Greek gov't bonds downgraded to junk status, Eurozone in trouble

[magerette]

I can tell the situation is getting pretty serious over there because we're finally paying attention to it here in our totally self-absorbed and self-reflecting news media. Yesterday's stock market plunge of over a thousand points in 15 minutes(even though it corrected itself) got everyone's attention and the pundits are trying to figure out if it was caused by some flash-based order processing glitch, *really* crazy market manipulation, or some sort of Greek/Euro related panic.
http://news.yahoo.com/s/ap/20100507/ap_on_bi_st_ma_re/us_wall_street

U.S. stocks were already sharply lower Thursday even before the big mid-afternoon plunge. Investors were concerned that a $140 billion bailout for Greece would be unable to stop a spread of debt issues across Europe that could unravel a global economic recovery…

…The dollar, which has been rising sharply particularly against the euro, retreated early Friday. Investors had been pouring money into the dollar and pulling out of the euro because of worries that the European common currency could eventually collapse under the weight of the mounting debt problems.

Frankly, it looks like we're all going to take some kind of hit whenever finances are grossly mismanaged, whether by corporations or countries, due to the very nature of how the modern global interdependent financial system works.

 

[Prime Junta]

The financial markets are way too volatile: with instantaneous, real-time trading, a computer program going haywire can put nations into bankruptcy. We should find ways to slow things down a bit. For example, would a random 5-15 minute delay on trades kill capitalism? It would effectively stop speculation using computerized trading programs, and eliminate one risk caused by them.

 

[GothicGothicness]

Why not use the four eyes principle for all big trades.. say above a certain amount ?

 

[Zaleukos]

The financial markets are way too volatile: with instantaneous, real-time trading, a computer program going haywire can put nations into bankruptcy. We should find ways to slow things down a bit. For example, would a random 5-15 minute delay on trades kill capitalism? It would effectively stop speculation using computerized trading programs, and eliminate one risk caused by them.

As an old academic I smell an opportunity for a multidisciplinary paper involving finance and control theory Too bad I suck at the latter and dont know any finance guys....

 

[Thrasher]

There are some controls in place to suspend trading if the market drops too much too fast

http://www.nytimes.com/2010/05/07/business/economy/07trade.html

Some circuit breakers do exist, a legacy of the reforms made following the 1987 stock market crash, but they only kick in after a huge drop — and only at certain hours. Before 2 p.m., a 10 percent drop in the Dow causes New York Stock Exchange to halt trading for one hour. Between 2 p.m. and 2:30 p.m., the pause shrinks to a half-hour and after 2:30, there is no halt in trading.
If there is a 20 percent drop, trading stops for two hours before 1 p.m. and by one hour between 1 and 2 p.m. After 2 p.m., the market closes.

 

[Prime Junta]

Well well. The EU finance ministers are holding an emergency meeting this weekend. Their objective is to agree on establishing a European stabilization fund.

I sure hope somebody's been doing some homework beforehand, 'cuz this isn't going to be something that can be decided with a show of hands.

Edit: Also, Portuguese bonds are trading at 8%. That's... not good.

 

[Zaleukos]

Last week has made me considerably more pessimistic. I expect things to get worse before stabilisation. We'll see a run on Portugal and Spain as well as the non-Eurozone countries with weaker finances. If any of these countries fold the pressure will pile up on Italy next, and then French and German banks will be bleeding.

It will probably take at least a month or two before we can tell where things are headed.

There will be good buying opportunities in the well-run non-Eurozone countries (Sweden and ?) and in the countries that have their austerity packages behind them (Latvia has already taken all the warranted hits to the real economy) as their currencies drop for no other reason than general instability

There are some controls in place to suspend trading if the market drops too much too fast

http://www.nytimes.com/2010/05/07/business/economy/07trade.html

Yep, a lot of markets have that kind of mechanism in place, but it is a fairly blunt one. It should be possible to use subtler mechanisms to increase stability. PJs lag factor would for instance have some cooling effect without going all-or-nothing the way suspended trade does.

That markets overshoot in their correction is a totally expectable mathematical feature (which in this case represents herd behaviour, and traders only looking back once they've already overshot), and one that can be seen in other types of systems as well. The mathematical principles are the same, no matter whether you are dealing with a stock market or a fly-by-wire system similar models apply. There is an entire engineering discipline dedicated to such problems

At the same time I am weary of overly complex regulations, they might destabilise the system further as a tweak on one side causes side effects elsewhere. Simplicity and transparency should always be at the forefront..

 

[Prime Junta]

I'm wondering how come this isn't all over the news, 'cuz it's hugely important -- apart from a few mentions in side phrases, the only reporting I'm getting is from a Finnish evening paper usually more (although, to be fair, not exclusively) dedicated to wardrobe malfunctions of various blonde bimbos.

It seems the good folks in Brussels agreed yesterday in principle about a permanent Europe-wide stabilization mechanism, and the finance ministers are meeting tomorrow to hammer out the details... and it should be a done deal by Monday, when the markets open. That's some fast action, there; if it happens, it's about as surprising as seeing an African elephant do a triple-salchow.

And I do hope it'll include mechanisms to deal with the moral hazard -- if gov'ts think they can do whatever they like and Brussels will pick up the pieces, it's not going to exactly encourage fiscal responsibility.

 

[GothicGothicness]

It was in swedish news…. I guess you finsih people are more intressed in nude blondes playing violin like Linda Lampenius instead of the importance of the EU stablization

 

[Prime Junta]

Well yeah, it is in the Finnish news as well, but not BBC, CNN, or the other big international ones I've checked.

 

[Prime Junta]

Came across some fairly good arithmetic about the Greek situation in a Finnish business paper. Short version: it doesn't add up. The best-case projection from the current situation, assuming that Greece stays in the eurozone and neither defaults nor restructures will have 10% of the GDP go toward debt service. That just won't work.

I.e., no country has managed to weather a crisis like Greece's without either defaulting (or restructuring, which is a controlled, partial default), or devaluing the currency and lowering interest rates. Since interest rates are already at 0% and Greece is in the eurozone, the other two options are off the table.

Finland managed a turnaround from a deeper hole than Greece is in, back in the early 1990's after our real-estate bubble, banking crisis coupled with a collapse of the clearing trade with the USSR, and botched rescue. But, we only managed it by floating the currency… and it was NO FUN AT ALL, I can tell you.

IOW, whatever the politicians say, we're lucky to get 50% of the bailout money back… unless the Greeks somehow magically produce a Pericles and Alexios I Komnenos rolled into one, and then achieve an economic miracle nobody has achieved before.

If this is the case, I say we get it over with: agree to restructuring terms that spread the pain around as fairly as possible, and then either put Greece under German administration or kick it out of encourage it to leave the EU so it can devalue in order to get its economy growing again (not to mention doing all the rest of the stuff it has to do, such as crack down on tax evasion and bring at least a modicum of flexibility into the labor market).

 

[dteowner]

and then either put Greece under German administration

You don't think that will set up uncomfortable echoes that will have the Greeks burning down their country again? I never got to finish the post yesterday, but (to brutally summarize a wonderfully-thought-out treatise) there's a big difference (psychologically, but also functionally) between outsiders telling a country what to do and outsiders actually having the power to do it themselves.

 

[Gorath]

The German banking and insurance sector was pressured by the government voluntarily decided to help the Greek economy with a package of guarantees worth 8B€.

Banks and politics are heavily connected in Germany. So this means politics sneaked another 8B€ to Greece and the banking sector will have their accountants handle this in the legally correct way, which means including a "risk" worth 8B€ in their books and making preparations for the worst case. Ergo: a tax write-off.

 

[Gorath]

External administration doesn't work. Germany post WW2 was an exception because it was clear that there was no way to resist, and because the allies had full power to restructure everything.

 

[dteowner]

You know, the thing I'm having a hard time getting my head around are the size of the numbers. You're looking at roughly $10B, maybe a shade more. Barack and Pelosi-ov can spend twice that on fish studies before breakfast shows up. The combined might of the EU puts your economic power in the vicinity of ours (that was half the motivation for the whole thing, anyway, right?) so this really is a case of chump change. Nobody outside of congress likes to piss away that kind of money, but y'all would be considered damn-near-communist by our scale, so bailouts (be they corporate, or national) shouldn't trouble you overly much at the emotional level.

 

[Gorath]

10B€? This month?

On our scale both your parties would be right-wing, hardly electable by 90% of the population.

 

[GothicGothicness]

You know, the thing I'm having a hard time getting my head around are the size of the numbers. You're looking at roughly $10B, maybe a shade more. Barack and Pelosi-ov can spend twice that on fish studies before breakfast shows up. The combined might of the EU puts your economic power in the vicinity of ours (that was half the motivation for the whole thing, anyway, right?) so this really is a case of chump change. Nobody outside of congress likes to piss away that kind of money, but y'all would be considered damn-near-communist by our scale, so bailouts (be they corporate, or national) shouldn't trouble you overly much at the emotional level.

You mean they can borrow that money from china to spend on fish studies right?

 

[Prime Junta]

Er, I wasn't entirely serious about the German administration.

 

[GhanBuriGhan]

Hah, a place at the sun!

 

[dteowner]

10B€? This month?

On our scale both your parties would be right-wing, hardly electable by 90% of the population.

Not disputing that at all. That's kinda my point, though. If us pigdog fascists (by your scale) can swallow corporate bailouts, y'all should have no problem at all (psychologically speaking) bailing out a country or two. It's just your social(ist) democracy on a slightly bigger scale.

You mean they can borrow that money from china to spend on fish studies right?

True dat. I didn't say they were right to do it, nor that we could afford it, but that's never stopped the dems yet.

Seriously, folks, I'm not being obnoxious here (at least no more than usual ). With the combined economies of the EU, 8 billion Euro is chump change. So the money isn't a hurdle and you're psychologically conditioned so bailouts aren't a hurdle. Since y'all seem to have decided you can't let the ship go down, what's the holdup with forking over the loot?