Greece's economic meltdown

[tridus.livejournal.com]

Here's an interesting BBC article that talks about how much money Greece might actually need, and why it's getting hard to find. CBC also covers the dramatic rise in borrowing costs (10% last week, up to 25% this week after a Standard & Poors downgrade). Somewhat predictably, that downgrade got the EU upset at rating agencies, as if they're the problem here.


Greece is in a financial crisis right now, caused by years of overspending. Much like many other governments, they spent far more on programs and entitlements then they collected in taxes, and borrowed the difference. In the good times when credit was easy to get, that worked. But the debt kept piling up. Servicing costs kept piling up. Then the global recession hit.

Suddenly, the government in Greece found that its deficit was 12% of GDP (and debt at 115% of GDP). That number is HUGE, and quadruple the eurozone limit of 3%. Suddenly people started looking more closely, and decided that Greece couldn't pay it's debt. Borrowing costs went up.

That started a spiral. As costs go up, the government can't keep up. The likelihood of a default increases, and costs go up. Europe was going to try to come up with a bailout package, but they ultimately failed and the IMF had to get involved. There is now a plan on the table that would see a €45 billion bailout package handed to Greece, which would allow it to continue to function for a time.

Meanwhlie, the government has made major cutbacks (called the "austerity plan") to try and get spending under control, triggering near daily protests and strikes. Despite that, the deficit will still be huge (over 8% of GDP I believe).


Now, the problem is that a lot of this bailout depends on Germany. German taxpayers are displeased at the prospect of using their tax dollars to prop up a government that borrowed its way into the abyss and will likely never be capable of repayment. Germany has elections coming up in May, so displeased taxpayers actually matter right now. If Germany doesn't join in the bailout plan, it's entirely possible not enough money will be available to service all of Greece' debt, which would trigger a default. As Greece is a eurozone country, that would affect the euro, and markets everywhere (more so then it already has). It could also scare off lenders in other countries that are heading in the same direction (Portugal also had their bond rating cut, but not as low as Greece).

On the other hand, if Germany does bail out Greece, will they then have to bail out Portugal, Spain, Ireland, and Italy? Is that even possible?

There's a number of things the community can discuss on this. To get things started, I'll come out and say that I think Germany should NOT go through with the bailout. They should kick Greece out of the eurozone instead.

Germany has no guarantee that Greece will actually get its act together if a bailout happens, or if they will continue to spend and hope for another bailout later. They have no guarantee that investors won't expect them to also bail out the other weak countries. Greece dug this hole all on its own by electing govenrments who kept spending money they didn't have.

The only way to stop this in the end is for Greece to start running balanced budgets, at which point it becomes possible for them to service the existing debt. Greece has thus far been unwilling to do that, and until they are a bailout package will simply delay the inevitable while adding a lot of new debt to German taxpayers that didn't do anything wrong.

(I realize this is usually a US focused community, but this is a pretty large issue affecting markets worldwide right now, so I find it interesting. As the US is also running huge deficits, it's also a chance to glimpse into the future.)

Comments

[policraticus.livejournal.com]

The Germans have no word for schadenfreude.

[kinvore.livejournal.com]

*rimshot*

[policraticus.livejournal.com]

I'll be here all week folks!

Please tip your bartenders!

And don't forget to try the veal!

[mijopo.livejournal.com]

"The only way to stop this in the end is for Greece to start running balanced budgets, at which point it becomes possible for them to service the existing debt. "

Well, not really the only way, economic growth (and ensuing inflation) could also address this situation. In fact, these austerity programs of which you speak will be deflationary and exacerbate the problem to some extent, but it's not clear what choice they have at a 25% bond rate. But the point is that if the EU abandons Greece, Greece is really and truly fucked, I think, and we shouldn't think that it's just some tough medicine and they'll come out the stronger for it. I'm not saying that it follows from that that the EU must bail them out, but I think there are moral and prudential considerations.

And note that whether or note this is a glimpse into the US future depends at least to some extent on US monetary policies. US debt was very high after WW2, although far less of that debt was held by foreign entitites.

[tridus.livejournal.com]

The problem is that if the EU doesn't abandon Greece, at what point does Greece actually deal with the problem? They haven't exactly shown much willingness in the past to tackle the budget problem, and what politician would want to tackle it when tossed an EU lifeline?

The proposed bailout isn't even enough, on its own. It's a temporary measure, they have to get the budget under control or pretty soon they'll be right back in the same situation, with investors expecting another bailout. I'm just not convinced that it'll actually work without some tough medicine.

As for the future, you're right. Nobody really knows. I do think WW2 incurred debt is different then the structural deficits the US is running today, though. Some of this years trillion dollar debt is due to things like the bailout and recession, but a large chunk of it existed during the relatively good economic years under Bush, and won't be made up when the economy recovers. So long as the US government also shows zero interest in dealing with the problem, it's heading down the same road (though it's got a long way to go to get there).

[mijopo.livejournal.com]

So long as the US government also shows zero interest in dealing with the problem,

Well, the question is how to deal with the problem. Many, including you, I guess, seem to be assuming that the US govt. must implement austerity measures to address the debt situation. That's not crazy talk, but I don't hear many explaining why that and the attendant deflationary risks, is preferable to ensuring that an environment for healthy growth is maintained. It's not at all obvious to me that huge spending cuts are exactly what the US needs now insofar as it's entirely possible that that could exacerbate the problem rather than fixing it. It's not silly to argue that insofar as current gov't spending is getting the economy back on track for growth, it is in fact "dealing with the problem".

The current US deficit and the portion of it held by foreign entities really does concern me, don't get me wrong. But I'm just arguing that (i) addressing the deficit question is not as simple as decreasing spending and (ii) the failure to decrease spending isn't the same as not dealing with the problem. There's an important disanalogy between household and government debt in this respect.

[tridus.livejournal.com]

The US government has a big advantage in that there's no immediate disaster looming that forces them to take immediate action. They could bring taxes and spending in line with each other over time, but there has to be a will to do that.

The last part is what worries me. There is zero will to bring the two in line, and hasn't been for years. These deficits aren't a new thing, and they're not due to the recession. They also won't go away when the recession ends (but they will shrink some). It's a fundamental "spending is too high or taxes are too low" issue. Stay on that course long enough, and you wind up like Greece today.

[rasilio.livejournal.com]

You're missing a few things.

First you seem to think these austerity measures are avoidable. The debt problem in the US (and most of the rest of the world) is not one you can simply grow yourself out of. You see, the time horizon on the debt is far enough out that any attempt to devalue it through inflation would result in interest rates rising to match the inflation in a very short time (no more than a year) meaning you get essentially no value because the costs to service the outstanding debt match your inflation dollar for dollar. Now the exception to this is if you were to overnight inflate the money supply such that it could be paid off at pennies to the dollar, the problem here is hyperinflation of that sort tends to destroy economies and it is a trick you can only pull once because it damages you ability to issue future debt just as badly as a default (if not worse). So if you can't inflate your way out of the debt you have no choice but to pay it off and no matter how you slice it the Debt levels being carried in the US are going to trigger a deflationary cycle when they start to be paid off, and if we don't stop them from growing then the costs of servicing that debt will begin to apply deflationary pressure.

Second, you are assuming that the bulk of US spending actually stimulates the economy. However this is simply not the case, especially when one considers the bailouts and stimulus package. The idea that either of those bills provided any stimulus to the economy is just a classic broken window fallacy. What it is really doing is diverting X from certain sectors of the economy and reinserting X-Y back into it where Y is the overhead and inherent inefficiency of government. True scaling back on this spending will result in a painful correction as resources are shifted back into the private sector but the net result will be adding that Y value back into the economy.

Third, you are assuming that by not scaling back that it maintains an environment for healthy growth. The problem is as I indicated earlier, the growing costs merely to service the existing debt will in very short order (no more than 10 years) make any type of economic growth impossible because of the volume of money the government must pull out of the economy in order to simply pay the interest.

[mijopo.livejournal.com]

I don't think you read what I wrote very carefully. I'm actually not making assumptions of the sort you're pinning on me, I'm not entirely sure how this situation falls out and neither are you. I was merely pointing out that addressing the current deficit situation isn't simply one of getting a government that's "tough enough" to balance the budget right now.

[johnny9fingers.livejournal.com]

Pretty sound.

I'm still 'conflicted' about your overall position: but that means you must be doing something right.

[underlankers.livejournal.com]

The point at which the corporations in the USA that got bailed out by Uncle Sam start having to pay their own way.

[eracerhead.livejournal.com]

The average US citizen has absolutely no understanding of national economy, and apparently neither does the average Greek citizen. I say let the IMF and other experts handle the situation. If their economy fails, then well they will learn first-hand about it. BTW I feel the same about the US.

I just don't see why people are bothering to protest. If there isn't any money you cannot get paid. We've seen furloughs and pay cuts here in the US without much in the way of protest and strike. Perhaps the average US civil servant isn't as uninformed as believed.

[mijopo.livejournal.com]

What in particular, in your opinion, do average US and Greek citizens fail to understand about (their respective?) national economies?

[eracerhead.livejournal.com]

How should I know? I'm an average US citizen.

[mrsilence.livejournal.com]

I'd say that have only the very vaguest idea of what the balance sheet of income versus expenditure looks like, and hence what the state can and cannot afford.

Nor, when it comes to things that the state cannot afford but which they want, do they really have any interest in knowing. They can just keep voting for it.

[mijopo.livejournal.com]

I don't think that that's where the problem lies, I think most citizens are quite aware of the extent of indebtedness. What's operational here, IMO, is greed rather than ignorance. I want to, personally, maximize what I receive from gov't and minimize what I give to gov't. I may be aware of indebtedness, but I'm not about to be altruistic to address it.

[mrsilence.livejournal.com]

Not that that isn't basically true of pretty much every democratic state.

[kinvore.livejournal.com]

The United States is too big to fail.

[mrsilence.livejournal.com]

Same goes for the Roman empire. And Alexander's, or the Byzantine empire, or the Ottoman, or the Holy Roman, or the...

[kinvore.livejournal.com]

^---

[mrsilence.livejournal.com]

Sarcasm?

[kinvore.livejournal.com]

Yes sir, I wasn't being serious.

[mrsilence.livejournal.com]

What can I say, you forgot your Sarcasm symbol.

Believe it or not, there are some idiots out there would say that with a straight face.

[kinvore.livejournal.com]

Yeah hard to convey irony at times. I suppose in a way it's true, in that while we CAN fail it would probably bring down most other major economies with it. So they'd want to work toward keeping us afloat, although of course everyone has their limits. Hopefully it won't come to that.

[underlankers.livejournal.com]

Part of the problem is that Greece was Europe's baby from the start and will continue to be bailed out by it. It's not paid its own way since Russia carved it out of the Ottoman Empire and now is just another in a long string of dysfunctional Greek governments. The greater problem is that Greece is today dysfunctional in a globalized world with a great deal of risk that way.

However, I would note that since Brussels let Greece in, they made their bed and they can damn well lie in it for all I care.

[reality-hammer.livejournal.com]

This is why you don't lend money to relatives.

[devil-ad-vocate.livejournal.com]

I think there may be a potentially huge market for Retsina. Third world countries could use it to fuel kerosene lanterns.

[policraticus.livejournal.com]

Worst hangover ever.

No, that is not a metaphor.

[debergerac.livejournal.com]

you can prevent that hangover with an ouzo chaser.

[kinvore.livejournal.com]

What exactly happens if we "allow" Greece to fail? Will it basically mean they won't be able to pay their debts, thereby screwing the creditors? Or will someone wind up repo'ing Greece? There's gotta be a joke in there somewhere.

What effect will it then have on other nations like Portugal? Will this start a chain reaction that brings down other nations as well?

[lucazzo.livejournal.com]

I'm trying to picture the Parthenon across the street from the Forbidden City.

[johnny9fingers.livejournal.com]

Oh damn....then they could buy the Elgin Marbles to complete the set. :)

[tridus.livejournal.com]

If I believed that anybody actually knew just what would happen, I'd put a disclaimer here saying that I'm not an economist. Truthfully, I don't think anybody knows exactly what will happen.

The fear is that if Greece falls, it will start a chain reaction as investors flee out of the other trouble spots (Portugal, Spain, Italy, and Ireland). A bailout could restore confidence that those countries will also be bailed out. But on the other hand, several things I've read lately suggest that investors are realizing that Italy's debt is "too big to save", and that a bailout is effectively impossible due to the sheer size of the problem.

Also as Greece is in the eurozone, it will likely affect the euro and that can spread to a lot of countries.

Finally, the wild card in this is the "who the hell knows" factor. A lot of damage from the subprime mortage crisis actually appeared elsewhere, in banks that bought items that included those mortgages which nobody really noticed until they went south. This has the same potential, as German and French banks own a lot of Greek debt. If that all goes south (and if they default, restructuring would be required and there would be writeoffs), it could affect those banks, and then chain out to who knows where.

But I still think that is a better plan then throwing money at the problem and hoping that Greece gets its act together. What happens if a massive bailout starts, and in a year they don't fix the problem and default anyway? Same problem, only now it's for even more money.

[abomvubuso.livejournal.com]

Politically, you could say that a country has "failed" when its not meeting the needs of its people. Some would say the ruling parties in Greece have already failed. But, by that standard, it'd be hard to find any country that has NOT failed.

So what happens if Greece is "allowed" to fail? Well, they'll just default on their loans, and no-one will lend to them any more, which they're already crying about, as well as the cost of borrowing. They're going to do it now anyway, the question is to what degree (ie delayed payment vs reduced payments, etc).

Example. Argentina failed in the early 90's; the main difference here is the EU membership, personally i think it'll entail an entire re-think as to the speed at which its being pushed forward. Letting Greece fail means that, ultimately, the EU has no authority or role when it really comes down to it.

Would the US allow Alabama to just not meet its debts to outside creditors? No, those debts are US debts, clearly thats not the case in the EU, which is fine, but it has grave implications for the Euro currency,

As for the effect on other countries, Portugal's debt was already downgraded recently, so that seems likely.

On a semi-serious note, i think we should just buy the whole fecking country. Greek holidays for all Europeans for free once a year! Plus as much olive oil as you can drink. Yay!

[mikeyxw.livejournal.com]

Alabama could indeed default under chapter 9. Orange County did this and I expect Alabama could.

My best guess about why the EU would bother to bail out Greece is to delay their default until the world economy is healthy enough that the other PIIGS won't follow suit.

On a semi-serious note, you might end up owning the whole fecking country if you're not careful. Beware of Greeks bearing balance sheets.

[abomvubuso.livejournal.com]

I already have a couple of estates in Heraklion (Crete) that i wouldnt mind owning in return for spilling some coins out of my money-box :)

[mikeyxw.livejournal.com]

Good point, the idea of owning Greece is more appealing than owning Iceland.

[abomvubuso.livejournal.com]

But think of all the sheep! O__o

[lucazzo.livejournal.com]

One of the major issues about the eurozone is that the Maastrich Treaty was signed too enthusiastically.

Germany gave up a very strong Mark, and it was more than justified in asking that countries like Italy curb their debt if their currency were to be tied together.

The MAJOR problem I see here is that Maastricht was never followed by binding political and economic treaties to truly enforce said 3% limit. Much like the UN, they'll give you a slap on the wrist and tell you not to do it again. After the gigantic strides made by Maastrich and Schengen, national governments figured they weren't just going to give up all their power and autonomy. This is perhaps best exemplified by the elections of that Belgian fellow as President of the EU (Merkel, Berlusconi, Sarkozy and Zapatero must have been more than happy).

So now that the shit has hit the fan in Greece, Brussels finds itself with its hands tied. How can they keep the Euro a competitive currency? In most countries the central bank would issue bonds, change interest rates, speak with the treasury and so forth. But in Europe such political mechanisms are practically nonexistent, so they really find themselves in a bind.

What I'm surprised about is Spain. All I've been reading for the past 7 years on Italian papers has been how well Spain has been doing, and how young Italians have been moving there searching better opportunities. I guess things weren't that rosy.

[mrsilence.livejournal.com]

It's easy to buy things spruce up the place and make it look rosy, when you haven't yet maxed out those credit cards you can't afford to pay.

[root-fu.livejournal.com]

Let's not forget Greece's "meltdown" was heavily profitted from via Goldman Sach's.

I do not care to substantiate that.

It'll be news later, maybe.

[allhatnocattle.livejournal.com]

truth!

[abomvubuso.livejournal.com]

I hope this (http://community.livejournal.com/talk_politics/449338.html) would be of some help.

[root-fu.livejournal.com]

Yes, I read that.

According to my "insider contacts", Goldman Sachs HFT trading is largely responsible for Greece's economic meltdown. This is why GS falsified data to make Greece's economy appear to be more stable than it really was.

I haven't seen it in the news, yet. And, I can't claim to fully understand or care enough to try to figure it out.

But, it may be worth looking into.

Because if its true, all of these attempts at analysis are failing on a somewhat massive scale..

[abomvubuso.livejournal.com]

My impression is it has been all around the news, as you could see from the multiple links. The point is, they claim they didnt breach any rules and surely they didnt - because there werent many rules, and surely there wasnt any enforcement of the few that existed.

[root-fu.livejournal.com]

Well, according to my friend, Goldman Sachs has spent the last 10 years or so profitting off Greece's economy(and in turn, killing it). GS was also waived the normal 5 day waiting period in being classified as a 'commercial bank', and other details I'm not really remembering.

If he's right, there may still may be things people and the mainstream media are missing. Or, it may be that GS receiving special treatment(being waived 5 day waiting period) implies they have enough political clout to get away with it.

If its ok with you, I'm going to stop talking about it, because I honestly don't know much about it.

[allhatnocattle.livejournal.com]

Well it's the lead story this morning.

[allhatnocattle.livejournal.com]

I don't see anything wrong with with what GS did. In fact what people don't understand is that to have a functioning currency (or any other kind of security) market there have to be people who bet on both sides so shorts have to exist by definition.

[mikeyxw.livejournal.com]

Possibly Germany is bailing out Greece so that Portugal, Spain, Italy and Ireland won't need bailouts in the future. Regardless, when the time comes, Germany can always say no, bailing out Greece doesn't create any obligation to bail out the rest.

Anyhow, although there would be a bit of justice if Greece was kicked out of the Eurozone, it probably isn't in anyone's best interest to do this just now. In short, the current "bailout" seems to be more about damage control than avoiding a default.

Also, rather than kicking Greece out of the eurozone, I expect it's more likely that Germany would just up and leave if this continues. What's the point of having a big market if you've got to give all of your profits back as bad loans?