Greece becoming a failed state?

[Mise]

If bond yields on gov't bonds are low, then risk-seeking investors are more likely to put money into private bond markets and equities instead, so low gov't bond yields drives yields on equities and private debt lower too. Normally, though, low gov't bond yields are a result of low yields on equities.

 

[innonimatu]

An interesting article in Der Spiegel about a plan that the German government is formulating to create growth in Europe by creating Special Economic Zones in crisis-countries in Europe where there can be fiscal benefits for foreign investors in exchange for labour market reforms and additional privatizations of state-owned companies.

Bad economic policy (fiscal benefits) on condition of applying more bad economic policy (labour market "reforms" and privatizations)? Oh, joy! The crisis countries should fall over themselves to take it!

The only good thing Germany could do for those crisis countries would be leaving the euro. But that the German governments doesn't want to do. That's what is at stake now: which countries leave the euro. Germany leaving it would not cause it any immediate problems, but a rising euro exchange rate would force an end to its industrial "mercantilist" strategy, and debt defaults from he countries leaving will weaken its banks, forcing them into a years-long period of reduced profits to rebuild their capital. Together this is something that would disturb the big german economic groups, and they'll use all their influence to prevent it. Greece and others leaving the euro would cause bank runs and likely a total political collapse there. Which outcome will we see?

Hollande gets to decide. I think he'll keep siding with Germany. The french governments, as all others in Europe, will keep resisting change. His mistake. The "eurozone" will start breaking apart disorderly now, and France will be left was the weak link of the reduced eurozone. In a couple of years also the remnants of the euro and the franco-german alliance will crash and burn...

 

[Dachs]

Moderating influence would be a better term.

Have you begun to abandon your realist paradigm?

In the last few decades we've seen the importance of treaty based institutions. Those forged by the Doha round talks, G20, kyoto talks, etc. A united European voice on the matter would be stronger than the sum of it's parts in a multi-polar world.

In the context of the rise of the BRICs and others, Europe needs to unite or dwindle.

None of that says "counterweight" to me. A "counterweight" is supposed to make something "balance" by providing an alternative center of gravity and acting in "opposition" to the thing it is supposedly balancing.

 

[Winner]

Have you begun to abandon your realist paradigm?

I've never fully subscribed to the realist school. In fact, I've always been opposed to some of their holiest tenets

 

[anandus]

Bad economic policy (fiscal benefits) on condition of applying more bad economic policy (labour market "reforms" and privatizations)? Oh, joy! The crisis countries should fall over themselves to take it!

In what way are they bad economic policies?
Countries like Greece need to get invested in and need to get competitive. An easy way for the latter part is to have their own currency so it can be devaluated, but this is an unwishful situation both for countries like Greece as for Europe.
If devalutation isn't an option, the other way is to modernize the labour market to make it more competitive in the global market, like a higher flexibility in lay-off laws.
Also there must be more investments to create the growth and as the state won't be able to properly do it in the coming decennia a lot will depend on foreign investors, but because of the uncertainty there'll be some additional stimuli needed to get them to invest.

I really don't see how reforms and investments are bad policies.

As for Germany leaving the euro, I really don't see a euro possible without Germany, to be honest. The other 'strong' countries would follow suit.

 

[innonimatu]

Countries like Greece need to get invested in and need to get competitive. An easy way for the latter part is to have their own currency so it can be devaluated, but this is an unwishful situation both for countries like Greece as for Europe.

Or so some people insist. I also recall some people insisting that the euro would be a good idea...

If devalutation isn't an option, the other way is to modernize the labour market to make it more competitive in the global market, like a higher flexibility in lay-off laws.

In other words, engineer a reduction of wages by reducing even more the negotiating power of workers. The "labor market" in many of those countries in crisis - certainly in Ireland and Portugal, I believe also in Spain - is already way more "flexible" than that of Germany, if you bother to look at the number of people on short-term contracts, lowest minimum wages in the EU and so on. This "cure" for crisis has been implemented over and over again over the last "lost decade", and produced only more unemployment, became no one wants to invest in countries where recessive policies are destroying their internal market.

As for recovery through exports, that looks like a nice idea... until you notice that everyone is aiming at that. It's an impossible race to the bottom, where the lowering of wages in a country for the sake of "competitiveness" prompts similar opportunistic lowering in other countries, with the net result that some companies (luxuries for the rich, and monopolies on essential products and services) accumulate a lot of money in profits, while the mass of the population (salaried workers or small businesses with those as clients) gets increasingly poorer and cuts on demand, and employment keeps falling because of that reduction of demand, feeding back into the reduction of income. It's suicidal at a national level, and it's suicidal at a global level. It's capitalism at its best...

Also there must be more investments to create the growth and as the state won't be able to properly do it in the coming decennia a lot will depend on foreign investors, but because of the uncertainty there'll be some additional stimuli needed to get them to invest.

And from where, I must ask, are these savior foreign investors supposed to come? And for what? The whole world in in crisis, though it varies somewhat in degree. The competition for "recovery through exports" is a race to the bottom. The investors are in it for the money only, and will invest only if they guess that they'll extract a good return. The opening of the economies of these countries (the ones now in crisis) to foreign investment, the flood of "investment" after the agreement to set up the euro, was what put them in the high external debt position in the first place! What insanity is this that leads people in Europe to keep recommending more of the same things that caused a crisis as a supposed solution for a crisis?

Foreign investment is only worth it to get new technology and equipment, and only when it cannot be obtained some other way (namely, bought). Otherwise it'll be a drain on national resources, because investors will always want to take out more than they put it. That's their business model.

As for Germany leaving the euro, I really don't see a euro possible without Germany, to be honest. The other 'strong' countries would follow suit.

That's the idea. The countries that have a strong currency fetish (or those with governments claiming they wish a string currency - reality may be different) would leave and get their strong currency, much joy may it bring them (not). The remaining ones would be free to set a monetary policy for the euro more adequate to their needs.

 

[anandus]

So basically you don't see a solution possible with the euro in the configuration it has now?
As I cannot think of any alternatives in the current configuration, the only way out I can see is increasing competitiveness on one hand and trying to stimulate economic growth on the other. And for that investments are needed, and the respective governments aren't able to 'borrow themselves out of the crisis', that's not a structural solution, but just shoving the burden on the next generation.

I agree that economy on a global level is slowing down, but not everywhere. It's mostly in Europe where there's an immense economic downturn, while the rest of the world is (slowly) moving on, while Europe is staying behind.

And, as I see it, it's not the foreign 'investment' (with which you mean cheap loans?) in itself perse that got certain countries in trouble, but how they handled it, pricing themselves out of the market with wage raises while bloating the government and government deficit.

Maybe you're right, maybe there should be something like a 'seuro' and a 'neuro', a southern and a northern euro.

But what would you see as a possible way out of the economic turmoil for the hard-hit countries like Greece in the current configuration if it's not competitiveness and investment?

 

[Grimz101]

That is already happening. These countries are in severe recessions and German exports to them are way down. The export volumes into these countries were really in a bubble, at a level that was not sustainable for them. Consequently, the share of German exports into the Eurozone is now (2011) down to 40 % and the trade surplus with the Eurozone amounts to no more than €20bn.

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.

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.

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.

Bank recapitalisations are unavoidable and should have been done way more aggressively back in 2008/09. Most or all of the peripherial countries will end up in some sort of default. Even with blue bonds, Spain et al. will not have the capacity to service their debt. I see Spanish debt going over 100 % of GDP within the next few years once the government decides to intervene decisevely in the Spanish banking sector - provided that a default didn't happen by then. I'm not optimistic that the Spanish economy can support such levels. I consider the money provided via EFSF/ESM as essentially gone. There's no way the hundreds of billions provided by Germany are going to be paid back once all the funds are being used.


Not by much unless you manage to convert their debt into Eurobonds overnight. If current bonds are not converted but merely replaced over time, the slower pace of cuts will be barely feelable given how long it takes to roll over the entire debt stock of a country.

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.

Yes the spanish cajas are in a dire, dire, dire situation to put it light, since regional banks weren't regulated per say the way Santander was, but leaving the Euro situation how it currently is won't help them.

But what worries me even more is that Eurobonds may lead us back into the days when the same bond rates for everyone led to the great misallocation of capital we have seen in the earlier years of the Eurozone's existence. Note that rates on government bonds typically act as benchmarks for the rates available for the private sector. Northern countries, especially Germany, not primarily the sovereigns, but their private sectors, were royally screwed when they lost their advantage in rates. However, their low rates were the result of their economic performance while the lower rates in the periphery were not the results of their economic performance (productivity etc.) but of the perception that the North would essentially backstop the South. For the moment, low rates may indeed help to stabilise the Southern economies but the long-term effect of returning to the same rates for everyone without having the same economic structures, productivity etc. will be as disastrous as pre 2007. Why anybody would make these mistakes again, i.e. deliberately building an institutional structure that invites capital misallocation and bubbles, is beyond me.

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.

 

[Grimz101]

None of that says "counterweight" to me. A "counterweight" is supposed to make something "balance" by providing an alternative center of gravity and acting in "opposition" to the thing it is supposedly balancing.

Maybe I could have worded it better, and I've played too many RTS games recently, but a dwindling European influence won't help Europe I imagine.

 

[Terxpahseyton]

If bond yields on gov't bonds are low, then risk-seeking investors are more likely to put money into private bond markets and equities instead, so low gov't bond yields drives yields on equities and private debt lower too.

Okay, that makes sense. But then I still can't really follow kronics reasoning. Isn't it good if investors are tempted to invest in the private economy of nations that struggle with low economic growth? Why must this result in bubbles?
My intuitive impression is that from the beginning one should have gone the whole way in one or the other direction. Let Greece go bankrupt (under controlled conditions - whatever that means ), do the same for Spain if necessary and possibly reset the financial industry, or introduce Eurobonds. As it is, money is getting burned and economies crumble (Greece / Spain) without a solution one actually knows how to achieve, which leads to time being wasted. On the other hand, I understand that politicians are very hesitant to do so. The whole situation seems to insecure, that it doesn't exactly breed bravery.
But then again, I don't think I really know what I am talking about

Normally, though, low gov't bond yields are a result of low yields on equities.

I have no idea why that would be so

 

[Tahuti]

I have no idea why that would be so

Because it wouldn't make any sense to take more risks for the same amount of yield. Government bonds are much more safer than private equities - even in the light of Greece - so if the two have comparable yields, it'll be pretty obvious what'll become your choice.

 

[innonimatu]

Plain and simple solution: all the existing debts should simply be wiped out (it's too big a mess to sort, clinging to it only causes further misallocation of resources) and all finance nationalized. For good, not just temporarily. Yes, it's too "radical" to go through now, I know. Yes, the creditors will fight tooth and nail against it. And for the sake of their continued influence this crisis will get increasingly worse, until things become so bad that they get wiped by a political backlash.

As things stand it's always states that must sort out the mess created by finance. Private profits and public losses... so end the fiction of "central bank independence" - they're always guaranteed by the states. So: force the central banks to obey clear politically (democratically!) decided policies; and either turn the banks into "non-profit organizations", or organizations that must give all their profits (obtained only due to state-granted privileges, we should keep in mind) back to the state.

 

[anandus]

Plain and simple solution: all the existing debts should simply be wiped out (it's too big a mess to sort, clinging to it only causes further misallocation of resources) and all finance nationalized. For good, not just temporarily. Yes, it's too "radical" to go through now, I know. Yes, the creditors will fight tooth and nail against it. And for the sake of their continued influence this crisis will get increasingly worse, until things become so bad that they get wiped by a political backlash.

As things stand it's always states that must sort out the mess created by finance. Private profits and public losses... so end the fiction of "central bank independence" - they're always guaranteed by the states. So: force the central banks to obey clear politically (democratically!) decided policies; and either turn the banks into "non-profit organizations", or organizations that must give all their profits (obtained only due to state-granted privileges, we should keep in mind) back to the state.

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

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.

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.
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.

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.
But most of all I'd rather see a healthy buildup of Greece's economy so the interest rates will go down on itself and Greece will be able to stand on it's own feet after a few decennia. Debt-wiping is only pushing the problem forward to the next generation.

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

 

[Mise]

Okay, that makes sense. But then I still can't really follow kronics reasoning. Isn't it good if investors are tempted to invest in the private economy of nations that struggle with low economic growth? Why must this result in bubbles?

Well, as Kronic said, it just results in misallocation of capital. Investors should prefer to invest in countries with strong economic growth, as they should have lower risk of default and greater returns, and should prefer to not invests in countries with weak growth, because there is more risk of default and lower returns. When banks pile into countries like Greece and Spain, believing their debt to be as risk-free as Germany's, that money has to go somewhere, and because the risk is priced incorrectly, it ends up going into abnormally risky ventures.

In a "normal" economy, investors invest in a country if that country has decent economic prospects; the money is channelled into the areas in which investors believe growth will occur. The demand for capital from bonds and equities comes directly from businesses who will invest and expect a return on their investment. So in Germany say, Volkswagen might want to build a new factory, and investors offer money for that factory to be built, e.g. through the bond market, raising capital through equity, through private lending by banks, or using VW's own retained earnings (i.e. profits that are not paid back to investors as dividends, so in effect investors are paying by forgoing a part of their dividend). Volkswagen will take the risk of building a new factory if the cost of capital (i.e. the yield on debt and/or equity that it needs to raise from the markets or the interest rate on a bank loan; or in other words, the price that the markets place on Volkswagen's debts) is less than the expected, risk-adjusted, present-value returns on that factory. There are two important parts to the equation:

1) Expected return on investment: this is a judgement made by investors on how profitable the investment is.
2) Risk adjusted return: this is a judgement of how risky is this investment, compared to the "risk-free" investment in government bonds.

Both of these things depend on correctly judging the economic prospects of the country being invested in (to determine if the investment will make a satisfactory return), and the risk associated both with the investment itself and the government. So three things can go wrong:
1) investors can incorrectly judge economic prospects,
2) they can incorrectly judge the risk associated with the investment, and
3) they can incorrectly judge the risk associated with gov't bonds.

Now, in Greece and Spain, all 3 things happened. People falsely believed that Greece, Spain, etc will all "converge" with Germany economically, so that Greece will get more and more competitive vs Germany and eventually become a modern economy. They believed that there was little risk in investing in Greece, because the rules set up by the Euro would without a doubt lead to convergence. And they believed that Greek government debt was just as safe as German gov't debt, partly because of this convergence, and partly because the Eurozone forbade governments from defaulting (i.e. there was an implicit underwriting of gov't debt written into the Eurozone's rules).

What that meant was, investors overvalued investments in Greece, Spain, etc. They falsely believed that investments in Greece and Spain were safer than they were in reality. That's where the bubble comes from - people overvaluing housing, overvaluing hotels, overvaluing golf courses in Ireland, etc etc. The money that poured into Spain and Greece had to go somewhere, and it went into places that were too risky, because investors underpriced risk in those countries.

I have no idea why that would be so

What Kaiserguard said. But looking at it from a different angle to him, you could say that if investment prospects in the private sector are really, really dire, and thus returns on equities are pathetically low, then investors will pile into government bonds instead. After all, where else can they go? This extra demand for gov't bonds will drive gov't bond yields down.

 

[Cutlass]

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

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.

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.
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.

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.
But most of all I'd rather see a healthy buildup of Greece's economy so the interest rates will go down on itself and Greece will be able to stand on it's own feet after a few decennia. Debt-wiping is only pushing the problem forward to the next generation.

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

The solution to that is to ban lending to Greece. Forgiving the past debt would likely be beneficial to about everyone, because it's not going to be repaid, and it would end uncertainty. But by the same token Greece is not going to reform unless compelled to. And that compulsion has to be internal, not external. And the way to do that is simply to prevent them from running deficits in the future.

 

[Tahuti]

The solution to that is to ban lending to Greece. Forgiving the past debt would likely be beneficial to about everyone, because it's not going to be repaid, and it would end uncertainty. But by the same token Greece is not going to reform unless compelled to. And that compulsion has to be internal, not external. And the way to do that is simply to prevent them from running deficits in the future.

I don't think Germany would be all to happy to forgive Greece's debt, even if it means Greece will be barred from lending.

 

[Winner]

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.

 

[Leoreth]

What would we need these islands for ...?

 

[kramerfan86]

Islands are useless to anyone but the larger global military powers who could make military bases out of them, and even then there is the question of would they actually want to do that at this point.

 

[Cutlass]

I don't think Germany would be all to happy to forgive Greece's debt, even if it means Greece will be barred from lending.

And that's the problem. Having made loans that were not really secured, and not done adequate due diligence concerning the safety of those loans, they don't really deserve the money back. However, they have the power to demand it, and demand the German government back their demands. So even though everyone else is going to be worse off in the long run because of it, they can in effect hold the system hostage.