head economist of HSBC today, and he was saying that this time last year had the French and Germans effectively guaranteed Irish and Greek debt - with austerity - then that would have ended these problems.  But all through the year the problem's been the lack of political will.  He said that his view is that the markets aren't worried about Spanish or Italian debt any more they're worried that Europe (effectively Germany) will let the Euro fail - which was something no-one had been thinking this time last year.

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.

Another point King made was that he now thinks the second of economic problems is going to start hitting 'creditor' nations hard.

One thing that I only discovered recently, which scares me even more, is that apparently Dodds-Frank explicitly bans bailouts - which is madness, though probably popular.  I think the way the Euro was designed never envisaged a crisis, that's one sort of stupid.  Passing a law after a crisis that means the way you resolved it's now illegal is a whole other level of stupidity.

Given the that we're now facing a possible Euro-bank crisis, declining growth in China, almost certainly a recession in Europe I think it's more than possible that US banks could end up in trouble again - but no bailouts.  It's a scary time.

[Zanza]

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.

If she had acted swift and unambiguously, she would not be here anymore right now. The idea that at the outset of the crisis, she could have acted more decisively ignores political realities in Germany.
And that also assumes that there was a swift and unambiguous solution that wouldn't have be shredded apart by financial markets and that was preferably also legal. Was there? What would have been the solution?

[Zanza]

I was listening to Stephen King, head economist of HSBC today, and he was saying that this time last year had the French and Germans effectively guaranteed Irish and Greek debt - with austerity - then that would have ended these problems.

That would most likely have been illegal under Germany's constitution and the EU treaties.

[Zanza]

Not really, the Commission's proposal sugggested that even Germany would be paying lower interest.

Yeah, right. We already pay a negative real interest rate. How much lower can it get?

Eurobonds: Let's bundle up a lot of bad assets, put it into different tranches and sell those seperately with different ratings. Nothing could go wrong with that brilliant idea.

[Iormlund]

If she had acted swift and unambiguously, she would not be here anymore right now. The idea that at the outset of the crisis, she could have acted more decisively ignores political realities in Germany.

The political realities in Spain, Portugal, Greece or Italy were against action as well yet we enacted deeply unpopular measures.
The difference is Germans seem to think this shit we're in is in no part their responsibility. At least we have the common sense to understand our governments/saving institutions fucked up. It's about time Germany wises up. It takes two to tango.

And that also assumes that there was a swift and unambiguous solution that wouldn't have be shredded apart by financial markets and that was preferably also legal. Was there? What would have been the solution?

Draw the line from the very start. Implement a tiered plan that makes jointly-backed credit available based on the adherence to stringent structural reforms, supervised by Germany if needed be. A clear, unambiguous signal that Italy and Spain would have as much liquidity as necessary as long as they reformed their labour markets, education, etc.

That was the only important thing, to keep investors from freaking out about Italy or Spain.

[Razgovory]

I didn't know Stephen King was an economist.

[Zanza]

The political realities in Spain, Portugal, Greece or Italy were against action as well yet we enacted deeply unpopular measures.

The measures decided upon so far (EFSF, ESM, bilateral bailouts, ECB buying bonds etc.) were deeply unpopular in Germany in case you didn't notice. Germans didn't hit the streets (yet?), but the government lost massive support and legitimacy.

The difference is Germans seem to think this shit we're in is in no part their responsibility. At least we have the common sense to understand our governments/saving institutions fucked up. It's about time Germany wises up. It takes two to tango.

What makes you think that Germans don't think our government and savings institutions fucked up? Because they do. Probably for other reasons that in Spain, but still.

Draw the line from the very start.

The line was drawn: Greece would be bailed out. The markets called that bluff. 

Implement a tiered plan that makes jointly-backed credit available based on the adherence to stringent structural reforms,

That would of course not have been possible politically in Germany (and probably in other countries). And it took the massive pressure of the markets to make Spain or Italy move. Otherwise no reform would have happened.

supervised by Germany if needed be.

I think you misunderstand Germans. We don't want that.

A clear, unambiguous signal that Italy and Spain would have as much liquidity as necessary as long as they reformed their labour markets, education, etc.

That is not a policy that Germany can enact anyway. The only institution that could have done that would be the ECB.

That was the only important thing, to keep investors from freaking out about Italy or Spain.

Do you think Italy would have done anything to reform if there hadn't been the massive pressure of the markets? If they had been guaranteed before that pressure set in, the reforms you think of would just not have happened in my and most Germans opinion.

[KRonn]

One thing that I only discovered recently, which scares me even more, is that apparently Dodds-Frank explicitly bans bailouts - which is madness, though probably popular.  I think the way the Euro was designed never envisaged a crisis, that's one sort of stupid.  Passing a law after a crisis that means the way you resolved it's now illegal is a whole other level of stupidity.

Given the that we're now facing a possible Euro-bank crisis, declining growth in China, almost certainly a recession in Europe I think it's more than possible that US banks could end up in trouble again - but no bailouts.  It's a scary time.

I didn't realize that bail outs were prohibited. While bail outs may annoy or anger some people, if this is a blanket ban of bail outs that would seem to be misguided. I'd think each case should be considered on its own merit.

[Admiral Yi]

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.

One of the problems with this line of reasoning is it assumes Germany is the only actor with agency. Any of the at-risk countries could have acted more forcefully at the start the crisis to cut spending and raise revenue.  Italy doesn't need German permission to do that.

[Iormlund]

One of the problems with this line of reasoning is it assumes Germany is the only actor with agency. Any of the at-risk countries could have acted more forcefully at the start the crisis to cut spending and raise revenue.  Italy doesn't need German permission to do that.

I'm not saying these governments were not at fault. In case you haven't noticed, none of them are still in power. In fact we just kicked out a government because it was to slow to react to the crisis, voted in a new one that promised draconian cost-cutting measures. We let two strikes fail. We've gone up in productivity, down in salaries. We're doing our part.



As for Germany's interest in helping out before this spread, let me illustrate where I'm coming from:

My work involves millions in high-tech high-profit equipment and software. Most of that is German, or at least used to be. Right now we're buying from elsewhere, a lot less, or the shit we buy tends to be lower tier, even if it'll take us a lot more man-hours and trickery to finish a project. We're also developing in-house solutions as alternatives (yours truly being behind the project).

Competition is ridiculous, with established firms bidding at a loss not to disappear. People and integrators with ample experience in developing solutions with German products are getting the axe. And that was those products' main lure: local talent ready to intervene in case of the inevitable clustefuck to offset their higher cost.

Corners are cut which means less advanced solutions are used (no redundancy and such).

This very week we took the representative of certain German giant to a meeting with a client, who pretty much asked the former to drop his pants and get on all fours if he wanted the contract not to go to the Frogs. In another big project this giant is having to provide the funding to get orders, effectively buying its own shit. Things like this have been going on for a while but are getting worse as ongoing projects are finished and austerity programs kicked in.

Finally, since the local demand has dried up, we're involved in a lot more projects in foreign countries now, often competing with German firms with our lower wages.

That's how things are from my perspective. As you can imagine, I don't see Germany coming out too well from this situation.

[Admiral Yi]

You might have noticed Iormlund that I singled out Spain as a country that IMO is serious about getting its fiscal house in order.  (Although as an aside I'd like to see some more evidence before I accept your judgement that Spaniards voted for more austerity.)  Do you think the same can be said of Italy and say, Belgium?

As a further aside, is there some off the books Spanish liability that's driving bond yields?  For example deposit guarantees on an insolvent banking system?  I ask because Spain's debt/GDP is so puny I'm having a hard time understanding why the market is punishing youse guys.

Yes, I understand that Germany has a vested interest in the prosperity of its export markets.  As does any country that exports to an at-risk country.  But if you look at the history of bailouts and debt guarantees it almost always has been a case of a very large country (or countries) bailing out a relatively tiny one.  The US could bail out Mexico, and if Mexico had left the US holding the bag it would have certainly hurt but it wouldn't have meant US insolvency.  The same is not true for Germany and the rest of Europe.  If Germany guarantees Italy's debt they could be fucked.

Shelf:  OK, did not know that about ECB sterilization.  Makes me wonder though whose bonds they're unloading to sterilize the purchase of shit bonds.  Also Eurobonds sounds to me like smoke and mirrors, a way for German taxpayers to assume liability for at-risk country debt without knowing it.

[The Larch]

As a further aside, is there some off the books Spanish liability that's driving bond yields?  For example deposit guarantees on an insolvent banking system?  I ask because Spain's debt/GDP is so puny I'm having a hard time understanding why the market is punishing youse guys.

What we have are puny growth prospects and a terrifying unemployment %, particulary amongst the young. The low debt/GDP is always touted by pundits and politicians as a reason why market attacks on Spanish debt are mostly unjustified. The banking system is not exactly great and some particular banks have a lot of problems arising from the housing bubble, but they've been kept mostly in line by strict regulation from the Bank of Spain and so far no bank went under even if a couple of smallish ones had to be intervened and now they're merging like crazy.

[Iormlund]

Yi, you are missing the point. Of course Germany cannot bail out Spain or Italy. What it should have done was contain the contagion at an early stage, before it spread to those two, by allaying investor doubt in return for tangible and strong structural reforms.

That way everyone wins. We get much needed reforms in one go, our politicians can shield behind the evil market-Merkel conspiracy to implement them and the Germans get to keep exporting their shit.
By taking half-measures one at a time instead the Germans will lose their preponderance in the region and our politicians will have a very hard job asking for more austerity when things keep getting worse despite all previous belt-tightening exercises, like it is happening in Portugal.

[Admiral Yi]

Yi, you are missing the point. Of course Germany cannot bail out Spain or Italy. What it should have done was contain the contagion at an early stage, before it spread to those two, by allaying investor doubt in return for tangible and strong structural reforms.

That way everyone wins. We get much needed reforms in one go, our politicians can shield behind the evil market-Merkel conspiracy to implement them and the Germans get to keep exporting their shit.
By taking half-measures one at a time instead the Germans will lose their preponderance in the region and our politicians will have a very hard job asking for more austerity when things keep getting worse despite all previous belt-tightening exercises, like it is happening in Portugal.

OK, how could Germany have allayed investor doubt without exposing itself to catastrophic liability?

[Ideologue]

Leopard 2s.