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-   -   Greek gov't bonds downgraded to junk status, Eurozone in trouble (http://www.rpgwatch.com/forums/showthread.php?t=10450)

Prime Junta April 27th, 2010 22:28

Greek gov't bonds downgraded to junk status, Eurozone in trouble
 
Well well. S&P just downgraded Greek government bonds to junk status, which means that many institutional investors can't by them anymore. Yields jumped to 15% and more.

Put another way, the Greek government just drove off a cliff. They're deeply, deeply in debt, and with costs like that, they have no way to service it. This means one of two things: default or a very expensive bailout by the Eurozone big economies.

Both are bad news.

Default would wreck the Greek economy even worse than it's wrecked now. It's also stuck between a rock and a hard place: to get back on its feet, it badly needs to devalue, but it can't, because it has the euro. OTOH it can't give up the euro, simply because the logistics of that operation are so fiendishly complicated that it can't afford to. That can mean only one thing: deflation. Deflation means a protracted period — say, three years at an absolute minimum, and could easily be 10, 20 years or even more — of very high unemployment, falling wages, falling prices, and a dramatically falling standard of living.

A bailout, OTOH, is incredibly unpopular among the countries who could afford it, in particular the Germans and the French — they're not at all happy about throwing money at Greece, especially as their wrecked economy is largely due to dishonest dealing by their government. However, if they *don't* bail Greece out and allow it to go into default, it'll drive up interest rates all over Europe, and may well cause the next dominos to fall — Portugal, Spain, Ireland, and Italy aren't doing too great either, and Spain and Italy are pretty big economies.

This is the first real moment of truth for the euro. I honestly don't know if it'll survive as we know it. I don't think it's likely to collapse altogether, with the eurozone countries going back to their old national currencies, but it's possible that when the dust settles, one or more of the weaker countries will leave the EMU, and at the very least it's likely that the Baltic states lining up to join will find their wait suddenly lengthened.

IMO this is a tragedy that Europe has brought on itself. We played fast and loose with the entrance criteria, both for the EU and for the euro, for political reasons. Greece, Romania, Bulgaria, Latvia, and Lithuania (at least) have no business being in the EU, let alone the eurozone; their economies, and in many cases polities, just aren't robust enough. We took them in for any of a number of political reasons — to bring the former Socialist countries into the Western orbit, or in an attempt to stabilize the chronically unstable, corrupt, and misgoverned Greece.

That was misguided kindness. The EU can only work if the countries in it are roughly on the same page politically and economically; it can give a bit of a leg-up to countries that are a bit weaker but are solidly on the right path, as the successful example of several other former Socialist countries shows. However, the EU can't do a country's work for it, and countries looking for quick short-term benefits will get bitten in the long run. Now we all pay.

Once the EU comes out of this, it'll look rather different. I'm pretty sure that we'll see the official emergence of a multi-tiered system, with a core of rich, stable Eurozone/Schengen Area countries, a second tier of countries with a realistic possibility of joining the core but not yet there, a third tier of countries that are EU but neither Eurozone nor Schengen, nor about to join immediately, and a fourth tier of "hang-around members." I also believe this structure will fairly quickly stabilize, with countries mostly remaining where they are, except perhaps the most successful of the second-tier countries eventually joining the core. I have no idea what that'll mean, globally, but things will be different, for sure.

Thrasher April 27th, 2010 22:37

Why don't they go after the crooks that stole the money and get it back?

dteowner April 27th, 2010 22:44

Apparently Portugal also got moved a peg closer to junk bond as well.

Prime Junta April 27th, 2010 22:45

Mostly because said crooks have already spent it on wine, women, and roulette, I'd expect — or else they're the ones who are responsible for catching thieves, and are therefore unlikely to go after themselves.

In any case, almost all the money will be unrecoverable by now. A lot of it has just evaporated as assets crashed; the rest has been spread around or salted away far enough that it can't be found. Hey, maybe even you've ended up with a few dollars of Greek gold!

And yeah, the PIIGS are all in trouble. Portugal, Italy, Ireland, Greece, and Spain, that is.

Ubereil April 27th, 2010 22:52

How long ago was Ireland one of the fastest growing economies in Europe? Can't be more than three years. What happened there?

Übereil

Thrasher April 27th, 2010 22:53

International investigations are in order. Dig up those caches! Prosecute the crooks!

Prime Junta April 27th, 2010 22:57

Quote:

Originally Posted by Ubereil (Post 1061009123)
How long ago was Ireland one of the fastest growing economies in Europe? Can't be more than three years. What happened there?

Bubbles produce really impressive growth figures. Until they pop.

Of course, at the time, Ireland's growth was touted as a brilliant success of neoliberal laissez-faire economics. Strangely, the folks who were doing that have been strangely silent about it lately…

dteowner April 27th, 2010 23:00

Greece will largely be chalked up to corruption (even if that's only a portion of the pie), but what about the others? Is this an indictment of the economics of Euro social democracy?

Prime Junta April 27th, 2010 23:12

Quote:

Originally Posted by dteowner (Post 1061009131)
Greece will largely be chalked up to corruption (even if that's only a portion of the pie), but what about the others? Is this an indictment of the economics of Euro social democracy?

Hardly. Greece wasn't even among the most social-democratic of Euro countries; Germany, France, and Scandinavia have a great deal tighter social safety nets, and they're doing fine, considering, especially Germany.

As to the other PIIGS, Ireland and Spain are classic bubble economies that popped and are now trying to pick up the pieces. Spain practiced remarkable fiscal discipline, actually, but during the boom a huge amount of money flooded into real estate there, and then it flooded out — a very similar dynamic as Florida in the US. There wasn't all that much Spain could do about that, I think — a runaway real estate bubble is very hard to pop, especially if the money is coming in from outside, and you're in a situation where you can't restrict capital imports (as is the case within the EU).

And Italy is just a corrupt kleptocracy with huge regional disparities and a government that doesn't. Govern, that is. (Lovely place to visit, though, but I wouldn't want to live and work there.) I don't know much about Portugal, other than that it always was one of the weakest economies of Western Europe — it never really got going full steam after dumping its dictator.

I've come to visualize the world economy as a bunch of containers filled with water, on board a ship that rolls a quite a bit. The smaller the containers and the less permeable their barriers, the stabler it is — crises are mostly local or at most regional, and there's not a lot of contagion. What we did over the past several decades was take down the walls between most national economies. We made it possible to zap capital around the globe instantaneously and with no cost nor controls. The idea was that the markets, when left to themselves, are best at allocating capital internationally, leading to increased prosperity for everyone.

The trouble is that that also resulted in capital sloshing wildly around the globe from one place to another, causing gigantic booms and catastrophic busts. Spain and Ireland experienced this big-time: they got a massive flood of money that drove up prices and wages, and then the money left as quickly as it came, leaving the prices and wages high but productivity nowhere near high enough to justify them, not to mention government programs predicated on tax revenues that are now well beyond reach. Now they're in deep doo-doo, and really through no (huge) fault of their own.

They're now discussing the possibility of a variant on the Tobin tax — something to put just a little price tag on those capital flows, which would make short-term speculation just a bit more expensive, without really affecting long-term investment. I hope it works out.

bkrueger April 27th, 2010 23:16

Quote:

Originally Posted by Ubereil (Post 1061009123)
How long ago was Ireland one of the fastest growing economies in Europe? Can't be more than three years. What happened there?

Übereil

I assume this is a rhetorical question…

If not there is an easy recipe to follow Ireland:
- Remove controls over speculation in order to attract speculators
- all speculators come, foreign banks found daughters in your country in order to avoid controls in their own country
- get much money
- the bubble explodes because of missing controls
- success

By the way with regard to Greece there is comfort:

Germany alone has given 500 Billion Euro bailout money to banks after the financial crisis - the complete Greece national debt is 300 Billion Euro. :biggrin:

dteowner April 27th, 2010 23:22

Quote:

Originally Posted by Prime Junta (Post 1061009135)
They're now discussing the possibility of a variant on the Tobin tax — something to put just a little price tag on those capital flows, which would make short-term speculation just a bit more expensive, without really affecting long-term investment. I hope it works out.

As much as I dislike taxes and government meddling, I'd be all for that one. There's too much emphasis on the value of the paper these days, and not enough on the value of the product/service. It leads to a lot of perverse incentives and quite possibly does more harm to the economy than good.

GhanBuriGhan April 27th, 2010 23:30

Yes its a troublesome situation, and the way it came about is extremely annoying. That states have some trouble fulfilling all the stability criteria is somewhat to be expected, even the big economies have repeatedly failed there. But as far as I can tell, the greek government lied and obscured its true dept on purpose, simple as that.
While the german government specifically puts on a nice show of not-really-wanting-to-help and putting-up-tough-conditions this is largely for the benefit of domestic politics, I'd guess. There is no way the rest of Europe and especially the big economies can afford to let Greece crash entirely and I don't even think they can easily throw Greece out of the Eurozone. The real question is what this bailout will do to the economies in the rest of Europe. I am no expert on economics, but my guess is we can probably save Portugal too, if need be, but if Spain or Italy start to fail (or maybe even Ireland is enough), my feeling is that things could go real ugly and scenarios like what PJ described in the OP become quite imaginable.

Prime Junta April 28th, 2010 08:25

Quote:

Originally Posted by GhanBuriGhan (Post 1061009144)
Yes its a troublesome situation, and the way it came about is extremely annoying. That states have some trouble fulfilling all the stability criteria is somewhat to be expected, even the big economies have repeatedly failed there. But as far as I can tell, the greek government lied and obscured its true dept on purpose, simple as that.

Worse, it was only able to do that because people were willing to look the other way. Greece was taken into the EU, and then the Eurozone, for political reasons. That meant bending the rules and looking the other way. If you're under real scrutiny, you can't get away with the shit Greece did.

Quote:

While the german government specifically puts on a nice show of not-really-wanting-to-help and putting-up-tough-conditions this is largely for the benefit of domestic politics, I'd guess. There is no way the rest of Europe and especially the big economies can afford to let Greece crash entirely and I don't even think they can easily throw Greece out of the Eurozone. The real question is what this bailout will do to the economies in the rest of Europe. I am no expert on economics, but my guess is we can probably save Portugal too, if need be, but if Spain or Italy start to fail (or maybe even Ireland is enough), my feeling is that things could go real ugly and scenarios like what PJ described in the OP become quite imaginable.
Greece, Ireland, and Portugal are relatively small economies, and as such they're manageable problems, assuming the political will is there to manage them. Spain and Italy are big ones, and I'm not sure the rest of Europe *could* bail them out even if it wanted to.

Prime Junta April 28th, 2010 09:18

Quote:

Originally Posted by Thrasher (Post 1061009124)
International investigations are in order. Dig up those caches! Prosecute the crooks!

If it only were that simple.

In a very small nutshell, what happened was this:

(1) The Greek government lied in order to get accepted into the Eurozone.
(2) Getting into the Eurozone drove down the interest level of government debt.
(3) The Greek government borrowed at those newly cheap rates like there's no tomorrow.
(4) A party ensued. The money was spent in all kinds of ways on all kinds of people. A few people got very rich, but most people saw their income rise.
(5) The global economy crashed, and people started paying attention.
(6) The Greek lies came to light.
(7) Interest rates shot up, leaving the Greek gov't with a crushing burden of interest payments on its national debt.

Since the country is poorly governed to start with, they have no way to get that kind of money via taxation, and since they already privatized most of the state-run businesses, they don't have any assets to sell either.

Other than a bailout, this leaves two options — default and socialization. The Greek government could simply pass a law to take over, say, the financial sector, or the assets of the Greek Orthodox Church, or any of a number of other parties who have a lot of valuable stuff, and then sell its assets to pay off the debt. Or it could default. That's what the protesters want — some want them to seize assets, others want them to default, some want them to do both and give Communism a try.

Of these options, IMO a bailout is the least bad, followed by a default, socialization, and Communism. None are good news, and the last two aren't really realistic, barring a full-on popular revolution (which could always happen, of course), because they would have Greece repudiate just about all of its international commitments, which isn't easy to do.

Prime Junta April 28th, 2010 11:39

Oh please. Now they're banning shorts.

[ http://news.bbc.co.uk/2/hi/business/8648029.stm ]

AFAICT this isn't naked shorting, which really is pernicious. Ordinary shorting is a favorite scapegoat, but it's actually a stabilizing influence on markets, because those shorts have to be covered. I.e., this is a panic move that demonstrates a pretty fundamental lack of understanding of how markets work, and as such is not a reassuring sign.

I.e., whenever the stock market falls, the short-sellers will cash in, which results in a burst of buying as they cover their shorts, which slows down or stops the fall. Banning shorts will only make things worse.

(If BBC had this wrong and this is about naked shorting, apologies. That should already be banned, though, so I don't see how it could be the case.)

akarthis April 28th, 2010 13:08

Well, i'm from Greece and i can tell Prime Junta told many truths in his posts,but believe me it's not so simple as it looks like.
Greece at the moment is in dire condition and everything is falling apart.
I agree that Greece should never joined the Eurozone with the economy it had back then.So,indeed, "cooked" books were presented. BUT,i can not accept that Europeans countries were fooled.They simply accepted them and,also, there are some kind of evedince that some of them encouraged this behaviour. For political reasons?Most propably…..

But,also,for future economic and financial exploits.

About the raise in salaries you mention,you are wrong.All money went to specific hands,politicians and mostly to 4-5 families that basically rule now.And we are talking for a lot of money.It's not strange that these families are considered among the strongest(financial) around the world. And it's really hard to prosecute them

In any case future seems pretty dark here and yes,i am really afraid Europe faces one,if not the biggest, challenges.

I can come up with many more details but at the moment i am checking vacancies around Northern Europe.hehe

Gorath April 28th, 2010 13:39

It's absolutely terrible that it's impossible to kick Greece out of the Euro zone. And it's similarly bad that the Euro contracts don't even allow help by the EU. So the EU needs to be tricky to be a legally allowed to help.

Now it's a no win situtation. As long as the structure in Greece is as corrupt as it is now, the country will need more money every few months. It's a bottomless pit.

A few scenarios:
1) Help Greece. They'll need much more money 4 times a year. Maybe a couple of years and 250B€ can cure the problem … until it happens again.
1a) This will set a precedent. Other problematic Euro zone countries, which are also in trouble albeit objectively much more stable than Greece, will demand the same. And rightly so.

2) Help them once, because it has already been agreed upon. Then let them go bankrupt.

3) Pay them to leave the Euro zone. Give them 100B€ and ask them to sign a contract. Then show them the door and ask them not to come back until they're 100% clean.

4) Change the Euro contracts to allow sanctions in case of misbehaviour. No chance. Guess who will veto it. ;)

5) Don't help them. Greece will go bankrupt, the Euro will probably survive. The other critical countries no what happens if they don't get their act straight.

6) Help all endangered economies, but only in exchange for drastic changes. Especially in case of Greece this would be a massacre. Play hardball. Beggars can't be choosers.

—————————————————

The best solution is IMHO (6) in combination with (4). If that doesn't help try (3). If they still refuse the solution should be (2), in combination with a prayer that the Euro survives. (5) has already been ruled out and (1) only delays the problem.

Playing hardball is 100% necessary. The necessary changes have to be enforced.

On sidenote, the strikes in Greece are certainly not helpful. The people in other country can only get the impression that large parts of the population still don't understand that their country is nearly bankrupt.

akarthis April 28th, 2010 14:21

Well,all started basically wrong with the Eurozone.And now,it's hard to set it straight.
It's not about Euro survival.They want a strong currency against dollar.That's why they do not let Greece go bankrupt.I believe they are working at the moment for creating the right rules for kicking out "bad" players.Until now there is no such settlement.

Watching the yesterday attack at Portugal spread rates,combining with the ferocius attack at Greece spread rates one can wonder how big is the game playing at the moment globally.Especially if we accept as true the fact that statistically Greece debt is the same as the US and almost the same with UK(never saw the official rates)

As for the strikes,well, it's of little importance of what others think because of the information they have.It's a risk asking people to pay for money they never got or used,especially for amounts like billions.

Prime Junta April 28th, 2010 14:31

Quote:

Originally Posted by akarthis (Post 1061009252)
BUT,i can not accept that Europeans countries were fooled.They simply accepted them and,also, there are some kind of evedince that some of them encouraged this behaviour. For political reasons?Most propably…..

I agree. The rest of us do share a big part of the responsibility. We knowingly looked the other way.

Quote:

But,also,for future economic and financial exploits.

About the raise in salaries you mention,you are wrong.All money went to specific hands,politicians and mostly to 4-5 families that basically rule now.And we are talking for a lot of money.It's not strange that these families are considered among the strongest(financial) around the world. And it's really hard to prosecute them
Not all, or even most of it. If it did, you would have far fewer problems. Specifically, your price and wage levels would not have gone up, and you would not need to devalue/deflate, as you have to do now. "All" you would have to deal with is the national debt. Here's a graph of the Greek GDP per capita since 1998:

[ http://www.tradingeconomics.com/Econ…spx?Symbol=GRD ]

The GINI coefficient (measuring income differentials) hasn't changed much at all over the same period; it's been meandering between 0.31 and 0.34.

[ http://stats.oecd.org/Index.aspx?Que…QueryType=View ]

What does this mean? Yes, most definitely a few people did get extremely rich — but they did not get all, or even anywhere near most of the money. Suppose Greece borrowed 200 billion euros over this time. If those four families got a measly 10% of that, they'd walk off with a cool 20 billion. The other 180 billion would still have been spent on other things — infrastructure projects for the Athens Olympics, higher salaries for civil servants, and so on and so forth. That would all translate to more demand for all kinds of stuff and an upward pressure on prices and wages — an overheated economy, IOW.

So, blame those crooks all you want (and the rest of the EU for allowing them to get away with it, if you like) — but don't delude yourself into believing that they got all the money while you never got anything, so all you have to do is catch them and get the money back, and all will be well. They didn't, and you did, and the money's gone.

Prime Junta April 28th, 2010 14:33

Quote:

Originally Posted by Gorath (Post 1061009254)
The best solution is IMHO (6) in combination with (4). If that doesn't help try (3). If they still refuse the solution should be (2), in combination with a prayer that the Euro survives. (5) has already been ruled out and (1) only delays the problem.

Playing hardball is 100% necessary. The necessary changes have to be enforced.

On sidenote, the strikes in Greece are certainly not helpful. The people in other country can only get the impression that large parts of the population still don't understand that their country is nearly bankrupt.

I agree. And, again, none of this would have happened had we not been so eager to take on new members, ready or not.


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