Sovereign debt bubble thread

[Admiral Yi]

You can't have a monetary union without such a clearing system. Otherwise an Euro in Greece wouldn't be the same as an Euro in Germany.

I don't follow.  I'm a Greek dude.  I want to buy a Hercules candy bar in Athens, I have to hand over euros.  I want to buy a Schicklegruber candy bar from you, I have to hand over euros.

[The Brain]

You can't have a monetary union without such a clearing system. Otherwise an Euro in Greece wouldn't be the same as an Euro in Germany.

I don't follow.  I'm a Greek dude.  I want to buy a Hercules candy bar in Athens, I have to hand over euros.  I want to buy a Schicklegruber candy bar from you, I have to hand over euros.

It's the little differences.

[Ideologue]

It's called a Fuhrer with Cheese.

[MadImmortalMan]

    * EU OFFICIALS WEIGH RUNNING TWO RESCUE FUNDS TOGETHER, FT SAYS
    * EU WEIGHS RUNNING TWO RESCUE FUNDS, MORE IMF SUPPORT: FT
    * EU WEIGHS GIVING ESM ACCESS TO ECB FUNDING, FT SAYS

Hmm. Maybe if they have two different funds, they can loan to each other and then leverage that collateral.   

[The Minsky Moment]

I don't follow.  I'm a Greek dude.  I want to buy a Hercules candy bar in Athens, I have to hand over euros.  I want to buy a Schicklegruber candy bar from you, I have to hand over euros.

If you buy the Hercules candy bar, the euros go from a Greek payor to a Greek payee.  Assuming for simplicity that both you and the Hercules company use the same bank, all that happens is that the bank just makes a series of electronic entries: first it adds 1 euro to your bank account and balances that by adding 1 euro to your loan balance with the bank.  Then it debits the euro from your bank account and adds it Hercules.  From the bank's perspective, the 1 euro increase in loan balances owed to it are balanced by a 1 euro increase in deposits so everything is honky-dory.  Now if you and Hercules have different banks it gets a little more complicated with interbank payments, but from the viewpoint of the entire Greek banking system, there is a matching increase in deposits and additional loans extended.

Now go to the Schikelgruber candy example.  Schikelgruber banks at BayernLB.  Now when you buy the candy bar on your credit card, your Greek bank has to send the Euro to BayernLB.  So loan balances go up in the Greek banking system but without a corresponding increase in deposits - that deposit goes to the German banking system.

This is not a huge problem for a 1 euro candy bar purchase.  But if you buy 100 billion candy bars, it starts being a problem.  Now you have got 100 billion euros in deposits going from the Greek banking system to Germany and the Greek system will be badly short euro reserves.  Normally what would happen here is that your bank will stop extending credit before you get to 100 billion candy bars.  But that is bad news for the Schicklegruber company which will now lose sales.

So what happens is that the Greek central bank provides billions of euros in cheap loans to your Greek bank, which now has the reserves and liquidity to finance your massive candy bar buy.  The Greek central bank can do that because it can get the money from the ECB.  And the ECB can give the Greeks the money because it gets it can borrow from the Bundesbank.  And the Bundesbank is willing to lend the money because it knows it will all end up going to their Bavarian friends at the Shicklegruber company.  Everyone is happy once again.  Only at some point it turns out you can't pay for 100 billion candy bars after all, and your bank can't repay its loans to the Greek central bank once you stiff your bank.  Which wouldn't be a problem for anyone outside Greece were it not the fact that now the Greek central bank can't pay the ECB the 100 billion and the only collateral the ECB has to collect on are Greek government bonds.

[Neil]

S&P going to cut the Eurozone's credit rating?  Be ready for a whole bunch of rhetoric against 'speculators'.

[The Brain]

This is not a huge problem for a 1 euro candy bar purchase. 

Unless you're Greece.

[Admiral Yi]

This is not a huge problem for a 1 euro candy bar purchase.  But if you buy 100 billion candy bars, it starts being a problem.  Now you have got 100 billion euros in deposits going from the Greek banking system to Germany and the Greek system will be badly short euro reserves.  Normally what would happen here is that your bank will stop extending credit before you get to 100 billion candy bars.  But that is bad news for the Schicklegruber company which will now lose sales.

OK, what's wrong with this?  Greek customers run out of money to buy Schikelgrubers, so no more Schikelgrubers.  What's the problem?

[frunk]

The problem is the Greek customers ran out of money to buy Schickelgrubers a long time ago, but they kept getting loans to buy more.  The Schickelgruber company was making a good portion of its money selling to Greece, and some of the money it was making was being loaned to Greece to buy more Schickelgrubers.  Now the Greeks are way underwater and the Schickelgruber's bank is wondering if it's going to get its money back and if they can even pay the Schickelgruber company its money back.  Hosage all around.

[Admiral Yi]

No, my question is why do you need the clearing blahdy blah in the first place.  People who have money buy stuff.  People who don't, don't.

[MadImmortalMan]

So that people who don't can buy stuff. Duh. 

[Sheilbh]

No, my question is why do you need the clearing blahdy blah in the first place.  People who have money buy stuff.  People who don't, don't.

What's the point of the Euro, or for that matter the EU, if you can't have cross-border payments and transactions?  The entire reason behind a massive chunk of the European project's gone.

[MadImmortalMan]

I think he's asking why the transfers have to match the purchases.

[Admiral Yi]

What's the point of the Euro, or for that matter the EU, if you can't have cross-border payments and transactions?  The entire reason behind a massive chunk of the European project's gone.

Who says you can't have cross border transactions?

[Sheilbh]

Who says you can't have cross border transactions?

I may not be understanding this at all, so apologies if I'm not.

But to enable transactions across the Eurozone you need a Euro-wide clearing system (?). 

From what I gather what the Eurozone's got is basically all national clearing systems, run by central banks linking together rather than a centralised European one.  Every national central bank is effectively providing the liquidity in the national economy and enabling transfers across national borders in a large, balanced Euro wide system with the ECB kind of guaranteeing it.

I could have misunderstood but as far as I can see you'd either need a centralised system to enable transactions or you'd have member states with I suppose internal balance of payment crises every other week.