Portugal & Greece downgraded on risk of debt default

[MadImmortalMan]

Ya, you're screwed

Fund has been doing well lately though.

It will continue to do so as interest rates get jacked up. Then it will pop and all those gains will evaporate.

[Zanza]

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.

[Zanza]

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).

[garbon]

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.

[HisMajestyBOB]

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).

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.

[Martim Silva]

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.

[MadImmortalMan]

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.

[Valmy]

Wow.  Martim is my hero.

[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.

[Martim Silva]

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.

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.

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.

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?

[The Minsky Moment]

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.

[DGuller]

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.

[Admiral Yi]

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.

[Zanza2]

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.

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.

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.

And 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.

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.

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.

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).
[...]

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.

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.

[Monoriu]

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.