You don't strike when you're getting rescued. Oh wait...

[luvdovz.livejournal.com]

The "saving of Greece" could easily top the chart of the biggest misstatements. In fact Greece, like Ireland and Portugal, may have never really needed "saving" as we understand it. For them there has always been a very simple decision - to stop paying. The EU and IMF aid, garnished with very burdensome measures of budget cuts (and the ensuing street protests and all that comes with it) has been probably the toughest of all options. Especially when there's no proper structural reform to efficiently make use of that aid in the first place (well, in Greece's case at least).

If we're to talk of anybody's "saving" at all (which is also a questionable concept), then we should start with looking at the European banks. Some of them had embarked on adventurous hoarding of Greek debt because of its attractiveneness and high profitability (but also extremely high risk), and now those same banks are threatened by huge losses worth billions of euros. If there's any clear sign that Greece's bankruptcy is more imminent than ever, it is the fact that the investors have already started evaluating which banks are the most threatened. And also how big the effect on their balances would be, and what concessions their shareholders will have to swallow.

It appears that the bulk of the Greek sovereign debt is held by banks outside of Greece, which hold a total of 72 billion euros, or 22% of all bonds on the market. They had been hoarding more and more Greek debt like crazy, which they could then use as guarantee for the credits they were taking from the European Central Bank at very low interest. And indeed, at those levels if they had to scratch off half of that amount, practically the whole bank sector of that country would have to be recapitalized.

There are several really big German and French banks which are threatened with enormous losses. A Morgan Stanley analysis found that at a 50% "haircut" (more or less the most realistical scenario at this point), BNP Paribas would have to say bye-bye to 1.7 billion euros, and Dexia to 1.3 billion.

The effect on those banks from a possible Greek restructuring isn't the main concern, though. The bankers are more frightened by the threat of infection of the whole system, not so much by the direct losses. Not only because the pressure of the markets on countries like Ireland and Portugal and the rest of the fiscally unstable countries in the European periphery would increase, but because the air of uncertainty stemming from the intransparency of those banks' budgets would ultimately make them very suspicious to one another. And that's a condition for disaster.

The desire of private investors to recapitalize banks in both the center and the periphery of the Euro-zone could drop drastically, the more the infection is spreading. And since the European banks are hoping to raise about 40 billion euros of fresh capital for this year, that threat sounds disturbing and it could force the central banks to start pouring money into the economy again, which would cause rampant inflation.

But regardless, even at this point 1/3 of the Greek debt has moved into private banks and investors and various governments and international institutions. First and foremost, the ECB holds 70 billion euros, which is 1/5 of the entire Greek debt. And according to JPMorgan analysts, if we include ECB's credits for local banks, the exposition jumps to over 200 billion euros. Based on this, we could suppose that if Greece restructures its debt with more than a 30% concession, ECB could already start reporting major losses.

Perhaps this time the rising discontent across Germany about the N'th bailout plan in a row is now pointed in the right direction. The big question now is not whether taxpayer's money should be handed to the "wasteful Greeks", not any more. The main question now could be: which would come cheaper - pouring unknown amounts of loans into the peripheral economies forever, or recapitalizing the banks in the very center of the Union which have been the driving engine of the whole process in the first place.

I mean the Baron Munchausen story about the old mofo pulling himself and his horse out of the mud by dragging himself by his own hair might sound like a nice thing, but how do you do that for real?

Comments

[underlankers.livejournal.com]

A good, thought-provoking post. It seems to me that a problem here is the degree to which solutions of an economic sort to this problem are becoming wrapped up in the latest flirtation with the BNPs and Le Penites, which adds a political danger to any effective solutions. Economic populism is seldom a good reference point to resolve these issues.

[htpcl.livejournal.com]

The Greeks have an old tradition of striking and voicing their public opinion. We Bulgarians have always admired that because we don't have this habit (or at least we're TOO tolerant to our own rulers, and we need some really huge tensions to pile up in order to act; on the other hand when we eventually do act, things could get really ugly - after all, we almost burned our own parliament 20 years ago). So we constantly say "look at the Greeks, they have a clear and firm position on social issues, a real civic society, not like us".

In the meantime, there's a certain amount of Schadenfreude now being felt here for the following reason: the Greeks have been living way beyond their means for quite a while, using various tactics to trick the EU (http://talk-politics.livejournal.com/449338.html) into granting them ever more subsidies virtually for doing little but nothing; also there's this meme going that they're lazy and only want to have endless siesta and rely on tourism and not work (which I don't necessarily agree with, because it's an over-simplification and generalization). But in fact all of this talking about Greece has just been our convenient way to divert the attention from this being our own flaw, whereas I've seen when Greeks work they work really hard (of course during siesta time they don't work at all and you can't find even one shop open in the afternoon, but can you work at +40'C?).

The point that I'm trying to make among all this verbiage is, when you've been cheating yourself for such a long time into believing that this excessive lifestyle is sustainable in the long run, once the piled tensions eventually snap and your economy can't take it any more and starts crumbling down like a house of cards, and since it doesn't have a firm ground to step on for recovery, going out and protesting about it doesn't make any sense. At all. Instead of working hard to amend things, you do what? Go and whine and complain and waste precious time. Papandreou told the Greeks: "these are hard times, we should be united and work really hard, now is not the time for self-destruction". Tough words which very few listened to.

It's true that the banks brought this on Greece, but meanwhile it's also true that the Greeks didn't mind getting their sweet, sweet loans and subsidies stimulating them to NOT produce this and that, and I definitely didn't see them go around streets smashing cars and shops in protest while they were practically being granted donations to build a small hotel, while they were actually using the bulk of the money to buy a new car and go on vacations and probably refurnish their house - and then declared those as "business expenses". LOL.

And when those who were supposed to be supervising the whole donation process came to ask "so where's your hotel and how's it working?" they saw what - a new car in the garage and some new furniture in the house. And instead of the declared project for a 2-storey hotel they saw a bunch of miserable bungalows which couldn't generate enough income for a bucket of poop. But then they didn't ask for their money back, all they did was to hand still more money and hope Mr Papadopoulous or Mrs Angelakis would do things right this time. Well, it doesn't work that way, sorry.

On the other hand, as the proverb here goes, "Not the one eating the pie is the crazy one; but the one who's giving it to them". So if we're to really look for scapegoats, they're just about everywhere around. Everyone is guilty.

As for what should be done from now on, it's simple. Prepare to tighten up the belts and do things right THIS TIME. But this time you'll have to work your ass out.

[luvdovz.livejournal.com]

when you've been cheating yourself for such a long time into believing that this excessive lifestyle is sustainable in the long run, once the piled tensions eventually snap and your economy can't take it any more and starts crumbling down like a house of cards

This description sounds eerily familiar. Reminds me of my home Iceland. People got really carried away there and now they are bearing the consequences.

[htpcl.livejournal.com]

Examples abound, but yes, those are the most visible ones.

[mahnmut.livejournal.com]

And when those who were supposed to be supervising the whole donation process came to ask "so where's your hotel and how's it working?" they saw what - a new car in the garage and some new furniture in the house. And instead of the declared project for a 2-storey hotel they saw a bunch of miserable bungalows which couldn't generate enough income for a bucket of poop. But then they didn't ask for their money back, all they did was to hand still more money and hope Mr Papadopoulous or Mrs Angelakis would do things right this time. Well, it doesn't work that way, sorry.

You're talking about bringing discipline. I agree. You want fiscal support? Show some results and you'll get more.

[htpcl.livejournal.com]

Reminds me of this eternal argument that we have here about Gypsies:

A. "They don't work! They just don't want to work! We give them subsidies for giving birth to 5-10 babies who they can't even remember the names of, and they live on that aid!"

B. "You're such an intolerant bigot! They can't get jobs because when they apply, you just tell them to piss off because you think they're dirty uneducated thieves by default. What else can they do but steal and try to make ends meet by getting parenthood aid and then force their children to beg on the street and pickpocket?"

Both are right and wrong at the same time. The truth is usually somewhere in the middle. The solution is not easy, but you remind me of one first and very necessary step:

Put a condition for that aid. "You can have aid for 3rd, 4th, etc babies, but you'l have to apply for job at the job agency. And when the job inspector offers you a job, consider accepting it. Then you get your baby aid. Deal?" It worked well prior to 1990.

[mahnmut.livejournal.com]

O boy. I can tell you zillions of stories about this because the job "inspector" as you called it? - that's me.

[htpcl.livejournal.com]

Do tell.

[mahnmut.livejournal.com]

Another time.

[mahnmut.livejournal.com]

Some interesting points there. But what should be an even bigger concern worldwide is that after the bailouts which mended the bucket somewhat, nothing more was done to change the system in a way that would prevent further busts. The double-dip recession may not happen right now, but nothing tells me a next bust wouldn't happen, and bigger than the previous one.

An interesting documentary (http://www.documentarywire.com/overdose) addresses this threat, and the fact that now that things have calmed down a bit, people's short memory span seems to have taken over again. And not that the next balloon hasn't been started to inflate again. This time it's the bailout balloon.

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Bailouts are not a bad thing by definition. They only become bad when done in haste, without proper planning, with no clear long-term concept, and with no oversight. It ends up in excesses, great potential for corruption, and such travesties like the employees of those same banks who did all the shit getting enormous bonuses virtually for being huge assholes.

[root-fu.livejournal.com]

When first causes of an issue are not addressed, history does have a habit of repeating itself.

[rasilio.livejournal.com]

Here is the problem facing Europe, and soon America, and Japan as well.

They bought into a line of reasoning that was inherently faulty. That is you can actually make yourself richer by spending money.

There is no need to actually build physical tangible wealth, just spend money and you'll get rich. This of course leads to the printing on money and development of a debt based economy. The problem is that in the short term it looks like this really works. The extra spending does indeed boost economic activity leading to growth and so for a while it appears that the growth will continue unabated keeping you 1 step ahead of the debts you are piling on.

What is never seen during those boom years is that the growth is essentially cancerous. Your economy is not growing because of any fundamental increase in economic activity, it is growing because people are flush with cash and are not saving it to eventually pay off the debts they are accumulating and so the debts continue to mount and the resources purchased with that debt get used up. Then one day you find yourself where we are today, with more debt than net worth and then eventually the cost of servicing your debt starts to eclipse your actual income (or GDP).

This problem is not just about government debt either, it is all debt in all sectors that is the problem. If government had huge debts but the people or the corporations were sitting on large stocks of capital reserves it wouldn't be much of a problem because you could just raise taxes a little to pay off the debt without actually cannibalizing your economic growth. However when all sectors of the economy have more debt than assets there is nowhere to go to get the money to start paying down the debts and you have no choice but to scale back spending or go bankrupt.

So why not just go bankrupt at the national level? It solves the problem right? Well sure, if it is just one or two nations in this situation. Sure it might cause a global recession or even a depression and will definitely make you unpopular at diplomatic gatherings, but it won't be the end of the world. But, what if it is all of the large economically powerful nations in some version of the same situation?

The entire global economic system comes to a halt. Assets are wiped out wholesale with no logical or legal framework for dealing with the wreckage (An example in a second). Trade between nations becomes difficult or impossible and governments themselves, especially those who are already weak have trouble maintaining cohesion and order. So you see waves of rebellions and civil wars and likely some cross border shooting wars as the larger and more powerful governments push to secure access to resources they can no longer acquire in trade.

So now the finance ministers and bankers are walking a tightrope, trying to keep everything stable in the hopes that somehow economic growth will resume and allow us to grow our way out of the problem. They know that Greece and Portugal and Ireland need to be maintained and manage how the losses that will be taken on those countries debt are spread lest they take down the banking systems in their own countries. China is essentially forced to keep buying as much debt as the US wants to print because it is the only way to keep America able to buy their manufactured products and the rest of the world just sits there and hopes and prays that none of the big boys makes a mistake and brings down the whole house of cards before some miracle solution appears.

[rasilio.livejournal.com]

The example of wealth destruction with no framework for dealing with the werckage...


Assume that you own a house that us upside down on it's mortgage.

The economy goes south and the amount you are upside down continues to grow but you hold on because it is your home and you can still make the payments. Eventually the economy gets so bad you lose your job and can't make the payments anymore and eventually it is foreclosed on and you are evicted. Your house sits empty while you go live in an apartment.

The market of course is flooded with homes in this exact same situation and it will take years for all of them to be sold off and while it is sitting there vacant waiting for someone to be willing to spend money on it things are deteriorating. Rodents and termites move in, maybe some raccoons as well. Vandals break in and cause more damage, maybe even set up a drug house inside it.

If this situation goes on long enough the house will be damaged so severely that it will cease to be an asset at all and become solely a liability because it will need to be torn down and rebuilt before it could be occupied again. So if this happens often enough then the bank who owns the title to the property just goes bankrupt itself and it's assets are sold at auction. However since this property (and hundreds to thousands of others like it) is not an asset no one buys title to them and they sit there as blighted abandoned properties not owned by anyone any longer.

The normal legal way of transferring assets like this back into productive use is to sell them, however that presumes a market willing and able to actually to buy most or all of the assets that are abandoned this way. If the economy stays bad enough for long enough that does not happen and the assets just rot with age until they have to be destroyed.

[luvdovz.livejournal.com]

I think I may need a couple of hours to digest all that. Just a question out of curiosity. Do you save your text on a Word file so you don't lose it in the middle of typing it?

(I promise to read it at some point).

[rasilio.livejournal.com]

Usually not and more than once I have cried as a 500 word response disappeared into the ether.

Fortunately I type fast with reasonable (but not perfect, hence the quantity of typo's in my posts) accuracy so it doesn't usually take too long to recover something.

[luvdovz.livejournal.com]

I like to save my longer texts in a simple Notebook file. After several paragraphs I save, then resume.

[anfalicious.livejournal.com]

Interesting.

I always thought that rather than bailing out the banks the government should have bought up all the mortgages and let people stay in their homes and renegotiate terms - perhaps even turning it into public housing. The banks would have gotten their money and the state would have gotten a whole lot of bricks and mortar assets to either use for social programmes or to release for sale in a way that doesn't destroy the market (I know this would be undue government intervention in the market, but would it have been worse than what actually happened?). It would have also given people a greater sense of agency in the financial crisis and a greater faith in their government having their best interests at heart. It seems insane to me that there is so much empty housing stock and so much homelessness/accommodation insecurity in the same nation.

[rasilio.livejournal.com]

Yes I have made this same argument myself.

If intrusion into the market was actually necessary to recapitalize the banks they could have done far more by buying those worthless mortgages from the banks and then cutting some kind of deal with the homeowners on the equity in them.

At least this way the public would have been the ones getting the benefit.

Further the moral hazard of the situation could have been ameliorated by not giving the people who had their homes foreclosed on the title to the property.

For example, if your house got foreclosed on, rather than you getting evicted the government buys the loan and keeps the title. They then negotiate a long term rental agreement with the former homeowner allowing him to live in the house at somewhere near market rate but also based on what they can afford to pay for some period of time, say 5 - 10 years, after which the home will be sold.

This way the house would have remained occupied, the government would have collected income in the form of rent and then the proceeds from the sale limiting their loss exposure, and the homeowner would have been allowed to remain in the home at a monthly payment he could afford thereby avoiding disrupting his family with a move and potentially been able to purchase it back once his credit and financial condition improved.

Obviously not all homes could have been saved this way but probably enough of them could that they would have prevented the complete bottoming out of the housing market and been a lot more equitable to the homeowners.

[anfalicious.livejournal.com]

Further the moral hazard of the situation could have been ameliorated by not giving the people who had their homes foreclosed on the title to the property.

Exactly, people didn't have to get off scott free, they just needed the government to catch them whilst they fell and could get back on their feet again. I think we have different opinions of the best model out of that, but I could live with your suggestion.

Obviously not all homes could have been saved this way but probably enough of them could that they would have prevented the complete bottoming out of the housing market and been a lot more equitable to the homeowners.

And I think that's pretty key, you wouldn't want to save everyone, the market needed the correction and many people did need to get burned, but I think the government can help to make sure that a correction doesn't become a crash and a singe in the pocket doesn't become total immolation.

Sorry, O.T.

[htpcl.livejournal.com]

Btw see today's Google doodle:



Referring to this (http://en.wikipedia.org/wiki/Saints_Cyril_and_Methodius_Day#Saints_Cyril_and_Methodius_Day).

Re: Sorry, O.T.

[mrsilence.livejournal.com]

Maybe it's a request for divine intervention through the intercession of friendly saints.

[abomvubuso.livejournal.com]

More on ECB's failure to foresee the upcoming Greek drama: see here (http://www.thelocal.de/money/20100530-27529.html).

[mikeyxw.livejournal.com]

Greece doesn't really have a "stop paying" short term option. They are still borrowing, not paying back their debts. If they simply refused to pay their debts, they would still need to find a way to cover a deficit of about 10% of their GDP. They would be unable to borrow any money, the reason their creditors are able to put any conditions on them is that they are already unable to borrow through normal channels, so they would end up cutting 10%, not 3% or 5% of their GDP from their current budget.

This is not the easier option.

[mrsilence.livejournal.com]

I keep forgetting. At what point are you supposed to stop loaning money to someone who has a proven inability to repay you?

[anfalicious.livejournal.com]

When their assets are no longer worth seizing to cover the debt.

[eracerhead.livejournal.com]

Cut Greece up into pieces and sell the assets.

[eracerhead.livejournal.com]

I wonder if Donald Trump would like to buy the Acropolis and move it to Vegas?

[anfalicious.livejournal.com]

Gotta be a better deal than the lot they let go to England...