Sovereign debt bubble thread

[PJL]

The ISDA is made up of the big banks who don't want this to fail. Which is like turkeys voting for Christmas - it's not going to happen. Therefore the real deciders of what constitutes a Greek defauilt will be the wonderful infallable ratings agenices as ever. And that will be decided this Thursday depending on the threshold (which I believe is actually 75% rather than the 66% you mentioned).

Don't ISDA decide if there's been a 'credit event' or not?  Although it's automatic in case of the CAC's being activated anyway, right?

This is the FT blog on the CAC.  I think the Greeks are currently briefing they expect 75% to approve:

The first part makes plain that collective action clauses, which would let a majority of quorate bondholders bind others, will be triggered. There's been a lot of fuss about this, but it's worth remembering that the CACs now in Greek law bonds provide for a 50 per cent quorum within the 66 per cent threshold. That is it. The end.

I'm not sure what that would mean in practice though.

The ISDA decided it wasn't a credit event, which suited the members since they don't want anything like that to upset their positions. And I've read that because of how it was it was set up, it's actually under UK law not Greek law which demands a 75% threshold, which the Greek ministries subsequently corrected..

[Sheilbh]

And I've read that because of how it was it was set up, it's actually under UK law not Greek law which demands a 75% threshold, which the Greek ministries subsequently corrected..

The FT's reported that it's been 66% for a while, but I think the Greek government were confusing issues.  Reuters reported that they toughened and clarified their line quite significantly today:

Today's press release, by contrast, is a lot simpler. Never mind the old distinctions about what happened if the take-up was less than 66%, or between 66% and 75%, or between 75% and 90%, or above 90%. Instead, we just get one, simple rule:

The Republic confirmed that if it receives sufficient consents to the proposed amendments of the Greek law governed bonds identified in the invitations for the amendments to become effective, it intends, in consultation with its official sector creditors, to declare the proposed amendments effective and binding on all holders of these bonds.

In other words, there are collective action clauses, and if Greece can trigger them, it will. End of story.

You're right it only covers Greek law bonds but there's only a few English law bonds (which require 75%) but I think all future Greek sovereigns will be issued under English law.  Presumably to reassure investors that the Greek government won't retroactively insert new clauses into their bonds

[Zanza]

Been reading this report commissioned by a Dutch party.

It's Geert Wilders party. I don't say that it changes the study, but it's certainly something worth considering when reading it.

With unchanged Eurozone membership, the only method of adjusting costs and prices in Med-Europe to be competitive without extreme and constantly reinforced austerity, leading to depression, would be stimulation of rapid inflation in The Netherlands and Germany for a decade or two; and acceptance over that adjustment period of large fiscal subsidy payments to the deficit countries – not loans to be repaid later, but unrequited transfers.

Won't happen.

[Tamas]

On the topic of QE, an insightful explanation of it:

http://www.youtube.com/watch?v=j2AvU2cfXRk

[Iormlund]

With unchanged Eurozone membership, the only method of adjusting costs and prices in Med-Europe to be competitive without extreme and constantly reinforced austerity, leading to depression, would be stimulation of rapid inflation in The Netherlands and Germany for a decade or two; and acceptance over that adjustment period of large fiscal subsidy payments to the deficit countries – not loans to be repaid later, but unrequited transfers.

Won't happen.

I know, which is why I said  a few months ago:

...I'd say breakup of the EZ is now the most likely scenario. I can't see enough political will to keep it together.

[Sheilbh]

With unchanged Eurozone membership, the only method of adjusting costs and prices in Med-Europe to be competitive without extreme and constantly reinforced austerity, leading to depression, would be stimulation of rapid inflation in The Netherlands and Germany for a decade or two; and acceptance over that adjustment period of large fiscal subsidy payments to the deficit countries – not loans to be repaid later, but unrequited transfers.

Won't happen.

There was excerpts of a note by an investment bank in the FT a while ago.  It said if the Euro keeps going that to survive there'll either be fiscal transfers on a regular basis from the North to the South, serious depression-inducing austerity in the South or ECB policies that are far more inflationary than at present.

Of the three it suggested the latter most likely, because it's the most politically easy and it's plausible in the long-term because of the balance of the ECB's monetary policy-setting board.

Edit:  As an aside I thought this was interesting:
http://www.rte.ie/blogs/european/2012/03/07/anglo-promissory-notes-dilemma-enters-critical-phase/

[Admiral Yi]

It cracks me up that non-Depression inducing reduction in wages is not even considered an option.

[jimmy olsen]

It cracks me up that non-Depression inducing reduction in wages is not even considered an option.

Hasn't the Greek economy already collapsed into Depression?

[Sheilbh]

It cracks me up that non-Depression inducing reduction in wages is not even considered an option.

Hasn't the Greek economy already collapsed into Depression?

More or less.  They have to cut private sector wages by 25% in the old bailout agreement.  The economy shrank by about 7% last year after shrinking by about 3-4% in 2009 and 2010.  Their PMI has been negative for fifty months.  Here's the chart comparing PMI's within the Eurozone which gives an indication of how severe the problem is in Greece:
http://fingfx.thomsonreuters.com/2011/10/04/121854e213.htm

[Admiral Yi]

Hasn't the Greek economy already collapsed into Depression?

The implication of Shelf's post above is that the only way for Greece to achieve competitiveness and macro balance is through *continued* endemic Depression.

[Sheilbh]

The implication of Shelf's post above is that the only way for Greece to achieve competitiveness and macro balance is through *continued* endemic Depression.

Not for Greece particularly, but for the Eurozone if you read it as a balance of payments crisis.  Either there's fiscal transfers - probably full fiscal union/federalism - or the surplus nations have inflation or the debtor nations have deflation.

Here's the quote from the Deutsche Bank note I was referring to:

With outright budgetary transfers from the creditor to the debtor countries unlikely and the latter also probably unable to achieve internal real depreciation through deflation of goods, services and asset prices, the path of least resistance seems to be an appreciation in creditor countries through the inflation of goods, services and asset prices. With representatives of debtor countries holding a majority of votes in the ECB"s Governing Council, a policy of easy money and exchange rate depreciation that leads to overheating in the creditor countries seems most likely.

One thing the EU's possibly thinking about is current account targets.  But the Commission's starting to study economic imbalances within the EU, in much the same way it issues 'excessive deficit' suggestions.  It's EU wide, not Eurozone specific.  The problem is it turns Europe's very imbalanced and the Commission's understanding seems rather German.  I think 15 or so of the 27 are going to get recommendations from the Commission.  An example of the Commission being philosophically German is simply that they don't seem to view surpluses as part of an imbalance.  They're sending a recommendation to Poland with an internal current account deficit of 5%, but not to Germany with an internal current account surplus of 5.9%.

[Admiral Yi]

Well that note from the ECB is quite a bit different in tone and substance from your original post Shelf.  In particular in how it discusses reduction in Greek factor costs.

[Sheilbh]

Well that note from the ECB is quite a bit different in tone and substance from your original post Shelf.  In particular in how it discusses reduction in Greek factor costs.

Of course it is, they're professional analysts working for Deutsche Bank providing a briefing note on current account deficits in the Euro.  I'm eating Pringles, watching Breaking Bad on the internet and citing a thing I read a few months ago from memory

Though sorry, I did get depression inducing fiscal austerity mixed up with depression-esque Latvian style internal devaluation.

[Tamas]

On the topic of QE, an insightful explanation of it:

http://www.youtube.com/watch?v=j2AvU2cfXRk

Come on, it was funny

[Iormlund]

It cracks me up that non-Depression inducing reduction in wages is not even considered an option.

Heh. How can a nation-wide 20/30% reduction in wages NOT result in depression?