Sovereign debt bubble thread

[Admiral Yi]

What?

The phrase "what's needed is more leadership"  usually has one of two meanings:

"I have no idea how to do it myself, but I demand that guy over there magically produce a good outcome."

or

"Here's something that sucks, I want that guy over there to pay to fix it."

[Sheilbh]

The phrase "what's needed is more leadership"  usually has one of two meanings:

Okay.  I think that's one possible angle.  What I actually mean is I think the problems have been slow-burning for the last two years.  That's allowed for Merkel's passive leadership style, though I still think it's been a failure for Europe.  I think if we move to a confidence crisis in the Euro then it will require bold leadership, decisive prompt action to reassure Eurozone citizens and the markets because that can quickly escalate in a matter of days.

Ultimately Merkel's always stumped up so far, if required I think Germany would again.  My worry would be that even if that were the case it may not be enough if we follow the normal pattern of, from Dan Drezner again, letting a problem fester, dithering, losing a regional election, dithering and then announcing a new policy at the next 'make or break Euro-summit', only for it all to fall apart in the morning.  If there's a crisis of confidence, which I think would happen with Greek exit or Spanish banking crisis, and we go through that again, then I think the risk is by the time we get to the Euro-summit it's already over and no new institutional framework, or new money would restore confidence and credibility in the Euro.

Do you think, based on the past two years of European leadership, that that would be sufficient if there's a Greek exit or a Spanish banking crisis?  Either of which would quite possibly (probably, in my view) overwhelm the institutions and 'firewalls' put in place so far.  Let's not forget the permanent European bailout fund still isn't operational.

Edit:  I think if there's been better leadership in 2010 we wouldn't be reaching this point.  The situation in Greece, Ireland, Portugal, Italy or Spain and the markets constant panic peaks would have provided the warning that not enough had been done.  A perfect, non-costly example, is the stress tests.  In the US Geithner was mocked for the idea but they were rigorous and did actually stabilise market worries about a lot of banks.  In the EU they did them a bit later, they were far less rigorous and what wasn't reported actually increased market nerves about a lot of Eurozone banks.

The Economist leader this week gets at what I mean, the last section:
http://www.economist.com/node/21555572

These dangers require urgent action. First, to prevent a mass run, the European Central Bank must be ready to flood the Greek banks with liquidity—raising the losses to European taxpayers if Greece does eventually leave. And second, to stop a Greek exit being followed by a cascading loss of confidence in other peripheral economies, the euro zone must undergo much faster acceleration towards fiscal and financial integration than most European politicians will admit.

To safeguard banks in Portugal or Spain from runs, European policymakers will have to set up some form of euro-wide deposit insurance. And to reassure investors in the sovereign-debt markets, there will have to be much quicker progress to some form of debt mutualisation among the single currency's members. The Europeans should have started work on these things during the lull in the crisis earlier this year. Germany resisted that. Now these changes must be done in a rush.

A vote to rock democracy's cradle

The Greek election is in effect a referendum on whether the country will stay in the euro. It is not completely without hope. A new Greek coalition which vowed to stick to the rescue deal would in fact gain some help from the rest of Europe. At the same time, with the promise of a common banking backstop and some form of Eurobonds, the euro would at last start to look as if it could survive and the dangers of contagion would fall away. And if Greece were an isolated problem, it would be much easier to nurse slowly back to health.

The financial re-engineering of Europe is a prerequisite for the euro to survive. Greece is bringing forward that moment of truth. And yet politicians, particularly in Germany, have still to accept the logic, let alone explain it to voters. The prospect of a Greek exit means they must begin to do so—and fast.

[Tamas]

I agree with you Sheilbh, that quick, decisive action would be needed. Hell, it is needed right now.

However, sadly, we cannot speak of a European public. Hence, decisive action to calm the European public, is not possible.

There is a Spanish, a Greek, a French, a German, etc. public and their perceived (not necessarily real!) interests differ and sometimes at direct odds with each other.

[Admiral Yi]

I think if we move to a confidence crisis in the Euro then it will require bold leadership, decisive prompt action to reassure Eurozone citizens and the markets because that can quickly escalate in a matter of days.

OK, so you want Germany to cover every body else's bets.  What does that have to do with leadership?

[Sheilbh]

OK, so you want Germany to cover every body else's bets. 

That's a big leap.

What does that have to do with leadership?

Time matters, so does preparation.  I don't think Merkel's style of leadership over the past 2 years has shown any ability to act decisively quickly.  I also think, though I could be pleasantly surprised on this, that there's been insufficient preparation within the Eurozone and I imagine within the German state and German politics for the sort of tough choice that could be coming - not least because Germany's had such a good crisis.

Regardless of if they decide to kick the Greeks out, or to save the Euro at all costs, or to leave the Euro themselves (sick of ever increasing exposure to the feckless South) then if it were done 'twere well it were done quickly, as it were.

[Zanza]

It's not really a tough choice for us when Greece leaves the Euro. Most people will just shrug and everything goes on as usual.

Forget about Germany leaving the Euro. What would we gain from that?

[Admiral Yi]

That's a big leap.

Not any bigger than the one you made when you posted the Economist article as support for your argument.  They suggest European deposit insurance and Eurobonds.  Both of those are Germany covering everybody else's bets.

Time matters, so does preparation.  I don't think Merkel's style of leadership over the past 2 years has shown any ability to act decisively quickly.  I also think, though I could be pleasantly surprised on this, that there's been insufficient preparation within the Eurozone and I imagine within the German state and German politics for the sort of tough choice that could be coming - not least because Germany's had such a good crisis.

Regardless of if they decide to kick the Greeks out, or to save the Euro at all costs, or to leave the Euro themselves (sick of ever increasing exposure to the feckless South) then if it were done 'twere well it were done quickly, as it were.

My hunch is if Merkele had boldy, quickly and decisively told the Greeks to take a flying fuck on day one you would not have been applauding her leadership.

[Zanza]

Sky News Newsdesk ‏ @SkyNewsBreak

AFP: German Chancellor Angela Merkel suggests Greece hold a referendum on its euro membership alongside general elections next month

The German government denies she proposed that.

[Sheilbh]

It's not really a tough choice for us when Greece leaves the Euro. Most people will just shrug and everything goes on as usual.

I don't think everything will go on as usual though.

Forget about Germany leaving the Euro. What would we gain from that?

It's always been my favourite mad idea to solve the crisis.  Split the Euro into a sort of core Hanseactic Euro and a Club Med Euro.  The latter can devalue and inflate away their debt, the former no longer have any reason to be paying for peripheral sins and the EU sets a new set of far more rigorous convergence criteria before eventually merging the two.

Edit:  Also which one would France go in?

Not any bigger than the one you made when you posted the Economist article as support for your argument.  They suggest European deposit insurance and Eurobonds.  Both of those are Germany covering everybody else's bets.

I think those steps and more will be necessary if Greece leaves and Germany wants to save the Euro.  But that's the policy content.  For me the important bit is this 'And yet politicians, particularly in Germany, have still to accept the logic, let alone explain it to voters. The prospect of a Greek exit means they must begin to do so—and fast.'  That lack of preparation is the failure of leadership, after two years, that will make it more difficult to take those steps now.

Also, as I say, if crisis of confidence then speed is of the essence and if there's already significant capital flight, or a run on banks in Italy and Spain, then I don't think even those policies would solve things.

My hunch is if Merkele had boldy, quickly and decisively told the Greeks to take a flying fuck on day one you would not have been applauding her leadership.

In retrospect I think that would have been best.  Greece needed (needs) to default, but it still wouldn't have answered the problems of contagion.  At the time you're right I'd disagree with her, but I can think someone's wrong and a good leader - she'd finally have lived up to all that Iron Lady hype

[Sheilbh]

The German government denies she proposed that.

Inevitably.  The European Commission denied that the Trade Commissioner said they were making contingency plans for a Greek exit, despite the fact that he'd given an interview in which he said 'we're making contingency plans for a Greek exit'

The German government have said 'this is false and we completely dismiss this.'  The technocratic Greek PM (President of the Administrative Court) had issued a statement saying 'she [Merkel] also conveyed to the President of the Republic thoughts about the holding of a referendum parallel to the elections on the question of whether the Greek citizens wish to remain in the eurozone.'

Edit:  It's worth saying there is a difference between 'suggesting' something and conveying thoughts about something.

Edit:  And now the Greek government have rejected Berlin's denial, they're insisting Merkel did suggest holding a referendum.

Edit:  Some British journos are interpreting this as Merkel asking Greece to leave.  Basically the chance of a no vote is high enough that there'd probably be mass bank runs before then, forcing Greece out before the referendum.

Edit:  And now apparently both sides are saying they think it was a mistranslation

I think this on Twitter is accurate 'So, Greece is denying a denial by Merkel that she suggested Greece hold a referendum, which it is doing anyway'

[Tamas]

The German government denies she proposed that.

Inevitably.  The European Commission denied that the Trade Commissioner said they were making contingency plans for a Greek exit, despite the fact that he'd given an interview in which he said 'we're making contingency plans for a Greek exit'

The German government have said 'this is false and we completely dismiss this.'  The technocratic Greek PM (President of the Administrative Court) had issued a statement saying 'she [Merkel] also conveyed to the President of the Republic thoughts about the holding of a referendum parallel to the elections on the question of whether the Greek citizens wish to remain in the eurozone.'

How lucky we are that we don't let the economy manage itself. Instead, we have it on the shoulders of these titans.

[Habsburg]

If the Euro is to move past this crisis, you're really going to need a common "Euro" bond instead of bonds for each country.  I don't see how that is achieved politically.

[Iormlund]

My hunch is if Merkele had boldy, quickly and decisively told the Greeks to take a flying fuck on day one you would not have been applauding her leadership.

Why not? Greece did cook its numbers. It could have been left out in the cold for that. I think it's a clear enough line for the markets.

The Greeks would have been better off, and so would the Germans.

[DGuller]

My hunch is if Merkele had boldy, quickly and decisively told the Greeks to take a flying fuck on day one you would not have been applauding her leadership.

Why not? Greece did cook its numbers. It could have been left out in the cold for that. I think it's a clear enough line for the markets.

The Greeks would have been better off, and so would the Germans.

Cooking the numbers is only damning if you actually deceived someone.  If everyone was in on the charade, and the numbers were cooked just so that a letter of the rule would be satisfied when everyone wanted it satisfied, then moral indignation is kind of hard to support.

[Iormlund]

I can't see how hypocrisy would be an obstacle. It isn't now when imposing austerity.