Greece becoming a failed state?

[Winner]

What would we need these islands for ...?

For cheap tourist resorts where German tourists can enjoy holidays pampered by Greek indentured servants? A place in the sun?

I'd definitely take it as a down payment

 

[kronic]

Exports account for around a third of German GDP, so those 40% of exports account for 13-14%(?) of German GDP. Although these countries are already in a severe recession, the peripherals bar Spain can be considered small economies who's recession won't affect German exports to a significant extent due to growth in other markets. The danger is what happens if Spain, France, Italy or other core members plunge into a severe recession.

That's the theory, yes. In reality though, the only big country that is not in a severe recession is France. Spain and Italy certainly are and have been there for a while now. And exports into these countries are in a free fall.

As I showed with the pie charts in the other post, German banks, and French have significant ownership of Peripheral debt. If Greece fails and causes a cascading effect on the other peripherals, European banks wouldn't be in a great position to put it light. Due to the binge in cross border lending over the past decade in Europe, even banks not directly exposed to peripheral debt would be put in danger due to their exposure to other banks, and reliance on the wholesale lending market (which I imagine would quickly become illiquid). Countries would be faced with two options, bailout the banks (consider most European countries are being considered for bond rating downgrades from ratings agencies) or let their banks face bankruptcy and experience anything ranging from renewed recession to the great depression squared.

Agreed. But this is why I said earlier that European governments (and that includes Germany's) should have intervened much more massively back in 2007/08. The European banking system (and the global banking system) is de facto insolvent. There is a chronic lack of equity and too much toxic debt. The true scale of that is hidden, policy is built around the idea of hiding and, so far, you haven't come up with an idea that would do anything else than hiding it for while longer. There's nothing Germany can do to restore the solvency of the European banking system. For that, Germany is just way too small. The best this country can hope for is to rebuild its own banks without going bust - but I'm not so sure if that's a realistic hope.

It's not that we should help the peripherals for the sake of maintaining the Euro, it's for the sake of not pushing Europe into a lost decade of growth that would make Japan's lost decade look cheerful.

But that's what's going to happen. In fact, we're already in it and it's not restricted to the Euro area or even Europe. The UK will have a hard time to reach its 2008 output level by 2018. The US economy, while posting some modest GDP growth, remains in a terrible state. I happen to view the Eurozone crisis only as a regional focal point in a much wider economic crisis of the Western world. The defining element of it is that we're all drowning in debt. The best performing countries, the US, Germany and Italy, have public and private debt of around 250 % of GDP. Most other countries have significantly higher debt levels. But with very few exceptions, we all need more than $1 in public and private debt to create $1 of additional economic output. That's what's eating us. And if we can't find new debtors who are still able to take on more debts, it's game over. We're nearing this point.
Japan's lost decade is interesting because it hasn't really been a lost decade. Living standards continued to improve, and despite a shrinking workforce, GDP increased. That was made possible by ever expanding the government's balance sheet. The government in return could rely on the excess savings in the Japanese private sectors to be used to buy government debt. It worked well, but now, Japanese private savings are reaching the American level of 0 % while government debt is heading for 250 % of GDP and the current account is shifting from positive to negative in the wake of the nuclear catastrophe. Based on that, the real lost decade in Japan is yet to come.

Most of the debt the peripherals have isn't under the extreme interest rates we've seen demanded of yet, especially in the case of Italy. Issuing Eurobonds now over time would mean the peripherals would be able to service their debt, and a clear message would be sent to bond markets about the intent of the ECB and Germany regarding their willingness to deal with the crisis. Yes we're not rolling over the entire debt stock, but only a fraction of that debt stock is currently paying the excessive interest rates. All the bonds that were issued pre excessive interest rates, doesn't need to be rolled over, only those of late.

Fair point but there's an important qualification to be made. The current rates for Italy and Spain are certainly not excessive when compared to pre-crisis levels. Back then, Eurozone sovereigns used to pay around 5 % on 10y bonds. That's not much lower than today. But of course, there are reasons why 5 % were considered normal five years ago and excessive today.
I'd argue that the bond markets will not reward Germany's willingness to deal with the crisis in the way you expect it. I think they're going to call into question Germany's ability to underwrite the entire Eurozone's debts. I personally would never buy a Eurobond. An investor must be stupid to do it. Of course, stupidity never dies out...

If I learnt anything over the past decade, is that there's a global imbalance of excess savers from the east helping to create asset bubbles in the west by way of excess demand in asset markets. Assuming blue bonds were implemented now, in 5-8 years time the rolling stock of bond renewals would hit that 60% blue bond limit for most of the peripherals, and anything over this would have be to issued as red bonds, ensuring fiscal prudence is adhered to, and the likes of Greece and Italian debt to GDP ratios will be a thing of the past. Some countries will have to at first issue red bonds when the blue bond quote is filled, as I doubt they can cut/grow their way out of their current debt to GDP ratios to one under 60% in the next 5-8 years, but the red bonds aren't guaranteed by whole of Europe, there will still be pressure on these countries to reform. The notion that the north would backstop the south will no longer exist.

I think you're grossly underestimating the debt dynamics currently at work. Of the peripheral countries, only Spain hasn't reached a public debt to GDP ratio of 100 % yet. But debt is rising in a strong pace everywhere (and not only in the periphery). Even with blue bonds, there would be 20-60 % of GDP needed to be financed through red bonds. Why wouldn't bond markets call into question the ability of individual countries to service that on top of their share of blue bonds, especially if it is not the North that in the end backstops all of the blue bonds? (But imagine how much 60 % of the entire Eurozone's GDP really is. No way, Germany and three other countries could actually backstop that.)

----

@Mise
Thank you for your excellent explanation!

 

[innonimatu]

I think one Rhodos will be enough to repay the debt to Germany. It could be "leased" to Germany until that time when Greece repays the last Euro. Other EU countries would get similar arrangements with smaller islands.

Rhodos is too far from Germany to be of any use. Wince we're all in the EU anyway, I propose we hand the sudetenland back to Germany as repayment for the accumulated debt of the whole of the EU to Germany. I mean, we're all in the EU together, aren't we, Winner? What does it mater which piece of land gets sacrificed if we're to be a nice centralized big state?

And if we wipe out all debt what will we have learned and accomplished? Nothing.

We'll have taught the lenders not to lend recklessly. That's the implicit condition on any loan: the lender gets to ask for an interest with some margin to cover the risk of default. What will we have learned if there are no defaults? Only to do more reckless, destructive lending, which is to say, more misallocation of resources.

We'll be in the same old situation (looking at Greece) where tax evasion is 'a national sport' (which is simply thievery from your neighbours in my opinion), the government is bloated and doesn't know how to run a decent budget and many companies and sectors are still in state hands.

If lenders do not trust Greece, let them not loan to Greece. Taking responsibility for their loans is something that lenders need to learn the hard way, as much as the greeks need to learn that defaulting means it becomes harder to get new loans.

Already 110bn euro's of debt has been wiped out to help Greece and that didn't help much and I won't see how wiping out all debt will help any more.

At the rate that the present interest was adding up to the remaining debt, while at the same time the greek economy was getting worse, it was pretty obvious that such a small cut would not be enough. Thus the need to just default on the whole of it and move forward. Cease kicking the can down the road just for the sake of preserving the stupid creditors who made all those bad loans.

From the moment the debts are wiped out new debts will be created, the borrowing rates will still be incredibly high and Greece won't be able to pay the new debts from the beginning. Next to that it won't help the country in any international economic sense, it'll be too expensive, too cumbersome and too uncertain.

The only reason new debt keeps being created is that the "bailouts" are in fact subsidies to the creditors: they don't even get handed to the greek government, but go straight to roll over the debt and pay the interest. End the EU's and IMF's interference and you'll end the accumulation of debt, simply because there won't be any way to keep paying it and delay the default.
The EU and IMF interventions haven't ever been about helping Greece or any of the other countries. They've been about maintaining the status quo (it's no accident one of the things got name "statilization fund"), a status quo which is obviously undesirable because it was what led to the present trouble.

As long as they haven't even obliged to the deal of the first loan, let alone the second loan, I don't think it's at all a good idea to wipe out the debt.
I don't think that rewarding them for all this bad behaviour and ignoring their part of deals, etc. is a good signal. At all.

In that case I'd rather increase the ESFS and ESM to safeguard [richer countries] against those countries blowing up.

Bad behavior? The institutional arrangements of the EU prompted that behavior by design. the greeks are being demonized so that all the other european "leaders", from bankers to economists and politicians, can cover their ass for having designed an institutional framework destined to blow. And they're still doing it. The ESFS and ESM which (as you correctly sate) are designed to safeguard creditor institutions, are just more institutions designed to delay a future crash, making it only worst when it happens.

Next to that I'd want to see the eurozone having structural tools to handle these sort of problems in the future, like the setting up of special economic zones for instance.
After this crisis is over there's no guarantee it won't happen again. The only thing you need is a corrupt government and Goldman Sachs

Goldman Sachs and its ilk thrive on "special economic zones". Such thinks are one of the causes of the present problem. That, fiscal paradises, lack of state control over fundamental economic conditions like money creation and lending rates, etc.
That they are now being peddled by Merkel as a "solution" is but another proof that the ruling elites across the EU are engaged in using any and all tools to postpone the crash of their own financial systems to cover their asses. And have no qualms about making things worse just shift the blame and/to buy some more time for themselves.

 

[innonimatu]

That's the theory, yes. In reality though, the only big country that is not in a severe recession is France.

And that's only down to France having neither adopted recessionary ("austerity") policies, nor being dependent on exports... but even there the accumulation of debt will get only worse, the way things are going.

Agreed. But this is why I said earlier that European governments (and that includes Germany's) should have intervened much more massively back in 2007/08. The European banking system (and the global banking system) is de facto insolvent. There is a chronic lack of equity and too much toxic debt. The true scale of that is hidden, policy is built around the idea of hiding and, so far, you haven't come up with an idea that would do anything else than hiding it for while longer. There's nothing Germany can do to restore the solvency of the European banking system. For that, Germany is just way too small. The best this country can hope for is to rebuild its own banks without going bust - but I'm not so sure if that's a realistic hope.

True. Though I think that a far more radical intervention than simply recapitalizing banks is necessary.

I happen to view the Eurozone crisis only as a regional focal point in a much wider economic crisis of the Western world. The defining element of it is that we're all drowning in debt. The best performing countries, the US, Germany and Italy, have public and private debt of around 250 % of GDP. Most other countries have significantly higher debt levels. But with very few exceptions, we all need more than $1 in public and private debt to create $1 of additional economic output. That's what's eating us. And if we can't find new debtors who are still able to take on more debts, it's game over. We're nearing this point.

I absolutely agree. The process of economic growth through accumulation of debt is what must be reversed.

Japan's lost decade is interesting because it hasn't really been a lost decade. Living standards continued to improve, and despite a shrinking workforce, GDP increased. That was made possible by ever expanding the government's balance sheet. The government in return could rely on the excess savings in the Japanese private sectors to be used to buy government debt. It worked well, but now, Japanese private savings are reaching the American level of 0 % while government debt is heading for 250 % of GDP and the current account is shifting from positive to negative in the wake of the nuclear catastrophe. Based on that, the real lost decade in Japan is yet to come.

Well, I suspect that median living standards have began to stagnate or fall a few years ago in Japan, even if the aggregate still shows some growth. That's the built-in consequence of letting debt keep accumulating: some people are getting richer (those are the creditors) others are getting poorer. And in a context of overall stagnation or near stagnation (let alone crisis) the old excuse that "the rising tile is lifting all boats" can't even be used to contest this (not that it was true much of the time anyway).

Why wouldn't bond markets call into question the ability of individual countries to service that on top of their share of blue bonds, especially if it is not the North that in the end backstops all of the blue bonds? (But imagine how much 60 % of the entire Eurozone's GDP really is. No way, Germany and three other countries could actually backstop that.)

Yes, all this talk about new bonds is just another delaying tactic, just as Japan's accumulation of public debt was a delaying tactic. It may fork for a few years, and if you bring rates to very low values even a few decades (Japan, again) but it'll eventually reach its limits.

The problem is inequality of income, which is always compounded by financial profits. The wealthier someone is, the more money someone can make just from interest. In the absence of defaults the rich - who are creditors - will invariably get richer, the poor - who are debtors - will invariably get poorer. And the poor, mind you all who read this, include all the "middle class" - what percentage of you receives more in interest that it pays as interest, I'll ask?

The state stepping in to create new money only allows this process to go on for some more time. The money the state borrows from the wealthy gets distributed to the general population through social services or public investment, allowing the income of that population to be maintained for some more time at a lever where they can keep servicing they own accumulated debt, but the state itself will eventually get too indebted.

A working way for the state to intervene would have been for the state to tax the wealthy as much as necessary to keep the whole system in balance: so that the redistributive function of state spending balanced out the accumulative process of wealth through finance. That's what made social-democratic regimes stable for a few decades. But we're on a bright new age now, where states lend instead of taxing the wealthy... and where trade deficits and keeping control of trade at state borders doesn't matter...

I mean, the base economic causes of the problem are so obvious and so simple to understand that I keep getting incredibly frustrated with how people keep failing to grasp it! Anyone with a basic understanding of finance ought to figure it out. Solving it is not simple at all, of course, involving shifts to the balances of power. But that can only begin to happen once people understand the causes of the problem!

 

[Grimz101]

That's the theory, yes. In reality though, the only big country that is not in a severe recession is France. Spain and Italy certainly are and have been there for a while now. And exports into these countries are in a free fall.

Well the free fall will become larger as the Europeans long for the time when the recession formerly described as severe becomes a Chernobyl scale recession. It boils down to what do you think will happen if Greece continues on it's current path? My opinion is that it will push the other peripherals and make an already severe recession much worse with a renewed banking crisis.

Agreed. But this is why I said earlier that European governments (and that includes Germany's) should have intervened much more massively back in 2007/08. The European banking system (and the global banking system) is de facto insolvent. There is a chronic lack of equity and too much toxic debt. The true scale of that is hidden, policy is built around the idea of hiding and, so far, you haven't come up with an idea that would do anything else than hiding it for while longer. There's nothing Germany can do to restore the solvency of the European banking system. For that, Germany is just way too small. The best this country can hope for is to rebuild its own banks without going bust - but I'm not so sure if that's a realistic hope.

And I agree that banks should have increased their equity ratios, but we can only discuss the present situation.
Pushing the problem further down the road may sound irresponsible, but it's a viable tactic. These countries need time to strengthen their situations, go to the gym and gain muscle before they go into the next round of fighting so to speak.

But that's what's going to happen. In fact, we're already in it and it's not restricted to the Euro area or even Europe. The UK will have a hard time to reach its 2008 output level by 2018. The US economy, while posting some modest GDP growth, remains in a terrible state. I happen to view the Eurozone crisis only as a regional focal point in a much wider economic crisis of the Western world. The defining element of it is that we're all drowning in debt. The best performing countries, the US, Germany and Italy, have public and private debt of around 250 % of GDP. Most other countries have significantly higher debt levels. But with very few exceptions, we all need more than $1 in public and private debt to create $1 of additional economic output. That's what's eating us. And if we can't find new debtors who are still able to take on more debts, it's game over. We're nearing this point.
Japan's lost decade is interesting because it hasn't really been a lost decade. Living standards continued to improve, and despite a shrinking workforce, GDP increased. That was made possible by ever expanding the government's balance sheet. The government in return could rely on the excess savings in the Japanese private sectors to be used to buy government debt. It worked well, but now, Japanese private savings are reaching the American level of 0 % while government debt is heading for 250 % of GDP and the current account is shifting from positive to negative in the wake of the nuclear catastrophe. Based on that, the real lost decade in Japan is yet to come.

What is a sustainable debt level? Consider Japan continues to age, western Europe's population is growing older, China's single child policy's legacy means their average age is growing too. What do pensioners all have in common? High savings rates. Chronic debt helped cause the crisis but private debt levels are at least decreasing(That's part of the problem in why the UK isn't returning to growth since consumption is going down, and inventories aren't being restocked)
This is all ignoring the main point though. Is it better to adopt Euro bonds and increase the chance of fighting off the recession whilst not increasing the risk of exposure to the creditor countries.(Red bonds may end up defaulted on in the worse case scenario but the Blue bonds should be able to manageable debt levels)

Fair point but there's an important qualification to be made. The current rates for Italy and Spain are certainly not excessive when compared to pre-crisis levels. Back then, Eurozone sovereigns used to pay around 5 % on 10y bonds. That's not much lower than today. But of course, there are reasons why 5 % were considered normal five years ago and excessive today.
I'd argue that the bond markets will not reward Germany's willingness to deal with the crisis in the way you expect it. I think they're going to call into question Germany's ability to underwrite the entire Eurozone's debts. I personally would never buy a Eurobond. An investor must be stupid to do it. Of course, stupidity never dies out...

Well every time the European leaders meet and say they're going to do something, the market has responded in a comedic positive way considering no substance was ever shown. If the leaders actually show substance for their "committal" imagine the market response.
Germany isn't underwriting all of Europe's debts, every Eurozone country and the ECB are underwriting the debts in no excess of 60% relative to GDP, there's a huge difference.

I think you're grossly underestimating the debt dynamics currently at work. Of the peripheral countries, only Spain hasn't reached a public debt to GDP ratio of 100 % yet. But debt is rising in a strong pace everywhere (and not only in the periphery). Even with blue bonds, there would be 20-60 % of GDP needed to be financed through red bonds. Why wouldn't bond markets call into question the ability of individual countries to service that on top of their share of blue bonds, especially if it is not the North that in the end backstops all of the blue bonds? (But imagine how much 60 % of the entire Eurozone's GDP really is. No way, Germany and three other countries could actually backstop that.)

Consider last year’s euro-wide budget deficit was 4.1% of GDP, less than half America’s 9.6%.
Italy has for long experienced excessive debt, and Spain's situation is still manageable. Ireland is returning to growth. The dangers lie in Greece and Portugal, but they're relatively small. What we haven't considered is letting Greece and possibly Portugal continuing on their current path (I only put Portugal in there because I'm not familiar with how bad a situation they're currently in compared to the rest) and defaulting if worse comes to worse, but using Eurobonds to shore up the finances of Spain and Italy the big economies of the Eurozone that are at risk.



At the end of the day what alternative do you envision to solve the current crisis?

 

[Oerdin]

I used to think the Euro would survive with Greece just getting kicked out but I now wonder if it will survive at all. When Greece officially defaults (it already technically defaulted) then that will mean French and German banks who own most of Greek debt might not survive. Greece will end up back in the economic stone ages unable even to import basic needs like petrol for some period of time while even the big banks of mainland Europe may fail causing a classic 1930's style liquidity crisis.

There are dominoes here waiting to fall. Yet if the rest of the EU puts up with Greece acting like a spoiled child who refuses to reform, refuses to cut spending, and worse refuses to pay taxes then they'll end up in the same place but in even worse shape because right now all that bail out money is just throwing good money after bad. The Greeks aren't good for it nor do they yet feel the need to seriously reform so shock treatment really is the best policy as it will get the pain over quickly. Greece will wind up in the same place but at least German taxpayers will end up losing less money then if they just kept throwing money down the Greek black hole. Let the Greeks experience hyper inflation and mass shortages of basic goods and then maybe they'll be so traumatized they'll actually start acting responsibly but the last 3 year and billion in bailout money sure haven't gotten the bastards to take serious action.

 

[Winner]

I wonder how the Americans will react when the federal government gets to the point of having to bail out individual states...

 

[Verbose]

There are dominoes here waiting to fall.

The dominoes are not in the same places as they were in 2008. It's still dangerous, but a lot less so, as the situation has been changing.

 

[Winner]

The dominoes are not in the same places as they were in 2008. It's still dangerous, but a lot less so, as the situation has been changing.

The money thrown at Greece was not entirely wasted - it bought the other member states time to prepare for the Greek default (and collapse). I just wonder whether it wouldn't have been more prudent to give less money to Greece and just prop up the most exposed banks instead.

Or screw the banks, let them collapse and use the money to recompense small-time savers. The bankers need to learn some responsibility. Preferably from inside jail cells.

 

[innonimatu]

There are dominoes here waiting to fall. Yet if the rest of the EU puts up with Greece acting like a spoiled child who refuses to reform, refuses to cut spending, and worse refuses to pay taxes then they'll end up in the same place but in even worse shape because right now all that bail out money is just throwing good money after bad. The Greeks aren't good for it nor do they yet feel the need to seriously reform so shock treatment really is the best policy as it will get the pain over quickly. [...] the last 3 year and billion in bailout money sure haven't gotten the bastards to take serious action.

The greeks have taken all actions demanded of them. It's just that the results have been contrary to all predictions by the "troikas", IFMs and other assorted banker's associations. Greece is well into a deep depression because it has taken the actions demanded by the EU. Capital flight, led by the wealthy moving their money to Swiss and even German banks, and to bonds of those countries, is happening because the EU prevents them from imposing capital controls. Delays on paying taxes over the last couple of months are due to the by now obvious impending end of the euro in Greece (at least), which common citizens there have finally began to account for (not just the wealthy and well connected).

The only way any greek government could have managed the crisis better would have been by taking the country out of the Euro and EU (they're tied by the treaties) as soon as the crisis was recognized. But that its "partners" in the EU would not have either. They're all guilty. They're just using the greeks as scapegoats for the failure of their whole EU project.

 

[Mise]

Well I've always maintained that Greece and Ireland should have just defaulted from the start. Investors know the risks of investing, and if they don't then they don't deserve all that money. That's how capitalism works. This crisis was definitely made worse by European "solidarity".