Greece, The IMF, And What Comes Next

By Peter Boone and Simon Johnson

The latest developments from Europe – including Greece appealing for an IMF program today – may well be a watershed, but if so, it is not a good one.  The key event yesterday was that the yield on all the debt of weak eurozone governments widened while German yields fell.  The spreads show all you need to know: a very clear and large contagion risk. 

The five year Portuguese yields rose from 3.84% to 4.26%.  The five year Spanish bonds rose from 2.89% to 3.03%, and the five year Irish bonds rose from 3.74% to 3.97%.  These are not minor moves for investment grade sovereign bond funds.  This kind of change means, for example (and roughly), you lose 0.5% on the value of a bond in one day.  These are bonds that just pay 3% per year – and one such day may be enough to cause “investment grade investors” to decide not to stay involved and not to come back for a long while. 

If these bonds transition towards being held by “emerging market investors” (usually quite different people), and stronger European commercial banks decide to limit their exposure to the weaker government’s bonds, we could be in for quite a major increase in yields across the spectrum. 

Emerging market investors look at these weaker eurozone bonds – compared to say Argentina with 10% yields – and think they represent unappealing reward for the risk.  Greek 5 year bonds rose to 9.4% yesterday from 8.1% the previous day.  This is still low for a country on the verge of default.

These higher government bond yields are also hitting banks.  No doubt there is a bank run on in Greece to some extent at the wholesale level.  This will spread to other banks in the region.  Since their marginal funding costs are tied to the creditworthiness of the sovereign, and since the collateral for these banks’ portfolios is tied to local property values and assets, these changes in sovereign yields will have a negative impact on banks’ balance sheets. 

Irrespective of the next move – which lies this weekend with the International Monetary Fund and the ministers of finance meeting in Washington for the Fund’s spring meetings – this looks like the moment when the Greek problems really start to generate contagion across the eurozone region.  We’ll see rates on government debt trending higher, asset prices (such as real estate) falling even more, and renewed concern about banks on the European “periphery”.

What can the authorities do?  The only path is a new package of “liquidity assistance” for countries under pressure but not yet ready to call in the IMF.  The liquidity is available from the ECB – it can provide emergency loans to all the banks in the region to prevent bank runs from toppling them.  But there is also a solvency problem for the weaker countries now under pressure. 

To return to solvency, the struggling eurozone countries will need funding for budget deficits and debt rollover for several years.  Governments will need to recapitalize their banks with new government-backed debt.  The best solution would be for the government to then sell their stakes to larger European banks with more creditworthy sovereigns.  SocGen Greece (with all its issues) would be a lot more attractive to Greek businessmen and depositors than National Bank of Greece at the end of all this.

And this is the heart of the problem:  Will Germany and other European nations be prepared to provide the large sums needed to refinance several peripheral nations?  Will these nations then take the painful austerity measures needed in the midst of recessions in order to get out of this? 

When the problem was just Greece, the numbers were already large.  In our view, the Greek government needs 150bn euros over three years to be sure it can refinance itself through a recession.  The Portuguese will roughly need 100bn euros.  If those amounts were made available – will that support the confidence needed to buy Irish and Spanish bonds, or would it scare investors because the protests from Germany would be so large that it would be clear no more funds would be available in bailout mechanisms? 

There is no easy answer to this question, but yesterday’s action suggested that markets are not at all confident policy makers are going to stop this crisis soon.  They are surely right:  Greek strikes, a weak Portuguese government deeply in denial, and German hatred for bailouts, all make a path to restore confidence very difficult.

Yesterday was also a wake-up call for the United States.  It is no longer reasonable or responsible to say:  “US banks have no exposure to Greece”.  US banks are heavily exposed to Europe, and this is turning into a serious Europe-wide problem.  The US badly needs to make sure this does not spread beyond Greece and Portugal/Ireland. 

To restore confidence in buying Spanish and other major European nation bonds, it would surely help to have clear signals that President Obama himself, and the Federal Reserve, are taking an active stance now on making sure this does not spread to become another threat to global financial stability. A broader wall of preventive financing must now be put in place – after all, this is exactly why (in principle) the IMF was recapitalized this time last year.

Such a push by the US would be awkward, to be sure, as the French and Germans (and British) are not keen to have more US involvement in their affairs.  But the Europeans have handled matters so badly in the past few months, it is time for a much more scaled-up US role.

85 thoughts on “Greece, The IMF, And What Comes Next

  1. If the 150bn Euros to Greece and the 100bn to Portugal and the much more to so many others were seen to have a chance to fly, against German opposition, then the Euro might strengthen for a couple of weeks, because some investors would feel reassured… only to really tank some months later when waking up to the bail-out implications.

  2. Perhaps this is where we test the laws of game theory; is it really to our advantage to support the lowest tier of European countries and prevent default or is it really better for us to stay out entirely?

    We have our own weak recovery to worry about do we not? Why start picking sovereign winners and losers? Is there fear of this creating a domino effect in European finance, yes, but where does it effectively stop for the US?

    I think if you do assist Greece, you’ll have to assist every other EU country that steps up to the plate, an amount that could easily end up costing a half a trillion dollars. Their deficits were run up in good time and in bad, a sign of overconsumption and excessive spending (as opposed to ours which was run up to combat the effects of the recession).

  3. Let me edit here: Trichet knew of these problems and has had as much time as anyone else to come up with appropriate packages and plans. Obama should take a hands off approach.

  4. If one steps back from everything…and takes a “wholistic” look around…it becomes obvious.

    Only no one in “official” capacities dares suggest. Nor do well-known pundits and/or authors of books that offer mere glimpses into the tidalwave about to engulf.

    From the top, the very top on down, we are witnessing the beginnings of an unraveling never seen before. Expect more sleight-of-hand, more “fancy” accounting, perhaps even yet another false flag operation meant to divert attention from the reality:

    There is no “there” there.
    And the emperor? Not a stitch to be found.

  5. I agree with you barbyrah. History is a fine teacher of what will come next when the harsh realities of the many are not comforted by increasingly transparent diversionary veneers of the enriched, empowered and delusional few. The contempt takes my breath away.

  6. Simon: you and your coauthor did a great job writing 13 Bankers. But perhaps there is a message in your book, that is not obvious and that you yourself might heed: When a person is out for himself, wanting to win and avoid losing, inclduing, in your case, wanting to be and appear smart, reach your goals, etc… that person is biased and blinded by his bias. In this condition he almost always uses defensive reasoning and is likely to be wrong in his predictions…and defeat himself in the process.

  7. “To restore confidence in buying Spanish and other major European nation bonds, it would surely help to have clear signals that President Obama himself, and the Federal Reserve, are taking an active stance now on making sure this does not spread to become another threat to global financial stability.”


    Why should we be led by the nose into having confidence in Spain and other over-extended European governments? What would be the costs to American taxpayers of actions by Obama or the Fed? What would be the nature of those actions you are proposing – in greater detail?

    Could it be that it is time for some truth to prevail here? The truth being, that western nations, including the US, have been living well beyond their means through credit-fueled “growth” and that a contraction/reset is long overdue?

  8. To amend my previous comment, I would ask what political will/capacity there is in the US to support a massive package for a European bailout. At a time when tax increases are being contemplated for support of our own deficit spending to stimulate our own economy, how much support is going to be available to take on more spending to support Europe?

    Moreover, I used the term cost to US taxpayers. This is probably misleading, as US deficit spending is really a conduit for Chinese largesse, which seems to be on the decline. The US taxpayer has not really paid for anything in a long time.

  9. Are you sure the situation can be salvaged anymore? Every once in a while a cataclysmic change reshapes the world. Perhaps it is again time for one?

  10. The British are suppose to have their last of three debates next week, focusing then on the economy. Let’s see which of the three gentlemen position themselves closest to TBTF – that guy from the Conservative side (Tory) or the guy from the Liberal Democrats or (Labour) MP Gordon Brown himself.

  11. A. Merkel just declared that a recue package/bailout -or anything that could be called meaningful financial help- will only be delivered if there is a imminent threat to the euro. Is it me or is she completely out of her German mind?

  12. 1. US should try to stay away as far as possible from this potential doomscenario.

    2. Greeks are still spending more than comes in at this moment. Everybody knows that something has to be done and wait till IMF comes in. 45 Billion is never enough. Next 5 years they need 140 only to refinance. It can be doubted if other EU governments are willing to finance that. If elections are close they would be butchred.

    3. For Portugal 100 billion seems like a fair estimate. Government knows it has to do something, but doesnot.

    4. Spain a little bit better of, but very high unemployment. But lower debt (%GDP) and invested more in real estate (while Greeks simply spend what they had).

    5. Italy looks better Ireland as well. Eastern countries partly big ????.
    UK huge debt but not in Euro. Austria in bad shape as it banks are heavily involved in Eastern Europe.

    6. Basically only Germany, Holland, little Luxembourg, Skandinavian countries are in relatively good shape.
    France and Belgium somewhere in between.

    7. Euro-countries will have to borrow to finance Greece. Increasing the problem of the weak brothers.

    8. A lot of countries have an aging population and a substantial part of their youth is immigrants (often badly educated).

    9. Most Governments not that efficient (from horrible in Greece, to not so efficient in countries like Germany Holland UK) and often simply too big.

    May be we have to look for a one way trip to the far east.

  13. there are so many moving parts in this whole scenario -PIIGS debts – including hedge funds and what they’re going to bet on/against going forward…people like George Soros and others who can, sometimes, have a critical sway on finances of sovereign nations – the Brits learned this lesson the hard way a few years back – so this makes for very fragile times, not just in Europe, but in the major financial centers worldwide as we (thru our financial institutions) are all so interconnected now that hardly anyone can escape unscathe if things start to unravel…hopefully the “bright money guys” can contain this troubling scenario…very soon

  14. Their deficits were run up in good time and in bad, a sign of overconsumption and excessive spending

    This is true of Greece and of several other EU countries. It is entirely untrue of the Republic of Ireland. In 2006 the Irish state had 25% debt and a 3% surplus. The state does not have a particularly large problem with future entitlements either. In many ways Ireland seems to be the mirror-image of Greece, which (to the best of my knowledge) has an acute case of the stereotypical European fiscal/entitlements malaise but experienced no big credit bubble. Yet both countries are now among the sickest men of the Eurozone.

    (as opposed to ours which was run up to combat the effects of the recession).

    On the contrary, the US’ worsening fiscal/entitlements crisis does indeed look stereotypically European, especially when you account for future liabilities properly and observe that poor Greece has no global reserve currency to monetise its debt into. Nonetheless, I think Ireland is likely an excellent refutation of those who want to blame the US’ situation entirely on public debt in order to acquit the distended financial industry. (Ireland had no GSEs involved in heavy lending to the private sector either.)

    None of which settles that the US necessarily ought to bail out Ireland, or Greece or Portugal. Frankly I’m not convinced it’s in anyone’s best interests for the US to continue bailing itself out through ZIRP, forbearance, fiscal stimulus etc. At least with a classic IMF intervention there’s a chance of getting necessary reforms in exchange for the money, as Prof. Johnson is well known for pointing out. So the US taxpayer might get a lot more benefit from bankrolling a hard-assed IMF program for Greece than it would from sloshing the money over the Wall Street banks. I’d be much more concerned if he’s now reversing himself, and “preventive financing” means no-conditions helicopter money.

  15. no politician today (including Pres Obama) has enough guts to tell the American people that, on the most part, they have been living beyond their means these past 30+ years…and that they have been sustained by heavily borrowing from the Chinese, and others and from future American generations to finance an unsustainable lifestyle and government policy choices in all areas… including military spending to sustain very divisive wars from Vietnam, to Gulf I & II and now, Afghanistan…we keep postponing the Day of Reckoning to the next generation…because the next generation cannot yet make their voices heard

  16. The contagion is reflected in the fact that if Greece partly defaults, the impact on demand for exports from other EU members, as well as write-downs of debt to Greek agents, will trigger more implosion – yet the ECB has no will to counter that deflationary trend.

    The creditor countries want their money paid back at par value, but they want the debtor countries to keep driving demand to sustain their export surpluses… And the only way that can happen is if they keep giving the debtor countries more credit.

    For Greeks, there are two levels of austerity – the austerity that would be needed to live within their means going forward (they need this badly – and so do we!), and the (impossible) austerity needed to repay their creditors at par value during a global recession, high debt load, high rates on debt, and without the ability to devalue their currency.

    Greeks would be better off just defaulting on everything and moving to a draconian pay/go import/export system…

  17. Mr Johnson

    Break up the banks and end the bailouts…but waits, Obama should bail out these profilagte Europeans?

    Oh the irony in your sentiments and opinions! lol

    You need to propose your suggestions of US intervention at a Tea Party to assess its probability of success.

    Thanks for the laugh of the week.

  18. but bernanke said we were over the financial crisis.
    the same way he said sub prime wouldn’t spread.
    I think we have chauncy the gardener from being there as chair of the fed.
    “it will grow in the spring”

  19. So, do democratic governments control bankers? Or, do bankers control “democracy”?

  20. By all means send in the IMF. They have done such great work elsewhere. You generally get maximum leverage from stupidity and arrogance when you institutionalize it.

    Everything will work out fine as soon as PIIGS fly.

  21. I’m ready for some of that Sosialist utopia because this “capitalism” doesn’t work too well for most.

  22. Irelands problem is they made some phenomenally poor lending decisions. They represent about 14% of Eurozone lending and in return only comprise about 2% of EU GDP, that’s less than even Greece and the banks of Ireland are embedded with significantly more risk as a result. Do they have future entitlements? I don’t know, probably marginally. Irelands problem is more like Icelands, basically the country is being run like a large hedge fund.

    When it comes to the US, you’re speculating too far into the future to make concrete statements of fact. Yes the US has been on a bit of a spending binge, but i) it’s not too late to curb this and rebound ii) when examining developed economies the US is at the top of the list in terms of economic robustness iii) the reserve currency adds flexibility other countries don’t have.

    I agree that we shouldn’t engage in morally hazardous behavior, however you can’t simply allow the world to fall apart and have everyone default. I disagree that the IMF is the solution. Right now this is Europes problem, which the Europeans should have examined when banding together and forming their own currency. What exactly has the EU done besides talk? Nothing. The US shouldn’t be the first to fight this fire, the EU should deal with it as best they can and then if necessary the US should step in. I would prefer my taxpaying dollars sloshing around in my country for the time being.

  23. Raise your hand if you’re beginning to wonder, as I am, if credit and democracy don’t really mix that well, as a matter of human nature?

  24. It’s a smart move on her part.

    In times like this, you lend based on character. Measuring the current Greek character leaves a lot to be desired. Lending to the Greeks is like pouring money down the drain. At present, they don’t want to help themselves because it is more important to pin the blame on someone else. They need to find bottom before they can come up for air. Then you can help them.

  25. Greece can’t “partially default”. It’s all or nothing. It will be “all default” and the Greeks will be left with nothing. The exporters know this. The countries will suppor their exporters with trade support. They will find a way to skirt the current regulations. If you can skirt an EU no-bailout regulation, trader matters are easy.

  26. Is it interconnectedness that is the problem now, not size? And not the interconnectedness of governments, but the interconnectedness of finance? Sovereign states are still distinct entities, but global finance knows no boundaries and seems to have effectively preempted the decision-making of governments. In the past, Greece could fail and it would be too bad for the Greeks. Now, with common currency and world-wide debt holdings, Greece fails and it’s too bad for all of us.

  27. Reasons Greece would rather not default:
    Greek banks hold about 45 bil of Greek government debt; Greek insurance companies hold about 4 bil; Greek pension funds hold 10-15 bil. Thus, a default would push banks and insurance companies into insolvency and would strain further the problematic government controlled pension funds.
    Furthermore, a default does not mean the borrower pays nothing. Greece will have ta pay perhaps 70% of its debt and that is not insignificant.

  28. IF the lesson of Greece is that issuing bad paper is not a sustainable economic model, we’re in for a major “oh crap.”

    That there is also so much faith remaining in our institutions and “king dollar” it’s beyond nuts.

    The numbers don’t lie. The world is broke.

  29. Bottom? You mean the implosion of the euro zone? I guess you mean that by waiting and lending to an offcially deadbeat Greece Germany will be able to extract better terms from them, to force them into real budgetary austerity and so forth. This is nuts, the point is not even here any more. Time is now of the essence, and any rescue should come sooner rather than later, even if Greece is set to default notwithstanding. I read several articles trying to make sense of Merkel’s statements, and all agreed that she was basically trying to assuage her domestic opponents before the inevitable bailout.

  30. The Greek’s are about to embark on a modern day tragedy…brought on,only by thenselves. Their egregious financial behavior could tear the country apart. It certainly is not beyond the realm of possibilities to evolve into a Civil War. What does this mean for America? The European’s will bring their money to the United States by the boatloads,buying our debt at what ever we price it? Ramifications of the event will put a lock on the Federal Reserve’s trigger-finger to leave interest rates alone for a very,very long time. America is everyone’s favorite saint (savior) for their flight to safety regarding “Sovereign Debt” – until the “PIGS” clean up their sty! JMHO Thanks Simon,and please “Keep up the Good Digging for America’s Sake”

  31. If Germany Is Forcing Fiscal Restraint on Greece
    Which Country Will Force Fiscal Restraint On The United States?

    Germany’s Prime Minister, Angela Merkel, was in the news today defining the conditions upon which Germany would provide financial assistance to Greece. Included in the list of requirements is a plan of action in which Greece would need to reduce its spending deficit and implement a viable savings plan.

    While I fully expect that ultimately Greece will be bailed out by a combination of the EU and the IMF (aka the U.S. Fed/Treasury/Taxapayer), it also appears that Germany is going to force Greece to implement a well-delineated plan of fiscal austerity, which will also require some material sacrifice from the Greek populace.

    Having said that, I continue to be highly amused at the all the attention Greece is getting, which seems to be nothing more than a big Orwellian smoke screen designed to cover up the massive fiscal/financial time bomb called the United States. Greece contributes 3% to the overall EU GDP. It has about $400 billion in Government debt. On the other hand, California represents 13% of U.S. GDP, is the world’s 7th largest economy, and with close to $600 billion in State/Municipal debt, and not including the State Pension fund that is underfunded by $500 billion, and is so hopelessly insolvent and in fiscal distress that it makes the Greek problem look like little more than a global economic toothache. And that’s just California.

    So, my question is, if Germany has the leverage to force some financial/fiscal discipline on little Greece, which country out there can do the same to the U.S.? The problem here is that eventually the market will impose its will on our country – and that will yield results that will be exceedingly more painful than most people in this country understand.

  32. The US ran big deficits prior to the recession and added at least a trillion to the US debt. Probably a lot more.

  33. Greek, Italian, Spanish, Portugese actions have caused/dictated the doom of the Euro. Everyone wants the Germans to pick up the pieces and make things right. There is a lot at stake here and at present the Greeks are not holding up their end.

    Take a read of Mish Shedlock’s thoughts on the matter:

    France and Italy ran a joint end-run on Germany a while back to get the current “agreement” but they naturally did not truly understand the Faustian bargain they got when they attempted to back Germany into a corner. A multi-year agreement should be the only thing that the German parliament should need to discuss. The agreement should be complete and accurate; not a partial concoction intended to make all parties part-way-pregnant.

    Germany should worry about the Germans to the same or greater degree that Greece worries about the Greeks, France the French, etc. The parties are not playing fair and you don’t operate from a naive proposition.

    If the euro zone implodes, it was never meant to be. With parties not willing to adhere to it’s statutes; and the statutes not meaning anything when times get tough; why go there? Leave now and bring back your own currency

    Here is Daniel Amerman’s thoughts:

    This situation is akin to an old World War II aerial dogfight. All are clawing for altitude and those that get on top of the whirling battle and have the sun at their backs can ensure they live to fight another day.

    I realize this seems cold and hard but Greek, French, Italian actions have turned this into a zero-sum game. What is good for Germany in the long run is good for the euro-zone. In the short run we are looking at a catfight.

    The natural progression of this zero-sum game is to delay and dump the mess in the lap of the IMF. Let them chew on it for dinner.

  34. If Goldfein and Dimon et al managed to game the US tax payers without a material resistance or fear of jail terms, how can we be certain that the bailouts of Greece and the rest of the PIIGS do not end up in the same gaming? How do we know that they are not sharpening their ‘kleptocracic’ knives to make sure to let them go bankrupt anyway so they can game the EU and IMF, and the US if she gets involved, via their rescue efforts? Yes, they can bring down the world, but can fatten their pockets with short term gains. Is there any safequards against such a possibility?

  35. These type of situations have ex-ante hundreds of impossible solutions, that ex-post seem quite natural.

    Greece gives each Greek resident a deposit of some thousand new Drachmas with a fix conversion rate to Euro used to recalculate a few things like housing rental contracts and similar type of practical Greek commitments and then take it from their…

    If then Europe is willing to lend Greece long term and at low rates, then Greece might consider paying 30% of current outstanding debt.

    Is anyone going to declare war on Greece? Don’t think so. Are we going to stop visiting Greece? Are you crazy? Now that it is affordable?

    The problem is not little Greece the problem is keeping some others from following the example of Greece.

  36. if you think Greece is a headache…the really big financial migraine coming will be Spain if it ever defaults…Spain’s economy is biggest in this PIIGS “unholy alliance” of sovereign debtors…this will be the Big Kahuna the IMF and the rest of Western Europe (plus U.S., Japan, and China)are really going to be losing sleep over in the next few weeks and months…if that happens (Spain defaulting) then all bets are off…

  37. It’s more like who’s going to be the last one standing, bankers or democracy? The actual answer about the chicken doesn’t offer a lot of hope.

  38. Um… given that the entities in the shadow banking system are amoral f*cks, why should I believe that the spread on PIIGS credit is indicative of anything but a plausible excuse to demand higher returns on investment? It’s not like I trust them to do the math honestly and then increase their interest requirements to compensate correctly for the risk.

  39. Hmmm…. Irresponsible banks should be allowed to fail, but irresponsible nations should be bailed out?

    I think the Greeks need to work through the pain of raising their retirement age to 65 or 67, and eliminating widespread tax-dodging… Then they deserve a helping hand. And the bankers who loaned them too much money? They need to feel the pain too. We are getting too addicted to bailing out everyone.

  40. re @ anns…not defending any of these financial entities wanting more for lending to high risk nations…but all investors (including all pension funds) have the same mindset – if they have to lend to a high risk (of deafaulting) borrower (business, homeowner or sovereign nation) they’d want to be compensated for that higher risk…and Greece right now is considered ultra high risk (of defaulting) as with all the other alphabet countries in PIIGS…on the opposite end of this scale is lending to relatively safe haven countries such as the U.S., Germany or Canada…although the Chinese might be understandably a wee bit uneasy about U.S. debt levels these days…but that’s for another discussion

  41. Few days ago about the agreed plan “Mr Van Rompuy said “We hope that it will not have to be activated”.
    I noted at that the fact that they hope not to activate it, it might mean that it would be a mess should it be activated.

    The loan plan was a naked gun put on the table to buy time but smelling the fear of default. It’s now clear that Greek bondholders should take a haircut and let Greece orderly default stopping the money creation for nothing of European banks.

  42. It seems to the casual observer that perhaps the plutocracy is an international phenomenon, and, perhaps more than any of us perceive. Can anyone say Bilderberg? I am not generally given to conspiracy theories, and not really of a mind to believe that this situation has been “rigged.” But, it seems that, given the factors involved, there would be a concerted effort to find a meaningful way out of this. It is beginning to look like a pingpong ball that is in perpetual motion. No one is willing to look into the eyes of the 800 pound gorilla in the room, but prefers to focus on the roaches. Nero perfected the art of fiddling during catastrophes, but it seems that the international community is now forming a string orchestra.

  43. I read German and French banks hold most of the Greek debt … so it will be their workers/taxpayers keeping their own banks rubbish investments alive.

    Just keep on passing private bad debt on to the taxpayer. Like Ireland couldn’t really afford to bailout it’s rotten banks as it already had a chronic fiscal crisis, but it ploughed ahead anyway. Now Ireland is going to borrow and contribute €450M to help Greece – where does this lunacy end?

    Simple rule – no bailouts ever.

  44. Irelands problem is they made some phenomenally poor lending decisions.

    What destroyed the Irish economy was excessive borrowing: a RE/credit bubble (plus public spending funded by the bubble). The major difference with the US’ bubble may be that Ireland borrowed from elsewhere in the Eurozone rather than from China.

  45. I think we’re talking about the same thing. I say the banks made a series of poor lending decisions; you’re saying people made poorly levered investment decisions…it’s likely they got this money from the same banks that made the poor lending decisions.

  46. And bernanke said we were out of the crisis. it shows how little he understands. we just are entering phase two. Aout two years ago when I looked at the policy responses of te fed to the crisis I preictd sovreign debt problems from the approach, I predicted budget problems becuase of the way we choose to deal with the crisis and that would impinge on our policy response to the sovreign debt crisis. ( we would blow pur wad on the banks, and be left with little resources for phase two). we would have record trading profits at banks.

    I do not understand the fuss. to me it was clear from the start the system was designed to do this. I LEAVE IT TO YOU TO EASILY FIGURE OUT WHY THE FINANCIAL OLIGOPOLY WOULD DO SO. MAX INFLATION, MAX PROFITS, MAX WEALTH TRANSFER


  47. You are 100% correct. Any factual analysis ends up concluding that every significant currency is obviously worthless. Everyone, every single person, every nation, has already sat down in the barbers chair. The haircut has begun.

    Wanna bet that George Soros and his pals have brooms, and are ready to sweep the floors? This is going to get real funny, real soon.

  48. I do not at all share the solutions you hinted at… but… read below what I wrote in November 1999 and tehn consider that even if life accidentally led me to be an Executive Director at the World Bank (1 of 24), 2002-2004, I were never able to get anyone to really listen, much less to do something about what I knew was doomed to happen… talk about frustration!!!

    “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the OWB (the only bank in the world) or the financial dinosaur that survives at that moment.

    Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.” Again… this was November 1999.

  49. Would it help Greece survive if we gave them the $33 Billion that the military is planning to spend to subdue Kandahar?

  50. Merkel has two goals:

    1. She has to save face with her voters. The only way to sell a greek bail-out to german people is to convince them that the euro will collapse if she doesn’t hand the cash to the much hated greeks, i.e. we’re not doing it for the greeks, we’re not doing it for Europe, we’re doing it for the currency.

    2. She has to make sure that Greece will accept all the terms of the IMF. Right now, IMF officials are in Athens negotiating the terms of the loan. Although the stability program already in place is going well, the word is that they are asking for additional budget cuts and changes in the labour laws to allow reduction in labour costs (e.g. abolition of minimum wage). The greek government’s approval ratings are sliding so they are (like Merkel) fighting for political survival. Since Merkel can’t dictate the terms of the deal directly, she wants to make sure the greek politicians don’t have any room to maneuvre by not promising anything until they sign the IMF proposal.

    I predict two things:
    1. Expect to see more analyses in the german press about the dire consequences of a greek default for the euro and the german banking system.
    2. As soon as the greek PM signs the IMF proposal for additional budget cuts monitored by IMF officials on a monthly basis, Merkel will say that Greece has done progress and go ahead with the bail-out.

  51. “the word is that they are asking for additional budget cuts and changes in the labour laws to allow reduction in labour costs (e.g. abolition of minimum wage).” How long before they us that?

  52. The problem is that Greece can’t solve it’s tax-dodging or early retirement problems in a matter of weeks but it needs to borrow billions in a matter of weeks. No bail-out means default within the next few months. The europeans are not bailing out Greece (most of them couldn’t care less) they’re protecting their currency.

    The “no bailout rule” can’t work and will never work. The german finance minister compared Greece to Lehman Bros – for good reason.

  53. Re: @ Barbara…Not so – the International Monetary Fund (IMF) is the adopted child of the WorldBank (WB),and is a totally independent entity (yes the US has some skin in the game along with every known country in the world). It is a dysfunctionally(IMF) run organization that brings ruin to whom ever comes under its “Midas Touch” – so says the “Honorable Mr. Joeseph Stiglitz”!

  54. Negotiations will have to conclude by mid-May due to debt refinancing needs (bonds mature and have to be paid). Most changes can’t be enacted into laws earlier than June, though I expect that the greek gov’t will wait at least until second quarter results before it applies more austerity. Most likely the EU will not ask for more this year, but they will ask for additional measures for 2011 and 2012.

    The reason for this is that despite what you may read in this blog and elsewhere, Greece is trying and there’s a limit to austerity for political and economic reasons: If the gov’t pushes too hard it will lose credibility and instability is likely to ensue. Massive unemployment and poverty tend to turn people against each other and against their governments. Argentina’s default was very messy partly because of political instability and the Europeans want to avoid that – not for Greece, for the stability of their currency.

    The economic reason is that austerity has a direct impact on economic output. The shock of an attempt to balance the budget right now could cause a loss in output (GDP) so big that the reduction in tax income would undermine the effort, requiring further austerity and so on, trapping the greek economy in a death spiral with massive default at the end (as opposed to a planned, pre-emptive debt reschedule now which seems to be discussed a lot lately).

    Bottom line: The deal is likely to be made in the second week of May (after the German regional elections and before greek bond maturity deadline) and additional austerity measures are likely to be applied in 2011 and 2012.

  55. If brains had colons this comment is what it would look like when they had to take a dump.

  56. Bayard wrote:

    “I am not generally given to conspiracy theories, and not really of a mind to believe that this situation has been “rigged.”

    Wall Stret And The Financial Crisis: The Role of Credit Rating Agencies

    From: van Praag, Lucas
    Sent: Sunday November 18, 2007, 5:47pm
    To: Blankfein, Lloyd

    Cc: Winkelreid, Jon; Cohn, Gary; Viniar, David; Roger, John F.W.; Horwitz, Russell

    Subject: New York Times

    April 23, 2010

    “ 3. The article references the extraordinary influence GS alums have – the most topical being John Thain, but Rubin, Hank, Duncan et al areall in the mix too. She hasn’t gone as far as suggesting that there is a credible conspiracy theory (unlike her former collegue at the Ny Post). She does, however, make the point that it feels like GS (Goldman Sachs) is running everyting.”

    5. We spent a lot of time on culture as a differentiator – she was receptive ”

    “Confidential Treatment Requested Gold”
    #Exhibit #101

  57. MF truly is bearing gifts for Greece – fund chief

    Sat Apr 24, 2010 5:45pm EDT – excerpts

    WASHINGTON, April 24 (Reuters) – “The Greeks have joined a long line of nations “demonizing” the International Monetary Fund, but the IMF is only trying to help, Managing Director Dominique Strauss-Kahn said on Saturday.

    “The Greek citizens shouldn’t fear the IMF. We are there to try to help them,” Strauss-Kahn said.”

  58. What triggered my first rela doubts about the B.I.S
    was this extensive article you may have already read:
    The Man Nobody wanted to hear, William White,1518,635051,00.html
    The current management of the B.I.S ( Simon already rightly described their ‘position’is neat-tosilent,
    has anyone heard the B.I.S’s chairman Angel Guerra recently on financial regulation ? The recent nomination
    of the current director of the Bank de France as rotating president ( 3 year terms ) bothers me even more.
    I think, looking back, it was a great mistake of the
    G-20 ( 186 Finance Ministers are currently at the
    IMF bash, so I would tempted to mentally think of G200) to call on the I.M.F for international bank regulation, instead of naming an effective Financial
    Stability Board, or independent task force. seldomly committed to that task,headquartered at the B.I.S for the sake of efficiency, a view I was happy to read voiced out recently through the FT by an insider as you were

  59. It is typical that a lot of nonsense is posted about Greece. Btiefly, 82% of Greek public debt is ownned by foreigners. The Greek private sector owes less as a percent of GDP than the US, Britain, Gernany, France, Portugal, Spain and Ireland! I say restructure the debt now with a sizable haircut and maturity extension and start borrowing domestically. Good luck to foreign bankers, they can be bailed out by their governments!!!

  60. What I find hilarious is that the IMF is setting up some type of relief, bailout fund and want all nations to contribute it, including Greece. Does that make any sense? You’re giving them tens of billions of dollars but then you’re asking them to give money?

    What I find most surprising is that people don’t worry about the U.S. crisis currently going on. $13 trillion debt, $1.6 trillion deficit and $107 trillion in expenditures and unfunded liabilities. Aren’t we in a bigger crisis than Greece?

    People constantly worry that the U.K. is the next Greece. Yeesh1

  61. Let’s all recount who owns the Greek debt, none other than Deutche Bank, Credit Suisse, and Societe Generalite, the largest Swiss, German, and French mega-banks. Why did they lend Greece the money in the first place? They did it because it generated big fees which in turn caused them to be paid huge bonuses, just like in the USA with our largest banks and mortgage operations. That the lending made no sense was not an issue. So why should we(taxpayers of the world) want to bail these big banks out anymore than we wanted to bail out Wall Street to begin with? This is the same tired argument used by Hank Paulson/Geitner/Summers/Rubin, that these banks are TBTF. Merkel, in a political bind, will have a hard sell with her voters, to bail out Deutche Bank by bailing out Greece sovereign debt, better to let Greece leave EMU, bail out DB directly, and keep German money in Germany, voters will swallow hard but accept it in the end. Then the other dominoes will surely follow….but what about American banks’ exposure to Greek debt? A tangled web for sure. We are not finished pouring taxpayer $ down rat holes.

  62. Sunday afternoon Greece: “Most important week of Europe’s monetary union”

    4/25/2010 04:04:00 PM – by CalculatedRisk

    “On Greece, from the Financial Times: Greek aid depends on budget cut plans

    Greece has been told to produce detailed plans this week to meet its budget deficit reduction targets in 2011 and 2012, as well as this year, before it can qualify for a … rescue package …
    excerpt with permission

    And from Wolfgang Münchau at the Financial Times: Greece is Europe’s very own subprime crisis

    This is going to be the most important week in the 11-year history of Europe’s monetary union. By the end of it we will know whether the Greek fiscal crisis can be contained or whether it will metastasise to other parts of the eurozone.”

  63. Well it’s a start. Tell you what, we could pull out of Afghanistan completely, think how much we could then lend Greece!

    Course, then the Taliban would take back Afghanistan and Al Qaeda would have two bases of operation, as why should they give up their Pakistani base of operation? (its always good to have back-up)

    Of course, then the possibility increases that the Taliban could pull off a coup in Pakistan with the assistance of sympathetic elements in the Pakistani Military and Intelligence.

    That’s not certain but it would have a much better chance for success with a Taliban able to credibly claim to Muslim sensibilities, that they beat the US and threw them out of Afghanistan.

    Were the Taliban influenced group to take over Pakistan, they might well give nukes to Al Qaeda…

    Good-bye New York, when a cargo ship sails into port with a nuke in a shipping container.

    Which means…good bye US economy.

    Guess you didn’t think it completely through, huh?

  64. About your attitude of TBTF being a load of BS.

    So, if Greece defaults and that leads to Portugal defaulting and then a cascade of failures leads to global collapse of economies…

    The politicians should just say to the average shlub working to support his family…sucks to be you and go quietly good fellow into the night, consoling yourself that your families sacrifice and starvation will reduce the planets carbon footprint?

    Good luck with that. You might consider though that REALLY bad social unrest leads to riots and, people with guns showing up at YOUR door to take from you what they need.

    And that you’ll have no rational basis for complaint, having previously voted for dog eat dog and the survival of the fittest, better known as the law of the jungle.

    Oh, what was your address again?

  65. I think it is also because Merkel’s political support for the whole Greek-style bailout (not to mention the CDU-CS-FDP coalition) is unravelling, or at least politicians are getting cold feets.

  66. Yield on Greek Two-Year Bonds jumps to 13.5%

    4/26/2010 05:49:00 PM – by CalculatedRisk

    From the Financial Times: Greek bond markets plunge again

    “The yield on two-year Greek government bonds … jumped 3 percentage points … to close at 13.522 per cent.

    This is the highest yield on short-dated government debt in the world …

    This is now higher than Venezuela at 11%.

    The yields jumped for some of the other PIIGS too (Portugal, Ireland, Italy, Greece and Spain). For Portugal the two-year yield increased more than 3/4 of a point to 3.98%.”

  67. Portugal Suffering Greek Contagion Puts Pressure on EU Markets

    April 27 (Bloomberg) — “Portugal risks becoming the new Greece.

    With a higher debt burden and a slower 10-year growth rate than Greece, Western Europe’s poorest country is being punished by investors as the sovereign debt crisis spreads. The risk premium on Portuguese bonds rose to more than double the past year’s average this month. Portugal’s credit default swaps show investors rank its debt as the world’s eighth-riskiest, worse than for Lebanon and Guatemala.

    “We do not ignore that Greece’s particular situation has contagion risks, and we are feeling it,” Finance Minister Fernando Teixeira dos Santos told reporters in Lisbon on April 22. “The performance of spreads in the market reveals that contagion risk.”

  68. Hey, someone gets it… Big is bad. Big is power. Big can over shadow the People.

    It does not matter if it is Big Government or Big Corporations or Big Unions. Each is powerful, and power corrupts.

  69. Re: @ Geoffrey Britain____Sorry,…the only reason the British/UN,and the United States are in Afghanistan/Pakistan & India on the peripheries is for the “Blue Gold-Rush” (Natural Gas Pipeline) I call the “High-Road” route! Russia,and Iran are the major players. All of China,Europe,India,and Pakistan need this source of valuable easily transported,and inexpensive energy. The Turkmenistan, “Gasfields of Dauletabad” are the source for the “Turkmenistan,Afghanistan,Pakistan,and India (TAPI)” Trans-Afghanistan Pipeline,and on the back end, the “Nabucco’s supply line feeding all of Europe. The Iran warmongers could care less about Iran’s “Nuclear Threat’s”,it’s all about their “Blue Gold-Rush” (Natuaral Gas Pipeline) that’s competing for the low road, of the two traveled, “Trans-Pipeline’s Route” called, “Iran,Pakistan,and India (IPI)Pipeline. Both countries natural gas fields have enough “Blue Gold” to stisfy the entire worlds hunger for energy for the next “200 Years”,plus! PS. This is Zillions$$$$,..not Trillions were talking about. The indigenous people mean literally nothing as far as life is concerned,if they get in the way! Lastly,…take a realistic look back at “911”?

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