Sovereign debt bubble thread

[Duque de Bragança]

That's not helpful.  So Yuros should take note of one feature of the American system of unemployment insurance: benefits here are a function of the legitimate jobs you've held in the recent past and how much you earned in them.  So people are incentivized to work on the books.

That's also true in all Euro countries I know of in some way or other - the UK doesn't link it to what you used to earn, it's a flat rate.  I once got trained by a guy who set up a perfectly legal EU social security scam that allowed French bankers getting fired from the City to go work a MacDonalds in Paris for one day and claim very generous income-based French unemployment benefits, rather than the less attractive British Jobseeekers Allowance.

I believe this loophole has been closed recently, but yes it definitively existed.

[Iormlund]

An Argentinian working in Greece telling his memories of their 2001 default.
A sobering reminder for the "what could possibly go wrong with a Greek default" crowd:
http://www.athensnews.gr/issue/13462/48005

I don't think there are many of those. Maybe Brit Euro-skeptics. The rest of us know it's going to hurt.

But what's the alternative? I haven't seen a single argument on how or why the downward spiral will stop. Lots of predictions, yes, that invariably prove too optimistic.

[The Minsky Moment]

What would have been this cheap solution two years ago?

Fire a Geithner-style bazooka at it.

[The Minsky Moment]

An Argentinian working in Greece telling his memories of their 2001 default.

Not quite the same thing.

[Tamas]

An Argentinian working in Greece telling his memories of their 2001 default.

Not quite the same thing.

Yeah, Argentina had an agriculture and natural resources to stay alive without  foreign loans and trade.


But all that said, let Greek default, just make sure the EU leaders handle the aftermath well (lulz)

[Iormlund]

Yeah, Argentina had an agriculture and natural resources to stay alive without  foreign loans and trade.

That makes absolutely no difference in a global market. Food was exported -- poor Argentinians could not afford international prices.

[derspiess]

Yeah, Argentina had an agriculture and natural resources to stay alive without  foreign loans and trade.

That makes absolutely no difference in a global market. Food was exported -- poor Argentinians could not afford international prices.

Populist Kirchner policies limited certain food exports-- IIRC beef was banned altogether for a period of time around 2006.  There were also price controls that must have sounded great at the time but caused shortages.

[Zanza]

What would have been this cheap solution two years ago?

Fire a Geithner-style bazooka at it.

I am not sure what that means. Care to explain? I am not even sure whether you would have fired at public or private debt with that bazooka. Or both.

[Sheilbh]

The point of a bazooka is that you don't have to fire it.

[Zanza]

At what would you not have fired the bazooka then? Private or public debt? And how would not firing a bazooka have solved Greece's solvency problems?

[Iormlund]

At what would you not have fired the bazooka then? Private or public debt? And how would not firing a bazooka have solved Greece's solvency problems?

I'm guessing he means monetizing the debt. You do that for Greece at the very start -- which would have been much cheaper than this whole mess -- and it doesn't make sense to speculate on the rest of the troubled economies, since investors know the ECB can print as much as it desires and keep going at it.

Of course there would have to be some structural changes attached, but that's the same now, except they become politically untenable when they lead to a worse situation for the average citizen.

[Zanza]

Monetizing debt is "not firing the bazooka"? What is firing it then?

Of course there would have to be some structural changes attached, but that's the same now, except they become politically untenable when the "reward" of implementing them is worsening of the situation for the average citizen.

Why would anybody change anything when you can rely on the ECB monetizing your debt anyway? There are barely any structural changes in Greece now, so I find it naive to expect any when there is no pressure anymore. 

[Zanza]

And wouldn't the ECB monetizing debt be a Bernanke-style bazooka instead of a Geithner-style bazooka? I am admittedly not well-versed in the relationship between US Treasury and Fed, but I had so far associated Geithner more with the implementation of TARP, i.e. buying toxic assets through leveraging public money.

And even if the ECB had monetized all of Greece's debt, that would still have left them with something like a 10% primary budget deficit. How would the bazooka have solved that?

And what happens if you implement a non-firing bazooka and your bluff gets called? Monetizing the debt of the entire Eurozone?

[Iormlund]

The "unfired" bazooka part is about Spain and Italy. Once investors witnessed the resolve in dealing with Greece it would make little sense to speculate against other targets knowing the ECB could print them out of trouble. And thus the bigger part of the bazooka never would never be fired.

As for compliance, I can't see why any rational government would reject such a bargain. That leaves Greece. The ECB could have always withdrawn from the agreement if there was no compliance and tried the same with Portugal and Ireland governments which I'm sure would have jumped at the opportunity, since they are doing much more painful things now for no gain.
Either way, you have dealt with the situation long before reaching critical mass.

[edit] As for primary deficits, that's where structural reforms come in. Yes, it would have been necessary to subsidize certain areas for a while. That's hardly any different to what is happening now, except the cost would have been much lower.

And I can't see why anyone would "call the bluff". How many investors do that when the Fed prints money to buy US treasuries? That's not a rational decision.

[Iormlund]

Interesting development in Italy. Beppe Grillo's outsider pro-exit party has taken control of Parma.