Sovereign debt bubble thread

[Sheilbh]

I offer you this deal Shelf.  I will agree that talk of easing austerity in the context of more expanisve monetary policy is reasonable, if you will agree that arguing for easing austerity divorced from monetary policy is retarded.

Obviously but monetary policy or something like that (eg. Eurobonds) is what the growth camp have always been arguing for.  My view is roughly what Clive Crook says.  Fiscal contraction won't help Spain's creditworthiness - it hurts growth and in most of the Eurozone so far the effects of declining GDP have swamped their deficit cuts.  On the other hand if Spain were to ease up on their contraction then that will hurt their creditworthiness because the markets get a bit jittery about their commitment to cutting the deficit.  I think either strategy would undermine the goal of helping European sovereigns.

If these are all countries acting alone with the occasional bail-out then they're screwed into a constant spiral higher deficits, greater cuts and lower growth.  But if the Euro area as a whole were to act to stimulate growth en that would help reinforce not undermine (like national measures) the austerity programs in each country.  I think the best of the proposed solutions at the Euro level are monetary (plus Euro-structural reforms).

Unfortunately the most likely is European project bonds financed by the European Investment Bank - Hollande wants them and Germany is apparently happier with this than any other idea.  Personally I think it'll be like 90s Japanese infrastructure spending.

[Zanza]

The Bundesbank has said that it will accept higher than EZ-average inflation in Germany to help with adjustment.

http://www.ft.com/intl/cms/s/0/5a40a056-99fb-11e1-accb-00144feabdc0.html#axzz1uRREwaan

[Iormlund]

Spanish premium at almost 500 points today.

[alfred russel]

The Economist has been predicting dire results for France since I first subscribed some 30 years ago, yet they seem to thrive on it 

Re budget balances and austerity, looking at the back of the aforementioned magazine; the USA and UK have budget deficits of 7.6% and 7.7% of GDP, the Eurozone has one of 3.5%; Italy, considered to be a weak link, has one of 2.2%. I don't see how a lack of austerity is the Italian problem, I guess the bond markets are pricing in future growth in the UK and USA, but are sceptical about future growth in Italy..........

I think something else is driving the disparity. The UK and US have their own currency. If they end up against it, their currency will devalue. This will make them more competitive internationally (even as their national income declines relative to the rest of the world)--thus there is a built in buffer against trouble. And if push really comes to shove, the US and UK could just print the money needed to make debt payments.

Italy doesn't have its own currency.

[Sheilbh]

Apparently markets in London have built a New Drachma into their systems in case there's a Grexit. 

The Austrian Finance Minister said that Greece can't leave the Euro.  They can leave the  EU and then reapply for membership to the EU (including eventual Euro membership).

Gilts are now at their lowest level in 300 years.

Apparently the Greeks think they spotted a slight change in tone by Germany and so there may be a ND-PASOK-DL coalition for a few months.  I suspect, though, that would just further discredit the centre of Greek politics.

[MadImmortalMan]

The UK and US have their own currency. If they end up against it, their currency will devalue. This will make them more competitive internationally (even as their national income declines relative to the rest of the world)--thus there is a built in buffer against trouble.

No it won't. Possibly for the UK, but every central bank on earth will devalue right along with the US. They can't risk losing that market. Any attempt by the Fed to devalue will only export the inflation abroad.

[Iormlund]

The Austrian Finance Minister said that Greece can't leave the Euro.  They can leave the  EU and then reapply for membership to the EU (including eventual Euro membership).

A very interesting game is about to take place.

On one hand, if just one of the countries decides to act against Greece upon exit, as is stipulated in Lisbon, the move will prove disastrous for Greece, and only Hod knows what will happen when Spain fails to meet the terms of its future rescue.

If, on the other, Greece is allowed to stay in the EU, it will encourage Portugal and Spain to follow the precedent once the pain is high enough.

[Zanza]

It may not be possible according to the treaties now, but I am sure they'll find a way when they need it.

Unless they really want to fuck with Greece to make it a daunting example.

[alfred russel]

The UK and US have their own currency. If they end up against it, their currency will devalue. This will make them more competitive internationally (even as their national income declines relative to the rest of the world)--thus there is a built in buffer against trouble.

No it won't. Possibly for the UK, but every central bank on earth will devalue right along with the US. They can't risk losing that market. Any attempt by the Fed to devalue will only export the inflation abroad.

No one needs to actively intervene; both the US and UK have currencies that float. When a country with a floating currency goes in the (relative) crapper, so does the currency--hence it devalues.

[Zanza]

Is the US dollar really comparable to "normal" currencies though? After all, it is used to denominate trade all over the world. When China buys oil from Saudi Arabia, they probably don't pay in Yuan or Dinar, but in US dollar. That should give the US dollar a value regardless of current US economic performance or Fed policy.

[MadImmortalMan]

No one needs to actively intervene; both the US and UK have currencies that float. When a country with a floating currency goes in the (relative) crapper, so does the currency--hence it devalues.

Doesn't matter how floaty the dollar is. It's a reserve currency and the one used by the US population--one of the most sought-after sales markets on earth. Yuan will be pegged to it no matter how low it goes, and most of the world will want to devalue at the same rate. Deliberately.

So, we might get more Arab Springs, but we won't get relative competitive advantage for the US of the cannibalistic kind that devaluing currencies usually hope for.

[alfred russel]

The Yuan is now pegged to a basket of currencies, not just the US dollar.

The USD is hardly immune to depreciation. It has probably lost 75-80% of its value the past 30 years or so against the Yen. At the height of the euro (circa 2007-2008), the dollar had probably depreciated 50% from just a few years before. Those are the most major currencies: the experience is even more volatile if we look at emerging markets.

[citizen k]

AFP, May 11:

The eurozone would cope if Greece left the currency union, Germany's finance minister said in an interview on Friday as Greek parties continued with efforts to form a government coalition.

Asked by the regional Rheinische Post whether the eurozone could withstand a Greek exit, Finance Minister Wolfgang Schaeuble said: "Europe won't sink that easily."

"We want Greece to remain in the eurozone. But it also has to want this and to fulfill its obligations. We can't force anyone.

"We have learned a lot these past two years and have built protection mechanisms. The danger of contamination for other countries in the eurozone have become weaker and the eurozone as a whole has become more resistant."

"The crisis has shown that one must act quickly and that Europe can act quickly... the notion that we would not be capable of reacting in the short term to something unforeseen is false."

Schaeuble's comments came as Germany's foreign minister kept up the pressure on Greece on Friday, saying there could be no more payments of aid unless Athens enacted reforms it has agreed with its international partners.

"We want to help Greece and we will help Greece. But Greece has to want to be helped. If they deviate from the agreed reform path, then the payment of further tranches of aid is not possible," Guido Westerwelle told lawmakers.

"We are sticking to our pledges to help. But that means as well that the agreed reforms in Greece must be carried out.

"We want to keep the eurozone together. The future of Greece in the eurozone now lies in the hands of the Greece," he stressed.

Socialists in Greece continued trying to cobble together a government, the third party to attempt to do so since Sunday's elections gave a razor-thin majority in parliament to anti-austerity parties.

Germany and the EU have made it clear to Greece that it must abide by its austerity pledges if it wants to receive bailout funds, money that Athens needs to avoid a default.

If no party manages to form a coalition, the president will call new elections that observers say are likely to hand a greater majority in parliament to anti-austerity parties.

"No-one is threatening anyone here," Schaeuble said in the interview. "But we must be honest... and tell our Greek friends and partners that there is no other way that the one that we have chosen together."

"We have already done a lot," he said, referring to two bailouts for Greece. "Greece must understand that in exchange, it must fulfill its obligations."

It is "dangerous to tell tales to citizens telling them that there was another, simpler way to heal Greece avoiding all the trials. It's absurd," he said.

[MadImmortalMan]

Nobody thinks Greece will sink the Eurozone. We're worried about Spain and Italy.

[Iormlund]

"The crisis has shown that one must act quickly and that Europe can act quickly... the notion that we would not be capable of reacting in the short term to something unforeseen is false."