Sovereign debt bubble thread

[KRonn]

Now Holland in danger of collapse? Ireland, Spain, Portugal, Greece, Italy. Others that I've not included? Would it be easier to name the nations in Europe which are not in danger? Not making a snide comment, because the US may be headed the same way. Just a worry that so many advanced economies are in such trouble.

[Sheilbh]

Holland's not in danger of collapse.  They're fine in the long run.  But their budget deficit is over EU targets and likely to stay over-target for a few years.  The Dutch have been very strict on the fiscal sinners though, their Finance Minister put on a bit of a show about it at the last summit.  So it's embarrassing for them more than anything and they like to follow the rules.

The problem is getting the budget cuts they need to meet deficit targets will be tough because they've got a minority government and from what I understand Wilders is opposed to cuts but could support them if he gets what he wants in other areas.  Which probably means they'll have to pass more anti-immigration laws or some anti-Muslim laws.

[Zanza]

Now Holland in danger of collapse? Ireland, Spain, Portugal, Greece, Italy. Others that I've not included? Would it be easier to name the nations in Europe which are not in danger? Not making a snide comment, because the US may be headed the same way. Just a worry that so many advanced economies are in such trouble.

The Eastern European economies mostly have fairly healthy levels of public debt. The Western European economies are all very heavily indebted and a crisis of confidence would doom every single of them, including e.g. Germany, France or Britain.

[Zanza]

http://www.economist.com/blogs/freeexchange/2012/03/productivity

Free exchange
Decline and small
Small firms are a big problem for Europe's periphery

COSTA NAVARINO is a luxury resort in the south-western Peloponnese, a 270km (168-mile) drive from Athens. It has two large luxury hotels, an assortment of pricey homes, a sports centre, some posh shops and two golf courses, one designed by Bernhard Langer, a German golf star of the 1980s and 1990s. The well-heeled traveller looking for more than a beach holiday can also choose from watersports, bird-watching or guided nature walks.

It is a world away from the austerity and social tension that is gripping most of Greece. Yet any long-term revival in the Greek economy hinges on this sort of enterprise. Around 15% of Greek GDP comes directly or indirectly from tourism, according to McKinsey, a consultancy. But tourism, like other Greek industries, is short of the kind of large developments, such as Costa Navarino, that can reap economies of scale and squeeze more year-round revenue from each euro invested.

Greece stands out among European Union countries as having the most stunted firms. Around a third of Greek manufacturers are "micro" firms with fewer than ten workers, compared with 4.3% of firms in Germany (see left-hand chart). But the small-firm problem also afflicts the other troubled economies at the euro zone's southern periphery. Spain lacks biggish manufacturers; Italy's small-firm bias derives in part from a reverence for family firms. Only 19% of Portuguese manufacturers have 250 or more workers, compared with 55% of industrial firms in Germany. "The incredible shrinking Portuguese firm" is the title of a research paper* by three economists at Carnegie Mellon University, which shows that Portugal had more small firms and fewer big ones in 2009 than it had in the 1980s. The authors find the trend has been towards larger firms in America, as well as in Denmark, a country of comparable size to Portugal.

A bias to small firms is costly. The productivity of European firms with fewer than 20 workers is on average little more than half that of firms with 250 or more workers (see right-hand chart). The deeper roots of the euro-zone crisis lie with the loss of competitiveness in the region's trouble spots. This problem owes more to dismal productivity growth in the past decade than to rapid wage inflation. If the best small firms were able to grow bigger, Greece and the rest might solve their competitiveness problems without having to cut wages or leave the euro.

The periphery's productivity malaise is the result of the rigid rules that govern jobs and goods markets. In theory the key to prosperity is the amount of physical capital and skilled workers in an economy, and how they are combined. But the quality of companies will vary so it matters greatly where—as well as how well and how much—capital and skills are deployed. If restrictive rules mean that resources are trapped in inefficient firms, it leaves the best companies starved of them. The result is sluggish productivity. The Carnegie Mellon economists blame Portugal's shrinking firms on its employment laws, which are among the strictest in the OECD (though becoming more forgiving) and act as a tax on firm size, because small firms are sheltered from them.



Growth hormones wanted

Establishing a direct link between regulation and firm size is tricky, as different rules apply at different-sized thresholds. In France, however, lots of rules kick in once firms employ 50 workers. A study* by Luis Garicano, Claire LeLarge and John Van Reenen of the London School of Economics (LSE) uses this boundary to test whether French manufacturers are kept small by regulation, and found a steep fall in firms with precisely 50 workers (see top chart). The bunching before this mark suggests that firms that might have grown bigger chose to stay small.

The barriers to growing are far higher in Greece, one of Europe's most regulated economies. In addition to rigid jobs rules, its licensing set-up is almost comically cumbersome. It can take visits to ten or more bureaus at several ministries and the filing of dozens of documents to get final approval for a business plan. Restrictions on land use keep Greek ventures from quickly reaching an efficient scale. It took 30 years for developers to assemble the plots for the Costa Navarino resort; little wonder that most Greek hotels have fewer than 100 rooms. Land-use restrictions are a problem in retailing, too. Greece has almost double the number of shops per head as the western European average, says McKinsey. As a consequence, Greek stores yield 40% less output than they might from each square foot of retail space.

The prescription for Greece and others is a familiar one: relaxing the rules that govern jobs, wages and land development will allow the best enterprises to grow bigger and the duds to fail, boosting productivity, GDP growth and tax revenues. Yet the idea that small firms are best persists even in less regulated places, such as America and Britain. This fixation owes much to the idea that small businesses create the most jobs. But a study by John Haltiwanger of the University of Maryland, with two researchers at the US Census Bureau, finds that young firms, most of which happen to be small, account for much of America's jobs growth. Mature small firms often destroy jobs, as do small start-ups that do not survive. It is better to be young than petite.

[Sheilbh]

That's one thing that baffles me--why in the world would a Greek bond holder voluntarily take a haircut when the alternative is to force a default and collect the CDS?

This piece is pretty good:
http://www.piie.com/realtime/?p=2709
It sort-of covers your question.

[The Minsky Moment]

I get the impression you don't understand what the objective of austerity is.  It's not to increase growth or decrease unemployment.  It's to decrease deficits to a level that the bond markets won't get freaked out by.

As the Greek example demonstrates, that exercise can be akin to catching a falling knife.

[jimmy olsen]

Lulz, Greek 1 Year Bond = 1006%

http://www.zerohedge.com/news/greek-1-year-bond-1006

[PJL]

Lulz, Greek 1 Year Bond = 1006%

http://www.zerohedge.com/news/greek-1-year-bond-1006

Well that implies that Greece is going to default in 36 days or so, which it almost certainly will do.  Personally I tihnk it could happen as soon as this Thursday.

[Razgovory]

Wasn't there a rumor that the going to declare bankruptcy this month?  I guess we'll all see if it's true.

[MadImmortalMan]

There will be published US bank stress tests coming out around that time too. They have asked the government not to publish the results because it "may cause negative reactions", but they are not going to hold back. Part of D-F I think. The last few months have been decent, but I think we're headed for another rocky patch.

[Zanza]

ECB Balance Sheet Jumps Above €3 Trillion

FRANKFURT—The European Central Bank's balance sheet soared past the €3 trillion mark last week after the ECB flooded banks with more than €500 billion in cheap loans, an indication of just how much risk the central bank has taken onto its books as it scrambles to limit the fallout from Europe's debt crisis.

The ECB's balance sheet easily surpasses those of other central banks such as the Federal Reserve and Bank of England as a share of its economy.

The balance sheet, which includes assets such as gold, government bonds, covered bank bonds and loans to banks, rose by more than €300 billion last week to a record €3.02 trillion, or one-third of the euro zone's gross domestic product. That easily surpasses the Federal Reserve's $2.9 trillion balance sheet, which equals 19% of U.S. GDP.

The ECB's balance sheet has doubled since the collapse of Lehman Brothers in September 2008 and has risen 50% since the central bank decided, in May 2010, to purchase government bonds of Greece and other fragile euro members.

The ECB has purchased around €220 billion in government bonds. But its main crisis measure—with the biggest effect on the central bank's balance sheet—has been the twin three-year loan operations in December and late February that pumped more than €1 trillion into the banking system. A significant share of these loans was taken up by Spanish, Italian and other banks in Europe's struggling periphery.

[...]

http://online.wsj.com/article/SB10001424052970203458604577265373668388122.html?mod=googlenews_wsj#articleTabs%3Darticle

Massive quantitative easing by the ECB in the last months.

[Iormlund]

AFAIK the difference between the Anglo-saxon programs like the one in the US and the ECB is that by buying bonds directly, the Fed injects money into the economy, because the government will use it to pay expenses.
The ECB OTOH just hands the money to the banks in debtor coutries, who pay other banks in creditor countries, who then park it in the ECBs own overnight deposit facility. Only a quarter of the LTRO money has escaped this fate, the rest went back to ECB the very next day it was loaned.

[PJL]

Wasn't there a rumor that the going to declare bankruptcy this month?  I guess we'll all see if it's true.

Correct, the dates vary slighty, but certainly W/C 19th March is the crucial week. It all revolves around the Greek bond rollover which takes place on March 20th (what the bailout money is for, which about 80% will go to the banks rather than the Greeks themselves).  There are reports that if 66 / 75 / 90% of bondholders don't agree to the haircut deal than Greece will impose collective action clauses (CACs) which will be considered a default by the ratings agencies (certainly Moodys). However for the whole thing to go through smoothly then the threshold has to be reached by the 8th March.

[PJL]

BTW, the group that have already accepted the agreed haircut only account for 20% of the total debt. So it's reasonable to assume that the deal has about a 70% chance of failure on that basis alone.

[MadImmortalMan]

Some news trickling over that several major Greek pension funds are refusing the deal. I don't know how much of a chunk the refusers represent though.