Greece Derails – Is Europe Far Behind?

By Simon Johnson

Already facing serious difficulties – both internal and with regard to its EU partners (see our longer essay in Saturday’s WSJ) – Greece’s predicament just became substantially worse.

Speaking on national television this evening, the Greek Prime Minister – George Papandreou – lashed out at the European Union (presumably meaning mostly Germany) for creating a “psychology of looming collapse which could be self-fulfilling.”  He also implied that Greece was being treated, in some senses, like a “lab animal.”

Without doubt, EU engagement with Greece over the past week or three has not be well-managed – and the pseudo-announcement of support after the summit on Thursday was a complete amateur hour.

But Greece has real problems that need to be confronted and it will go much easier for everyone if there is external assistance.  You cannot overspend in the Greek fashion without eventually facing a reckoning.

The Greek government is implicitly suggesting collapse – with the possibility of contagion to Portugal and Spain (and thence to the banking system of Latin America, etc).  But this is a very dangerous game.  Greece is not Goldman Sachs – it cannot credibly threaten to bring down the world’s entire financial system. 

Less well-run countries default on their debts with some regularity.  To be sure, it is awkward for a eurozone member to be forced into the arms of the IMF – but several European Union members are there already (e.g., Latvia, Romania.)  Korea had to borrow from the Fund in 1997, despite having recently become a member of the OECD – which stamp previously was considered to connote respectability and stability.

Greece is well down the path to becoming regarded more like Argentina – a country that struggles over many decades (and whose leaders frequently rail against the world) and for which episodes of reasonable prosperity and new economic models are punctuated by gut-wrenching crises, most of which do not shake the world.

Will the EU save Greece?  Much will depend on how bad the situation could become in other “related” (in the eyes of the financial markets) places.

But destabilizing actions or inflammatory statements by Greece make an orderly rescue less likely and put another major international economic crisis firmly on the table.

131 responses to “Greece Derails – Is Europe Far Behind?

  1. Maybe Papandreou was lashing out at the European Union to protect himself politically with his own public. If he submitted to the creditors’ regimen without complaining publicly, he’d risk a backlash that could jepordize his postion and perhaps destabilize Greece and other members of the EU especially the PIIGS.

  2. Oh, gosh Simon, there’s so much angst but Greece should have seen it coming when they initially requested membership into the EU policy making. ….that posting from the other day suggested Greece is seen by its member neighbors as possessing all of the financial maturity of a 12-year-old. With Greece’s current temper tantrums and the recklessness now catching up to them, it’s even gotten the best of German Chancellor Angela Merkel, not to mention the EU prez in his face-saving public relations move……okay my European history is sorely lacking but I’ve always been fond of and even had past relationships with some Brits when I used to live over there by the beach shores…………..

  3. Greece ‘canary in coal mine’

    FEBRUARY 12, 2010 – FINANCIAL POST – excerpts

    “In a way, the Greek case signals that we are in a new phase of the global financial crisis where the forefront issue becomes fiscal sustainability rather than exiting the recession,” Pier Carlos Padoan, chief economist at the OECD said in an interview with Reuters yesterday.

    Based on projections from the International Monetary Fund, the average ratio of G20 government debt-to-GDP will reach 118% by 2014. The United States, the group’s biggest member, will see its debt exceed 100% of GDP in two years’ time. Its federal deficit already adds up to 10% of GDP.

    “The broad picture is that many, if not most, G20 economies are in a fiscal mess,” said Tim Bond, head of global asset allocation at Barclays Capital Markets in a research note.

    Mr. Bond said a 1% shift in the U.S. deficit-to-GDP ratio has historically raised long-term interest rates by 35 basis points. That points to an upward risk of as much as 336 basis points for long-term U.S. yields.”

    http://tinyurl.com/yfc4m8r

  4. huh? wow, that’s a lot of baseless quotes. Who is Tim Bond and why do I give a flying broomstick about anything he has to say, especially when nothing is cited/quoted/detailed? Additionally, will you please provide the juggernaut of the analysis that debt at 10% of GDP will mushroom to in excess of 100% of GDP within 2 years? Perhaps you would care to submit more sophomorically amalgamated nonlinear, illogical quotes? Perhaps I should imbibe less wine before responding…

  5. “Less well-run countries default on their debts with some regularity.”

    Gee, they must take out loans in some other country’s currency. Not such a great idea, eh?

  6. two bad choices of word:

    angst – Since you are using the english language. The word you should use is “fear”

    recklesness – the only fitting description of greek behavoir is: deceit

  7. This George Papandreou got nerves:
    After deceiving everyone for years. Chief of a corrupt, unproductive, parasitic society, living solely on european aid and making debt, now he is trying to defame the very same people he betrayed as culprits.
    A typical levantine scoundrel!

  8. I would suggest that the one to watch is Japan. Their high domestic savings rate saved them over the past 20 years, but that savings rate has declined significantly as the population ages.

    The Absolute Return newsletter graphs this perfectly: http://www.planbeconomics.com/2010/02/12/if-piigs-could-fly/

  9. Did anyone notice?

    All these activities to fill holes and bridge gaps, alter accounting rules, and invent “new” measurements will not solve any of the system’s basic failures. If it will not be Greece that threatens to face the world’s economies with sudden death it will be any other one of the PIIGS or Japan or Belgium or in fact just name any country; you will hardly fail to hit a “fit for failure” candidate.

    What would it take to put a country like Greece back on track (if it ever was on one)?

    In today’s world it would be a competitive currency that allowed Greece to offer cheap labour; they would have to have low cost energy and affordable commodities at hand. A well-trained, skilled and willing workforce would be next on the wish list to not only fight but win the battles against countries like China, India, Russia…; of course, its domestic infrastructure from roads to collecting taxes would have to be sound and in working condition.

    It is a pity that at the same time all the fellow other countries are on the same trip enhancing the battles for exactly that: labour, energy, commodities.

    That’s all daydreaming; in reality we have gone too far into that cul-de-sac that now does not even allow turning.

  10. The Greek government is implicitly suggesting collapse – with the possibility of contagion to Portugal and Spain (and thence to the banking system of Latin America, etc). But this is a very dangerous game. Greece is not Goldman Sachs – it cannot credibly threaten to bring down the world’s entire financial system.

    Goldman Sachs never credibly threatened to bring down the America’s or the world’s economy. Nor did Wall St as a whole credibly threaten it.

    So clearly the credibility of threats doesn’t necessarily mean anything where corrupt governments and multinational organzations are concerned.

    (I know the quote says “financial system” and not “real economy”. But the original Mafia stickup said that “by Monday we won’t have an economy” or something like that. The gangsters in banks and government and media have long equated “finance sector” with “economy” as such.

    But bringing down the financial system never credibly threatened real people with worse punishment than the Great Criminal Bailout itself is inflicting.)

  11. Greece broke the rules
    Consequense: Greece must be expelled from the eurozone
    ttp://www.fgmr.com/greece-broke-the-rules.html

  12. we’re all done. We are going to transition from a world on the edge of economic collapse to one in freefall. THat will lead to surprising dislocations, maybe a nuke or two going off, and a population and technological crash? Ready?

  13. Whatever is going on, it’s none of the USA’s business. The USa has its plate full, remember? Goldman Sachs allowed some Greeks in government to lie to Eurostat.

    France (who suggested the euro to Germany) and Germany want to set up a european economic governmental structure backing up the euro. This is resisted by the little ones: they just want French and German money, not discipline. But they will get discipline.

    France, and Germany, are delighted that the crisis threatens the competitive devaluation of the dollar. Fact is the euro ought to be equal to ONE dollar (it was set-up that way, before the ongoing American collapse).

    After the ridiculous Sino-american circus in Copenhagen, it is time for Europe to get tough, and play dirty too. Greece is a Trojan gift to the baffled Sino-Americans.

    PA

  14. E. Barandiaran

    Dear monkeywatcher,
    You should know that this George Papandreou was born in St. Paul, Minn., because his father Andrea was a well-known professor of economics at the U. of Minnesota (I got my Ph.D. there and I also have a son that was born in the Twin Cities). Socialist Andrea Papandreou returned to Greece and became prime minister in the 1980s, a position that his liberal father (also named George) had held in the 1960s. In the meantime, socialist George Papandreou got a degree in sociology at LSE and did research in Harvard. Quite an extraordinary family for the standards of Western poliitics–not typical Levantine scoundrels.

    Apparently the post-WW II fiscal history of Greece is not different from that of my Argentina. I know very well my country’s fiscal problems–in 1951 I was 10 years old but I used to spend time with leaders of the opposition to Perón and I know each stabilization plan from the first one in 1951 to the one that is coming after Cristina Fernández. As my country, Greece will continue to have serious fiscal problems regardless of an EU that is too weak to agree and enforce anything (and the history of Argentina suggests that the IMF will aggravate Greece’s problems because they don’t have the guts to enforce any agreement they may reach).
    Now in an earlier comment you recommend to use the words fear and deceit. You’re right. And I hope that you and all Americans use these two words when referring to your country’s fiscal problems, both at the national level and the state level. Pay close attention to Argentina and Greece because they may teach you a lot about the future of your country, and in particular of states like California, New Jersey, and Michigan. You should fear the deceit of your scoundrels.

  15. In 2007, Germany announced, to much public protest, that it would be gradually phasing in an increase in the retirement age from 65 to 67.

    But in Greece, Labor and Social Security Minister Andreas Loverdos just announced a two-year increase in the average retirement age, to bring it from 61 to the age of 63 by 2015.

    So now, you are asking a 57-year-old German worker, who has ten years to go to retirement, to give up more in taxes and local services, in order to support a 57-year-old Greek worker’s pension, which he will begin to collect in only four years in 2014. Economics and finance aside, this simply doesn’t work politically. Greece would need to raise the retirement age by 6 years *tomorrow* to make these seem remotely fair to the average German voter, and such a move would probably cause riots in the streets.

    This is a monetary union, but it is not a political or fiscal union, and the rules that are supposed to ensure sovereignty and subsidiarity *so long as* the member nations can balance their own books, are worthless if they are wildly flaunted. You need, at a minimum, equity and parity when it comes time to do a bail-out.

    As for me, if Greece defaults tomorrow, I don’t see any reason to expect the Germans not to make good on their debts, and Greece is a tiny economy. Threat of catastrophic “spillovers” that affect the larger European economies seem, like with Dubai, greatly exaggerated.

  16. lighten up monkey

  17. lighten up monkey

  18. IMF can’t be called in. Terrible optics here… Any legislator who voted for the US’s $108b quota will lose his seat, no question about it. Hell, in the US, it’s a near-certainty that no one outside the state will even support New Jersey, much less Portugal.

    Germany/France’s bazooka isn’t big enough, especially not when the rest of the PIIS come calling later.

    Stiglitz, ever mistaking effect for cause, argues that the EU should band together to burn the bond/CDS market shorts. Let me know how that works out…

  19. Could this have any effect on Estonia’s application to the euro zone? Estonia is due to be considered for euro adoption this summer — given that the EC could credibly argue that Estonia’s price stability and <3% GDP budget deficit is not sustainable, is there any chance that the Western European authorities might reject its application over concerns of Euro stability?

  20. “Greece is well down the path to becoming regarded more like Argentina”

    Becoming? Reinhart and Rogoff perfectly describe Greece with their idea that some countries become “debt intolerant” (i.e., they are perpetually in a situation where it is easier to borrow externally than reform their institutions). The country is in familiar territory, after being bailed out under Papandreou the Elder with the typical promises of reform. I think you overestimate the power of the EU experiment to override history and culture.

    These posts remind me of Hank Paulson on his knees before Nancy Pelosi. If you do not throw money at the problem now, there will be another depression. Nevermind the fact that your solution enables the next episode. And the episode after that. And the episode after that.

  21. I’ve heard the analogies between the PIIGS in the EU and the California / Michigan states in the US, but Indy’s point shows why they are so fundamentally different. Pushing the other problems aside, the US cannot allow a state to totally default for political as well as economic reasons. Each state has two senators, California has about 10% ofthe whole House of reps – presidential candidates need California, New jersey, Michigan, Rhode Island (okay maybe not Rhode Island) votes.

    This crisis could well be the death knell for the Euro. That political reason doesn’t exist for France, Germany, and the Nordic countries that have kept relatively stable economic policies. A bailout of California might not be politically popular, but the terms of that bailout would be generally spread out among all the citizens of a single political entity. How do you think the US public at this point would respond to a plan to spend billions bailing out let’s say Belize? That’s the public response you’re going to get in France and Germany to any bailout of Greece. If they don’t do it, how does Greece stay in the Eurozone? If Greece doesn’t stay in the Eurozone, how does Portugal, Spain and Ireland? If they don’t stay, what is the Eurozone? A European version of NAFTA?

  22. let’s see if there is an EU to grant membership when the summer rolls around.

  23. Speaking as a non-expert here: What the EU could do is bailout Greece and other countries at risk for default on their sovereign debt … but in the process impose conditions on the large financial institutions complicit in this mess … that the US did not do with TARP.

  24. Plus California does not bear half-healed scars of bloody strife which can reignite under stress, as Europe does. And by that i mean both ethnic strife within borders, and state-to-state strife.

  25. Prof. Johnson reads too much into this statement. Papandreou let off some steam in the cabinet meeting, after an extremely difficult week, he certainly didn’t threaten collapse. The greek newspapers mentioned the statement in passing, reporting it as a sign of his frustration after failing to get financial support from the EU although the greek ministry of finance has been placed under direct supervision from a joint commision of EC/ECB/IMF officials. So Greece has given up, in essence, part of it’s sovereignty without getting any true support in return. I’m sure you can imagine how frustrating that can be for a prime minister. And before you say “you deserve it” I can assure you that many greeks (including myself) welcome the intervention as we don’t trust our governments.

    Another source of the greek PM’s frustration is the absence of any sort of EU agreement on either the problem or the proposed solutions. It seems that the EU is just starting to put in place a financial crisis management mechanism which will be tested on Greece, hence the “lab rat” comment.

    The greek PM’s anger at the EU officials is understandable if one is familiar with the recent political history of the country. Before becoming PM last October, Papandreou had lost two consecutive elections to his right wing opponent, who won promising structural reforms, reduction of public spending and a more efficient government. That government, which turned out to be the most corrupt and criminally incompetent in the last 35 years was responsible for fudging the national accounts, a practice that he had himself publicly denounced many times in the past. Now Papandreou is being chastised by the same EU officials who had done nothing more that “express their concerns” as bureaucrats usually do, for something he and his government had nothing to do with.

    A quick google search didn’t come up with many mentions of the statement in the international press and nothing about a threat of collapse. I think prof. Johnson totally misread this one.

  26. BTW if a single statement made by the prime minister of a small country (11 mil people, 0,6% of world GDP) in a cabinet meeting is enough to “put another major international economic crisis firmly on the table” as prof. Johnson suggests then the world financial system is way too fragile to be saved…

  27. D. Christopher Leonard

    Perhaps as Kyriakos intimates we might look to the ways in which post-war settlements shaped Greek political culture in dysfunctional ways (like Italy)and these factors in turn, have made the kinds of reforms in national policies very difficult to achieve. Nobody ever gets an effective parliamentary mandate to undertake structural reforms (and if they do, political clients under mine it). The problems are political-economic not purely economic (and institutional).
    Germany and France (playing holier than thou) are further contributing to the mess.
    But then, the kind of institutional gridlock, domination by elites sounds a lot like the U.S.?

  28. the ideal IMF “solution” : immediately raise retirement ages to 70 everywhere, and then gradually phase it up to 80 …. Volcker is still working, after all.

    Too bad for the ruling class there is still resistance in some parts of the world.

  29. Well said Leonard. Take a look at this for example to see what greeks think of their governments.

    http://www.ekathimerini.com/4dcgi/_w_articles_politics_1_29/12/2008_103370

    In a poll conducted a year ago “in an index of 48 institutions, political parties came rock bottom for the second year running, as only 8 percent of those questioned said that they had faith in them. Standing just one place above the parties are governments, which are only trusted by 10 percent of respondents.”

    At least we trust the national meteorological service :P

    And this one for a greek take on the PM’s remarks:

    http://www.ekathimerini.com/4dcgi/_w_articles_politics_100002_13/02/2010_114888

    Kathimerini (means “daily”) btw is one of the most reliable greek news sources, with a center-right leaning.

  30. The only long-term solution for Greece is either (1) exit the euro, devalue, inflate, default and start over (Argentina 2001), which is painful and creates social unrest but gives you the opportunity for a clean start; or (2) give up some sovereignity in exchange of assistance (which will make it more palatable for the savors to assist them) and become sort of the “Puerto Rico of Germany”. At the end of the day, the Euro only makes sense if there is some sort of political and fiscal unity to enforce the value of the currency. The rest is just extend and pretend…

  31. Kyriakos, are the people of Greece ready for a forced radical solution from the populace? Thanks, for the links.

  32. This isn’t all that different than investors shorting major financial institutions in the US in 2008.

  33. Good point, we have our share of racism, xenophobia and the like, but it’s not concentrated by state boarders. The Northern Europeans have always looked down on the Southern Europeans (just look at our own immigration policies in the late 1800s in this country) so that only compounds the problem.

  34. Is there really any serious talk about bailing out California? Are there procedures and processes in place in the USA for that kind of thing?

  35. The plan is to lend Greece what it needs, but with huge cables attached. It is true that the French are livid at the idea of supporting profligate, corrupt Greece. Public functionaries can retire after 15 years in Greece!
    So this will change, and change in a hurry. France and Germany will perhaps use the IMF’s diagnostics as a pretext (IMF being led by DSK, a French socialist).

    It’s an excellent crisis; EU integration will advance…

    PA

  36. 3) Increase revenues?

  37. Indeed… Plus conditions on all Greeks, large or small… Let’s not forget that democracy was imposed by the EU on Greece, Spain, Portugal.

    Those commentators here who speak about the end of the EU are obviously ignorant of the way the Union works. It has never worked better.

  38. Long-term, the EU must be able to deal with the fact that Greece is Greece, must it not?

  39. France and Germany want Greece to crack down on spending, including the 4.8% of GDP for military spending (caused by the Cyprus problem with Turkey). As I mentioned 4 times more elementary school teachers per child in Greece than in Finland. Finland (part of Eurozone) is not going to tolerate that anymore.

    Greece has no choice, but obey.

  40. “Let’s be honest!
    The hole Mediterranean culture is one of corruption and irresponsibility.”

    That’s poppycock unless one has a strange definition of what is the Mediterranean region.

    Both Greek and Turkish Cyprus, Turkey itself, Syria, Israel and Tunisia are countries where standards in life would be perfectly acceptable. Maybe others but I don’t know those!

  41. FEBRUARY 5, 2010 – The First Post – excerpts

    “For a country like Greece, which contributes only 2.5 per cent of the euro area’s economic output, a bail-out is one thing: bailing out Spain or even Italy is of a different order of magnitude.

    But the current bad mood is not limited to the European outlook. Nassim Nicholas Taleb, author of The Black Swan, said yesterday “every single human being” should bet US Treasury bonds will decline because of soaring US national debt that the White House predicts will not begin to decline until 2019 at the earliest.

    Taleb says President Obama’s soaring US deficits (standing at a record $7.27 trillion and being added to it at a rate of $1.6 trillion a year) “are like putting dynamite in the hands of children…”

  42. Well I know Spain went a bit “nuts” in the right way when they got democracy. Kind of like a some fresh air and people could breathe again.

  43. Reducing the military spending to less then 1% is a no brainer, the EU can send peacekeepers if security is an issue. Sounds like a perfect solution, the EU can take over that percentage of Greek spending without having to arrange an official bailout.

    Now, can we think of any other countries that spend way to high a percentage of GDP on military?

  44. Since, you have a german name, let me inform you that they will steal almost all the accumulated postwar wealth of the Germans in the process. Be prepared and go into gold.

  45. Hey kyriakos,
    “what greeks think of their government”
    Who cares! They elected them. That is all that counts.
    Still searching for excuses, trying to divert from the facts and trying to avoid responibility like a true levantine scoundrel?

  46. To whom it may concern:

    Credit Default Swaps are creating another financial meltdown!

    They are “weapons of mass financial destruction”! The so-called “naked credit default swaps” should be OUTLAWED IMMEDIATELY, and if you can’t outlaw the other kind, then their use MUST BE REGULATED! Do it through the WTO, if necessary!

    Christopher C. Currie, 161 Lake Shore Drive, Pascoag, RI 02859-3211 (401)-568-8266 curriec@onesalt.com See the seekingalpha.com article below:

    As I see it, the recipe for a double-dip recession is a simple one.

    The supposed recovery, which we’ve doubted every step of the way, has happened on government stimulus and bail-outs distributed by bought-off politicians to their private sector cronies. Those politicians refuse to raise taxes for fear of losing their jobs. That leaves the game vulnerable to a bond market upheaval that sends interest rates higher and stops the hands of government money-throwers.

    Said money-throwers would have no choice but to cut spending and raise taxes, precisely at the worst possible time to do so. The move could bring the second half of the recession. That’s why any ripple in bond markets, but especially in sovereign bond markets, gets stock investors bent out of shape.

    What’s more, the same forces that contributed to the collapse of 2008 are working hard to cause and benefit from the next collapse. How? By buying credit-default swaps (CDS), which are insurance against a bond going bust, when they don’t even own the bond in the first place. That’s called “naked” buying. Naked buyers of CDS want to own only the insurance policy against a bond going bust, and collect when it does. Well, what happens when people want to buy the same thing? Its price rises.

    Last week, the price of CDS on bonds out of Greece et al. rose like mad. The price of the cost to insure against default is used as a measure of the safety of the underlying bond and, by extension, the bond issuer. If the cost of insuring against Greece defaulting goes through the roof, we assume that Greece is in trouble. Few inspect the cause for the insurance price spike. That’s how enough institutions buying the CDS can drive up the prices, cause fear around the bond issuer, lead to downgrades of its debt, and start the cascade that fulfills the prophecy of having bought the insurance against default.

    It happened in 2008, and it’s happening again. Watch carefully.

  47. Yes, of course, and the only solution is to kick them immediatly out of the eurozone.

  48. Thank you for your helpful edifying comments. You add a great deal to the discussion and the general understanding of the world among humankind. Keep up the good work!

  49. monkey, you are not up to our level of discourse on this site. We rarely get a troll here. I hope you are disallowed.

    Kyriakos, never mind him. It is not you who is the scoundrel.

  50. The consequences of expelling Greece are to expell Italy, Spain, Portugal, Ireland, Belgium, I believe Poland and some more of the new ones… with other words, France and Germany might be left with what? Enormous debts and nowhere near a chance to get over that. They would loose markets and would have to face cheap competition, even more and much closer than the one they face now, at least.

    I am no Guru and have no solutions at hand but I believe a new start would be the cleanest way possible. That could as in should (!) include much more than just a monetary reset.

    Christian

  51. Good job, even if only five or six people will understand it or pay any attention. I’ve been singing this song for more than a year. Have you tried contacting a senator or congressman? That is a real eye opener!

  52. Without knowing, I would guess that Greece has some juicy public sector assets which the Disaster Capitalists are itching to take over. Anybody have any information about this?

  53. Calculated Risk wrote 2/13/2010 02:59:00 PM

    Simon Johnson on Greece

    “Another view …”

    http://www.calculatedriskblog.com/

  54. The NY Times reports today that the big banks were responsible for facilitating this fiasco — once again, they fiddle while Athens (and Rome, and Madrid, and Main Street USA) burns. How about having the Greeks default on the money they owe to Goldman, Morgan, etc? When the banks totter as a result, Obama can intevene and nationalize them like Simon has been suggesting all along.

  55. “Germany and France are cooking up a belated support package for Greece, but they have made it abundantly clear that Greece must slash public sector wages and other spending; the Greek trade unions get this and are in the streets.”
    What a great solution to the crisis: cut jobs and wages! It always comes down to this, doesn’t it? Necessary sacrifices have to be made, we are told. But by whom? By the people who caused the crisis: the speculators, corrupt government officials, bankers? No, of course not. That would be uncivilized. Get the ordinary people, instead. Off with their heads!

  56. staying in the euro means cutting spending which decreases growth, in fact it will likely contract gdp, and therefore tax receipts. a third alternative could be privatization of govt assets (public utilities, etc), though.

  57. which makes you wonder what the Germans were thinking when they were pushing the Euro.

  58. Ellis wrote:

    “What a great solution to the crisis: cut jobs and wages! It always comes down to this, doesn’t it? Necessary sacrifices have to be made, we are told. But by whom?”

    Calculated Risk wrote 2/13/2010 07:18:00 PM:

    “Many on Wall Street just care about short term fees and large bonuses, and politicians just want to push the problems into the future. A perfect match … except for all the people who are eventually hurt by their actions.”

    http://www.calculatedriskblog.com/

    You can’t control the events, but you can control your responses.

  59. My question: How much further behind is the U.S. Banana Republic of China to that of Greece?

  60. Aristotles Eleftheris

    “Greece is well down the path to becoming regarded more like Argentina – a country that struggles over many decades (and whose leaders frequently rail against the world) and for which episodes of reasonable prosperity and new economic models are punctuated by gut-wrenching crises, most of which do not shake the world.”

    vs.

    “But destabilizing actions or inflammatory statements by Greece make an orderly rescue less likely and put another major international economic crisis firmly on the table.”

    So which is it, Mr Johnson? Is Greece irrelevant or world shaking? Sounds to me like speculators and politicians better consider the “social unrest risk” a little more carefully next time. Politicians better reign in speculators and cut a deal quickly with the people whose wages and pensions are threatened. Soon this worldwide disaster will reach the rest of angered Europe and the situation will be out of political control.

  61. Goldman Sachs was explicitly involved in Greece’s debt restructuring.

    “Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.”

    http://www.spiegel.de/international/europe/0,1518,676634,00.html

  62. Yes, Iran.

  63. Wait, were Enron and Lehman Bros Mediterranean companies then? California or New Jersey Mediterranean states? It’s convenient to point somewhere else, but you may be overlooking the corruption that is endemic to the system. Has it always been thus, I don’t know.

  64. Indy,
    An excellent point on the retirement age.
    I think its also important to note that those in the Med. countries tend to live longer than those in Northern Europe – something to do with an healthy diet.
    Hence we have a ‘double whammy’, not only do you get to retire earlier in the Med region, you actually live longer to enjoy it, obviously at the cost of your future generations and bailouts from Northern neighbours.
    Being a ‘left winger’, this is a major issue and one that cannot be papered over.
    I believe the term ‘grow-up’ should be forced on the Greeks and that retirement ages across the EU should be raised to 67 for men and women.

  65. Functionally, I can’t see much difference between a money union and a political union. Money controls both anyway.

  66. Yay! More right wing paranoia about the brown people! That’s what the real problem is. Never mind the actual issue going on. Use this as an opportunity to inject more Jesus vs. Allah rhetoric!

  67. Did the population of Greece eat your children or something? Did you watch them butcher a kitten? Did every last one of them violate you in a personal way? What’s with suddenly showing up here with this massive vendetta for Greece and Greece alone?

    And it’s not like you’re after everyone that’s an irresponsible wreck with their money. It’s only Greece. Are you racist? Ultra-nationalist? Just flat out ignorant? What’s with all the irrational levels of angst?

  68. I believe the whole point of the media circus surrounding Greece is to distract people from asking that question. ;-)

  69. Thank you for that!

  70. In fact we’re right behind the US and Israel in military spending as a percentage of GDP.

  71. This is definately on the table and I think it’s part of the stability program. There are a couple of banks and a few large companies that will be privatized.

  72. Polls show widespread support the austerity program.

    http://english.capital.gr/news.asp?id=903774

  73. “As Dow Jones Newswires reports, four separate polls show public approval for tough measures at a rate that exceeds 60%, and in some cases, they even register support for harsher reforms, while also showing relatively little support for recent farmer protests or upcoming strikes by civil servants.”

  74. Greece is probably going to be cut by S&P and Moodys just on account of the undershoot for Q4, and 100bps of -ve revisions to prior 2009. Europe needs severe fiscal tightening just to stabilise debt to GDP ratios – and they already look to be on the edge of a double dip recession.

    http://ricardianambivalence.wordpress.com/

  75. He is a complete idiot.

  76. Germany is the truly corrupt nation. For many years Germany used companies like Siemens to bribe politicians in Greece and other nations. The Greek representatives of Siemens are hiding in Germany and they will not be extradited to Greece to face trial. Germany protects it own criminals. The clear objective of Germany was to corrupt Greek officials to take on huge amounts of loans Greece did not really need with the aim of completely controlling the natural resources of Greece, which are many and huge, like coal, aluminum, oil, uranium, and other commodities. Greece is one of the richest countries in Europe, with the most corrupt politicians. As a matter of fact, the brother of prime minister Simitis, who signed for the entrance of Greece in the EU, was a high official in a German political party. The deal he made for the Drachma to enter the Euro is what really killed the Greek economy. It was for about 345 drachma to a euro and immediately, the equivalent of 100 drachma of purchasing power was equated to one Euro in the local markets because that was the actual rate with which Greece should have joined the monetary union. As a result, inflation killed the local economy, as it run very high compared to EU average.
    Germany seems to have all along a plan to destroy Greek economy. They never forgave Greece for delaying the Axis attack to Russia, which highly contributed to the defeat of Germany there and the eventual destruction of the Axis.

  77. Bond Girl, prof. Johnson’s own contradiction reveals the rationality question: if Greece sneezes and brings the world economic system to it’s knees then it’s TBTF, in which case the europeans are not doing nearly enough to save it. That’s what the markets are (or should be) responding to, not a stray remark by the PM, which is absolutely justified in this context. Essentially he complained that the europeans are doing too little too late. If Greece doesn’t matter and can go down without major disruption of the economic system, Argentina style, then the markets should not care about what the greek PM thinks of the EU, and if they do they are definately wildly irrational.

  78. Thanks antiani.

  79. ECB should provide the facility to support the liquidity at lower cost for Greece under reasonable condition to protect the moral hazard. I think ECB should provide the funding for Greece to refinance the debts at lower cost. Currently, Greece bonds drop a lot from the fear of private investors and it is better to provide funding for Greece to buy back debts to lower debt level suddenly and this way will help Greece to reduce debts more quickly under the fear of private investors.

    ECB should provide the full facility to all European countries that commit to control the budget deficit and have long term plan to reduce debt.

  80. Monkey is certainly ridiculous. However, I’m
    against throwing people out of discourses. It
    discourages all the rest of us. It is certainly
    very easy to scroll past Monkey, and I recommend
    doing so.

    Best wishes,

    Alan McConnell, in Silver Spring MD

  81. I have a long experience in workouts (private sector) and I know how almost impossible it is to correct a bad financial situation without some very important upfront sacrifices by everyone. In this respect I have a feeling that trying to sort out the Greece problem by helping it to save and grow out of its problems might prove in the long term even more destabilizing to Greece and the euro-zone than what an outright default would be. Yes, time can indeed heal problems… but time can also prolong unbearable sufferings.

    The fact is that Greece was able to borrow too much and so those who therefore lent Greece too much, should also suffer.

    One of the responsible for the current Greek-mess are those regulators (probably Simon´s pals) who came up with the idea of allowing the banks to lend to governments without being required to put any capital… and there you have the Greek banks… overextended to their government without a Euro, much less a Drachma to their name… but then again in this it-is-solely-the-bankers fault´s baseline I guess that is not an issue that is going to be discussed.

  82. Ditto Moneywatcher. You hit the nail on the head.

  83. Let’s face it.
    Those Levantine Mediterranean types are basically primitive childlike people who can’t be expected to handle finances in a sober and responsible manner like they do on Wall Street.

  84. Germans say euro zone may have to expel Greece: poll

    Sun Feb 14, 2010 8:16am EST – excerpt

    BERLIN (Reuters) – “A majority of Germans want debt-ridden Greece to be thrown out of the euro zone if necessary and more than two-thirds oppose handing Athens billions of euros in credit, a poll published on Sunday showed. Vocal opposition to aid for Greece from members of Chancellor Angela Merkel’s coalition also grew at the weekend with several senior politicians expressing skepticism, especially as Germany’s own recovery is fragile.”

    http://www.reuters.com/article/idUSTRE61D0ZC20100214

    Hubris against the gods is often said to be the “tragic flaw” of characters in Greek tragedy, and the cause of the “nemesis” or destruction, which befalls these characters. I suspect this play will be going on the road shortly.

  85. Lets be clear you can’t borrow money if the money lenders won’t lend it to you. You can not put all the blame of the people who borrow when the professional risk measurers (bankers) lend the money. The problem lies in the continued moral hazard that we keep bailing out the bankers for making bad loans, punishing the general public, and don’t change our assumptions that bankers should actually bear some responsability for making those loans.

    In ancient Rome, if the money lenders made such awful loans that ruined the bank their families assets were taken from them and they(and their family) were sold into slavery. Hence there was a great incentive not to engage in overly risky short term behaviors. Now we reward those who do this. does anyone really wonder why it keeps happening?

    Now the bankers don’t even own their business and play with other peoples money (stocks). We have created a system designed to fail, incentivized to fail, and then turn around and blame those who take the loans. Worst of all is that those in power have gotten into power by endorseing this system, made their riches doing so. Fixing the system means much less profits for those at the head of the system. Does anyone think people are going to cut off the hand that feeds them?

    The problem has very little to do with the people in the system. It has to do with the design and the ideology of the system itself. But those in power got there by advocating the faulty system, so they won’t change it.

    The faulty ideology has been taught for so many years, become so accepted, that people don’t even recognize their own intellectual bias. Bernanake is unable to grasp the role he played in the crisis. To do so means fixing/altering the very system that made him famous and got him to where he is. You are asking people to dismantle the system that made them. Therefore, you knew reform was dead once you saw who Obama appointed.

  86. And in this case the moral hazard of implying a bail-out was taken to the umpteenth level when the regulators told the banks that if they lent to Greece (as well as to many other sovereigns) they did not have to put up a dime in capital….

  87. DCB wrote:

    “The problem has very little to do with the people in the system. It has to do with the design and the ideology of the system itself. But those in power got there by advocating the faulty system, so they won’t change it.”

    I agree, privatizing gains and socializing losses won’t change anytime soon, it pays too well.

  88. D. Christopher Leonard

    Putting the current Greek fiasco in the broadest possible historical context, I think we are finally seeing what the longer term price of the Cold War/bi-polar world is likely to be. Both Greece and Italy have political cultures shaped by the the U.S insistence that left parties be excluded from power in the immediate post-WWII era. Greece more volatile than Italy reflecting the terrible civil war. This has meant in practice a stilted circulation of elites (who may have different party labels but neither the Italian PSI nor the Greek socialists look much like socialists). The net result is what the Italians called ‘partitocracy’in which clientela asociated with party factions (corrente) inhabit various institutions of the state as patronage fiefdoms. No institutional reform can be achieved while simultaneously, state jobs become the safe haven – hence bloated bureaucracies. Attempts at fiscal/budgetary austerity strike right to the core of this state-created ‘middle class’ who will go to the streets if threatened (e.g. a solution like the disasters imposed on Asian states after that crisis). The net result in Italy is the triumph of Berlusconi (the old dc clientelist cluster renamed as forza italia). These bizarre political structures precisely reflect the Cold War settlements.
    Spain and probably Portugal are a different story (although Ireland may be closer to Greek/Italian model of clientelism than most imagine.
    All in all, post war history matters a great deal and to act as if economics operates in a vacuum is quintessentially american (where history is bunk) and profoundly ideological

  89. If rescuing the reckless and irresponsible is necessary to avoid putting “another major international economic crisis firmly on the table”, then I say, let justice be done, if the heavens fall.

  90. Who lent the funds to Greece or any other state for that matter? It was not the bank employees in the case of a publically held bank. It was the bank legal organization owned by the shareholders in most cases. It was the depositors and lenders to the bank. Mostly though, Greek State debt was syndicated and sold to many different investing parties. Many of these ownership parties allocate 100 % capital to the purchase of assets they invest in because they are investment corpus vehicles like pension funds and money market funds.

    Certainly , a small percentage of state debt may be held by central banks. Traditionally, in the US, the Federal Reserve Banks owned around 7 % of Treasuries as literal backing for the currency. Practically, theliability account for issued currency is capital in nature . Thus, even central banks are using near 100 % capital to buy state debt.

    So, what portion of state issued bonds are issued with no capital allocation by bank buyers? US banks hold a relatively small portion of total Treasuries. This gets even more complex because state issued bonds are the basis of multiple hypothecation via the bank repo system.

    It is the depositors and other lenders to the bank that are the real lenders of funds to cover bank ownership of state issued debt.

    The system of syndication to secure funds for investment in state debt is the real danger creating structure in modern finance. Every dollar of state issued debt is someone’s capital on a macro basis. The same is true of any loan but state bonds are generally without security. But even if they were, the security is without much practical meaning because the secured asset serves the people of the state.

    A state debt general collapse from too much integration brings the entire system down. Before that can be permitted the state must simply pay off with unbacked national currency like the United States Note.

    The ECB can refloat Greece but Greece will politically solve the problem in a way that benefits the Greek people. Greece will eventually go back to their own currency. They will convert the Euro debt to their currency in ways that destroy the foreign holder of their debt. Naturally, the Greek people will live with the consequences. Might the consequences to the Greek people of any restructuring be the same, or nearly the same, as simple punitive repudiation?

    Will the time soon come for a March on Athen’s?

  91. I can only hope that the German taxpayer is as outraged as I am that they should be required to spend their hard earned money bailing out a bunch of reckless and the irresponsible speculators. And that the German government is more responsive to the will of its citizens than the US government was.

    The buyer’s Greek government bonds aren’t innocent children who should be protected from the results of their behavior. They are investors. They took a risk in the hope of gain. If they miscalculated the risks on their investment, some innocent third party in Germany shouldn’t have to pick up the tab and make them well.

    If the seller’s of CDS’s on Greek debt were reckless and irresponsible, that’s there problem not mine, and it’s them that should take the hit, not anyone else.

    Maybe if the bondholders and the cds sellers feel a little pain today they will do a better job of due diligence next time. We would all be most certainly better off if they did.

    Time to stop bailing out rich, sophisticated, knowledgeable speculators. Let them take their lumps. No one else in the world deserves it but they themselves.

  92. I read in the paper that the current retirement age for greek social security is 61 years of age, and that they are in the process of ‘gradually extending’ it to 63 years of age over the next several years. Strangely enough, despite all of the claims of ‘deep cuts’ and ‘fiscal austerity’ coming out of Athens there hasn’t been any suggestion to accelerate this increase in the retirement age, or increase the retirement age to more than 63 years of age.

    Even Uncle Sugar doesn’t give a full pension these days to Social Security retirees until they are 66 years old, so, I’m not too impressed by the purported fiscal austerity being touted.

    I personally hope they do default. It would be extremely beneficial for a bunch of recklessly irresponsible lenders to lose some money. Maybe they will be a little more careful next time about who they lend their money to.

  93. Well said Mr. Barandiaran!!!

  94. Simon Johnson says “it will go much easier for everyone if there is external assistance”

    I guess that depends on your definition of “everyone”, Simon. It would certainly be much easier for “everyone” who owns greek debt, and “everyone” who has sold greek CDS’s.

    It may even be easier for “everyone” who is a resident of Greece – although that is a much harder call. A valid case could be made that the citizens of Greece would be far better off if they exited from the Eurozone, default on their external debt, and sharply devalue of the drachma.

    And it certainly seems a Greek default would be far better for the rest of the citizens of the Eurozone than bailing out the greek bond holders.

    In fact, it seems like that a Greek default would be far better for the entire rest of the world than bailing out the greek bond holders – with of course the exception of the bond holders and CDS sellers of other overleveraged countries.

    In fact I can’t see any downside at all for anyone except THE BONDHOLDERS and CDS SELLER’s of the debt of reckless, irresponsible, free- spending, massively over-leveraged countries. LIKE THE USA.

    As a taxpayer I YEARN for the the Greeks to default on their debt. As a serial victim of my governments reckless irresponsible inability to do anything but SPEND SPEND SPEND SPEND SPEND I hope the bond market gets its fingers burned on half a dozen countries going bankrupt in the next year or so. Maybe they will stop being so willing to lend to the USA.

    As far as I can see, the governments of the world are like a bunch of crack addicts, and the bond market is their pusher. I HOPE THEY ALL DEFAULT.

  95. Allahu Akbar!!!!

  96. Goldman’s (and other investment banks) involvement shouldn’t come as a surprise. The real question is how many other surprises there are in addition to Greece. Another question is whether the investment banks will take any hit from this latest crisis. Times also noticed.

    http://www.nytimes.com/2010/02/14/business/global/14debt.html?pagewanted=1&ref=global-home

  97. Who cares?!?!

    Everything that is occuring in Greece will be comming to a government/country near you in the not-too-distant future.

  98. Center-right?!?!

    Those are the clowns who created this mess! (by your admision)

  99. What’s the value of democracy if the oligarchy controls the economy?

  100. The Vampire-Squid never loses!!!

  101. Do you really think GS only sold derivative tricks to Greece and not the rest of the EU? Please.

    How is it that the financial world seem enchanted with the idea that you can lay off risk through derivatives. The worlds appetite for derivatives and its belief that when you lay off risk through derivatives all the problems go away is akin pouring water into a sponge…at first it appears that the water simply disappears into the sponge.

    We’ve reached a point of over saturation in the worlds financial system to absorb debt. It’s over and all the various financial tricks is unjust to future generations.

    The youth of our countries should be the ones up in arms in revolt against such fools.

    We reached t

  102. But the whole point of the Bailout is to enable those institutions to engage in stepped-up plundering, disaster capitalism.

    If they were going to impose restrictions, they wouldn’t bother with the Bailout at all; letting the bubble finally deflate, letting the market finally discover the real prices of everything, would impose its own real restrictions.

    So a Bailout-with-restrictions would be a contradiction-in-policy.

    (Needless to say, Bailout defenders would deny all this, but they’ve simply lied from day one.)

  103. Trichet Says Promises by European Leaders, Greece Are ‘Enough’

    February 14, 2010, 04:16 PM EST – Businessweek – excerpt

    (Bloomberg) — “European Central Bank President Jean-Claude Trichet said promises made last week by Greece and the 26 other European Union governments on finances and the stability of the euro area are “enough.”

    “Everyone needs to respect their commitments,” Trichet said today on LCI television. “For me, that is enough.” EU leaders on Feb. 11 promised “determined and coordinated action” to support Greek efforts to regain control of its finances, though they stopped short of putting up money for a bailout. Finance ministers from the 16 nations sharing the euro meet tomorrow in Brussels to discuss the situation.

    “Greece must correct what it’s done in the past and was incompatible with price stability,” Trichet said. The country’s spending policies “were intolerable and shouldn’t have been tolerated,” he added.”

    http://tinyurl.com/ybwym2x

  104. Plato wrote: (427 BC – 347 BC)

    “We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light.”

  105. The whole discussion seems to be the proverbial “storm in a teacup”. Reading Simons article and the comments one almost has the impression, that Greece has no income whatsoever. This is decidedly not the case. Greece has a deficit of just above 12% of GDP, for this/last year, a year of global crisis. Which means Greece has a choice of paying all but 12% of its dues.
    No bond auction has failed(the last one, Jan 25th was oversubscribed 3:1), Greece has not failed to make any payments in government debt issued. Even if any debt auction were to fail to sell all the debt offered, what would be the consequence? The other European governments would step in (either directly or through banks/insurance companies/ pension plans) to buy up the difference.
    Even assuming that, this scenario does not hold true for political/legal reasons, assuming that Greece cannot issue any more debt, what would be the consequences?
    Greece would have to cut payments by approx. 12%, this would most likely happen in the way that is politically most expedient and least harmful, California, in 2009, is a good example what this is concerned. What are the options(In order of political convenience)?

    1. Cutting waste, this should account for 1-2% of GDP in the short term, if done at least half seriously.

    2. Defer payments to suppliers.
    For domestic suppliers this probably means bankruptcy, for foreign supplieres the situation is very different.
    Most exports in Germany for example are insured through the “Hermes” export financing rogram, there are similar mechanisms in virtually every major european nation. To take a practical example: Assuming the greek government decides to reduce payments to the health sector, the hospital in question therefore decides not to pay its German/French/Italian(Greece´s major trading partners) supplier. What is the consequence? The exporting company gets payed through the export guarantee of the national agency in question, and the
    government owned banks has a claim against a) the greek gvnt or b) the hospital in question. And the government owned bank(in the case of Germany the KfW http://www.kfw-ipex-bank.de/EN_Home/Financing_Products/KfW_ERP-Exportfinanzierungsprogramm_IPEX_englisch_neu.pdf ) would in this case hold the claim. Should it be a claim against the gvnt directly, (this can be done without holding captital against it[and I dont see any of the major banks arguing against this accounting rule]), otherwise, if it is solely a claim against the hospital, this can be written down and settled at a fraction of face value of the debt.
    By my back of the envelope calcutations, these factors constitute at least 11% of Greek GDP.

    3.Cutting salaries of government employees and general expenditure.
    This will happend and it is clearly necessary, but as California has shown last year it is clearly possible to survive periods where the government is not able to pay.

    4. Defaulting on Bonds. Greece would have to go to go from paying interest rates in the low single digits to paying Argentine levels of interest.

    In summary: Greece does not actually need to raise any money and is more than capable of servicing it´s debt as long as the banks/financial institutions in the Euro-Zone do not try to foreclose on trade debts acquired through government or government related purchases.
    With governments representing/guaranteeing ~25% of greek expenditures saying Greece will not fail, given a 12% deficit, I do not see any reason for doubt, unless you assume that the likes of Goldmann Sachs(at CDS insurance rates of 3-4%/pa) can stay solvent longer than European(first and foremost the French and German governments) at ~0-2%.

    George Soros is still widely remebered as a villain in Europe , despite turning philanthropist many years ago.
    If there is any serious consequence of the current crisis, it is probably going to affect Goldman Sachs,
    first enabling fraud and then profiting by betting against the consequences does not make you popular. Whilst everything seems to be forgotten and forgiven almost intstantaneously in the US, memories do tend to last just slightly longer on the other side of the Atlantic.

  106. Do you really think that all of our banks where to stupid to see the actions of your socialist governments coming.
    We should all just follow the constitution and the principles of the founding fathers. Obamas socialism leads us to hell and europan comments definetly dont provide solutions.

    Jason, TX

  107. I think you don´t get the key issue.
    There are many things you can say.
    The question, how does a central bank perform monetary policy?
    Is it by buying and selling government bonds?
    Would the FED be able to stop buying government bonds just because they lost a certain raiting?(I think not so, how works monetary intervention?)
    Why trust Standards&Poors or Moodies after they said that all combinations of people who where unable to pay is as well as greek state debt?
    Germany buys our food, tourist come visit, my country and I welcome him.
    We are a independent country if we will still have drachme as our currency, my central bank would buy government the loans.
    I see the crisis started when the ECB says, we will buy loans, from anyone who has a good opinion from the people who said, which the combinated loans on all the houses in Florida or California are ok(S&P,Moodys) and still say UK,US regime:no problem.
    Why is my country not like other country allowed to same right with ECB? Trichet: Rating agencies I dont believe, still Greece is shit! Greece is part of Euro. I think we have SAME RIGHTS FOR BUYING LOANS FROMOUR BANKS LIKE ITALIANS.

    Sorry, Alex

  108. AZ wrote:

    “The whole discussion seems to be the proverbial “storm in a teacup”.

    FEBRUARY 8, 2010 – Wall Street Journal – excerpt

    “But for some, it is a tempest in a teapot. While not dismissing the challenge facing those countries, some say it is simply not a material problem for the U.S. markets, especially stocks.

    ….two reasons that the Greece situation presents real issues.

    The first is the degree to which the global economic recovery is still reliant on massive stimulus efforts. “Everyone is depending on sovereign and fiscal authorities to keep the music going,” he says. However, because the huge government deficits eventually act to slow economic growth, “people know that eventually the music is going to stop playing.”

    The key unknown is at what point do the bond markets force governments to cut back on the stimulus. The answer, Mr. Brynjolfsson says, “is purely a function of confidence.” Greece, he says, may “accelerate what could theoretically happen over a five- to 10-year horizon and instead make it happen within a three- or six-month period.”

    http://tinyurl.com/yz6ucgm

  109. Speak for yourself. All the crap that Texas has put us throught the last 20 years(GW, Armey, Phil Graham, Enron, Deregulation-er the giving away of everything, that drunk neo-con who was indicted whose name I can’t remember at the moment, etc..) makes all us Californians on the mad side.
    If the none-healed-scars from the Enron raping are not addressed, we might have our first east-west Civil.

  110. Sure, you are no Guru. Poland was only country in EU
    which economy did not contracted last year.

  111. CDS should not be regulated, because they are strictly speaking a lottery. But no bank should be rescued from its CDS losses. Specially, using taxpayers money for that purpose is criminal.

  112. ” The key unknown is at what point do the bond markets force governments to cut back on the stimulus. The answer, Mr. Brynjolfsson says, “is purely a function of confidence.” Greece, he says, may “accelerate what could theoretically happen over a five- to 10-year horizon and instead make it happen within a three- or six-month period.” ” and I completely agree with you, Greece is cutting back on any stimulous spending right now and even more than that. I´m sure they will cut spending to the bare bones of necessity(with some consideration to political expediency) but that was strictly not my point.
    The main issue of the post by Simon and the whole issue of this discussion is that Greece will default fairly soon. With a budget deficit of 12% of GDP and ~70% of gvnt related purchases coming from the Euro zone, I just dont see this happening. As I detailed in my comment above, the fact that Greece purchases most of its essential(and non essential supplies from the Euro zone) provides a very easy way to either extend further credit to Greece or bail them out, without violating the Maastricht treaty (technically, extending credit would just be a transfer of funds to a government owned bank(KfW in the case of Germany)).
    A back of the envelope calculation, that probably is familiar to anyone following the discussion, what greece or europe is concerned, whith at least the minimum of intelligence, clearly indicates that payments to eurozone suppliers are equivalent to approx. 25-35% of the government expediture(when taking indirect payments into account).
    Given that France as well as Germany have clearly stated, that Greece is NOT going to default, and given that the Eurozone essentially holds the key to Greece having to pay, I believe this is the relevant question.
    If GS really wants to speculate against Europe let them do so, I don´t believe however that most people involved in public life in Europe regard this as “just a question of doing business”, from what I´ve seen and heard in terms of actions and statements by public figures in Europe, history of the past century still does seem to play a role. Peace is still paramount concern in Europe, yet, depending on how you ask (at least the west) German poulation, reunification should never have happend, and you will find many of surveys to that effect. Every citizen of former West Germany has payed a surplus of ~5% of income tax for about 20 years now. Amounting to a grand total of ~ 1.6 trn in transfers to East Germany.
    I have no doubt, that Germany will pay, to keep the Eurozone together, but there will be someone that has will have to pay the political price for that. I find it very interesting, that the Eurozone banks have kept very quiet, in term of inflammatory statements during the current crisis. By contrast, I dont see GS getting any more government business in the near future(5-10yrs) in Europe.
    I wonder who the real looser is going to be in the medium term. I started shorting GS.

  113. “But bringing down the financial system never credibly threatened real people with worse punishment than the Great Criminal Bailout itself is inflicting.”

    Exactly. Both hurt Main St. But which hurts worse?

    (1) In “the bankster bailout” scenario there is a wealth redistribution from the have-less & have-nots, to the haves and uber-haves. The costs will be born for many years to come.

    (2) In the “let the financial phantom economy collapse” scenario, the nation would have avoided the bailouts and unconscionable wealth redistribution. Stockholders, bondholders, and bankster gamblers would have all born losses. But we would have reset, and moved on.

    As I see it, what was behind door number (2) was the moral and ethical choice, and the best for society as a whole. But instead, the Congress and Administration bought into the financial terrorist assertions and pleas (and still are buying into those), and abandoned their constituents.

    There is no way to undo the incredible damage Bernanke, Geithner, Summers, et al. have inflicted on the U.S. It is too late. And it too late for Obama. He served as a front man for the bankster gang and still does. He will lose in 2012, if we make it until then (e.g. no coup, revolution,or nuclear war).

  114. Since I am not a guru I stick with Churchill and question statistics, especially those made for purpose.

    As to Poland: check here and you will find something to question; the answer is not so difficult.

    Christian

  115. A significant part of the Greek problem, whether measured by debt to GDP, debt to exports is due to the long established tradition of the Greek offshore economy- ships/shipowners are an obvious example but there are others: this explains the extraordinary low tax take on the wealthy. Kurowski writes- I have a long experience in workouts (private sector) and I know how almost impossible it is to correct a bad financial situation without some very important upfront sacrifices by everyone. In this respect I have a feeling that trying to sort out the Greece problem by helping it to save and grow out of its problems might prove in the long term even more destabilizing to Greece and the euro-zone than what an outright default would be. He does, as Venezuela has a long history of a kleptocratic elite and a poverty stricken underclass. Letting Greece default would no more assist than it did Venezuela which did not need to but did it twice in the 1980s. The point is that reprofiling the debt and allowing time to grow your way out was what worked for Latam- despite it taking 5 years for ” experts” to see sense and realise that it was a solvency issue and not a liquidity one. Lisbon & Maastricht offer almost no room for manoeuvre, so it has to be a political fix. The Germans in particular whilst one can fully understand their reluctance. as co-leaders of the Eurozone are playing a very dangerous game of brinkmanship. Patricia A’s comment also is wide of the mark. A Greek default may not be a US problem – it most certainly is- since the shockwaves will affect the US economy, their banks, US exports. The Europeans have fallen into almost the same trap as the UK’s reverse in to the Gold Standard in 1925, there is no adjustment mechanism other than a fall in real weages and output, when you cannot adjust the FX value.

  116. “as Venezuela has a long history of a kleptocratic elite and a poverty stricken underclass”

    Absolutely, but mostly a direct result of the oil revenues going directly to the State and thereby creating an oil-autocracy… currently an oil dictatorship.

    “Letting Greece default would no more assist than it did Venezuela which did not need to but did it twice in the 1980s. The point is that reprofiling the debt and allowing time to grow your way out was what worked for Latam”.

    I do not get it since Venezuela used the same or even less of the Baker bonds solution as the rest of LatAm. Do you think Greece is a solvency or just a liquidity problem? Do you believe Argentina should be repaying all the loans it should never have received? Do you have Greek bonds in your retirement portfolio?
    “The Europeans have fallen into almost the same trap as the UK’s reverse in to the Gold Standard in 1925, there is no adjustment mechanism other than a fall in real weages and output, when you cannot adjust the FX value.”

    The problem with Europe is that some countries have immense trade surpluses and others deficits and there is no way of adjusting between them… unless they want to become a real political union. Would Massachusetts pay California debt if not both part of the USA?

  117. Per Kurowski writes”I do not get it since Venezuela used the same or even less of the Baker bonds solution as the rest of LatAm. Do you think Greece is a solvency or just a liquidity problem? Do you believe Argentina should be repaying all the loans it should never have received? Do you have Greek bonds in your retirement portfolio?. My point is that Venezuela could have avoided its initial default but chose not to, cynically you could suggest that they thought they could get a “better deal” by following the rest of the Continent and at what horrendous cost. Yet another example of total mismanagement of that economy, secondly, The initial prevailing philosophy for Latam Steering Committees was to TREAT the problem as “a liquidity” issue. Problems of mixing cause and effect again. Sure certain Latam countries were more deeply structurally indebted than others. Only when significant write downs by the big banks and the Baker plan morphed into the Brady scheme did Latam (as a whole) escape the clutches of “the lost decade”. OK, Mexico messed it up again in the 1994 Tequila crisis- bankers were told that deficits there were “essential imports” when in fact they were flying in eggs! and Bird’s Eye frozen tamales from Houston- ask anyone who worked for Mexicana de Aviacion /Aeromex.
    Clearly this IS a solvency issue in Greece unless there is a last ditch fix ruled out by Dr. Issing. No I wouldn’t have lent to Argentina in the prevailing circimstances but that does not excuse the debt obligations it has incurred. They will need to be addressed too. No I do NOT hold Greek sovereign bonds. Finally, the surplus and deficit EU countries have no mechanism for internal adjustment nor a credible fiscal mechanism. That in essence is what is wrong and why this is such a critical issue – you cannot force such an austerity plan on Greece without a political blow up. Such mechanjisms in the Latam crisis also coliided with stark political reality, as I am sure we both clearly recall.

  118. @Per K,
    Touché, then!

  119. You say,”Greece is not Goldman Sachs – it cannot credibly threaten to bring down the world’s entire financial system.” Well actually, the derivatives that Goldman created for Greece in 2001 to hide its debt so that it could join the European Union is precisely what is now threatening the future of the European Union. The deceit of derivatives was also what led to the mortgage meltdown and financial crisis in the U.S. The tentacles of Goldman, Chase and the other Wall Street Oligarchs are hideous in their destructive impact worldwide. Closer to home, the fact that our administration and Congress are in their pockets means there will be no reform, no Volker Rule, no consumer protection. They have paid no penalties while pocketing billions and eliminating rivals. They should be tried for treason – for what they are doing is, in fact, an act of betrayal to America. Their allegience is to money only. They pray at the altar of greed. They are destroying our country more than any terrorist ever could. Americans must wake up. We cannot take on the looming threat of China with our financial house in such a horrific mess. It is ALL inter-related.

  120. CDS should be regulated as insurance and protection buyers should be required to have an insurable interest through exposure to underlying debt. Don’t hold your breath.

  121. David Nowakowski

    Buying CDS (i.e. paying a fee in return for protection in case of default) is not very different from short-selling a bond and buying a treasury or otherwise hedging i-rate risk. You have to find repo, true, but that is usually manageable; the advantage versus CDS is there’s no counterparty risk.

    If CDS did not exist, but instead people shorted Greek bonds and drove up the yields, and forced holders of Greek bonds to dump theirs into the market as well, of course yields would spike to clear the markets too, in much the same way.

    How about put options on stocks? Are they instruments of the devil too?

  122. David Nowakowski

    The fragility in not in Greece per se, nor even perhaps in the threat of contagion to the other PIIGS, though that is a real risk.

    The true problem is that many Swiss, French and German banks are highly leveraged and filled to the gills with the PIIGS’ bonds (which are given special treatment by regulators so that almost no reserves need to be held for these risky loans), and a default and blow-out in spreads would wipe out their equity and then some. Source: BIS

    This is what makes it pretty clear there will be some kind of assistance from the EU. It might be beneficial not just to think about bail-out, but bail-ins. The enablers should be pushed to roll over their loans at below-market rates into long-term bonds, in exchange for austerity. This is what was done in Korea in 1998.

  123. “special treatment by regulators so that almost no reserves need to be held for these risky loans”

    And the Basel Committee and the Financial Stability Board still have as the fundamental pillar of their bank regulations that the capital requirements of banks should be based on discriminating the risk of default of their loans and investments… as if this has no effect on the risk of their loans and investments.

    Yes, there are indeed times when instead of talking of bailouts for some, one feel more incline to speak about the jailins of others.

  124. Teaching Greece and the other debt PIIGS to fly

    Tuesday, Feb. 16, 2010 6:52AM EST – Globe & Mail – Nouriel Robuini – excerpts

    “Greece’s fiscal problems are but the tip of a global iceberg. The next instalment of the global financial crisis will be rising sovereign risk, especially in advanced economies that run massive budget deficits and accumulate large stocks of public debt as they socialize private financial losses to revive growth.

    Indeed, history suggests that severe recession and socialization of private losses often lead to an unsustainable buildup of public debt. Moreover, financial crises triggered by excessive debt and leverage in the private sector are followed by sovereign defaults and/or high inflation to wipe out the real value of public debts.

    Greece is also the canary in the coal mine for the euro zone, where all the PIIGS economies (Portugal, Italy, Ireland, Greece and Spain) suffer from public-debt sustainability and external-debt sustainability. Euro accession and bull-market “convergence trades” pushed bond yields in these countries toward the level of German bunds, with the ensuing credit boom supporting excessive consumption growth.

    At the same time, if Greece doesn’t fully adjust its policies to restore fiscal sustainability and competitiveness, a partial bailout by the EU and the central bank will still be likely to avoid the risk of contagion to the rest of the euro zone and the consequent threat to the monetary union’s survival. A default by Greece, after all, could have the same global systemic effects as the collapse of Lehman Brothers did in 2008.

    Sovereign spreads are already pricing the risk of a domino effect from Greece to Spain, Portugal and other euro-zone members. The EU and the central bank are worried about the moral hazard of any “bailout.” But that is precisely why a credible IMF program that ties financial support to the progressive achievement of fiscal and structural reform goals is the right way to teach Greece and the other PIIGS how to fly.”

    http://tinyurl.com/yfmvewz

  125. After the meeting with Mr Sarcozy last week the Greek PM announced that Greece will by six (6) new French warships.
    A few years ago Greece bought 400 (German) tanks, and they are currently negotiating eurofighters.
    Even a statement of support does not come that cheep nowadays…
    I have the feeling that defense spending is not going to be reduced

  126. It does not matter for Greece’s Government. It is the Greek people and the future of Europe. This is the focus of what needs to be performed. Researching
    the events and following the money trail yeild valuable information. Greek PM Papandreou appeaas that he wishes for Greece to fail. Then in Drachma, profits will be made, transperency will be lost. The Greek people victims of the dishonest deeds of their leaders

  127. Follow the money trail. Where is Papandreou’s and his business associated money…Can we tell where they invested? If they derail the Euro who will benefit? Do the Greek people know what is going on?
    EPT (Greek Radio TV) is telling them what the government wants them to know: That Europe is pushing them hard, that they are the new stars and saving Greece from an economic meltdown and that Europe wants to take all their money. Europe, do something….Let the people know!