Sovereign debt bubble thread

[Admiral Yi]

Eliminate the Clearing House.

[Martim Silva]

Over the last decade, inflation in the Germanic countries was lower than in the Latin countries. I wonder how one would go to change that.

Not going to happen. Any policy that deliberately leads to higher inflation in Germany is out of the question, even if that would be the easier path for southern countries.

By the way, I have to clarify one thing:

A 25% cut on the typical 1000€ salary leaves you 750€. With a reasonable 350€ monthly mortgage payment you are looking at a 40% loss of available income for a great part of the population. A massive decrease in consumption. Whoever thought of this must be a complete lunatic.

Note, Iormlund, that we are talking about a 25% cut on labour costs, not wages. Southern countries (and not only) have extra 'social taxes' that an employer must pay to the State, in addition to the money he pays the worker, to fund Social Security.

In Portugal, for example, if you employ someone for 800€ pre-tax (the average wage), then you have to pay not only the 800€, but an additional 200€ (25%) in social tax.

In order to minimize the pain the workers feel in their pockets (and to keep them consuming), the Troika is asking for these social taxes to be reduced, so as to lower labour costs without hurting wages.

Problem is, governments and unions resist this, and so they tend to cut wages, which in turn depresses the economy. The Troika has warned governments often against keeping the social taxes and hittling low wages instead.

The local media, however, sadly gloss over this and just blame Merkel for the wage cuts, when in fact Germany and the other EU nations are actually arguing against excessive wage cuts and for the reduction of other taxes. 

[Iormlund]

In Spain it's a third of your salary, more or less.

And I'd be very much surprised if Berlin was suggesting tax decreases in the PIGS.

[Admiral Yi]

And I'd be very much surprised if Berlin was suggesting tax decreases in the PIGS.

Yeah, that struck me as bizarre.

[Sheilbh]

Eliminate the Clearing House.

I still don't understand what you think this would achieve.


Not on the elections per se but I saw a poll today that has New Democracy on 30%, PASOK on 8% and LAOS on 5% (the government parties), government disapproval is 96%.  Aside from the government parties the Democratic Left on about 18% and the Coalition of the Radical Left on around 12%, I don't think either are currently in Parliament.  The Communists (and Greek Communists are hard-core Commies) are on about 12%, but won't work with any other party in a coalition.  Apparently some fringe far-right party's also 'surging' and may meet the Parliamentary threshold.

Edit:  The fringe far-right party are actual neo-Nazis.  The Communists, it turns out, are Marxist-Leninists.  The Radical Left are Eurocommunists.  I can't work out the Democratic Left, they look like vaguely greenish social democrats, but I'm not sure.

[Admiral Yi]

I still don't understand what you think this would achieve.

Prevent the recycling of liquidity from trade surplus countries to trade deficit countries.

[Martim Silva]

In Spain it's a third of your salary, more or less.

And I'd be very much surprised if Berlin was suggesting tax decreases in the PIGS.

You can be surprised now.

http://www.agenciafinanceira.iol.pt/economia/tsu-fmi-troika-ugt-cip-passos/1319606-1730.html

It's in Portuguese, but you can probably get the gist of it. The TSU stands for Single Social Tax, and it specifically refers to the tax employers pay in addition to their employee's gross wage (the worker often doesn't even realize this tax is paid by the company).

The Troika's idea is that all efforts should be taken to avoid destroying the population's purchasing power (which would crush all hopes of a decent recovery). Infortunately, the government - with ministers who were economic professors in the liberal universities of the US and Canada - prefer the path of least resistance, which is to 'tax the poor'.

[Iormlund]

I still don't understand what you think this would achieve.

Prevent the recycling of liquidity from trade surplus countries to trade deficit countries.

That's not a given, though. If you check the graph provided when the original discussion on the TARGET2 system, you'll see that it was only AFTER the crisis started that the PIGS found themselves in the red in the system, despite running big trade deficits for quite a while. Ireland, OTOH doesn't even have that much of a trade balance problem, yet owes quite a lot to the ECB clearing house system.

[The Minsky Moment]

Eliminate the Clearing House.

The surplus countries will oppose because the effect is to interpose the ECB to insulate their own banks from potential losses.

[Admiral Yi]

That's not a given, though. If you check the graph provided when the original discussion on the TARGET2 system, you'll see that it was only AFTER the crisis started that the PIGS found themselves in the red in the system, despite running big trade deficits for quite a while. Ireland, OTOH doesn't even have that much of a trade balance problem, yet owes quite a lot to the ECB clearing house system.

This is a bit of a guess on my part since I don't know exactly how the clearing house works, but I think the difference is that before the crisis the outflow of the current account was counteracted  by the natural working of the capital account. 

[Iormlund]

In Spain it's a third of your salary, more or less.

And I'd be very much surprised if Berlin was suggesting tax decreases in the PIGS.

You can be surprised now.

http://www.agenciafinanceira.iol.pt/economia/tsu-fmi-troika-ugt-cip-passos/1319606-1730.html

It's in Portuguese, but you can probably get the gist of it. The TSU stands for Single Social Tax, and it specifically refers to the tax employers pay in addition to their employee's gross wage (the worker often doesn't even realize this tax is paid by the company).

The Troika's idea is that all efforts should be taken to avoid destroying the population's purchasing power (which would crush all hopes of a decent recovery). Infortunately, the government - with ministers who were economic professors in the liberal universities of the US and Canada - prefer the path of least resistance, which is to 'tax the poor'.

That's interesting. Has the Troika suggested where Portugal might find the money to do that?

[The Minsky Moment]

before the crisis the outflow of the current account was counteracted  by the natural working of the capital account.

That's true, almost tautologically, beause the flows have to balance.
But "natural" is the tricky word here.

The capital account counteracted here by extending cross-border loans to finance net imports.  The problem with that is once the stock of loan commitments gets quite large, the lender/exporter is badly exposed in the event of a default in the importing country.  The value of the clearing function to the exporter is that the ECB steps in the middle although in reality (IIRC) the credit exposure remains, at least in law in not in fact.  It's not clear that the TARGET2 system has a substantive impact other than to obscure somewhat where the exposures really lie; although due to pretty decent EU data transparency it doesn't really even do that.

[Admiral Yi]

FT is reporting the Byzantines have signed off on the deal.

[Zanza]

Prediction: They'll break the terms of the deal eventually. Not that I can blame them.

[Neil]

Has anybody ever kept an EU deal?  I mean, the stability pact got raped to death the second it became inconvenient, didn't it?

You know, even though they're not real civilized people, it's hard not to feel a little bad for the Greeks in all this.