Rationale for the Greek Deal

I’ve been following the news stories on the proposed potential Greek bailout. However, reading articles like this, I’m struggling to find a good rationale for the agreement that’s been reached. The following questions come to mind:

  1. Greece needs to address its huge fiscal problems. To do this will require putting through highly unpopular measures. How does the EU’s offer of a potential bailout help get this achieved? How does the Greek government convince its people that harsh measures are required to reduce its deficit and keep open its access to sovereign debt markets when they now know that the EU tooth fairy is waiting by to help?
  2. Even if the senior figures in the leading EU countries have ultimately decided to intervene to prevent the disruptions associated with a Greek failure to roll over its debt, why not wait until that failure has happened?
  3. Why would the EU wish to be associated in the Greek public’s minds with the harsh expenditure cuts and tax increases that would still have to follow even after a bailout deal?
  4. Do those who advocate this policy really believe that the current Greek crisis is sui generis or are they planning to put in place a safety net for the whole Euro zone? If the latter, can such a policy really be credible?
  5. Is the long-run macroeconomic stability of the Euro area better served by avoiding the dislocations associated with one its constituent members going through a sovereign debt default or should we be more concerned about the problems created by the new bailout mechanism that lets governments know that the EU will intervene if they choose not to tackle their fiscal crises?

I feel that in asking these questions, I’ve clearly been missing something. Hopefully those who thrashed out this deal have thought these issues through. My concern is that in the somewhat fevered quasi-crisis atmosphere of this week, precedents may be getting set that we will live to regret.

Update: To be honest, I probably should have linked to this hand-wringing Times editorial as a better illustration of what I’m confused about. The editorial worries about “depressing the value of the euro” (which would in fact be a good thing for the Euro area economy) and discusses how this “raises major doubts about the future of the single currency” without explaining why this is the case.  The piece ends with the dramatic note of “The European Union remains on alert and on financial standby.”  It does make one wonder a little whether this issue is being hijacked somewhat by those who see “Europe” as the solution to most ills.

67 replies on “Rationale for the Greek Deal”

@ Karl

posted this on the “EU imbalances room” but decent chance no one is gonna bother to make it to comment #83…

Greek GDP data for 2009 revised sharply lower for Q1/2/3, and Q4 good bit worse than forecast.

Revisions to previous quarters of -0.8%, and Q4 coming in at -0.8% instead of -0.4% forecast. 2009 GDP has now fallen -2.6%.

(a) at -2.6% Greece GDP didn’t ‘outperform’ by as much as they had previously suggested/expected.
(b) sharp revisions to previous quarters continue to undermine credibility in economic statistics for Greece
(c) it increase their debt/GDP ratio further!
(d) it fits well with a story i heard this week (think i posted above) that lots of Greek data is going to be revised worse in the coming weeks, and the German support package was hastily put together this week to get ahead of the bad-news cycle and avoid a complete collapse.

Re the “Why”, i think this is really about Spain and a fear of contagion there. If Spain was to get into serious trouble, it’d call into question the whole EZ project. Greece (and Ireland/Portugal if it came to it) is qualitative, but Spain is quantitative. Basically they pay off the Greeks to save the Spanish is how you could read it.

Greece was seen as unreliable when giving unspecified assurances that the deficit would be addressed. So far the EU has not promised one cent. Granted, some see the EU as more believable but without any details, we don’t know that anything will be done.

The “stop the contagion” is a very political phrase. I is implying that curing Greece will stop the others from becoming worse. Saving Greece will not cure Spain, Italy, Portugal or Ireland of their ills and therefore the stop the contagion phrase is at best a fudge.

Also as Karl said, it is better to let Greece fail & then the Greeks will realise the trouble they are in. After they’ve failed, anything the EU does to improve the situation will be seen as help. Helping them before, gives credibility to entitlement demands and I wouldn’t even be surprised if the aid would be seen as too little and at too high a cost.

They are not entitled to aid and as far as I can tell they are not even trying to justify why they should be helped.

Officials in central banks are not elected, one of the reasons is that they shouldn’t feel pressured about giving in to populist demands like we see now in Greece. Merkel is not elected by the Greeks, she can and should do what is right and let the Greeks handle this to the best of their ability.

@Eoin,

Following on from Karl’s 4th point, is “pay off the Greeks to save the Spanish” really credible? What’s stopping the hedgies swtiching the focus onto Spain and saying “OK, we’ll let you have Greece, but we think your political statement on solidarity is all fur coat and no knickers”?

However, taking a broader view and linking to the discussion in the previous thread – Philip Lane’s fiscal policy paper, the fact that the Eurozone is not an optimal currency zone has long been clear, but there are signs that the power-that-be in Brussels, Frankfurt and the core EZ countries sense an opportunity to impose centrally-determined fiscal and political harmonisation on the fiscally incontinent PIIGS.

The forces that gave us the EU Constitution – and had eventually to swallow Lisbon – have not gone away.

@Karl Whelan

Politics supercedes economics in this case: EU is a developing project and, acknowledging Greece’s self-inflicted difficulties and the apparent dodgyness of their sums, to dump on Greece at this time would have been an unmitigated disaster in terms of European Integration and future global crisis management. Look on next week as period of ‘due diligence’ as others try to figure this out and keep the ‘vultures’ hovering over the Euro at bay (1% drop OK). Nor can one take ‘democracy’ for granted in any European context.

Van Rompuy has passed his first real test. Credit to Angela, Niclas, George and Co.

Look back at Bosnia – and look at EU impact recently in Copenhagen; Europe needs a good bit of ‘toughening up’ in a world where the ideologues and vested interest groups are in control of far too many levers of power.

@Karl, maybe you are asking the wrong questions.

The contagion problems with Greek sovereign debt seem to be quite large. 75% of Greek sovereign debt is held externally, with some large European banks seeming to have big exposures.

If there was a sovereign default from Greece the contagion would be two-fold. Firstly, there would be obvious problems for other peripheral eurozone states when it came to selling their debt, but secondly there would be (even more) problems for eurozone banks that already hold Greek sovereign debt.

Perhaps it is just more politically acceptable to bail out the Greek government (or at least provide a guarantee to debt issuances) than to go through the round of bank bailouts that a Greek default would cause?

It is interesting that throughout the negotiations that the Greeks have stuck to the line that they do not need a bailout (obviously they do), so maybe the finance ministers meeting in Brussels are coming under pressure from different quarters?

@Karl Whelan
You are approaching it from the wrong angly. The rationale behind the agreement is not wrong, it is the analysis of what the agreement means that is incorrect. I believe Mr. Beesley is incorrect in his analysis.

I think we are seeing the rise of the EMF – the european monetary fund, or IMF-lite – that will implement IMF-like policies in europe (the stability and growth pact is essentially what the IMF try and achieve).

It is reasonably clear that there is going to be no carrot without the Greeks sticking themselves. If that is the case, there is no requirement for carrot, because the Greeks will put their fiscal house in order.

So what might happen? Well, the ECB might bend the rules and say that eurozone sovereign debt will always be accepted, but that increasing haircuts apply, but this would probably compound the issuance problem. They could allow debt with CDS to be used, maybe?

Where we might see some action is in relation to Ms. Lagarde’s comments on CDS. Bereft of currencies to speculate against, sovereign debt is being used via CDS; this is deeply destabilising for governments, more so, I believe, than currency since it raises the spectre of a sudden stop in a way that a currency crisis doesn’t.

@ Lorcan

Ok. I could argue with some of that (Greece isn’t really so big, the default could involve a restructuring rather than a complete failure to ever pay and so on).

But suppose I agreed with it. Why not wait until a default and all of its negative consquences are imminent and then appear on the scene as the good guys? Why tell them now that we’re going to swoop to save the day and undermine their internal process of adjusting to the reality of their fiscal position?

Already I suspect that even if a bailout never happens, any austerity package will be seen in Greece as something inflicted on them by the EU.

By Post Author

@Karl, I’m certainly not saying that a default would mean to a failure to ever pay.

But there is a problem with banks repo-ing Greek sovereign debt if that debt gets down-graded to junk (as it surely would in the case of a default).

If the banks can’t repo the debt to fund the purchase, then the solvency issues that seem to have dies down in the banking system lately will quickly raise their ugly head again. What is the ECB do then? Accept junk as collateral?

By keeping the Greek government solvent they are forestalling this problem.

I agree that politically there is no way that this can play well for the EU in Greece. But the EU allowing Greece to default so it can ride into Greece on a white horse instead of a black one seems short sighted.

The EU will support Greece because it has to. And it will probably support any other nation (eg Portugal) that gets into the same situation, because it has to. The time to sort out Greece was before they joined the EU, it is much too late to teach them a lesson now.

The Irish Times editorial board is utterly clueless when it comes to economic matters and their know-it-all tone only makes them even more pathetic.

@Karl Whelan

OK. What I’m trying to say is that there were other considerations, other than ‘internal EU macro-economic’, at the 1st Brussels meeting yesterday – geo-political, democratic, legal, military, and global. Certainly the fiscal difficulties facing Greece and others was top of agenda ……. but these do not encompass the entirety of the EU project – nor does economics. I regard yesterday’s outcome as positive from both EU and Global Cosmopolitan perspectives. So lets try a scenario – by ‘Dump’ I mean that EU basically tells Greece to ‘take a hike’ : assume it happens and now I respond to your Qs at the internal EU level posed.

[1] How Greece ‘sells’ its new ‘fiscal stance’ is its own democratic business – and it will receive some advice. What the EU guarantee does, in blunt terms, is to prevent the Colonels from re-polishing those brass buttons, and not only in Greece!

[2] Most Greek Gov. debt is held by French, German, Dutch and Swiss ———– I’m open to more precise figures here. Dump on Greece and one immedialy creates negative ripple effects in Germany, France, Holland and Switzerland. Drop in Euro of another 10% in a week not an implausible possibility – surely you are not suggesting that one create yet another ‘banking crisis’ and a massive devaluation of the Euro?

[3] Reality is not the preserve of the Greeks – All EU states and citizens could do with being better informed …………….. this Q was prob not on yesterday’s meeting. Democratic deficits are local, national, European and Global.

[4] There is some move towards such a broader policy for Euro Zone – extremely difficult – but effectively impossible if the EU ‘solidarity bond’ broken by dumping Greece. Do we really wish to give Europe back to the zenophobic far right nationalists?

[5] Long run macro-economic stability of EuroZone demands further political integration and the emergence of stronger institutional mechanisms re regulation etc.

So it appears that we may be approaching this at different levels of analyis. And if you are missing something, and you don’t miss all that much, it is the broader picture of the relations between Power, Democracy, Money/Economy, and Law. Your questions are probably more relevant to this week’s discussion among finance ministers etc. Hope you have been invited in some capacity or other ……. and probably by ‘others’ (-; Keep up the work.

@ David – “in blunt terms, is to prevent the Colonels from re-polishing those brass buttons” – they should ship over some polish as that is probably the best thing that could happen to Greece (and the EU) – they would be able to bring in the IMF, clean up the mess and then come back in (with the New Drachma).

The reason that is not going to be allowed is my previous post – who holds the debt (and what would the consequences of default be) – you have the key countries in [2] but it should be noted that French banks hold the lions share – hence the German foot dragging.

It might be possible to track the bondholders but how much of the bondholdings are covered by CDS?

Who would be forced to pay out if the CDS are exercised?

Were any new CDS issued (as opposed to traded) after the restatement of the Greek accounts?

@Edgar

No further comments on ‘brass buttons’ – rumour has it that Minister O’Dea reads this blog ……. but come to think of it (-;

Ah – yes. This explains all that hugging and male bonding in Paris on Tuesday between Niclas and George …… and that Napoleonic clinched fist and determined set of jaw in that defining digiphoto on which reams of post-structuralist French PhD dissertations will be based.

Eoin
Very plausible. But the euro dropping is also desirable for the EZ. Especially as the powerhouse seems to have had a power cut.

All
Sovereign for the EZ is the EU. Not Greece. Legally it may be different. But we are talking banking where at this level, handshakes are more important than niceties. Ask the guy who decorated the bridge in London. With his corpse.

Delay is all a lawyer can do for a client, who has no case, as we were taught at the Honourable Society of KI. Delay can be very valuable, but is costly and often just that. Delay. We were never actually taught the hoary ol’ one that justice delayed is justice denied. Counter to a profession that at that time could not sue for most of its fees!

The reception for Greeks, even if bearing gifts, will be frosty for the rest of this century, I suspect, in certain quarters.

@Karl,

As to why not wait until default is imminent rather than promising now to swoop in later, two observations:

– this week’s announcement came in a quasi-crisis context where EU leaders felt that they had to say something to calm market nerves, but the Germans are obviously not yet ready (if they ever will be) to sign a cheque;

– your substantive point about the announcement undermining Greek internal adjustment raises echoes of the long-running debate over whether the IMF’s lending facilities give rise to moral hazard or whether the existence ex ante of well-articulated support frameworks is good for macro-financial stability. The EU unfortunately has so far only come up with a vague framework, cobbled together under pressure, that may well add to uncertainty and potential instability.

Another angle:

The bondholders & CDS issuers might now be in the situation that they cannot allow Greece to fail as the losses would be too great and therefore they have no choice but to keep financing Greece?

I.e. roll up interest and give loans a la Irish banks to insolvent developers & hope for the best.

Or if the banks & CDS issuers can handle the losses then they won’t need a state bailout. (Whichever state that might be.)

@Jesper – that is what I was driving at – it does seem that we are close to bailout territory though.

One way or another a bailout will come at a price.

“Hoping for the best” is not going to end well – as I keep pointing out (elsewhere on this blog) the Greeks can’t trade their way out of this (whatever about the other PIIGS) and their public does not seem to want to take the bitter medicine.

Con-artists create a sense of urgency to cloud the judgement of their intended targets.

There is no urgency here, the current eventuality has been covered in the treaties and by precedent of countries defaulting through history.

The treaties are clear. No country in the EU has any obligation to bail out another. Bondtraders dealing in hundreds of millions (should at least) know this.

If Greece were to default, it wouldn’t be the end of the euro & it wouldn’t be the end of EU. Greece would have to grow up and face reality: They can’t spend money they don’t have.

@ Jesper – in case it was not clear, I don’t believe in bailouts, I think Greece needs to learn the hard lesson.
However, I suspect that our decision makers will not hold their nerve and will cave in (sooner rather than later).

Karl asks why not wait till the dark day is upon us and then bail Greece out (if bail-out there is to be). Surely the answer to that is that by announcing a bail-out now you might get away with not having to actually perform one at all. The commitment to bail Greece out at least prevents fears of default becoming self-fulfilling.

@Edgar,

my comment was strong, but it wasn’t intended at you. My apologies if it came across that way. We seem to think along similar lines here & my comment was more about frustration about how urgent & important some believe the current situation is. (& I was a bit hasty in my posting as I wanted to leave the office to go home :-)).

Anything the EU does to help Greece now will be a bailout & in that sense a bailout is inevitable. Bailout from EU or bailout from IMF should come to the same thing.

Hopefully the bailout will be limited to rolling audits of the Greek accounts & some help in getting the bondholders to the negotiating table for restructuring of the debt.

@ Jesper

Re: Urgency

Of the expected 53bn debt to be issued this year, approx. 30bn are rollovers with about 20bn of these occurring in April & May. Taken into account Eoin’s comments about Gov. stats missing expectations over the coming weeks there is obviously a real fear of an auction failure and subsequent default.

@GK

I don’t see your point. Which comment are you referring to? Was it this:

“# Jesper Says:
February 12th, 2010 at 3:55 pm

Another angle:

The bondholders & CDS issuers might now be in the situation that they cannot allow Greece to fail as the losses would be too great and therefore they have no choice but to keep financing Greece?

I.e. roll up interest and give loans a la Irish banks to insolvent developers & hope for the best.

Or if the banks & CDS issuers can handle the losses then they won’t need a state bailout. (Whichever state that might be.)”

Or this:

“# Jesper Says:
February 12th, 2010 at 4:50 pm

Con-artists create a sense of urgency to cloud the judgement of their intended targets.

There is no urgency here, the current eventuality has been covered in the treaties and by precedent of countries defaulting through history.

The treaties are clear. No country in the EU has any obligation to bail out another. Bondtraders dealing in hundreds of millions (should at least) know this.

If Greece were to default, it wouldn’t be the end of the euro & it wouldn’t be the end of EU. Greece would have to grow up and face reality: They can’t spend money they don’t have.”

@All

EuroSkeptics look away now ………….

Paul Krugman’s comments this Wednesday – ‘fiscal and labour market integration’

http://krugman.blogs.nytimes.com/2010/02/09/anatomy-of-a-euromess/

“Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable.”

Now back to other more serious matters under discussion with the French this weekend – and in this instance, I’m wearing the ‘Green Jersey’ (-;

@ Jesper

Sorry maybe I should have been clearer. If one accepts that default by Greece would do enormous damage to financial institutions in the EU,UK,and US with significant Greek exposure and possibly do systemic damage, which I do, then an urgent resolution is required given the upcoming rollovers. You seem to be of the opinion that default is an acceptable outcome. It is difficult to say, ex ante, who is correct.

US subprime = EU sovereign deficits

Lehmans = Greece

Do we still think letting Lehmans go t1ts up was a good idea?

Yes its a rather simplistic analogy, but sometimes you need to cut through the complexities and get right to the core. “Fear of contagion” is not just a political term, and fudges are not always bad ideas or something which makes matters worse. Letting Greece default on their debt isn’t going to solve Spain or Ireland’s debt problems either, but buying ourselves some time to solve our problems just might.

As GK notes above, default could happen as early as the middle of April given their debt repayments falling due then. While there is a benefit of waiting til they actually default to show the Greek public how bad things are, i think a p1ssed off Greek public and a few billion spent bailing them out is far cheaper then letting it all fall apart and hoping we can put it back together again. For those who think a Greek default wouldnt ultimately lead to the end of the Euro, i wouldnt be so sure, and this would be a great great shame given the potential long term economic, political and social benefits that the Euro can eventually bring.

@Edgar

Hard lesson for Greece? And the rest of us soon thereafter.

Greece is just the first domino. My feeling is that the Germans will put it up to the Greeks in the face of French vacillation and either the Greeks will do the necessary and gut the State or failing that they default. DE will wash its hands of the whole project in the latter case. End of Euro.

The Greek issue has the potential to kick off World Wide Default (WWD). With liabilities of 800% of GDP where are they to go? Who is to save them? Eurozone liabilites of 500% of GDP. No joy there. The US? With 500+% liabilities to GDP. At this moment the whole Keynesian experiment is winding up it seems.

The question for all of us is; what do we do after the WWD?

Think Breton Woods without Keynes…perhaps?

Maybe this is a once in a century opportunity to re-align the world economy along lines more favorable to freedom and honest money.

@ Karl

i mean in the sense that its a smallish part of the system (lehmans was far smaller and less important than the other investment banks), and so its demise was expected to be uncomfrotable but not systematically dangerous. In the end it proved to be anything but. Ditto Greece and letting it default.

@GK

I’m getting the impression that people believe that a default would lead to 100% losses for the bondholders. How else could the losses be large enough to be even close to cause systemic damage?

For those who believe that a default would lead to 100% losses, a restructure of the debts would surely be more beneficial for the bondholders. 100% indemnification of losses is as unlikely as 100% losses, as they did get a risk premium.

The bondholders and Greece are linked. If the bondholders refuse to rollover the debt they might end up realising larger losses than if they worked together with Greece & the IMF and restructured the debt.

Only sure thing is that if Greece is bailed out, then all of the PIIGS have to be bailed out as moral hazard is real and it is very contagious.

I’ll be interested to hear why Karl thinks Greece = Lehmans doesn’t work. Sure Greece is plenty small enough to fail but contagion seems a real risk. Everyone has been assuming that when it comes to what Alex Ferguson in a different context calls “squeaky bum time” there will be a Greek/Irish/Spanish etc bail-out. But even if there’s an economic case for letting Greece deal with its problems on its own, the decision is a political one – and if Greece is let fall doesn’t it become politically more difficult to bail out the next fiscal heart attack patient?

@James Conran
“if Greece is let fall doesn’t it become politically more difficult to bail out the next fiscal heart attack patient?”
No, it either becomes easier (if the first one failing was indeed a disaster) or unnecessary (if the first one failing passed by without much of a murmur).

Remember, the resolution of the CDS on Iceland and the Icelandic banks was supposed to be a major event. It passed by with no problems. The same too was the case for Lehman’s bond CDS. It was the fact that Lehmans was a counterparty for so much that caused major instability (as far as I understand it).

A sovereign doesn’t generally have to role of a counterparty in quite the same way. The fallout, if there is significant fallout, from Greece will be of the LTCM kind where a seemingly unrelated counterparty fails, but that counterparty has greater significance. So the whispers about bank exposure, specifically French bank exposure, may be what is driving the shouts for a bailout.

“it either becomes easier (if the first one failing was indeed a disaster) or unnecessary (if the first one failing passed by without much of a murmur).”

But that assumes that if a Greek default passed without a murmur so too would the next one. But while Greece might be small enough to fail, maybe Spain isn’t?

@James
Sorry, what I mean is that if Greece failing is a disaster, it is easier to bailout the next country to get into trouble. Lehmans being such a disaster made it easier to bailout AIG.

On the other hand, if a Greek default is a minor issue and the markets become used to the idea that sovereigns might default (which, according to Reinhart and Rogoff, is their natural state over time) then it is a matter of price – CDS won’t be available at any price, bonds will be priced at pre-CDS levels.

@ Karl

i think the notion of perceived risk-free EZ sovereign debt (everyone on her ehas been telling me that if you want risk-free, invest in govt bonds) ending up in default would have a hugely destabilising affect on the EZ economy and the Euro as a whole. Personally i think it would be a very very big deal.

Look at what happened when a Dubai fund (not even the sovereign itself) got into trouble before Xmas. This was a quasi-soveriegn corporate, with only an implicit state guarantee, with almost no linkage to the global financial system, and even the notion of a debt extention caused havoc. You don’t think that an outright default from a first world EZ sovereign would cause a large multiple of that chaos? Beyond this, if Greece isnt systematic enough, then neither is Portugal, Ireland, and potentially Belgium or Austria. Do we let those ones go under as well, if it came to it?

@ Eoin

This is an important debate and we’ll probably be revisiting it a lot in the coming weeks. For now though, some quick thoughts:

1. Nobody thinks that, as a general matter, sovereign debt is risk-free. As Reinhart and Rogoff have documented, sovereign default has ocurred time and again over history and there’s no reason to think it won’t happen again.

2. Dubai-related chaos? Who even remembers that now? Yes we could handle a large multiple of that chaos.

3. As for other states “going under”, the principal way to avoid sovereign default is to take the steps necessary to convince the market that you are on a stable fiscal path. Isn’t that what we’ve been trying to do? And wouldn’t we have to do that even if we did end up getting an EU rescue package?

I have to say that Mr. Hennigan’s comments about “markets aching for bailouts” strikes a chord with me. How much of the current crisis atmosphere reflects pressure from sovereign bond owners to extend the safety net to them?

Eoin, we can only have so big a safety net. If every government in Europe has to provide a safety net to see that it’s banks don’t go bust and then every government in Europe has an implicit sovereign safety net from the Germans, then that’s a pretty huge net we’re asking Hans and Franz to stitch together. And you know, they’re not really so keen on this kind of thing.

@Bond. Eoin Bond – your characterisation of Dubai is not quite right – there is no clear differentiation between the state and the rest of the economy in the arabian peninsular (everything is essentially owned by the ruling families) so a default on the fund (owned by the ruler of Dubai who is also the prime minister of the UAE) was equivalent to defaulting on government debt. However, it was always obvious (to anyone who knows anything about the UAE) that oil-rich Abu Dhabi would bail them out – they took their time in order to teach Mohamed bin Rashid al Maktoum a lesson, but they were always going to bail Dubai out – why the markets were in a mess is beyond me (maybe some of the locals were making a few quid by spooking the markets).

Needless to say we are in a different position here – there is no oil-rich cousin with oodles of spare cash who will come in and pay off the Greek debt – so I think you are right to say Greece defaulting would be a big deal, but we are not there yet. As an economist I wonder what would be cheaper in the long-run – letting them default and potentially having to sort out the debt holders or to bail them out. However, I doubt that they are going to be let default.

@ Karl

cost of saving Greece: 20bn this year and 20bn next year in shortish term loans. Its tiny relative to the size of the EU. We could even attach strict covenants to them so that if Greece isn’t hitting performance marks, then the deal is off. And why do Hans and Franz care what the Greek public care about them? A bit of external anger might even create some internal solidarity, which they are going to need to ge them through this.

To those who say that saving Greece would only mean we have to save Portugal and Spain, the difference there is that they have both smaller deficits to take care of, but also much much better overall debt levels to service. They have much more time and flexibility to get their houses in order, in the same way we appear to at least be trying to, although we have shown this process takes time and effort. Letting Greece default would only see them have less time and flexibility to do this. Greece is going to require very large amounts of funding over the next few years regardless, letting them default would probably see this entire burden fall on the EU anyway (im assuming we’re not suggesting letting the country fall into complete chaos, ie ala Lehmans or Iceland?)

I’d also note that many of the bank “safety nets” erected by various EU governments were ultimately never required, and so have cost the taxpayer nothing (in many situations in fact delivering a profit). In essence, they did their job exactly as they were supposed to.

And, @ YM, i dont quite get the logic that by letting Greece default, it’ll be easier to bailout the next, potentially much bigger, country? Or rather, i understand the logic, but don’t see how that’s a situation we want to occur? Isn’t there as much merit in trying to avoid that situation altogether by saving Greecing as by letting her default? Either way, i certainly dont see a Greece default being a “minor” issue when 75% of their government debt is held externally (there would also be immediate problems in the Balkans where Greek banks are very active).

Anyway, as you said Karl, this is probably going to remain the evolving storyline of H1 2009, so there’s plenty of time and energy to use on it in the future. For now i urge you all to don the Green Jersey and focus on our true enemy, those cheating Frogs….

@ Edgar

re Dubai – everything is owned by the same people, but in seperate legally incorporated structures. As such, the Dubai government is quite correct that Dubai World and its subsidiaries are not backed by a legal obligation from the Dubai State, and that these entities are responsible for their own borrowings. There was no “personal guarantees” extended to them. Of course, when they were building these companies up, they were quite happy for everything to be in a very grey area where people assumed there was a highly implicit guarantee, but the blame for that is shared far and wide.

And like you said, there seemed to be a lot of local dodgy activity going on behind the scenes (rumours of them buying back their own distressed debt for instance). Ultimately Abu Dhabi wanted the bailout to be on their terms, even getting the Burj Dubai renamed Burj Khalifa. Now im not suggesting the Acropolis be renamed the Franzopolis, but there could be some tough negotiations going on behind the scenes re Greece as well…

“local dodgy activity going on behind the scenes (rumours of them buying back their own distressed debt for instance”

Eoin, I am shocked at the apparent hypocrisy! They are buying back their debt! They are reaching voluntary agreement with a willing seller who is happy to get out ahead, otherwise s/he could wait and wait! Capital is changing hands and markets are being freed! Precisely what should happen elsewhere.

This is exactly what I had been hinting that the Irish government should have been doing, for the banks, if they were obliged by forces bigger than the 32 counties, to set up NAMA. Rigging the market with players of this size is not possible, Eoin and you know it! Or you should…… There are plenty of these opportunities available for those with capital. But not if the capital is tied up in a social welfare program for stupid greedy property developers!

Get the finger out!

Fiat currencies devalue. But as they will all devalue, to repay debt as cheaply as possible, they will cause inflation which will show up in food etc. The only things they cannot devalue will appear to go up inprice…..like Gold.

Bond, didn’t you go up against Goldfinger? You did not do such a good job it seems! Look out for the Tungsten!

@Eoin
“cost of saving Greece: 20bn this year and 20bn next year in shortish term loans. Its tiny relative to the size of the EU. We could even attach strict covenants to them so that if Greece isn’t hitting performance marks, then the deal is off.”

My fear is it will be €20b for ever more as we have to subside Greek living standards ad infinitum. I read an article in the economist on the plane recently and apparently Greek pensions are 96% of pre retirement salary and thay have a massively bloated public sector. The austerity measures they need make ours pale into insignificance and rack my brains as hard as I might apart from tourism what do the Greeks have going for them in terms of recovery.

Personally can’t see the Greek government pulling the austerity package off and if they know the EU will bail them out why push too hard? So in the end the deal will be off, I suppose the hope is by then the Portuguese and the Spanish and hopefully Ireland are out of nearly out of the woods. Otherwise it will all just have been a big waste of money. Maybe we can call it “Euronama”

@Bond. Eoin Bond “but in seperate legally incorporated structures.” – only if you believe their legal system – I don’t and I know a few things about it!

“the Acropolis be renamed the Franzopolis” – more likely “Merkelopolis” as the idea seems to be that the Germans will come up with the bulk of the cash – a deal will come at a cost (repeating myself). They have been floating tax harmonisation for a long time…..

@ Stuart

“Greek pensions are 96% of pre retirement salary”

Correct, and you get to retire at 61 right now (recently proposed increase to 63 was greeted with much anger).

I personally love this statistic and have mentioned it on here on a few occassions – in 2008 a grand total of 65 people declared an income above €900k in Greece, off a population of 11mio. I also like this one – there are 475k “self employed” people in Greece (painters and plumbers to be sure, but also accountants and solicitors). Of these, 75% of them have a declared income of under €12k. Tax evasion is quite clearly a big issue there.

@ Pat

quite a big fan of the Physical Gold ETF as it happens!!

@Eoin
“Isn’t there as much merit in trying to avoid that situation altogether by saving Greecing as by letting her default?”
Possibly, that is, after all, why there is such a debate! But you have to think that forestalling the inevitable is pointless and expensive. The BoE’s conclusion with hindsight was that it shouldn’t have supported sterling during the ERM crisis. The bet was that it would fall. The bet would only make big money if it was opposed. Opposing it caused the bet to be doubled and redoubled. I suspect the same is true of Greece.

If only 20 bn in short-term is required, then even the NTMA would be able to source that in CP. But is there any need to tell anyone about it? The NTMA (and the other european chappies) borrow short, lend short to Greece. Greece is on a tight rein to keep the fiscal chariot on the tracks.

@ Stuart & Eoin – I have seen estimates of 25%-30% tax evasion.

I think @Stuart’s point “My fear is it will be €20b for ever more as we have to subside Greek living standards ad infinitum” is very important. They did not get into this situation overneight and have dragged their feet regarding remedial action – they have just about zero credibility of pulling off a turnaround. Unless a deal implies of taking total control of their fiscal matters one would worry that the moral hazard of a bailout is too great. Of course one can help now and see wht they do – if they can’t reign in their expenditure and chase after taxes then the next crisis is preprogrammed.

@Eoin
“well i think legally, per EU rules, they would have to tell everyone about it?”
Well, I think it depends on whether they have an NTMA-like structure. So far as I can see, the NTMA don’t have to tell nuttin ta nobody… lending and borrowing between those quasi-state sovereign banks would be off-balance sheet until it reaches the exchequer. Does it already go on? Who knows, we may have been selling dollar commercial paper (up to 120 bn dollars of it) to the Fed. We may still be. Or it could be chinese excess treasuries that we are getting in return.

Anyway, without unrolling too much foil, the point is that the whole funding system is incredibly opaque, in particular at the short end and especially when you start talking about commercial paper as opposed to treasury bills.

@Eoin,

Not sure what you mean by chaos in Iceland. They are not rioting, they have food to eat & they are working themselves up again. Sure, they can no longer spend money they don’t have but is that really chaos?

Greece should pay its on way. If the rules are bent for them, then the precedent will be set and expectations of further bailouts will be the result. The populations & governments of Portugal, Ireland, Italy & Spain will know that by throwing tantrums they can pass on their burden to someone else.

Bondtraders will know that the badly run countries will be saved by the well run countries so they have no interest anymore to force any tough conditions and improvements on their borrowers. Cheap credit for everyone. What could possibly go wrong with that?

@KW
“The editorial worries about “depressing the value of the euro” (which would in fact be a good thing for the Euro area economy) and discusses how this “raises major doubts about the future of the single currency” without explaining why this is the case. The piece ends with the dramatic note of “The European Union remains on alert and on financial standby.” It does make one wonder a little whether this issue is being hijacked somewhat by those who see “Europe” as the solution to most ills.”

I agree with your first point and not your second. A decline in the value of the euro is going to be good news for euro exporters. At a time of falling commodity prices, this is the sweet spot for devaluing in tandem – you are less likely to import inflation. This gives you some slack to beef up your exchange rate later in the cycle to prevent super-competitiveness and commodity-led inflation or asset price bubbles.

The point then is who benefits from keeping the euro strong? Not the exporting nations. Not really the euro-centralists, as a generalised european recovery would be good for most european economies. Rather it is those who export to the eurozone who have most to fear.

The US and the UK likewise have done all they can to cheapen their currencies short of their central bankers painting themselves pink and running naked through the studio on the evening news shouting “I’m a fairy, hear me roar”. Nothing they have done has given them the currency movement they need to make a significant difference to their exports or to make imports expensive enough that local substitution might occur (the real goal of their actions, I suspect, since this crisis, like the 1930s, is about over-production, over-capacity, over-spending, and a lack of return on investment (or debt as it is otherwise know)).

An add-on effect of a cheapened euro is that eastern europe, through the ERM, has an easing of pressure. Bets have been raised against various countries, way beyond the economic value of those countries. Some of the countries, the baltics for example, are reasonably well run by any standard I can see, yet still they took a pasting.

So, I think the “we want a strong euro” talk is an inside joke. Nobody ever says “we want to trash our currency externally, while keeping prices stable internally. We believe we are a large enough market to do this in”.

@ Jesper

at no point have i suggested that Greece pass on their debt “burden” to the EU. All im suggesting is that we help them out with some emergency support at a time of crisis. We’re not giving anyone a free lunch here, and im not suggesting either lending them 50-60bn at 0% every year forever, or paying back all of their previous debt. What im saying is that Greece is facing a very real funding crisis and that they may need the EU/Germany to step into the breach created by this.

Whats interesting is that way back in the day everyone on here said that NAMA would scare bondholders away from funding Ireland, while i said that ultimately the budget deficit was of far more importance in terms of our indebtedness and bondholder perceptions of such. As we have seen with Greece, who have almost no major bank bailout to worry about, the budget deficit is the overriding concern of bond investors, and they now have the funding crisis which i was always worried about Ireland facing. Ultimately tackling the budget deficit has gotten Ireland out the mess now facing Greece, and markets don’t appear to be overly worried by NAMA.

Eoin,

I don’t mind if the EU makes some pretty speeches and announcements, what I do mind is support that is making it easier for Greece at a cost to the rest of the EU.

If that is what you are saying as well then we’re in total agreement.

If Greece is being bailed out now, then they know they can be bailed out again & they will not work as hard as they could/should to clean up their mess.

But hey, maybe Ireland will clean up and next time Ireland will help Greece out and then Germany won’t have to. Maybe then Irish people will pay this kind of taxes:
http://www.parmentier.de/steuer/steuer.htm?wagetax.htm

All in the name of solidarity of course 🙂

@ Jesper – thanks for the link – very good (once you have kids you are not that badly taxed in Germany and remember you can also write off commuting costs! The big difference is wages and cost of living).

We are now being told that we have to show solidarity with the Greeks but there seems to be little talk about Greek solidarity towards the other EZ members – they did not care about the rest of the EZ and should now face the consequences.

@Edgar,

yep, the taxes aren’t so bad considering the quality of services that are provided 🙂

I grew up in Sweden, lived in Ireland for 10 years and since a couple of months am now living in Germany. Something that I found which might surprise some:

After tax & accomodation I have about the same amount left in Germany as I had in Ireland (salary almost identical).

Ireland has many advantages and I’d like to go back but not so much if the salaries goes down, taxes go up and the rents are artificially held up by tax funded NAMA. Somehow that combination seems to lead to a lower quality of life.

@Eoin,

about bondtraders and NAMA:
True, they don’t care much about NAMA now. Ireland has liquidity now but NAMA might lead to solvency issues later. Lending to insolvent entities are fine as long as they have liquidity to pay back. The problem will be when the liquidity is gone & solvency is a problem and then the problem will be for whoever is the bondholder at that time. I’m guessing some buyers now expect to be able to sell before that happens. Or being the suspicious kind, when that happens in 5-10 years time then the bondtrader will have retired on his/her bonus.
I might be wrong, NAMA might break even but I wouldn’t bet my money on it. Introduce the malus and we’ll see if bondtraders would 😉

@Jesper
Goodness, taking into account tax and PRSA pension contribution here, I am better off under the German tax system! Without any allowance there (other than the two children) and claiming all here.

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