Sovereign debt bubble thread

[Admiral Yi]

Of course they need to be credible. How are they supposed to sell the pain if nobody believes there'll be any gain?

Bingo.  Here's the 600 pound gorilla.  Greece provides austerity in exchange for growth, and the troika is not meeting their half of the bargain.

That's not the deal.  The deal is austerity in exchange for loans.

[Admiral Yi]

And as Iorm said there's a political element here. They need countries to think it's better than the alternatives - and that goes for Germany and Finland as much as Ireland and Greece.

This reminds me of Neil's comment about disfunctional state voters and the federal government.  The primary responsibility for stupidity lies with the people being stupid.

[Sheilbh]

What do you mean by that comparison?

I'd add the issue isn't austerity for growth but averting a depression caused as much by factors aside from austerity (like the stability of the banking sector) which is beneficial for all of Europe. And austerity according to a program that works - none of the Troika countries are close to being able to return to the market or reducing their debt (with the partial exception of Ireland because of a potential bank bailout), even model patients like Portugal and Ireland. In that context it's worth noting that all rating agencies say the major problem is the economic situation and the effects of the Eurozone crisis in general, like the renationalisation of capital.

[DGuller]

Of course they need to be credible. How are they supposed to sell the pain if nobody believes there'll be any gain?

I don't think "no pain, no gain" is applicable in this case.  The point of austerity is not to painfully pump iron to gain muscle mass.  The point of austerity is to put your hand in the hot oven, and keep it there, just to show others that you're man enough to do it.

[Iormlund]

Of course they need to be credible. How are they supposed to sell the pain if nobody believes there'll be any gain?

Bingo.  Here's the 600 pound gorilla.  Greece provides austerity in exchange for growth, and the troika is not meeting their half of the bargain.

That's not the deal.  The deal is austerity in exchange for loans.

You're being deliberately obtuse here. The question is whether the current strategy can deliver better living standards than default and dissolution of the Eurozone.
If every single projection fails miserably eventually the will to carry on will naturally wane.

[Admiral Yi]

You're being deliberately obtuse here. The question is whether the current strategy can deliver better living standards than default and dissolution of the Eurozone.
If every single projection fails miserably eventually the will to carry on will naturally wane.

No I'm not.  You're not facing reality.  Default automatically, overnight, reduces your deficit to zero.  That's 6% of current consumption (or whatever the current Greek deficit) that disappears.  *That* is a reduction in living standards.  The purpose of an IMF style bailout is *not* to boost everyone's standard of living, it's to cushion the blow while the program country takes the necessary--and by definition unpleasant and painful--measures needed to return the country to fiscal stability.

[Admiral Yi]

What do you mean by that comparison?

I mean it's not Merkel's job to convince Greek voters they would be even more fucked if they default.

In that context it's worth noting that all rating agencies say the major problem is the economic situation and the effects of the Eurozone crisis in general, like the renationalisation of capital.

I'm pretty sure if asked the question directly they would say the major problem from their point of view is the likelihood bond investors will be repaid.

[Sheilbh]

Of course they need to be credible. How are they supposed to sell the pain if nobody believes there'll be any gain?

I don't think "no pain, no gain" is applicable in this case.  The point of austerity is not to painfully pump iron to gain muscle mass.  The point of austerity is to put your hand in the hot oven, and keep it there, just to show others that you're man enough to do it.

I disagree. Austerity's necessary. What is unhelpful though is a politically imposed timeline (2013) and unsupportive monetary policy. Especially when there's very real concerns about the viability of the banking sector (Europe-wide, it's why Slovenia may need a bailout despite its debt of around 45%) and the survival of the currency union.

I support UK austerity, over several years with a loose monetary policy, though I think it's been mishandled and agree with the IMF that the government should be prepared to ease of and backload it more of the economy continues to slide.

Similarly I think austerity is necessary in the US.

[Sheilbh]

What do you mean by that comparison?

I mean it's not Merkel's job to convince Greek voters they would be even more fucked if they default.

Again  I'm not sure what you mean here about the Troika and the Eurozone, including Germany.

[mongers]

There's a third option, that the Eurozone sort of muddles through for a good few more years in the way it has already ie mini-crisis that threaten, but never bring down the whole edifice, whilst politicians sticking plastic policies in an ad hoc fashion.
And yet it still rumbles one as no one is willing to take their own personal, political or national leap into the dark/unknown. 

[Admiral Yi]

Again  I'm not sure what you mean here about the Troika and the Eurozone, including Germany.

I'm not sure what you're not sure about.

[Iormlund]

No I'm not.  You're not facing reality.  Default automatically, overnight, reduces your deficit to zero.  That's 6% of current consumption (or whatever the current Greek deficit) that disappears.  *That* is a reduction in living standards.  The purpose of an IMF style bailout is *not* to boost everyone's standard of living, it's to cushion the blow while the program country takes the necessary--and by definition unpleasant and painful--measures needed to return the country to fiscal stability.

OK, maybe not deliberately obtuse.

Nobody is talking about boosting living standards. It's about minimizing loss of those.

In any case, Greece is already losing over 6% GDP a year and it's getting worse every year. And it's not just raw numbers that matter. What are economies like Spain going to do in one or two decades when the boom generation is retired, with our best talent abroad, an entire generation that hasn't worked and no R&D investment for a decade?

[Sheilbh]

Again  I'm not sure what you mean here about the Troika and the Eurozone, including Germany.

I'm not sure what you're not sure about.

My point is that politically the system needs to suow that it can work to survive. If that doesn't happen the Germans might decide they're pouring good money after bad and refuse further support even to model countries like Ireland and Portugal. The Greeks might leave (not for lack of growth but lack of prospect of growth) with all those unpredictable consequences and costs to the rest of the Eurozone and world economy. Or potential patients like Italy (who UBS think would benefit most from Euro-exit) decide to leave. If the Troika isn't working in restoring countries to the markets or dealing with their debts then all sides will lose political faith.

Also, the Troika's responsible to more than Merkel and the IMF, most of the ECB and I'd guess most contributors aren't happy with the current course.

[Admiral Yi]

OK, maybe not deliberately obtuse.

I'm not terribly interested in getting into a name-calling contest.

[Admiral Yi]

My point is that politically the system needs to suow that it can work to survive. If that doesn't happen the Germans might decide they're pouring good money after bad and refuse further support even to model countries like Ireland and Portugal. The Greeks might leave (not for lack of growth but lack of prospect of growth) with all those unpredictable consequences and costs to the rest of the Eurozone and world economy. Or potential patients like Italy (who UBS think would benefit most from Euro-exit) decide to leave. If the Troika isn't working in restoring countries to the markets or dealing with their debts then all sides will lose political faith.

Also, the Troika's responsible to more than Merkel and the IMF, most of the ECB and I'd guess most contributors aren't happy with the current course.

What you seem to be suggesting is a technical failure.  If only the troika had a much more clever austerity program in place then Greece's contraction would be less severe and there would be no need for additional funding.  If you've got something in mind I'd love to hear it.

That is *not* the same debate that I hear taking place.  The "less austerity" debate is at bottom line about Germany coming up with even more money.