Tag Archives: Greece

The End Of The Euro: A Survivor’s Guide

By Peter Boone and Simon Johnson

In every economic crisis there comes a moment of clarity.  In Europe soon, millions of people will wake up to realize that the euro-as-we-know-it is gone.  Economic chaos awaits them.

To understand why, first strip away your illusions.  Europe’s crisis to date is a series of supposedly “decisive” turning points that each turned out to be just another step down a steep hill.  Greece’s upcoming election on June 17 is another such moment.  While the so-called “pro-bailout” forces may prevail in terms of parliamentary seats, some form of new currency will soon flood the streets of Athens.  It is already nearly impossible to save Greek membership in the euro area: depositors flee banks, taxpayers delay tax payments, and companies postpone paying their suppliers – either because they can’t pay or because they expect soon to be able to pay in cheap drachma.

The troika of the European Commission (EC), European Central Bank (ECB), and International Monetary Fund (IMF) has proved unable to restore the prospect of recovery in Greece, and any new lending program would run into the same difficulties.  In apparent frustration, the head of the IMF, Christine Lagarde, remarked last week, “As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time.” Continue reading

What Next For Greece And For Europe?

By Peter Boone and Simon Johnson

Uncertainty about potential loan losses in Europe continues to roil markets around the world.  For many investors, taxpayers, and ordinary citizens there is no clarity on the exact current situation – let alone a stable view about what could happen next.  What should any friends of Europe — the US, G20, IMF, perhaps even China — strongly suggest that they do?

A good start would involve being honest on four points.  There is nothing pleasant about the truth in such crisis situations, but continued denial increasingly becomes dangerous to all involved.

Greece is on the front burner.  Currently on offer is a debt swap for private sector lenders that, once it goes through, will effectively guarantee 33 cents for every 1 euro in bonds that they currently hold.  The downside protection here is attractive to banks – made possible by the fact they will now get hard collateral in the restructured deal (meaning that Greece buys the bonds of safe EU countries, like Germany, and holds these where creditors could get at them).

The first brutal truth is that this is a default by Greece and all attempts to deny this or use another word just muddy the waters. Continue reading

Greece Saved For Now – Is Portugal Next?

By Peter Boone and Simon Johnson

The Europeans announced Sunday they would provide 30 billion euros of assistance to Greece, amid informed rumors that the IMF will offer another 10-15 billion.  With a total of say 40-45 billion euros in the bag – more than the market was expecting — the Greeks have time to make changes. 

The Greek government, helped by the market threat of a near term collapse, appear to have strong armed the other eurozone countries into a generous package without making efforts to change seriously their (Greek) fiscal policy.  This is good for near term calm, but it does not solve any of the inherent problems now manifest in the eurozone. Continue reading

The Coming Greek Debt Bubble

By Peter Boone and Simon Johnson

Bubbles are back as a topic of serious discussion, as they were before the financial crisis.  The questions are: (1) can you spot bubbles, (2) can policymakers do anything to deflate them gently, and (3) can anyone make money when bubbles get out of control?

Our answers are: Spotting pure equity bubbles may sometimes be hard, but we can always see unsustainable finances supported by cheap credit.  But policymakers will not act because all great (and dangerous) bubbles build their own political support; bubbles are invincible, until they collapse.  A few investors can do well by betting against such bubbles, but it’s harder than you might think because you have to get the timing right – and that’s much more about luck than skill. Continue reading

An Underfunded Program For Greece

By Peter Boone and Simon Johnson

The EU, led by France and Germany, appears to have some sort of financing package in the works for Greece (probably still without a major role for the IMF).  But the main goal seems to be to buy time – hoping for better global outcomes – rather than dealing with the issues at any more fundamental level.

Greece needs 30-35bn euros to cover its funding needs for the rest of this year.  But under their current fiscal plan, we are looking at something like 60bn euros in refinancing per year over the next several years – taking their debt level to 150 percent of GDP; hardly a sustainable medium-term fiscal framework.

A fully credible package would need around 200bn euros, to cover three years.  But the moral hazard involved in such a deal would be immense – there is no way the German government can sell that to voters (or find that much money through an off-government balance sheet operation). Continue reading

The IMF Cannot Help Greece

This guest post is by Carlo Bastasin, a visiting fellow at the Peterson Institute for International Economics.  An economist and a journalist, Carlo is a leading commentator for the Italian daily Il Sole-24 Ore and for German newspapers.  He reacts here to recent proposals that Greece should bring in the IMF.

The Greek crisis has at least two different dimensions.  One is a fiscal deficit, aggravated by Athens’ mismanagement and deception; the other is the protracted loss of competitiveness, especially within the Eurozone, leading to a large current account deficit.

The IMF can be very effective in tackling the problems of solvency and liquidity arising from the fiscal emergency – and it has probably more expertise than the European Union (EU) or the European Central Bank (ECB) in this regard.  But the Fund is much less able to address the problem of restoring equilibrium in current account balances within the Eurozone. Continue reading

Everyone Was Doing It

By James Kwak

Gerald Corrigan, a Goldman Sachs executive and a former president of the New York Fed, had a curious defense of the Greece-Goldman interest rate swaps. Here are some direct quotations from the Bloomberg story:

“[The swaps] did produce a rather small, but nevertheless not insignificant reduction, in Greece’s debt-to-GDP ratio,” Gerald Corrigan, chairman of Goldman Sachs’s regulated bank subsidiary, told a panel of U.K. lawmakers today. The swaps were “in conformity with existing rules and procedures.” . . .

“There was nothing inappropriate,” Corrigan told Parliament’s Treasury Committee. “With the benefit of hindsight, it seems to be very clear that the standards of transparency could have, and probably should have been, higher.” . . .

Goldman Sachs was “by no means the only bank involved” in arranging the contracts, Corrigan said. . . .

“Governments on a fairly generalized basis do go to some lengths to try to ‘manage’ their budgetary deficit positions and manage their public debt positions,” Corrigan said. “There is nothing terribly new about this, unfortunately. Certainly, those practices have been around for decades, if not centuries. We have to keep that perspective.”

Continue reading