Sovereign debt bubble thread

[Ed Anger]

My gut says things will get better. Eventually. And if not, I'm equipped for the fall. I'll use my Kentucky Colonel commission to enslave Hazard county.

[Admiral Yi]

Always has before.

So you share Ide's certainty? What would you say are the unchanged fundamentals that are the source of the US being able to pick itself up again? What are the biggest question marks, in your opinion?

It looks to me that there are some structural issues that it would be good to address, and the political climate seems fairly dysfunctional at present. But perhaps it's no worse than it's been at other times?

I mean, I hope you guys are right since that certainly is better for Canada and me personally.

Technological innovation, work ethic, flexible labor markets.

Fiscal situation is unsustainable and needs to be addressed seriously.

[Grallon]

I'm not overly concerned about a pile of ruins in Asia Minor, nor about a number of small towns in the US named by classics enthusiasts.

The whole thing is already collapsing you poor fool...  Personally I can't wait! *wry grin* 

When bloated toads such as Yi or that mongrel Minsk come tumbling down I'll be here cheering...  That is - if I have any electricity/connectivity left *cackles*




G.

[Admiral Yi]

   I don't have very far to tumble.

[Neil]

The whole thing is already collapsing you poor fool...  Personally I can't wait! *wry grin* 

When bloated toads such as Yi or that mongrel Minsk come tumbling down I'll be here cheering...  That is - if I have any electricity/connectivity left *cackles*

Wouldn't you be dead?

[Ideologue]

America will eventually get better.

What's the source of your certainty?

All kidding aside?  We are already seeing attitudes toward taxation change; I believe that we will voluntarily assume a greater--i.e., normal--tax burden in order to partly fund the government spending required to lift us back into prosperity.

[Neil]

America will eventually get better.

What's the source of your certainty?

All kidding aside?  We are already seeing attitudes toward taxation change; I believe that we will voluntarily assume a greater tax burden in order to fund the government services required to lift us back into prosperity.

You know full well that government services can't save you.

[Ideologue]

That and the inflation large-scale government spending would entail can save me personally.

But what else could help the U.S.?  Besides a monarchy, Neil.

[Admiral Yi]

That and the inflation large-scale government spending would entail can save me personally.

A large public sector does not cause inflation.  A large deficit does not cause inflation.

[Ed Anger]

That and the inflation large-scale government spending would entail can save me personally.

But what else could help the U.S.?  Besides a monarchy, Neil.

Eitzengruppen.

[Sheilbh]

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

I don't know about the German constitution but the EFSF is probably technically illegal under the treaties.  My understanding is that the article used to justify it enables emergency relief for countries suffering from natural disasters.  If we're going violently incongruent interpretations of the treaties let's at least have them be for sufficient solutions.

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.

Everything Germany's agreed to so far in every summit has been the bare minimum necessary, for the previous summit.  Every time commentators say there's a need for very decisive large-scale intervention and we get a statement that says that's happened and then two or three days later everyone realises that's not really the case. 

I mean the latest (still unimplemented) program with the EFSF's an example of that and trying to hawk it to the Chinese they raised the very fair objection that if Europeans aren't willing to cover these debts to save the Euro, why should China?

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.

Well Ireland had serious cuts and tax rises for at least two years before they were bailed out.  I think Spain and Portugal had some austerity measures prior to getting into trouble (much like France has over the past year).

The problem is this is about far more than debt.  The rising yields in Finland and the Netherlands indicate that.  The next crisis is apparently possibly Austria - which is a Northern European, Germanic, creditor nation - but apparently due for a downgrade.  The problem there is the banking system (same goes for Belgium and France to differing degrees) needs recapitalisation.

I think the problem's moved from one of debt in the periphery, to fundamental doubts about whether there's the political will to sustain the Euro and to a banking crisis that will probably end up requiring bank recapitalisation in Northern Europe and further debt crises.

You're also overlooking the moral hazard.  If lenders know that Germany is going to pick up the tab in case of default they'll keep on lending to deadbeats, and deadbeats will keep on borrowing.

The Greeks and Irish and everyone else would still need to be going through austerity.  It's worth remembering that a degree of French and German policy has been driven by the need to save French and German banks from their bad investments in government debt - so I find their moaning about moral hazard somewhat self-interested.

Having said that I think everyone supports Merkel in using this opportunity to get governments to pass reforms and  she wants treaty changes to institute fiscal oversight, to ratify the EFSF and so on.  All of which is good but I do worry that it just won't work.  I can't see the Irish agreeing in a referendum, the UK will use the reopening of treaties as an excuse to try and renegotiate membership, I can't imagine that the Eurosceptic right in Finland or the Netherlands will be keen either.

So far I think we're very lucky there's not been an anti-German backlash in one of these countries.  I think the only reason Greece hasn't said 'fuck you, we're off' is because they've not had a charismatic enough figure to pull it off.  Similarly we should be very glad that a populist like Berlusconi's been discredited for in large part causing Italy's crisis.  If he were outside of the government and had clean hands I think someone like that'd be very dangerous.  So far we've got two right wing parties who admit the need for very stern measures winning elections (Spain, Portugal), two technocratic regimes virtually appointed by Europe (Greece, Italy) and a country in which all main parties agreed with the EU-IMF program (Ireland).

So how fucked is the world?

The Euro's collapsing on itself, the Chinese bubble is set to deflate and the US is not righting itself either... what's going to happen? Will the Brazillians take over?

If only.  I'd note that there seem to be positive reports coming out of the US and if the US consumer's coming back then that's good news.

But I've read that China's growth is already slowing in response to the Euro-crisis.  I think the UK expects a recession next year.  I'd never previously thought it but I think the Euro could collapse (I feel it's 50-50 at this point).  If that happens, to use Martin Wolf's phrase, the ECB will go down in history as the magnificently orthodox central bank of a failed currency union - Merkel will be the political equivalent.

If the Euro goes down I think we'll end up seeing bank failures on a scale far beyond 2008-09.  There's a genuine chance that protectionism and competitive devaluations will start being a problem, I don't know if the EU can survive the failure of the Euro.  My feeling is that if everything that could, very plausibly, go wrong over the next year does go wrong then we'll end up in a depression like situation that'll make 2008-09 look rather mild.

[alfred russel]

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.

It is hard to see how the problems in Greece could have been contained, if you accept that the problem is the underlying solvency of the governments. If the rest of the eurozone had stepped in early and completely bailed out Greece in one go, that doesn't mean the current concerns regarding Italy and Spain would be allayed since those countries are too big to bail out. If the problem is contagion spreading from Greece, then it seems the best course of action would be to cut the problem out of the eurozone by kicking Greece out at an early date. A direct bailout would be a precedent that would undermine efforts at fiscal responsibility throughout the eurozone (and couldn't be duplicated in the larger countries), while this drawn out process has not been helpful either. Obviously there was no appetite for kicking Greece out of the eurozone.

My $0.02 is that the current sovereign debt crisis isn't about contagion from Greece so much as the markets starting to price in the liklihood of a recession in Europe. The government accounts may not be unworkable now in Italy and Spain, but there will be severe strain if we end up in a recession in the next year or so.

[Ideologue]

That and the inflation large-scale government spending would entail can save me personally.

A large public sector does not cause inflation.  A large deficit does not cause inflation.

I said partly in the previous post without fully explaining it; my understanding is that direct creation of money does cause inflation, all else being equal.

[Sheilbh]

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.

My understanding of the ECB's sterilisation is that they buy the bonds from banks and then offer a low interest rate one week deposit from the banks.  This was criticised by Germany because of the threat of inflation.

Worryingly I believe the limit that economists have guessed the ECB has is going to be hit in January.  Any bond purchases after that would be unsterilised, they'd be Anglo-Saxon style increases in net liquidity.  There's already worries about whether that'll happen with Germans and Dutch calling it a massive expansion of the ECB's remit and other saying the bond purchase program has to carry on.  For myself I hope Draghi acts like an Italian Central Banker.

[Neil]

That and the inflation large-scale government spending would entail can save me personally.

But what else could help the U.S.?  Besides a monarchy, Neil.

Hard to say.  A profound cultural shift would be required.