This page has been archived and commenting is disabled.
Greece Is Europe: The Failure Of The Euro
- Budget Deficit
- Capital Markets
- Corruption
- Credit Default Swaps
- default
- Deficit Spending
- Deutsche Bank
- European Central Bank
- Eurozone
- Germany
- Greece
- Gross Domestic Product
- International Monetary Fund
- Ireland
- Italy
- Lehman
- Ohio
- Portugal
- Purchasing Power
- ratings
- recovery
- Reserve Currency
- Sovereign Debt
- Sovereigns
It may not matter if Greece is bailed out by the powerful EU economies because they are just one of many problems that the eurozone faces. While George Papandreou's socialist government survived a no confidence vote, they are just postponing the inevitable. For while Greece may be temporarily propped up with loans, it is likely that they will ultimately default on the massive loans the EU and IMF have poured into it. This may have the unfortunate consequence of spilling over to the other PIIGS and jeopardize the entire eurozone.
The basic problem that the eurozone faces is the unworkability of the monetary system envisioned by the European Monetary Union (EMU). They are now paying the penalty of having a central bank that is subject to political pressures. Make no mistake: the purpose of the EMU was political more than economic, created to foster further political integration of the EU. Looking back on this faulty system the economically powerful countries perhaps regret having given up their monetary independence. It will be they who will pay for it.
The end result of this faulty system, the PIIGS' (Portugal, Ireland, Italy, Greece, and Spain) deficit spending, will result in the euro's devaluation against other currencies, including the dollar. While the printers of dollars have nothing to brag about, the U.S. has the benefit of being the world's reserve currency and having a semi-capitalist country that is still the most powerful economy in the world. The Europeans have not integrated as well as we, and have not achieved that monetary status. With all our faults, the U.S. and its Treasury bonds are still the preferred port in a storm.
What the EMU has created is a Europe loaded up with debt financed by a banking system that has been given almost unlimited credit by the European Central Bank (ECB).
The worst part of the system is that it has given profligate countries an almost blank check to spend. To use an analogy, it is as if the Fed were to bail out all the U.S. states that have spent too much. Greece came into the EU as a corrupt socialist country with a huge bureaucracy and a moribund economy. Their political system, as we can see from the protests and riots, caters to a large public sector that keep voting in politicians who will support their lifestyles. They don't care who pays for their benefits as long as it isn't they.
Contrast this with a well run fellow EMU country, Germany, with a large and productive private sector whose sovereign debt is relatively modest in relation to its GDP:
The socialist PASOK party run by Mr. Papandreou and his father and grandfather before him, ran a political model familiar to Americans: an expanded central government, a public sector that consists of about 40% of the economy, a perpetual majority in parliament that serves their bureaucrat voters, a decline in the economy, massive corruption and tax cheating, and deficit spending to pay for the benefits. Greece ranks 37th out of 43 countries in Europe in terms of economic freedom. They have run up about €360 billion in debt ($518 billion).
To put Greece in perspective, at about 11 million people they are comparable to Ohio, but with a GDP of about $330 billion they are smaller than Ohio (GDP of about $480 billion). Ohio's local and state governments spend about $106 billion per year. Greece spends $152 billion, but it has been running a deficit equal to 10% of GDP (down from 15% in 2009).
Now Greece needs another €100 billion or so on top of €110 already pledged to them by the EU.
This need for a new bailout was a bit of a surprise to many European observers. They didn't count on the intransigence of the socialists and their rather half-hearted attempts at budget cutting. They didn't count on the stagnation of the Greek economy which would further diminish government revenues. They didn't count on the backlash of Greek citizens who are famous for their inventiveness at evading taxes.
The big question about Greece is whether or not they can repay their massive debt even with bailouts.
"Euro-zone governments are still pretending that they are dealing only with a liquidity problem, and that Greece and Ireland will emerge creditworthy from their programs," says Thomas Mayer, chief economist at Deutsche Bank in Frankfurt.
"But what happens if these countries can't return to the capital markets? If more austerity programs are needed, will voters rebel? The message is missing that a country that can't pay its debts must restructure," Mr. Mayer says.
While he survived his no-confidence vote, Mr. Papendreou has to convince his party members to make €28 billion more in budget cuts by July 3 or the next installment of the May 2010 bailout money (€12 billion) will be held up.
The market is betting that Greece will default. Insurance on their debt has gone up more than 47 basis points. Here is the chart on credit default swaps for Greek bonds:
The picture for Greece is grim:
Young people are still the hardest hit by Greece's deepening economic woes, with 42.5% of those between ages 15 and 24 without jobs in March—a sharp increase from 29.8% a year earlier.
The decline in industrial output accelerated in April, falling 11% from the year-earlier level after an 8% drop in March.
Greece has promised the EU and IMF that it will implement €28 billion in fresh spending cuts and new taxes to bring the country's budget deficit below 1% of gross domestic product by 2015, down from 10.5% last year.
Although the final details have yet to be announced, the government is considering several highly unpopular measures, such as new taxes on the poor, an extraordinary 3% levy on all Greek wage earners, new property taxes and cuts in retirement bonuses.
Spending cuts include deep cutbacks in welfare payments and possibly even layoffs in Greece's long-cosseted public sector.
On June 5, 2011 some 100,000 people gathered in front of parliament to protest spending cuts and reforms:
Protesters and even rioters appear every day to confront parliament. This environment will make it very difficult for the Papandreou government to survive to the end of the year.
There is a serious debate going on between Germany and the rest of the EU. You would guess right that Angela Merkel is getting a lot of heat from her fellow Germans about the bailout. The Germans want debt reductions (haircuts) from Greece's bankers. Or at least they would like an extension of the maturities. Which means they don't want to stick German taxpayers with the entire bill.
The ECB and the IMF do not want this because it would amount to a de facto default by Greece. This is not a small problem. It is a huge problem. If it were only Greece, then it would be a minor issue. They are afraid such a default would start a chain reaction of defaults (euphemistically called a "credit event") by Greece's fellow PIIGS, especially Ireland and Spain. The ECB said last week:
The risk of "adverse contagion" from the bloc's sovereign debt crisis, and its interplay with the financial sector, "arguably remains the most pressing concern." European-level efforts to contain the debt crisis "have not been sufficient," and European crisis management has been "fraught with some detrimental shortcomings."
In other words, if Greece defaults, the market for euro denominated government bonds would possibly collapse and the losses would be enormous. Here is a picture of the debt structure of major economies as a percentage of GDP, including the PIIGS:
What is the real fear behind this? The stability (and bailout) of their banks who have invested massively in government bonds of the PIIGS. Here are some charts on banks exposures:
This exposure concerns the ECB and national bank regulators because their banks are highly leveraged:
If these banks get into trouble, who will bail them out? The article from which the above chart was taken (Fortune) likened the problem to Lehman which pre-Crash had 30:1 leverage. The German taxpayers would not only bail out their own banks but also would be on the hook for propping up Greece, et al. If you wish to see a list of the top 40 banks in terms of exposure to a Greek default see here.
So, what will happen?
The problem as I mentioned at the beginning of this article is the European Monetary Union and the concept of the euro itself. All the safeguards of the Maastricht Treaty establishing the European Monetary Union and the ECB have been tossed aside as they try to save the system. The "no bailout" rule, the ECB independence mandate, the prohibition of deficits of more than 3% of GDP, the prohibition of debt exceeding 60% of GDP, the prohibition on ECB purchases of member sovereign debt, have all been ignored during this crisis.
Instead the ECB has been a massive fiat money pumping machine that has served the needs of its client nations to borrow and spend. Here's how it works:
When governments in the EMU run deficits, they issue bonds. A substantial part of these bonds are bought by the banking system. The banking system is happy to buy these bonds because they are accepted as collateral in the lending operations of the ECB. This means that it is essential and profitable for banks to own government bonds. By presenting the bonds as collateral, banks can receive new money from the ECB.
The mechanism works as follows: Banks create new money by credit expansion. They exchange the money against government bonds and use them to refinance with the ECB. The end result is that the governments finance their deficits with new money created by banks, and the banks receive new base money by pledging the bonds as collateral.
This is what the Greeks did and as a result they exported inflation, including price inflation, to the rest of the eurozone. They ran a deficit financed by eurozone banks, the banks were allowed to use the bonds as Tier 1 capital, and the ECB expanded money and credit to accommodate them. The Greeks got something for nothing from the fiat money expansion, exported price inflation to the eurozone, and as prices went up, the suckers at the end of the money chain paid more for the same things.
The costs of the Greek deficits were partially shifted to other countries of the EMU. The ECB created new euros, accepting Greek government bonds as collateral. Greek debts were thus monetized. The Greek government spent the money it received from the bonds sale to win and increase support among its population. When prices started to rise in Greece, money flew to other countries, bidding up prices in the rest of the EMU. In other member states, people saw their buying costs climbing faster than their incomes. This mechanism implied a redistribution in favor of Greece. The Greek government was being bailed out by the rest of the EMU in a constant transfer of purchasing power.
This is a house of cards. The Maastricht Treaty established that the ECB cannot make loans to banks without certain defined collateral. Specifically, for this bailout they can't accept Greece's bonds as collateral if Greece has been declared to be in default. Thus the current argument between Germany and the ECB about haircuts and extensions. Both S&P and Moody's have said they would treat haircuts and extensions as a default. S&P just cut Greece from B to CCC, and Moody's to Caa1. Such ratings are defined as meaning that there is an even chance that Greece will default.
There are two ways out of this mess: default or monetary inflation. They could unwind the EMU and ditch the euro, but that is unlikely to happen in the near term.
My guess is that they will print their way out of this mess. Continental governments have very little stomach for mass unrest since it has a tendency to bring down governments, bring in more radical regimes, and create uncertainty in Europe. They have already pledged another €750 billion in stand-by bailout money to the other PIIGS. That will be used up and perhaps more.
The eurozone powers are crossing their fingers and waiting for something good to happen. With various economic signs pointing down in the U.S. and in the rest of the world, this only puts greater pressure on the euro and their debt problem. This week red flags were raised about the German economy, the powerhouse of the EU. There won't be an economic recovery to save them.
Relying on monetary inflation is a traditional way for governments to get themselves out of debt. A 7% rate of inflation could reduce the amount of debt owed by these sovereigns by about one-third in just five years.
That is just too tempting for the EU to pass up.
This article originally appeared in The Daily Capitalist.
»
- advertisements -
Thank U Econophile.
Best article i read so far concerning the greek drama.
Where are you getting your figures for Greek defence spending ?
I am reading $13,917 million dollars for 2008
and $ 9,369 for 2010 via wiki.
Greece has consistently the highest level of defence spending per capita in Europe !
There is also all the other spending that a country must pay for such as a diplomatic service etc etc.
Your comparsion between Greece and Ohio is not a good one - for example Ohio does not spend much on national defence.
Also lack of goverment debt in the Euro region as a whole is the primary reason for the banking crisis although the Greek situation may be somewhat different.
This is the most important statistic in the Euro area in my opinion.
Central government debt; total (% of GDP) in Euro area
This has increased the leverage of the banking system to very high and unstable levels.
Also check out Mike Darda latest interview in the WSJ
He accuses the ECB of wrecking the prospect for fiscal austerity by contracting the monetory base.
He compares this to the FEDs decision of 1937 - 38 which may have been their punishment ( I am speculating now) for the nationalisation of Gold withen the treasuary.
Cork, you can't fool me, you are really Paul Krugman writing under a pseudonym. Also, Mike Darda? He forecast a "V" recovery, 4%+ growth and lower unemployment in late '09. See my comment above to Redneck on Ohio, but Greece's defense budget is tiny (€1.6 billion).
Yes Econophile I am gravitating towards neo Keynesian solutions - you got me , but please don't associate me with that other Dork Krugman.
However I favour Gold as a mechanism to balance global trade in a rational manner and therefore prevent Sovereign wealth funds accumulating absurd goverment money surpluses and also absurd defecits in other countries.
So I am a Hybrid Bastard , Goverment money at home , Gold to prevent trade distortions and silver to protect the little people.
New Dealer maybe but with limited or no private credit creation.
Despots and corrupt governments always tell the people that they must stay in power or something worse will come in to power. Thus the status quo.
"Greece came into the EU as a corrupt socialist country with a huge bureaucracy and a moribund economy. Their political system, as we can see from the protests and riots, caters to a large public sector that keep voting in politicians who will support their lifestyles. They don't care who pays for their benefits as long as it isn't they."
+1
This sums it up. And now they are to face the consequences of their socialist imbecility, which is slavery to their banksters. Same fate awaits many other countries, including the US.
NTSH,
current government (social democrats) came to power 2009 after New democracy has ruined the country since 2004 by "cooking the books".
And. No I am not a socialist... far from it. But pure nonsense must be met.
Dear Econophile,
you take the big picture of USD v.s. Euro. Thats good. But boy are you wrong on the monetary side.
1) Combine Greece fiscal deficit with Germany's 2011 debt of 2,5% of GDP and you will get 2,8%
2) Combine Portugals with France's 5,7% of GDP fiscal deficit and you will end up with 5,73%
3) Combine Ireland with Italy and the Dutch and you will get 4,2% of GDP fiscal deficit.
Same story for total debt. Combine Greece with germany and GG will have 83% of GDP.
US fiscal deficit is closer to 9% (1,27/14,7 TnUSD =8,6%) of GDP.
No wonder the Euro is still at 1,43 to the USD.
Young, the point of the article was that Greece's failure is imminent and that it could take down the euro. Small as they may be, they can't repay their debt under any scenario. That is the key. Germany can tax the shit out of their citizens, Greece can't. The money party is just starting in the eurozone and it will put pressure on the euro.
Survival thy name is INFLATION.
Nothing else will do it, as it is the least worst choice.
Think that Weimar or Zimbabwe would agree with your appraisal? :-)
I don't think a country that is primarily a natural resource economy can be compared to the U.S. And with only 12,000,000 people it is less than a third the size of our Californica. And Zimbabwe has given up its own currency and uses the dollar for part of its trade.
Apples and oranges.
The German people went thru some tough times and today and for decades is one of the strongest most disciplined economies in the world.
It is more than probable that the Eurozone will,once again, be bailed out by either the IMF (possible) or the ESF (more likely), the super secret slush fund of the USTreasury.
The global banksters will not allow a default; technical or real. Too many Red Shield progeny would take a haircut; a real no-no for the Masters of the Universe.
I would phrase it differently: "It is more than probable that some Eurozone governments will, once again, be bailed out by some international effort led by banking institutes that don't wish any changes in the way financial business is done..." That ugly "Red Shield" propaganda does not help the argument, even if it were true it would not matter...
The currency is not the government, except when it is (massive monetization)
Beauty is in the eye of the beholder.
What he writes about the Rothschilds is perfectly true, not in the least 'propaganda', though not pervasive or inclusive of the other Plutocrats' societies that seek to increase the subjugation and the overthrow of the proletariat.
The article is a good attempt at explaining the situation. I couldn't do better, but it still falls short. The big colourful chart with all the numbers has no references, no source. Other charts have big numbers but no analysis - the figures have no context. Then the tiresome ignorant comments that do not illuminate, simply waste time, and childishly try to affix blame. I simply want to understand the situation clearly and position my assets accordingly. Could someone simply analyze the three or four most at-risk countries: how much do they owe, public, private and off-balance sheet; when is it due; what is their capacity to pay; evaluate their economies and taxation schemes; outline a few possible paths; the the implications to banks and governments? Leave out the hyberboli, references to abyses, grim-reapers, sexual positions, buttering bread, suckers at the end of chains, etc. It is alot to ask, but I am convinced that there is one intelligent person in the room.
The article is a good attempt at explaining the situation. I couldn't do better, but it still falls short. The big colourful chart with all the numbers has no references, no source. Other charts have big numbers but no analysis - the figures have no context. Then the tiresome ignorant comments that do not illuminate, simply waste time, and childishly try to affix blame. I simply want to understand the situation clearly and position my assets accordingly. Could someone simply analyze the three or four most at-risk countries: how much do they owe, public, private and off-balance sheet; when is it due; what is their capacity to pay; evaluate their economies and taxation schemes; outline a few possible paths; the the implications to banks and governments? Leave out the hyberboli, references to abyses, grim-reapers, sexual positions, buttering bread, suckers at the end of chains, etc. It is alot to ask, but I am convinced that there is one intelligent person in the room.
Dude, I was trying to explain the situation, not write a book. If you want more, do your own research. Sorry that you didn't get my points. BTW, all charts are from OECD, BIS, Eurostat, World Bank, and IMF.
This comprehensive yet concise report by the European Economic Advisory Group from Münich comes highly recommended:
EEAG Report on the European Economy 2011
The pre-Eurocurrency system was excellent : it was called the "monetary snake". Each European currency could float within the system according to circonstances. Countries like Italy benefited from the "snake" system by slightly devaluing their currency in times of crisis. With the tailor-made-for-Germany Euro currency they now can't.
If intelligent people prevail at Brussels, this is the system we're going to head back to.
Sounds like you forgot all about George Soros' breaking the Bank of England. If you try to float currencies within defined bands, the markets can and will take the weakest of them down.
Why do you expect "intelligence" from the politicians we send to Brussels? It's often our second tier. It's not a decision that has to be taken in Brussels. It's a national decision of every Euro-Nation. The Euro not much more than a multi-currency peg. The UK does not want in, full kudos and sympathy. Others wanted and still want it. Most Nations entered the Euro because they wanted a currency which would be more stable. And we hated the "snake", it was anything but stable. I remember how difficult it made trade and investments inside Europe. OK, if you are a politician then the Euro is terrible. It has all the issues of a "harder" currency, nearly as bad as a gold standard. It implies you shrink your national expenditures during good times, which Prime Minister likes to do that? Tailor made for Germany? No, we got in because it was promised it would be as conservatively managed as the Bundesbank did. We joined a German "Service" template on purpose, willing and hoping it would be "just like the D-Mark". Hard. Stable. No sense-of-humour-like-Germans-seriously-hard.
of course the solution is inflation only because it always has been the solution not because it is right. the real solution only appears in a new system(the phoenix theory).
with that in mind why can't the maturing debt be rolled over into a sort of infinity, interest only loan with an adjustable rate to clear the current issues making way for greece and the rest of the piigs to build new issues. wouldn't that kick the can down the road with a cannon(poke appropriate size hole in top of empty can. place open side of can in a larger receptacle filled with 1-2 inches of water. fit a firecracker snugly into hole in empty can so that just the fuse is exposed. light fuse.)
i don't understand the objection to this. the debt would be a perpetual asset for the banks as it is, de facto, anyway.
"Greece came into the EU as a corrupt socialist country with a huge bureaucracy and a moribund economy."
Spot on. But can we extend that discription to pretty much EVERY member country of the bloated, corrupt and bankrupt Socialist republics that joined the EU please
...and although Britain didn't join the Euro it should be included too with news that the Toffee Nosed Home Counties Village Idiot (Tory) Party has, despite adding to the parasitical burden of socialist taxation in raising more tax, VAT, State Insurance, Fuel and Cigarette duties (that helps everyone!), has actually INCREASED the budget deficits over the previous worse Govt in British history.
Spending in April and May was 4.1% higher than during the equivalent period in 2010. Government borrowing was £27.4 billion, up from £25.9 billion the previous year... national debt has increased from 53 to 61 per cent of GDP .
The Tory Party are pissing away even more money than the socialist scum of Labour with increasing Overseas Aid, Wars, a bankrupt Socialist State healthcare system and a 71% increase in contributions to the EUSSR.
Anyone thinking the PIIGS are the black sheeps of Europe hasn't got a handle on the 'Big Bankrupts' that are holding this shambles together by their scrawny fingernails ...as Jim Rogers said last year, "the UK is totally insolvent" years ahead of those bozo rating agencies
Sounds pretty much like what's going on here in the good old US of A. I have a feeling its a global fiat-based money thingy.
Imagine a world where lenders who len to the insolvent actually have to pay the price for their poor lending decisions. we are in the place we are for one reason and one reason only. globally central bankers have been bailing out bankers for the folly, it has destroyed capitialism as we know it, and the only way forward to to fix the problem. the problem is that since the central bankers are owned by the bankers they will do everything thing in their power to make sure their masterrs don't loose money. After all if they did so those cushy jobs, appointments, easy money may vanish when they leave office. Their motivations are so clear it akes me gasp. the very idea that they have anyone other than their own self interest in these events in just foolish. Nobody in their right mind would have ever allowed the system to get where it is. from a structural and design standpoint the system is designed to fail and be rescued by the taxpayer. the bankers know this and why give it up. fixing the problem means they make much less money, they are limited in downside risk because of the state and central banks. So, they (the central bankers) will never fix the system. They know who butters their bread.
I might be dense: I don't get the argument... So the Dollar is better then the Euro because of the european banking system or the periphery, including Greece? Long or short term? May I quote the author: "There are two ways out of this mess: default or monetary inflation. They could unwind the EMU and ditch the euro, but that is unlikely to happen in the near term." It's two ways. Default would not imply a further devaluation of the Euro, not at face value. Several banks would go bust, perhaps nationalized. Even if a country nationalizes all banks, we know from history that it's bad, but it's not the end of the world for the non-financial world. Hell, it's easier to rebuild a financial system than to rebuild a manufacturing sector - some countries of the Eurozone had to rebuild one or both, some several times last century. And yes, no Euro Country has the political will or interest in ditching the Euro, at least at the moment. If you reflect: even serious talk about exiting the Euro would be political suicide in most of the Eurozone. What is fun in the "Sun" is not popular on the continent. To put it in a different way: why should the (at the moment) shallower mine full of toxic & explosive gas be less safe that the deeper ones? Because it has canaries? Poor critters, it's always the messenger that catches the bullet. The Eurozone looks like a gigantic mess. Still, I do not see why it should necessarily break first. And even if it does, it has a fallback solution (the old currencies), it has all previous National Banks on stand-by ready to take over (with their own gold reserves). The biggest danger for the Euro in the long run is this fabulous idea of the fiscal transfers, then no government has any reason to balance the budget, ever.
It is not particularly fair or accurate to compare the relatively spendthrift Helots, to the hedonic masses in Ohio and ignore the combined Federal & state obligations attributable to Ohio, since the bulk of the US borrowing is done at the federal level, even though much of is flows directly to the states to cover current state funding needs.
"To put Greece in perspective, at about 11 million people they are comparable to Ohio, but with a GDP of about $330 billion they are smaller than Ohio (GDP of about $480 billion). Ohio's local and state governments spend about $106 billion per year. Greece spends $152 billion, but it has been running a deficit equal to 10% of GDP (down from 15% in 2009)."
Ohio's share (on a GDP basis) of US sovereign debt is $488 billion, the state government has 28 billion in debt, and the municipalities another 99 billion. A fully loaded outstanding debt model for Ohio would be at least $614 billion, 127% of GDP, or $53,391 per person against a GDP per person of $42,035.
Ohio's share (on a GDP basis) of FY 2010 US federal spending is $118 billion, if the state and local spending is another $106 billion, then the total annual government expenditure attributalble to Ohio is $224 billion.
Ohio's share (on a GDP basis) of US unfunded obligations is $3,796 billion, the state government has 47 billion in unfunded obligations, and the municipalities have an undetermined amount of unfunded obligations. A fully loaded unfunded obligation model for Ohio would be at least $3,843 billion, 801% of GDP or $334,173 per person against a GDP per person of $42,035.
Red:
The purpose of the comparison was not meant to be exact, as you obviously noted. My point was to put in perspective the relative size of their economy. Greece also has many unfunded liabilities that are off book. You make valid points about Ohio, but my point was otherwise. Thanks for the info.
Watch this: http://www.youtube.com/watch?v=UspoXzWC5Xc
more specific on who's corrupt: Interview with Marta Andreasen about the inner workings of the political elite.
part one of six: http://www.youtube.com/watch?v=uo1ygFynK30
The burocrats in Brussels had ONE job to do, to manage the funds and infrastructure. They fucked up 100%.
Instead they engaged in megalomaniac "shortcuts" trying to bypass basic rights of the european citizens, with the Treaty of Lisbon. As a european citizen it saddens me that these apparatchik swines have destroyed the european dream.
http://fd.nl/economie-politiek/2011/06/23/banken-stellen-eisen-bij-hulp?visited=true
My personal conclusion is that a special court must be assembled, to investigate and put this scum on trail. Ironically, they've re-introduced it (death penalty) themselves:
http://www.currentconcerns.ch/index.php?id=866
Any idea of who might be the non-bank private holders and who the others are?.....guess if we knew that it would be too obvious why the bail out is so important...it is just a little pressure relief while the private holders and other pool together some cash to buy the Parthenon...
how can anyone want this to happen?