Looks like things are going to get worse. :(
http://www.smh.com.au/business/world-business/portugal-greece-downgraded-on-risk-of-debt-default-20110330-1cf6i.html
QuotePortugal, Greece downgraded on risk of debt default
March 30, 2011 - 9:16AM
Portugal and Greece were downgraded by Standard & Poor's, which said the European Union's new bailout rules may mean that both nations eventually renege on their debt obligations.
S&P cut Portugal for the second time in a week to the lowest investment-grade rating of BBB-, three steps below Ireland. Greece's rating fell two grades to BB-, three levels below investment grade. S&P cited concerns that both countries may be forced to restructure debt after seeking European aid and that governments will be paid back before other creditors.
The moves increase pressure on European policy makers trying to stem the sovereign-debt crisis almost a year after Greece became the first euro member to seek a bailout. Even as Portuguese Prime Minister Jose Socrates repeatedly denies his country needs help, investors are increasing bets that it will be forced to follow Greece and Ireland into seeking aid.
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"The downgrades intensify the pressures facing peripheral economies, Portugal in particular," said Neil Mackinnon, a London-based economist at VTB Capital Plc and a former UK Treasury official. "It increases the likelihood of bailout."
New rules on bailout loans, which take effect in 2013, mean sovereign-debt restructuring is a "potential pre-condition to borrowing" from the future European Stability Mechanism and that senior unsecured government debt will be subordinated to ESM loans, S&P said. Both aspects, announced after a meeting of European leaders in Brussels on March 25, are "detrimental to commercial creditors," the rating company said.
Emergency loans
While Portugal "may be able" to obtain emergency loans without restructuring, the priority given to ESM loans "reduces the prospect of timely payment to government bondholders and likely also results in lower recovery values," it said.
S&P had warned when it cut Portugal's rating last week that it may do so again once the details of the ESM were announced.
The temporary European Financial Stability Facility forms the lion's share of the 750 billion-euro ($1.1 trillion) bailout pool agreed by European leaders nearly a year ago. It will be replaced by the permanent ESM in 2013.
"Financial markets are generally disappointed with the outcome of EU summits this month," VTB's Mackinnon said. "They don't feel there is a proper acknowledgement that debt restructuring and bank recapitalisation is required."
The gap between Portuguese and German borrowing costs surged to 467 basis points today, the highest intraday level since November 11. The Greek spread widened to 938 basis points from 934 basis points yesterday.
'Inevitable' move
"It only accelerates the inevitable move to calling the EFSF for Portugal," said Glenn Marci, a strategist at DZ Bank AG in Frankfurt.
Portugal, which has about 9 billion euros ($12.8 billion) of bond redemptions coming due in April and June, faces weeks of political uncertainty after Socrates resigned on March 23 in the wake of a parliamentary defeat on his austerity measures. Elections are expected in May or June.
Portugal's debt levels aren't as onerous as those of Greece or Ireland, said Marchel Alexandrovich, an economist at Jefferies International in London.
"Markets have come around to the view that sooner or later Greece and Ireland have debt that is unsustainable," he said. "Portugal and Spain are in a different boat. Portugal is on the cusp, it has debt levels much, much lower than Greece and Ireland."
Rescue aid
S&P said that Portugal is still likely to need aid.
"Given Portugal's weakened capital market access and its likely considerable external financing needs in the next few years, it is our view that Portugal will likely access" Europe's current and future rescue funds, S&P said.
A bailout may total as much as 70 billion euros, said two European officials with direct knowledge of the matter. Analyst Laurent Fransolet at Barclays Capital estimated in a note on March 25 that Portugal's current cash position was likely to be about 4.5 billion euros to 5 billion euros, enough to cover the April redemption, though not the one in June.
S&P said it retained a negative outlook on Greece's sovereign debt rating because the country may be falling behind its budget targets. "There are growing risks to the sovereign's budgetary position, the possibility of slippage," S&P analyst Marko Mrsnik said on a conference call. "The debt figure of 2010 could be higher than 9.6 percent" of gross domestic product."
so i see timmy's still at it after all these years
OMG, we're next! :o
I predict that talk radio will begin a new round of gloating about the PIIG nations.
Buy gold! Buy gold!
Looks like some major restructuring of Greek debt is going to happen. What are the global economic ramifications of this going to be?
Quote from: jimmy olsen on May 26, 2011, 05:08:55 AM
Looks like some major restructuring of Greek debt is going to happen . What are the global economic ramifications of this going to be?
I hope Ireland is next to restructure its debt.
There's no way that we can pay it all back.
Yes, there is no way that Greece is going to pay back the debt. The Germans will have to do it for them or Greece will have to leave the Euro.
Quote from: Richard Hakluyt on May 26, 2011, 05:31:18 AM
Yes, there is no way that Greece is going to pay back the debt. The Germans will have to do it for them or Greece will have to leave the Euro.
Nobody is going to leave the Euro. That would be a gigantic step back for Europe, one we might not recover from.
Currently, the plan is to delay the unavoidable debt restructuring until 2013, when the ESM is put in place and after the German elections. Then we'll see about the PIIGS (and possibly Belgium and any others).
Chancellor Merkel so far doesn't want anybody talking about restructuring, to "avoid rattling markets".
Quote from: Cerr on May 26, 2011, 05:20:31 AM
Quote from: jimmy olsen on May 26, 2011, 05:08:55 AM
Looks like some major restructuring of Greek debt is going to happen . What are the global economic ramifications of this going to be?
I hope Ireland is next to restructure its debt.
There's no way that we can pay it all back.
Tell Irish-Americans you need the money to drive the British out of Ireland using terrorism and violence. They will fall over themselves to pay your debt.
Quote from: Valmy on May 26, 2011, 07:54:17 AM
Quote from: Cerr on May 26, 2011, 05:20:31 AM
Quote from: jimmy olsen on May 26, 2011, 05:08:55 AM
Looks like some major restructuring of Greek debt is going to happen . What are the global economic ramifications of this going to be?
I hope Ireland is next to restructure its debt.
There's no way that we can pay it all back.
Tell Irish-Americans you need the money to drive the British out of Ireland using terrorism and violence. They will fall over themselves to pay your debt.
Cdm is writing a cheque as we speak.
Quote from: Valmy on May 26, 2011, 07:54:17 AM
Quote from: Cerr on May 26, 2011, 05:20:31 AM
Quote from: jimmy olsen on May 26, 2011, 05:08:55 AM
Looks like some major restructuring of Greek debt is going to happen . What are the global economic ramifications of this going to be?
I hope Ireland is next to restructure its debt.
There's no way that we can pay it all back.
Tell Irish-Americans you need the money to drive the British out of Ireland using terrorism and violence. They will fall over themselves to pay your debt.
:shifty:
Quote from: Martim Silva on May 26, 2011, 07:17:31 AMChancellor Merkel so far doesn't want anybody talking about restructuring, to "avoid rattling markets".
There is a lot of talk about reprofiling or voluntary debt buybacks at discount though, even from the Buba and the German finance ministry.
Quote from: jimmy olsen on May 26, 2011, 05:08:55 AM
Looks like some major restructuring of Greek debt is going to happen. What are the global economic ramifications of this going to be?
Contagion.
Either the German taxpayer will have to lend Greece a bunch of money that won't be repaid, or German banks will have to write off a bunch of Greek debt that's not going to be repaid, and the German taxpayer will have to recapitalize the German banks.
Quote from: Admiral Yi on May 26, 2011, 09:31:58 AM
Either the German taxpayer will have to lend Greece a bunch of money that won't be repaid, or German banks will have to write off a bunch of Greek debt that's not going to be repaid, and the German taxpayer will have to recapitalize the German banks.
The private banks will long have disvested from Greek debt, that's all owned by the ECB nowadays. But some state-owned banks still have considerable investments in Greek debt, e.g. KfW. They might need a capital injection when they have to take considerable write-downs. But probably not on the scale as private banks would as the KfW can finance itself through massive leverage thanks to its explicit state guarantee. I am also not sure if state-owned banks have to fulfill the Basel III criteria.
However, the ECB would probably have to take considerable write-downs on the collateral posted by Greek banks and the Greek bonds they bought in the secondary market (however they bought it heavily discounted, so a 50% cut would maybe just be a 10-20% cut for the ECB). The member banks of the ECB have some 80 billion or so in capital, but they can't use all of that obviously, so they might need fresh capital injections. From the tax payer.
That said, Germany's and France's fiscal position aren't exactly stellar either. If Greece, Portugal and Ireland default, that might be something we can cope with. If Spain and Italy default, Germany and France are toast.
The longer that they keep stringing Southern Europe along with the notion that they can have lifestyles similar to those of their more civilized Northern European friends, the worse the crash is going to be.
Quote from: Zanza on May 26, 2011, 10:03:08 AM
I am also not sure if state-owned banks have to fulfill the Basel III criteria.
They are supposed to I think b/c the Landesbanken were squealing about new capital requirements.
QuotePortugal, which has about 9 billion euros ($12.8 billion) of bond redemptions coming due in April and June, faces weeks of political uncertainty after Socrates resigned on March 23 in the wake of a parliamentary defeat on his austerity measures. Elections are expected in May or June.
Time to drink the hemlock?
The big mistake of the EU was in forgetting how corrupt mediterranian societies really are. It's not laziness or stupidty (it takes hard work to be successfully corrupt lol), it's just ingrainined and won't go away soon. They should not have been given free reign over monies borrowed.
Quote from: HVC on May 26, 2011, 10:32:50 AM
The big mistake of the EU was in forgetting how corrupt mediterranian societies really are. It's not laziness or stupidty (it takes hard work to be successfully corrupt lol), it's just ingrainined and won't go away soon. They should not have been given free reign over monies borrowed.
They are like children. Dark little children that steal the car keys.
Quote from: Ed Anger on May 26, 2011, 10:33:51 AM
Quote from: HVC on May 26, 2011, 10:32:50 AM
The big mistake of the EU was in forgetting how corrupt mediterranian societies really are. It's not laziness or stupidty (it takes hard work to be successfully corrupt lol), it's just ingrainined and won't go away soon. They should not have been given free reign over monies borrowed.
They are like children. Dark little children that steal the car keys.
It's like if you gave detriot several billion dollars and then were surprised when they fucked up :lol:
Hm, would you say any of the following societies are corrupt?
* Bulgaria
* South Korea
* Lithuania
* Vietnam
* Hungary
* Croatia
I have a sovereign debt fund and those are the top countries it owns debt from, in descending order (the Bulgarian holding is more than double the South Korean one). :hmm:
Ya, you're screwed :lol:
Bulgaria: Come for the computer viruses.
Quote from: Ed Anger on May 26, 2011, 10:33:51 AM
They are like children. Dark little children that steal the car keys.
Was Northern Europe: rubbed on the bitch? :(
Quote from: Ed Anger on May 26, 2011, 10:37:55 AM
Bulgaria: Come for the computer viruses.
stay for the easy women who really seem to like anal. like like it a lot.
Quote from: HVC on May 26, 2011, 10:37:45 AM
Ya, you're screwed :lol:
Fund has been doing well lately though. :ph34r:
Quote from: HVC on May 26, 2011, 10:38:43 AM
Quote from: Ed Anger on May 26, 2011, 10:37:55 AM
Bulgaria: Come for the computer viruses.
stay for the easy women who really seem to like anal. like like it a lot.
Please tell me more sir.
Quote from: Caliga on May 26, 2011, 10:37:00 AM
Hm, would you say any of the following societies are corrupt?
You might have a problem except for the fact that corruption is not really the source of the debt crisis.
Quote from: Caliga on May 26, 2011, 10:38:50 AM
Quote from: HVC on May 26, 2011, 10:37:45 AM
Ya, you're screwed :lol:
Fund has been doing well lately though. :ph34r:
It will continue to do so as interest rates get jacked up. Then it will pop and all those gains will evaporate.
Quote from: HVC on May 26, 2011, 10:32:50 AM
The big mistake of the EU was in forgetting how corrupt mediterranian societies really are. It's not laziness or stupidty (it takes hard work to be successfully corrupt lol), it's just ingrainined and won't go away soon. They should not have been given free reign over monies borrowed.
I think there were a couple of major mistakes made, but ignoring falsified statistics and corruption was a minor one.
A currency union takes away quite a few macroeconomic instruments from a country, which basically leaves fiscal adjustment as the only instrument in crisis, but that's extremely painful and can lead to a vicious debt-recession cycle as currently witnessed in Greece and Portugal. The EU members didn't want a full fiscal union and the transfers from prosperous parts to those less fortunate are way less than e.g. in the similar-sized USA. Furthermore, while capital mobility is high, labour mobility is much lower than in a single-language country like the USA. These arguments are the non-optimum currency area arguments. However, I don't think that was necessarily leading to the current crisis.
The EU basically pretended they didn't exist and put a no-bailout clause in the Maastricht Treaty. Each country would be responsible for its own fortune. However, that's wishful thinking.
The reason why that is impossible is the massive interdependency of European banking. Every bank will trade with banks from other EU countries, so there is massive exposure going round. Especially from the "core" to the "periphery", but also within these areas. The problem was that everybody pretended that differences between the countries didn't exist anymore so massive capital transfers from e.g. Germany to Spain and Ireland led to asset bubbles and cheap sovereign credit meant that Greece could splurge on public spending. That all came crumbling down when the markets, governments and rating agencies realized that there were very clear differences between the Eurozone economies with regard to credit risk. If everybody had realized that earlier, we wouldn't have had the asset bubbles or the public spending, instead we would perhaps have seen more investments in the "core", which would have helped a lot in the last decade, which was rather bad for Germany for example.
Quote from: The Minsky Moment on May 26, 2011, 10:28:56 AM
Quote from: Zanza on May 26, 2011, 10:03:08 AM
I am also not sure if state-owned banks have to fulfill the Basel III criteria.
They are supposed to I think b/c the Landesbanken were squealing about new capital requirements.
You are correct. But I am not sure if the Landesbanken and KfW are treated the same in this regard. The former only have an implicit guarantee, while the latter has an explicit guarantee (and thus an AAA rating).
Quote from: Caliga on May 26, 2011, 10:38:15 AM
Quote from: Ed Anger on May 26, 2011, 10:33:51 AM
They are like children. Dark little children that steal the car keys.
Was Northern Europe: rubbed on the bitch? :(
I thought it was more like rubed on a bich.
Quote from: Caliga on May 26, 2011, 10:37:00 AM
Hm, would you say any of the following societies are corrupt?
* Bulgaria
* South Korea
* Lithuania
* Vietnam
* Hungary
* Croatia
I have a sovereign debt fund and those are the top countries it owns debt from, in descending order (the Bulgarian holding is more than double the South Korean one). :hmm:
South Korea is crazy-obsessed with maintaining steady GDP growth and most corruption is buddy-buddy, Good Ol' boys stuff, so your money is probably safer there than in gypsy-land.
Quote from: Zanza
That said, Germany's and France's fiscal position aren't exactly stellar either. If Greece, Portugal and Ireland default, that might be something we can cope with. If Spain and Italy default, Germany and France are toast.
Basically, the idea goes as follows:
1) In exchange for aid, nations in trouble enact austerity programs that are meant to cut their spending to manageable levels. This usually means a strong reduction in their standards of living, but the fact is, these countries are simply not rich enough to sustain the levels of consumption they got used to in the last decade.
2) With spending reduced, the BIG concept is that we will all implement Common European Governance Rules. These are being negotiated (because the Southerners hate being told that what they do is just a waste of money), but the general idea is to make all european nations follow similar rules in how they use the public money. Key to this is that national budgets are to be reviewed and adjusted between european capitals (in practice, this will mean that Berlin and Paris* will make the budgets for fiscally irresponsible nations). With this, we should have a way to eliminate a large part of the corruption and incompetence that are the trademarks of government in Southern Europe, not to mention their habit of retiring at ages 45-50, giving lavish pensions to senior civil servants and creating myriads of institutes ran by 'boys' from the major parties that are just there to gobble subsidies.
*: Mostly Berlin. But we say 'Paris and Berlin' when this is mentioned. The effect is that the French get all fuzzy and support the concept, which is what is desired.
Germany is taking great pains to prevent this from being seen as "imposing German rules" to the South, but southern politicians are using every dirty means they have at their disposal to show everything as an evil German coup to attack their wealth (not mentioning, of course, that they spent all their 'wealth' and are now only surviving because of German help).
3) Needless to say, austerity measures coupled with shrinking economies and the inability to devalue the currency means that all these nations are in a debt spiral. Germany knows this very well. So, in 2013 after the elections and with the ESM in place, a carefully planned debt restructuring of these nations will take place, which will inevitably involve a haircut of around 20-30% to the bondholders. The size of the ESM should be enough to incude Spain and Belgium.
4) With their debt cut, spending reduced and with proper governance measures in place that reduce their endemic corruption and mismanagement, these nations should, after 2014, start a slow process that will enable them to engage in a sustaineable growth that can, at the same time, allow them to compete in a globalized economy (since their current business models cannot withstand Chinese and Indian competition).
Basically, this is what Germany is looking for. We will also manage a more integrated EU out of this crisis.
Now it's just a matter of fighting the Southern politicians and local interests, who are horrified at the idea of not being able to plunder their national coffers anymore and have a near-mafia control of their nations' media. I am helping in this problematic area.
Quote from: Martim Silva on May 26, 2011, 11:40:50 AM
Quote from: Zanza
That said, Germany's and France's fiscal position aren't exactly stellar either. If Greece, Portugal and Ireland default, that might be something we can cope with. If Spain and Italy default, Germany and France are toast.
Basically, the idea goes as follows:
1) In exchange for aid, nations in trouble enact austerity programs that are meant to cut their spending to manageable levels. This usually means a strong reduction in their standards of living, but the fact is, these countries are simply not rich enough to sustain the levels of consumption they got used to in the last decade.
2) With spending reduced, the BIG concept is that we will all implement Common European Governance Rules. These are being negotiated (because the Southerners hate being told that what they do is just a waste of money), but the general idea is to make all european nations follow similar rules in how they use the public money. Key to this is that national budgets are to be reviewed and adjusted between european capitals (in practice, this will mean that Berlin and Paris will make the budgets for fiscally irresponsible nations). With this, we should have a way to eliminate a large part of the corruption and incompetence that are the trademarks of government in Southern Europe, not to mention their habit of retiring at ages 45-50, giving lavish pensions to senior civil servants and creating myriads of institutes ran by 'boys' from the major parties that are just there to gobble subsidies.
Germany is taking great pains to prevent this from being seen as "imposing German rules" to the South, but southern politicians are using every dirty means they have at their disposal to show everything as an evil German coup to attack their wealth (not mentioning, of course, that they spent all their 'wealth' and are now only surviving because of German help).
3) Needless to say, austerity measures coupled with shrinking economies and the inability to devalue the currency means that all these nations are in a debt spiral. Germany knows this very well. So, in 2013 after the elections and with the ESM in place, a carefully planned debt restructuring of these nations will take place, which will inevitably involve a haircut of around 20-30% to the bondholders. The size of the ESM should be enough to incude Spain and Belgium.
4) With their debt cut, spending reduced and with proper governance measures in place that reduce their endemic corruption and mismanagement, these nations should, after 2014, start a slow process that will enable them to engage in a sustaineable growth that can, at the same time, allow them to compete in a globalized economy (since their current business models cannot withstand Chinese and Indian competition).
Basically, this is what Germany is looking for. We will also manage a more integrated EU out of this crisis.
Now it's just a matter of fighting the Southern politicians and local interests, who are horrified at the idea of not being able to plunder their national coffers anymore and have a near-mafia control of their nations' media. I am helping in this problematic area.
Very well put. That's the best case scenario.
Wow. Martim is my hero.
Quote from: MadImmortalMan on May 26, 2011, 11:44:54 AM
Quote from: Martim Silva on May 26, 2011, 11:40:50 AM
Quote from: Zanza
That said, Germany's and France's fiscal position aren't exactly stellar either. If Greece, Portugal and Ireland default, that might be something we can cope with. If Spain and Italy default, Germany and France are toast.
Basically, the idea goes as follows:
1) In exchange for aid, nations in trouble enact austerity programs that are meant to cut their spending to manageable levels. This usually means a strong reduction in their standards of living, but the fact is, these countries are simply not rich enough to sustain the levels of consumption they got used to in the last decade.
2) With spending reduced, the BIG concept is that we will all implement Common European Governance Rules. These are being negotiated (because the Southerners hate being told that what they do is just a waste of money), but the general idea is to make all european nations follow similar rules in how they use the public money. Key to this is that national budgets are to be reviewed and adjusted between european capitals (in practice, this will mean that Berlin and Paris will make the budgets for fiscally irresponsible nations). With this, we should have a way to eliminate a large part of the corruption and incompetence that are the trademarks of government in Southern Europe, not to mention their habit of retiring at ages 45-50, giving lavish pensions to senior civil servants and creating myriads of institutes ran by 'boys' from the major parties that are just there to gobble subsidies.
Germany is taking great pains to prevent this from being seen as "imposing German rules" to the South, but southern politicians are using every dirty means they have at their disposal to show everything as an evil German coup to attack their wealth (not mentioning, of course, that they spent all their 'wealth' and are now only surviving because of German help).
3) Needless to say, austerity measures coupled with shrinking economies and the inability to devalue the currency means that all these nations are in a debt spiral. Germany knows this very well. So, in 2013 after the elections and with the ESM in place, a carefully planned debt restructuring of these nations will take place, which will inevitably involve a haircut of around 20-30% to the bondholders. The size of the ESM should be enough to incude Spain and Belgium.
4) With their debt cut, spending reduced and with proper governance measures in place that reduce their endemic corruption and mismanagement, these nations should, after 2014, start a slow process that will enable them to engage in a sustaineable growth that can, at the same time, allow them to compete in a globalized economy (since their current business models cannot withstand Chinese and Indian competition).
Basically, this is what Germany is looking for. We will also manage a more integrated EU out of this crisis.
Now it's just a matter of fighting the Southern politicians and local interests, who are horrified at the idea of not being able to plunder their national coffers anymore and have a near-mafia control of their nations' media. I am helping in this problematic area.
Very well put. That's the best case scenario.
Which won't happen because the Eurozone doesn't have until 2013. The Eurozone politicians are way too optimistic and way too slow and indecisive. Germany for example is extremely tactical in everything it does and has absolutely no coherent strategy in this whole mess. And Greece, Portugal and Ireland won't put up with the troika governing their countries for another three years I think. It could also be that protests like the one in Spain destabilize governments and make necessary reforms all but impossible. What Martim here describes is wishful thinking.
Quote from: Zanza
Which won't happen because the Eurozone doesn't have until 2013. The Eurozone politicians are way too optimistic and way too slow and indecisive.
Spain is the worst case, and it can last until 2013, if things don't get too jittery.
The other countries are in bad shape - not totally unexpected - but the fact remains, their financial needs can easily be taken care of. After all, at an European scale, they represent a small % of the GDP of the EU. Financially speaking, the line can be held for two years.
Quote from: Zanza
Germany for example is extremely tactical in everything it does and has absolutely no coherent strategy in this whole mess.
Germany has a very coherent strategy. The problem is that it has to negotiate with 26 nations, most of which are very suspicious of any attempts to make things better.
And for historical reasons (the cry 'German dominance' is ever ready to be yelled), Berlin has little choice but to be tactical.
This is not without drawbacks, and some do feel that too many concessions have been made (giving up Axel Weber and allowing an Italian to preside over the ECB is a big mistake IMO. Draghi is a very shrewd politician, but he is ultimately tied to southern interests and will probably try to issue Eurobonds, which are essentially a way to make the German taxpayer liable for all the debt of the South. And the German taxpayer IS the backbone of Europe and should be protected at all costs).
In the Government, most agree that, since it is the life of the euro - and by extension, the whole existance of the EU - that is at stake, Germany SHOULD stomp its feet and impose its will in vital areas if nobody else (i.e. the French) do so. But actually doing it still presents problems.
There are also pressing internal issues (the CDU is worried about its loss of popularity, and the FDP is panicking because at this rate they will vanish from the Bundestag), who DO hinder the solution, but those in themselves are not critical: the SPD and even the Greens do understand what should be done and will carry on with this tactic, should they become the next government.
Quote from: Zanza
And Greece, Portugal and Ireland won't put up with the troika governing their countries for another three years I think. It could also be that protests like the one in Spain destabilize governments and make necessary reforms all but impossible.
The problem is, while they may not like it, they cannot survive without the EU. They will just face endless bankruptcies if they do not accept external aid, even if they renege on their debt.
(besides the fact that they would be cut off from the debt markets, there is no way they can support their expenses on their own; they HAVE to make massive cuts, troika or no troika). And if reforms are impossible, they will face collapse, which is not acceptable by the financial and political interests in their countries. Even gritting their teeth, they HAVE to accept.
That is why this crisis affords the opportunity for a tighter EU.
Quote from: Zanza
What Martim here describes is wishful thinking.
It is the only credible plan there is. Yes, it is not 100% guaranteed (maybe not even 50%), but it is the best we have. The alternative - the breakup of the eurozone - would not only create large losses in the global financial system, but it would also:
a) not truly help the nations with problems for many, many years;
b) lead to a total loss of confidence in the european project;
c) Render the EU meaningless;
d) Remove all hope for the europeans that they can expect a future world where they matter (this is particularly important for small nations).
Also, the backlash would hit Germany very hard, as many european markets would raise protectionist barriers. ALL european nations would have to reevaluate their paths to the future, and the political landscape would change massively in most nations.
If this happens, we would have a whole new ball game. I am also ready for this contingency - everybody is, actually - but the general consenus is that we should TRY to hold what has been achieved by Europe in the last 60 years.
Do you have a better alternative?
Martim is right in that a currency union can't sustain long term stablility absent real mechanisms for common fiscal and economic management. The integrationists who backed the currency union concept understood this - the Euro was conceived as political tool for pushing further European integration. But politically it seems that the tide has turned decisively against further integration since the 90s. I don't think this crisis will be sufficient to overcome political resistance to serious institutional development towards a common fiscal management. it is more likely that the players will attempt to muddle through with temprorary measures and stopgaps, just as they have done so far to date.
Did the integrationists really expect the whole Europe to develop common governance? I know it's not 1913 anymore, but it still seems like they're quite a ways off from having the conditions for that. It also doesn't help that the only candidate for a common language, which a unified entity needs, belong to a country that definitely doesn't want to be integrated.
Quote from: The Minsky Moment on May 26, 2011, 02:24:57 PM
Martim is right in that a currency union can't sustain long term stablility absent real mechanisms for common fiscal and economic management. The integrationists who backed the currency union concept understood this - the Euro was conceived as political tool for pushing further European integration. But politically it seems that the tide has turned decisively against further integration since the 90s. I don't think this crisis will be sufficient to overcome political resistance to serious institutional development towards a common fiscal management. it is more likely that the players will attempt to muddle through with temprorary measures and stopgaps, just as they have done so far to date.
I hear this all the time and I don't get it. Seems to me the problem was that the buyers of PIIG debt forgot to price in the right risk. There's no law that says all debt issued in the same currency has to carry the same interest rate. US corporates carry different rates. US munis carry different rates.
Quote from: Martim Silva on May 26, 2011, 12:38:10 PM
Spain is the worst case, and it can last until 2013, if things don't get too jittery.
The other countries are in bad shape - not totally unexpected - but the fact remains, their financial needs can easily be taken care of. After all, at an European scale, they represent a small % of the GDP of the EU. Financially speaking, the line can be held for two years.
Let's see.
QuoteGermany has a very coherent strategy. The problem is that it has to negotiate with 26 nations, most of which are very suspicious of any attempts to make things better.
My impression is that Germany's foreign policy is almost completely dominated by domestic considerations, not just with regards to the Euro, but in general. It may look from the outside like there is a grand plan, but Merkel is really just in it for domestic survival. As the Economist put it: in Brussels Merkel is treated like an Empress, in Berlin she is just one of many feuding nobles. Her power base has dimished a lot in the last years and she seems to be panicking and resorting to populist policies. That will of course just further erode her power base among conservatives.
QuoteAnd for historical reasons (the cry 'German dominance' is ever ready to be yelled), Berlin has little choice but to be tactical.
Germany had a very predictable foreign policy all the way to the 2000s. Schröder started to diverge from this path and Merkel has continued that. Nowadays no principles are left and they just decide day-to-day, completely unpredictable and without any clear imperative.
QuoteThis is not without drawbacks, and some do feel that too many concessions have been made (giving up Axel Weber and allowing an Italian to preside over the ECB is a big mistake IMO.
Weber gave up against Merkel's express wishes. She was duped by him basically and now has no choice but to accept Draghi, especially after Sarkozy and Schäuble came out in his favor.
QuoteDraghi is a very shrewd politician, but he is ultimately tied to southern interests and will probably try to issue Eurobonds, which are essentially a way to make the German taxpayer liable for all the debt of the South. And the German taxpayer IS the backbone of Europe and should be protected at all costs).
[...]
There are also pressing internal issues (the CDU is worried about its loss of popularity, and the FDP is panicking because at this rate they will vanish from the Bundestag), who DO hinder the solution, but those in themselves are not critical: the SPD and even the Greens do understand what should be done and will carry on with this tactic, should they become the next government.
The SPD will support Draghi if that's really what he plans to do. Look up the opinions of Steinmeier and Steinbrück for the SPD's position on Eurobonds. Not sure about the Greens' position, but I guess they aren't averse to them either. The only hindrance here is the Constitutional Court.
Quote
It is the only credible plan there is. Yes, it is not 100% guaranteed (maybe not even 50%), but it is the best we have. The alternative - the breakup of the eurozone - would not only create large losses in the global financial system, but it would also:
a) not truly help the nations with problems for many, many years;
b) lead to a total loss of confidence in the european project;
c) Render the EU meaningless;
d) Remove all hope for the europeans that they can expect a future world where they matter (this is particularly important for small nations).
Also, the backlash would hit Germany very hard, as many european markets would raise protectionist barriers. ALL european nations would have to reevaluate their paths to the future, and the political landscape would change massively in most nations.
If this happens, we would have a whole new ball game. I am also ready for this contingency - everybody is, actually - but the general consenus is that we should TRY to hold what has been achieved by Europe in the last 60 years.
Do you have a better alternative?
I agree that it is the best case scenario and I don't have an alternative. Problem is, I don't see it happening like that. I fear that the bad consequences you name will actually be the outcome of this. Which would be a very sad development after the huge success story of 60 years of European integration.
Quote from: DGuller on May 26, 2011, 02:33:21 PM
Did the integrationists really expect the whole Europe to develop common governance? I know it's not 1913 anymore, but it still seems like they're quite a ways off from having the conditions for that. It also doesn't help that the only candidate for a common language, which a unified entity needs, belong to a country that definitely doesn't want to be integrated.
I think it is a chicken and egg situation. They lack conditions to develop common governance, but I can see the argument that a currency union will help promote such conditions.
I don't think the EU needs a common language. They can still learn their own national langauge or whatever. So long as their second language is English, they'll be fine.
Quote from: DGuller on May 26, 2011, 02:33:21 PM
Did the integrationists really expect the whole Europe to develop common governance? I know it's not 1913 anymore, but it still seems like they're quite a ways off from having the conditions for that. It also doesn't help that the only candidate for a common language, which a unified entity needs, belong to a country that definitely doesn't want to be integrated.
English is already the de facto common language. However, that's "International" English, not British English. It has a much reduced vocabulary, doesn't use idioms and other subtle ways to express something. I remember reading how British diplomats faced problems in Brussels because everybody was quite comfortably speaking English, yet they somehow felt left out because they spoke a language that wasn't as readily understood. ;) So Britain being eurosceptic really doesn't matter language-wise.
Quote from: Admiral Yi on May 26, 2011, 07:52:34 PM
I hear this all the time and I don't get it. Seems to me the problem was that the buyers of PIIG debt forgot to price in the right risk. There's no law that says all debt issued in the same currency has to carry the same interest rate. US corporates carry different rates. US munis carry different rates.
We are talking apples and oranges. The apples are the problem that zanza posted about - in a currency union, by definition the value of the currency will not adjust to reflect merely local conditions, which means (like the old fashioned gold standard) that the only adjustment mechanism for a chronic current account deficit is deflation. If that occurs in the context of high levels of private or public debt, the consequence can be a Fisherian debt deflation spiral. In a fully integrated national economy, that response is tempered by fiscal transfers, internal migration, centralized bank rescue and support schemes, and possibly central guarantees of state or regional level debt.
As it was discussed in this thread before, German bank exposure to Greece is manageable apparently. Exposure of the government and central bank is much bigger.
http://www.spiegel.de/international/europe/0,1518,765318-2,00.html
Quote[...]Greece's biggest creditor in Germany is the government-owned KfW development bank. So far, the government's all-purpose bank for urgently-needed cash injections has approved loans worth €8.4 billion to Athens, which were paid out as part of the European and IMF rescue package. Since Germany's federal government acted as the loans' guarantor, the finance minister would have to make up for any shortfalls. If Greece gets a 50 percent haircut on its loans, that would cost the ministry more than €4 billion.
German Banks' Exposure to Greek Debt
Commerzbank 2,900
Deutsche Bank (including Postbank) 1,601
DZ Bank 1,002
Landesbank Baden-Württemberg 1,389
Landesbank Berlin 364
HSH Nordbank 295
NordLB 197
BayernLB 121
WestLB 97
Landesbank Hessen-Thüringen 78
FMS Wertmanagement (bad bank for Hypo Real Estate) 7,400
Erste Abwicklungsanstalt (bad bank for WestLB) 1,400
Kreditanstalt für Wiederaufbau (KfW) 8,400
Source: Company figures, some values are estimates
With €7.4 billion in loans to Athens, FMS Wertmanagement is the second-largest German creditor to the Greek government. But behind the reassuring name -- "Wertmanagement" can be translated as "value management" -- is the bad bank for Hypo Real Estate, which had to be nationalized during the financial crisis. Similarly, the bad bank for Düsseldorf-based regional bank WestLB -- which bears the not overly trust-inspiring name "Erste Abwicklungsanstalt" ("primary liquidation establishment") -- also holds roughly €1.4 billion in Greek sovereign bonds.
With a 50-percent haircut, the two bad banks would lose around €4.4 billion in total. Taxpayers would end up indirectly footing the bill.
The rest of Germany's regional banks, which are known as Landesbanken and are predominantly owned by individual federal states and savings banks, collectively have about €2.5 billion in outstanding loans to the Greek government. But none of the institutions, however, would be left seriously in trouble by a drastic haircut -- they have sufficient capital at their disposal.
Of mild comfort is the fact that the state would probably not have to come to the rescue of any private institutions. Commerzbank, Deutsche Bank and the DZ Bank, which acts as the central bank for Germany's roughly 1,200 partly state-owned co-operative banks, are (once again) in a position to be able to cope with possible shortfalls by themselves.
This is aided by the fact that the write-offs at places like Deutsche Bank might be smaller than the amount involved (€1.6 billion) would suggest. Sources close to Germany's largest bank have indicated that the bulk of the Greek securities have already been accordingly revalued. Even if worst comes to worst, any additional reduction in value would tend to be limited.
The situation would also be manageable for German insurance companies. A year ago, the industry assumed that up to 1 percent of all its investments were in Greek government securities. But since then, the figure is estimated to have fallen well below 0.5 percent, which corresponds to a maximum value of €6 billion.
A debt restructuring of 50 percent would therefore see write-offs of at most €3 billion. In view of insurance companies' total investments of €1.2 trillion, it is probable that no single company would find itself in serious trouble -- and almost no individual customer would feel the consequences in their life or pension insurance policies.
Fund investors also have little to fear. With the four largest providers, which manage more than two-thirds of the money, the risks are minimal to non-existent:
•DWS invested less than 1 percent of its assets in Greece. The value of most of this has already been adjusted.
•Deka only has one fund which still holds Greek government securities. Even in this product, they do not play any significant role.
•At Union Investment, the share of total assets held in the form of Greek government bonds is very low, at below 0.15 percent.
•Of the big four, Allianz Global Investors took the most thorough approach to dealing with the issue. Today, the asset-management firm no longer holds even a single cent in Greek debt.
A drastic restructuring of Greek debt would therefore lead neither to a collapse of private banks nor to the implosion of the insurance sector in Germany, and would scarcely affect the fund investors.
Risk to Taxpayers
But the situation looks different for the German government and the federal states. At the very least, the large exposure of KfW and the bad banks of Hypo Real Estate and WestLB could end up being expensive. Taxpayers might need to step in, as might the savings banks that are owned by municipalities.
In addition, the European Central Bank (ECB) has bought up tens of billions of euros of Greek sovereign bonds. Because the Bundesbank, Germany's central bank, holds more than a quarter of the ECB's capital, it would have to take its share of losses accordingly.
So nothing to worry about, then? Not quite, even if a debt haircut for Greece would appear to be manageable for Germany. The greatest dangers of such a course of action lurk elsewhere. The Greek banking system would probably break down, while the country would find itself unable to borrow on the financial markets for a long time.
And a partial Greek default could also result in an aggravation of the euro crisis for a different reason. If Ireland and Portugal were to be infected by the debt restructuring virus, the situation would quickly spin out of control. In that event, private banks, insurance companies and investors in Germany would definitely feel the consequences.
Why is there Zanza and Zanza2?
I'm scared. :cry:
Yeah what happened to Zanza3?
Quote from: The Minsky Moment on May 26, 2011, 10:28:56 AM
Quote from: Zanza on May 26, 2011, 10:03:08 AM
I am also not sure if state-owned banks have to fulfill the Basel III criteria.
They are supposed to I think b/c the Landesbanken were squealing about new capital requirements.
I'd prefer they applied Basil II criteria: have all Bulgars' hands chopped off.
Quote from: The Minsky Moment on May 27, 2011, 08:52:41 AM
We are talking apples and oranges. The apples are the problem that zanza posted about - in a currency union, by definition the value of the currency will not adjust to reflect merely local conditions, which means (like the old fashioned gold standard) that the only adjustment mechanism for a chronic current account deficit is deflation. If that occurs in the context of high levels of private or public debt, the consequence can be a Fisherian debt deflation spiral. In a fully integrated national economy, that response is tempered by fiscal transfers, internal migration, centralized bank rescue and support schemes, and possibly central guarantees of state or regional level debt.
A Fisherian deflationary spiral only can happen if the debt being liquidated is large enough to affect the real money supply. I don't think that's true for an economy the size of Greece's compared to the euro.
Quote from: Zoupa on May 27, 2011, 04:57:53 PM
Why is there Zanza and Zanza2?
I'm scared. :cry:
When Languish came back online after the crash, I couldn't send myself a new password. Now I could and figured I could go back to Zanza. ;)
Quote from: Zanza2 on May 27, 2011, 04:57:36 AM
Quote from: DGuller on May 26, 2011, 02:33:21 PM
Did the integrationists really expect the whole Europe to develop common governance? I know it's not 1913 anymore, but it still seems like they're quite a ways off from having the conditions for that. It also doesn't help that the only candidate for a common language, which a unified entity needs, belong to a country that definitely doesn't want to be integrated.
English is already the de facto common language. However, that's "International" English, not British English. It has a much reduced vocabulary, doesn't use idioms and other subtle ways to express something. I remember reading how British diplomats faced problems in Brussels because everybody was quite comfortably speaking English, yet they somehow felt left out because they spoke a language that wasn't as readily understood. ;) So Britain being eurosceptic really doesn't matter language-wise.
(https://languish.org/forums/proxy.php?request=http%3A%2F%2F26.media.tumblr.com%2Ftumblr_llg1j6TFLw1qzo83ho1_500.jpg&hash=5690125345340a4c5e5bcc68ff03ac8be646fecd)
Very interesting.
And very accurate.
Quote from: Admiral Yi on May 27, 2011, 08:04:34 PM
Fisherian deflationary spiral only can happen if the debt being liquidated is large enough to affect the real money supply. I don't think that's true for an economy the size of Greece's compared to the euro.
It can happen to Greece.
Those translations are spot-on :D
More on the subject :
http://www.bbc.co.uk/news/world-europe-13545386
Quote from: Richard Hakluyt on May 31, 2011, 10:50:26 AM
Those translations are spot-on :D
More on the subject :
http://www.bbc.co.uk/news/world-europe-13545386
Far too reasonable an analysis for this forum. There must be judgments made and nationalities denigrated! :angry:
Martin Wolf's editorial: http://www.ft.com/intl/cms/s/0/1a61825a-8bb7-11e0-a725-00144feab49a.html#axzz1O46vqzef
This solves a mystery for me in terms of how the Eurozone could be operating.
To the extent the dynamics of the Eurozone is akin to that of the gold standard, then it must not only be the case that chronic deficit countries must face deflation (if the rules of the game are kept) but also that chronic surplus countries must accept inflation. Such is the mechanism that brings relative competitive position back into balance. But the highest profile chronic surplus country - Germany - has done its best to rig the system to squeeze out inflationary impact. Still that leaves open the question - where do all the excess Euros flowing into Germany go?
Wolf, via John Whittaker of EuroIntelligence, provides the answer. The Bundesbank has quietly accumulated over 300 billion euro in claims on other national central banks. That is, the flow of euros into Germany - rather than inflating the economy -- has been redeployed to shore up the battered German banking system while the Bundesbank has absorbed the flow in the form of acquiring massive claims on the central banks of Ireland, greece, and Portugal. This of course in addition to whatever pro rata exposure the Bundesbank effectively holds of the ECB's own inventory of claims on the debtor countries.
The system is badly broken and there is more than enough blame to share.
Quote from: The Minsky Moment on June 01, 2011, 05:24:20 PM
Martin Wolf's editorial: http://www.ft.com/intl/cms/s/0/1a61825a-8bb7-11e0-a725-00144feab49a.html#axzz1O46vqzef
This solves a mystery for me in terms of how the Eurozone could be operating.
To the extent the dynamics of the Eurozone is akin to that of the gold standard, then it must not only be the case that chronic deficit countries must face deflation (if the rules of the game are kept) but also that chronic surplus countries must accept inflation. Such is the mechanism that brings relative competitive position back into balance. But the highest profile chronic surplus country - Germany - has done its best to rig the system to squeeze out inflationary impact. Still that leaves open the question - where do all the excess Euros flowing into Germany go?
Wolf, via John Whittaker of EuroIntelligence, provides the answer. The Bundesbank has quietly accumulated over 300 billion euro in claims on other national central banks. That is, the flow of euros into Germany - rather than inflating the economy -- has been redeployed to shore up the battered German banking system while the Bundesbank has absorbed the flow in the form of acquiring massive claims on the central banks of Ireland, greece, and Portugal. This of course in addition to whatever pro rata exposure the Bundesbank effectively holds of the ECB's own inventory of claims on the debtor countries.
The system is badly broken and there is more than enough blame to share.
So JR, when do you think I'll become evident that it's not working and what are the consequences ?
It's been evident from last year.
the two most likely outcomes - expulsion of Greece and possible others from the Euro or large-scale transfers - are fixes that don't address the underlying problem.
Relief in sight?
QuoteEU agrees in principle on new Greek bailout: source
By Lefteris Papadimas and Sakari Suoninen
ATHENS/AACHEN, Germany (Reuters) – Senior euro zone officials have agreed in principle on a new international bailout of Greece that will give it more time to try to resolve its debt crisis, a source close to the talks said on Thursday.
The Economic and Financial Committee of deputy ministers and senior officials of the 17-nation currency zone approved the plan in principle in talks in Vienna that ended in the early hours of the morning, the source said.
The second bailout of Greece, which will effectively replace a 110 billion euro ($160 billion) scheme launched in May last year, will run until mid-2014, giving Athens an additional year of financial support beyond the original plan, the source said.
The euro rose moderately to a fresh one-month high above $1.45 and U.S. stock prices came off lows in response to the news, which seemed to remove the risk of Greece defaulting on its 330 billion euro sovereign debt this year.
Major areas of uncertainty over the new plan remain. The exact size of the bailout, and how much each international donor will contribute, remain to be worked out in time for a June 20 meeting of euro zone finance ministers, the source said.
The new scheme will involve some participation of private sector investors but this will be limited to avoid triggering a "credit event," the source added. That is an event which would inflict losses on holders of Greek bonds and lead to downgrades of Greece's credit rating or the triggering of insurance contracts on its debt.
Officials from the European Union, the European Central Bank and the International Monetary Fund, which put together the first bailout, have been working with the Greek government for weeks on a new plan for spending cuts, revenue increases and privatizations by Athens after it missed fiscal targets under the original scheme.
The source said the new bailout would cover Greece's funding needs on the assumption that it could not resume borrowing from capital markets in 2011 or 2012. The original bailout envisaged Athens raising 27 billion euros from the markets next year and 38 billion euros in 2012.
The source said the new program would involve detailed commitments by Greece on the management of a new national wealth agency and on the timing of specific privatizations, but would stop short of intrusive international supervision of the agency.
ROLLOVER
Details of how private investors will participate in the new plan are still being worked out, the source said, declining to comment further.
ECB officials have strongly opposed any restructuring of Greek debt through changing the terms of bonds, on the grounds this could destabilize financial markets by fuelling speculation about restructurings in Ireland and Portugal, which are also receiving bailouts.
So in recent days, EU officials have focused on the possibility of organizing a voluntary rollover of debt, in which private investors would agree to maintain their exposure through fresh purchases of Greek bonds as existing ones matured.
Senior ECB policymakers indicated this week that they might accept a rollover, though it remains unclear what incentives might have to be offered to private investors to persuade them to take part.
Athens intends to present a fresh austerity plan on Friday, a senior Greek government official told Reuters. The new budget plan would include faster privatizations and 6.4 billion euros of new savings including some tax rises.
Prime Minister George Papandreou was due to deliver the details to Luxembourg's Jean-Claude Juncker, who chairs the group of euro zone finance ministers, on Friday.
"My personal feeling is Greece will have a new program submitted under strong conditionality. I will have a meeting in Luxembourg tomorrow with the Greek prime minister," Juncker told reporters. "I would like us to come to a final conclusion as far as Greece is concerned before the end of this month."
Pressure on all parties to agree on a new rescue of Greece rose further on Wednesday when ratings agency Moody's downgraded Greece by three notches deep into junk territory, citing a 50/50 risk that Athens would have to restructure its debt and impose losses on private investors.
As a condition for further help, the EU has been urging Greek political parties to reach a consensus on austerity measures, and there was still no clear sign of this on Thursday.
There is even unrest within Papandreou's ruling party; a group of Socialist party members of parliament demanded on Thursday a full debate on austerity steps and privatizations.
Another source of uncertainty over the new bailout is the stance of the IMF, which made no immediate comment on news of the euro zone's agreement in principle. IMF officials warned over the past week that the global lender would not pay its part of the latest aid tranche for Greece under the old bailout unless Greece's 2012 funding gap was addressed; this forced euro zone governments to come up with a broader financing plan.
As the Moody's statement underlined, even a second rescue would be unlikely to remove fears that Athens will eventually be forced into a coercive restructuring of its debt, which stood close to 150 percent of gross domestic product at the end of last year and was still rising.
A key fear for investors is that a Greek restructuring would spill over to other debtors in the euro zone, with Spain's much larger economy the potential tipping point for the bloc.
But Spain saw strong demand at an auction of 3.95 billion euros of medium-term bonds on Thursday, suggesting investors still view it as fundamentally stronger than the countries receiving bailouts.
More time to dig a deeper hole, most likely. Germany shouldn't give them jack shit else until they have a balanced budget (in the black, not just inside ECC guidelines) and a complete outside audit verifying the numbers.
I found fascinating the suggestions of EU supervision of privatization and possibly even their tax collection. Shades of the Khedive.