Sovereign debt bubble thread

[Sheilbh]

It's established that the IMF proposed a different program for Greece, including partial default/debt forgiveness in place of devaluation. That was rejected by France and Germany because it would hit their banks hard (in 2010 BBC correspindents suggested it seemed like bailout for Euro banks via Greece), as deterrence and, according to Papandreou to make it so unpleasant no one else would want it.

All I want is something closer to a traditional IMF program, run by the IMF who have more experience at this and at providing technical assistance than the EU, which has next to none.

In addition I think the current system is producing those psychological barriers Monti's talks about, as well as real effects like nationalising capital. I think part of the reason the risk of Euro failure is increasing is because of growing distrust and difficulty cooperating (Germany seeing everyone as Greek, Berlusconi papers depicting a fourth Reich). If everyone sees it in zero sum terms I think the outcome's more unpredictable and negative which is why the Troika needs to show it can work.

The bottom line for me is Germany enduring a bit more inflation and longer time frames for austerity, other parts of Europe reforming and cutting and the whole of Europe taking credible steps on fiscal and banking union (first step, allowing the ECB as common regulator, with power to wind up banks).

No one in Europe is talking about less austerity, that's decided, but about slower austerity. I often get annoys with the American commentators because the debate seems to be entirely about the US by proxy. Paul Krugman's the worst and he didn't really survive a BBC interview because he as basically projecting regardless of the facts here or in Europe, his ostensible topic.

[Admiral Yi]

It's established that the IMF proposed a different program for Greece, including partial default/debt forgiveness in place of devaluation. That was rejected by France and Germany because it would hit their banks hard (in 2010 BBC correspindents suggested it seemed like bailout for Euro banks via Greece), as deterrence and, according to Papandreou to make it so unpleasant no one else would want it.

Greece did partially default.

All I want is something closer to a traditional IMF program, run by the IMF who have more experience at this and at providing technical assistance than the EU, which has next to none.

Tell me how Greece's program is different from a traditional IMF program.  I don't see it.  The IMF comes up with numbers for spending cuts and revenue increases, and funds the rest. 

In addition I think the current system is producing those psychological barriers Monti's talks about, as well as real effects like nationalising capital. I think part of the reason the risk of Euro failure is increasing is because of growing distrust and difficulty cooperating (Germany seeing everyone as Greek, Berlusconi papers depicting a fourth Reich). If everyone sees it in zero sum terms I think the outcome's more unpredictable and negative which is why the Troika needs to show it can work.

And I think Greek voters need to wake up and smell the roses.  They can take the pain Germany is offering, or decline the offer and have it even worse.  Beggars can't be choosers.

The bottom line for me is Germany enduring a bit more inflation and longer time frames for austerity, other parts of Europe reforming and cutting and the whole of Europe taking credible steps on fiscal and banking union (first step, allowing the ECB as common regulator, with power to wind up banks).

No one in Europe is talking about less austerity, that's decided, but about slower austerity. I often get annoys with the American commentators because the debate seems to be entirely about the US by proxy. Paul Krugman's the worst and he didn't really survive a BBC interview because he as basically projecting regardless of the facts here or in Europe, his ostensible topic.

Slower austerity means more German money.  More front-loaded to cover a bigger deficit, and for a longer time.

[Neil]

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.

Calling people stupid and being judgemental is a hard way to operate public policy.  Especially when you  would really like these people to go along with your program.

[MadImmortalMan]

Slower austerity means more German money.  More front-loaded to cover a bigger deficit, and for a longer time.

It does, but like you say, the alternative is worse.

Shelf seems to have a good grasp on this, and I agree that Krugman is an idiot recently. Well, since Bush was elected really.


I see over and over people saying this shit will not create growth. Well duh. The point is not that any of these policies will create growth. The growth already happened, it just hasn't been paid for yet. None of the austerity stuff out there now is intended to create growth.

[Admiral Yi]

Not sure who you are agreeing with Mimsy.

[MadImmortalMan]

Not sure who you are agreeing with Mimsy.

I think there is an inherent agreement between you and Sheilbh, you're just saying it in different ways.

[The Minsky Moment]

The troika set a target of 50 billion euros in privatization proceeds.

Why not make it trillion and put the pinky in the mouth?

[Admiral Yi]

Why not make it trillion and put the pinky in the mouth?

Not sure.  Maybe the Greek state doesn't possess a trillion euros worth of assets.

[MadImmortalMan]

Why not make it trillion and put the pinky in the mouth?

Not sure.  Maybe the Greek state doesn't possess a trillion euros worth of assets.

Likely. Their GDP is like a third of that. 

[The Minsky Moment]

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. 

More than half of the Greek deficit is interest on the existing debt and it is growing.  that also goes away on default.

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.

That only makes sense if there is a realistic path to recovery of the real economy.  But there isn't.  The austerity proposals don't address that.  And without out, fiscal stablization is not possible, it is a death spiral.

[The Minsky Moment]

Why not make it trillion and put the pinky in the mouth?

Not sure.  Maybe the Greek state doesn't possess a trillion euros worth of assets.

So where are the assets that could fetch 50 billion?
Not feasible is not feasible.

[Admiral Yi]

So where are the assets that could fetch 50 billion?
Not feasible is not feasible.

No clue.  The only assets I've seen mentioned in print are the lottery and the Athens airport.

Obviously if Greece doesn't own 50 billion worth of assets it's unreasonable.  Do you have any evidence that suggests that true other than my inability to list them?

[Admiral Yi]

That only makes sense if there is a realistic path to recovery of the real economy.  But there isn't.  The austerity proposals don't address that.  And without out, fiscal stablization is not possible, it is a death spiral.

What do you mean there's no realistic path to recovery?  Go back and re-read your own article about the deflationary spiral.  It's a very specific linkage between deleveraging and money supply.  It's not, as your posts often suggest, a generalized tendency of contracting economies to contract forever.

[Crazy_Ivan80]

isn't one of the reasons the greeks dn't get their assets sold is because the rest of their economy is still so very closed? Locked up in what are essentially closed guilds.

[Sheilbh]

Greece did partially default.

The IMF proposed a partial default in 2010, before the first bailout.  At that point the majority of Greek debt was private sector held and debt to GDP was around 125%.  By the time Greece did default only around 20% of their debt was private sector and their debt to GDP was over 150% so it had far less effect.  A large part of the reason for that (as well as debt held by core banks like those in Germany and France) was to avoid contagion, ironically enough.

Tell me how Greece's program is different from a traditional IMF program.  I don't see it.  The IMF comes up with numbers for spending cuts and revenue increases, and funds the rest. 

I'm not sure, I can say what they're arguing for now.  The IMF are currently, reportedly, wanting 'more realistic' reforms and timetables for reform implementation.  They also think the program should be more ambitious so instead of aiming to get 120% debt to GDP by 2020, they want 100%.  At the same time they don't think that's plausible without either the ECB or the EFSF taking a haircut, or the Eurozone taking on the €50 billion cost of the Greek bank bailout.  Needless to say Europe's reluctant to take any of those steps.

And I think Greek voters need to wake up and smell the roses.  They can take the pain Germany is offering, or decline the offer and have it even worse.  Beggars can't be choosers.

Your perspective on this depends on how much you think the Eurozone's done.  As I see it the Greeks are beggars with a nuke.  It's a bit like Vince Cable's (lefty Lib Dem Business Secretary) description of his position in cabinet.  He doesn't have much leverage to shift policy most of the time, but he does have a nuclear option which is that by resigning he would bring the government down.  So he can only be taken for granted so far.  If you think - and from what I can tell, the German government does - that enough has been done to establish that the Eurozone can respond quickly and has large enough firewalls then it's fine, the Greeks are beggars.  If not then the calculation changes.

The situation's the same with Ireland and Portugal but different for Italy and Spain.  Those two countries can, from my understanding, more or less veto anything the EU wants to do unless they get their way - this is what Monti did at the last summit, which is why they won't be so easily dictated to by the Troika.

Slower austerity means more German money.  More front-loaded to cover a bigger deficit, and for a longer time.

No it doesn't. 

First of all it's not German money.  Germany's the most important creditor because it's the biggest and the last AAA big country in the Eurozone.  But all countries have contributed an equal amount proportionate to GDP.  The Germans have contributed around about a third, but the French, Italians and Spanish have also contributed around 3-4% of their GDP to these bailout funds.

Secondly I'm not talking about the program countries - of them I think Greece and Portugal probably need renegotiation and possibly a further bailout and Ireland needs that promised Euro-help with their banks.  I'm talking about the fiscal pact that means all Eurozone countries are required to cut their deficit to under -3% by 2012.  This was a political deadline set by Euro leaders, and subsequently extended to 2014 for Spain.  If they don't they face a 1.5% of GDP fine.  This means that countries with low levels of debt and a relatively low deficits are making far steeper cuts than, say, the UK despite the lack of market pressure - often their yields are falling to record lows.  The effect is that the core economies are, at best stalling, and some are seeing governments fall and slides into recession (the Netherlands).  The problem with this is it really is the paradox of thrift.  All of these countries need austerity but they need it far less than the Anglo-Saxon world and it needs to be less precipitate.  As it is it seems singularly unsupportive of the Eurozone to simultaneously require these budget cuts periphery while taking steps that remove demand from the core economies that as major trading partners could help them recover.

Just today Danske said they didn't expect growth in the Eurozone until 2013 citing austerity, uncertainty, renationalisation of capital and banks as the major problems.

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.

Actually the Greek primary deficit is 2.5% - down from over 10% a couple of years ago.