Greece Rescue = Smoke and Mirrors

It is astonishing that the words “rescue” and “bailout” are being applied to the headfake announced by the EU for Greece last week. Rebecca Wilder at Angry Bear blandly noted, “All I’m saying is that this plan, in its current form, is really not much of a plan at all.” Ed Harrison stressed that voters in Germany would be assured “This is not a bailout”.

The big problem with this non-bailout bailout is that it appears designed to provide Greece with air cover so it can roll its debts coming due (April and May are crucial months) without adequately addressing the underlying problems. The problem is that deep budget cuts are almost certain to worsen rather than improve deficit to GDP ratio. They will simply put the economy into a deflationary tailspin, with the GDP contraction assured. Wilder explains:

Financial crises, especially those in small-open economies (Sweden, for example), generally end with a massive currency devaluation that drives export growth (provided there is external demand to suffice). I honestly don’t see how a sufficient export-generated rebound is even a possibility, given that the rest of the Eurozone is essentially trying the “internal devaluation” bit simultaneously (chart above).

And who’s going to pick up the slack? In 2008, 64% of Greece’s export income was derived by the EU 27 countries, 70% for Spain, and 74% for Portugal. If the Eurozone as a whole is using this same internal deflation mechanism to spur export growth, only the “zone” as a whole really benefits, not any one country.

WITHOUT a massive surge in export-driven GDP growth no “zone” country can drop its financial deficit without incurring behemoth debt burden growth (in the case of the Eurozone, the term “burden” actually applies since Greece, nor any one economy, can print its own money).

Yves here. The strategy appears to be kick the can down the road, get Greece through its near term financial needs and declare “Mission Accomplished.” But what does that achieve? If Greece has an unsustainable debt overhang, the best course of action is a restructuring (which amounts to a partial default), not roping more investors in simply to forestall the inevitable.

Wolfgang Munchau, whose initial reaction to the deal was skeptical, is even more critical upon further reflection:

The aspect that puzzled me most was the announcement that a rescue would come in the form of a loan at market interest rates. This surely must imply that the market would not be willing to lend money to Greece at market interest rates. That is an absurd proposition.

In fact, it is hard to imagine even a hypothetical scenario in which the European Union would disburse the emergency aid….

Judging from some of the comments from Greece, I suspect the big idea is to try to get by without help, using the promise of an emergency fund as a psychological support for the market. This is a dangerous confidence trick. It will backfire, perhaps not right away, but at some point. It was no surprise that Standard & Poor’s, the rating agency, concluded that its rating of Greek government debt would be unaffected by the deal….

When a country adopts an austerity package of such magnitude it needs some form of relief, simply to make it through the recession. This would normally come either through devaluation or from a low-interest loan, usually from the International Monetary Fund, or ideally both. Greece will have neither.

Under these circumstances there may come a point when the Greek government concludes that default is the financially superior option, especially since 70 per cent of Greek debt is held by foreigners. If they are smart, they will take the EU money and then default. In any case, default is still the true backstop, not the emergency loan. Bond market investors should be well aware of that…

I must admit that the late-night meetings, the dramatic announcement of an agreement, and the press conferences by European leaders are highly effective tools to impress the outside world. Ms Merkel in particular is a very persuasive politician. But the politics of smoke and mirrors cannot fool all the people all of the time. This will not end well.

Ambrose Evan-Pritchard savages the plan with his usual vigor:

The Frankfurter Allgemeine summed up the deal succinctly: “No member of Europe’s monetary union should be liable for the debts of another state. Bilateral credit from Berlin for Athens is not the same as German acceptance of responsibility for Greek debt.”

This shatters the assumption since Maastricht that monetary union leads inexorably to fiscal union. By drawing the IMF into Euroland’s affairs, Germany has broken the spell and reduced EMU to a fixed-exchange system with knobs on, like the 1930s Gold Standard that it so resembles….

The ‘rescue’ resolves nothing for Greece, either short-term or long-term…Greece is worse off than before. It cannot decide when to invoke the mechanism. It has given up its right as an IMF member to go to the fund when it wants, leaving it prisoner to Europe’s deflation dictates. “The IMF would be a lot softer than Europe,” said Ken Rogoff, the fund’s former chief economist….

Mr Nielsen said Greek data released last month show that the budget deficit is 16pc of GDP on a “cash basis”, rather than the official 12.7pc on an “accrual basis”. The IMF is watching closely, having warned last June that Greece’s “cash fiscal data show consistently weaker results than accrual data, which has been inadequately explained.” Translation: the real deficit is 16pc. Greece is drowning…Mr Nielsen said Greece would have to carry out an “internal devaluation of at least 20pc to 25pc” to claw back competitiveness lost over a decade. This means wage cuts…

I suspect that Greece has already gone beyond the point of no return with a public debt nearing 135pc of GDP by 2011 (Commission data). If so, the most likely way out is default within EMU. Athens can craft a “pre-emptive debt-restructuring” with the help of the IMF along the lines of Uruguay’s controlled default in 2003. But first we must go through the etiquette of exhausting all the options. “The game plan is to hope for miraculous growth,” said Mr Rogoff. Let us pray.

Yves here. The announcement does seem to have caught the hedgies on the back foot, but a tactical win is a far cry from a resolution.

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  1. Jojo

    Is Greece Already Doomed to Default?

    The suspenseful Greek drama seems well into its fifth act. In an unexpected twist, German Chancellor Angela Merkel on Mar. 21 reversed herself and said the Continent’s biggest economy opposes a European Union-funded rescue for Athens, which must refinance $27 billion in debt before the summer. As EU policymakers head for a two-day summit starting on Mar. 25, Merkel warned that the meeting may not produce an aid agreement.

    Some economists, however, think the dénouement of this play has already been written. In a Mar. 11 post on The New York Times Economix blog, Simon Johnson of MIT and Peter Boone of the London School of Economics argued that Greece’s debt load is probably unsustainable. Their line of reasoning:

  2. Tortoise

    I agree that the EU gave nothing to Greece on March 25. It was political theater from which Merkel, Papandreou, and (to a lesser) Sarkozy gained political points with their constituencies. In a sense, then, the summit was a great success! The Greeks have to deal with the problems of Greece virtually on their own, and this is how it should be.

    On the specifics of the cash versus accrual issue raised by Nielsen, of the venerable House of Goldman and Sachs, I am not so sure. (Actually, Nielsen provided a correction, see below.) I will try to explain the issue. Greece’s deficit may well be larger that the one announced for January and February (and so may be Italy’s, Spain’s, California’s, and I venture to say Germany’s), though Greece has shown itself to be the worst in that department. Why the discrepancy? Well because there is the “little” issue of arrears, or obligations that have not yet been paid or even officially recognized. Suppose, for example, that the Aldermen of Cologne discover that they are running a deficit, for any conceivable reason. Oops! Now the city may not even be allowed to run a deficit so something has to be done or perhaps not done. Given the tough times and that there will soon be an election in the State, the powers that be decide not to do something drastic, like fire some municipal workers but rather to, how shall I put it delicately, delay the appearance of some expenses or to hasten the appearance of some income. There are easy and quasi-legal ways to do that. Of course, this can be done only for a while because at some point there will have to be the “clearing of the arrears”. Clearing of arrears is done partially at the end of the fiscal year or within the next fiscal year.

    Greece has arrears in the state hospital to the tune of about 4.5 billion/year (typical lag about a year); state railroads (roughly 1.2 bil a year); municipal governments (roughly 2 bil/y, lag time about a year); defense-equipment related payments (amortize a debt); and a few more. At the same time, there is delay in receiving payments: for example, the government has billions to collect in real-estate taxes for 2008 and 2009, inheritance taxes from past years, etc.

    This year, 2010, is special as public-sector salaries were paid at the full rate though they were reduced by 12%. This 12% difference is now gradually deducted from paychecks since, I believe March 15. Similar issues with collection of new taxes. So, there are a lot of explanations for the difference between cash and accrual based numbers.

    On Mr Nielsen and Greece, you can read more here:

  3. renting is like owning

    ‘Greece Entry Into Eurozone = Smoke and Mirrors”

    And to think that this headline version was common knowledge a few years ago. Much like the fact that Greece entering the eurozone was part of the sort of unspoken dealing that included Macedonia having its independence recognized, accepting Cyprus’s entry into the EU, etc. In other words, the EU encompasses much much more than a single currency.

    ‘The announcement does seem to have caught the hedgies on the back foot, but a tactical win is a far cry from a resolution.’

    There will never be a ‘resolution’ – problems and solutions will arise as the system changes, then breaks down. Nothing new in European history. And a tactical loss is a far cry from a tactical win. As the news was spun in Germany, having the IMF get involved meant that European involvement would come at a lower total cost.

    However, when talking about exports, recognize that a major portion of the exports from countries like Spain or Greece are agricultural – they aren’t likely to diminish significantly, because people still like to eat fresh fruit and vegetables.

  4. bionick

    Wouldn’t “bailing out” Greece simply invite more irresponsible behavior from the member states and entice the Anglo-Saxon barbarians eager to plunder wealthy European members to facilitate imprudence and profligacy? It’s equivalent to the moral hazard in the US, where “bad” debt was transferred on the society as the whole, while the raiders got away. From what I understand, the thinking is that bailing US banks was a bad idea; why would it be a good idea to bail out Greece. So, let Greece fail.

    1. Alexandra Hamilton

      This is the ‘moral hazard’ argument that the banks did get a pass on. They – unelected, unsupervised, unaccountable to anyone, out of control greedy men – got all the money they wanted and then some. Now Greece – a democratically elected government representing the Greek people – is on the ropes and should just be let go? Odd choice.

  5. Ryan

    All this talk about Greece…

    Check out this story about Thales (hat tip Bertrand Russel) who, according to Aristotle, was the first philosopher in the Greek tradition:

    “He was reproached for his poverty, which was supposed to show that philosophy is of no use. According to the story, he knew by his skill in the stars while it was yet winter that there would be a great harvest of olives in the coming year; so, having little money, he gave deposits for the use of all the olive-presses in Chios and Miletus, which he hired at a low price because no one bid against him. When the harvest time came, and many were wanted all at once and of a sudden, he let them out at any rate which he pleased, and made a quantity of money. Thus he showed the world that philosophers can easily be rich if they like, but that their ambition is of another sort.”

    Apparently Thales was not only one of the first philosophers, but the first olives futures trader. All of these astrological musings and cutthroat capitalist behaviors look familiar…

  6. a

    “If they [the Greeks] are smart, they will take the EU money and then default.”

    Dunno, but it doesn’t seem so smart to me. Taking the money and then defaulting would not be considered good European sportsmanship and could well lead to Greece getting thrown out of euroland if not the EU itself. If that’s okay for Greece, then sure it’s smart to take the money and run. Otherwise, it seems pretty much the last thing they would want to do.

    “The ‘rescue’ resolves nothing for Greece…”

    It wasn’t meant to. If AEP is really that surprised, then he is even more naive about European politics than I had supposed.

    “This shatters the assumption since Maastricht that monetary union leads inexorably to fiscal union. ”

    Not in the least. Maybe there will be fiscal union, somewhere down the road. But we’re not getting there by having first a system where states become liable for each others’ debts. That’s craziness and AEP would be the first to scream so – it’s then obviously beneficial to be the state which has the largest deficit.

  7. Kevin de Bruxelles

    It would be interesting if someone knowledgeable about these things could “war game” an eventual Greek default. It seems to me a political disaster for EU members to just hand Greece money to pay its debts. If for example Greece just defaulted across the board then the different countries would in many cases need to bailout their local banks. This seems a more politically acceptable solution but then again I don’t know what the true impact would be.

    Greece seems like it would have quite a bit of leverage if it selectively defaults; say on all non-Eurozone debt first. Perhaps this is why AEP is pushing so hard for a Eurozone bailout, to help conver the exposure of British financial institutions to Greek debt. While I tend to agree that Greece may be beyond the point of no return; in this case the best way to unwind all this debt has to be found.

    1. Claire

      I’d actually love to see how code like that is written.

      Having said that, the code could very well generate results such as Greece buys CDS on itself, threatens default, sells the CDS, and then uses the proceeds to buy its own bonds ;o)

    2. anon

      You’ve given me an idea.

      Consider that the Fed is backstopping the US mortgage market by holding Agency debt.

      Could the ECB perform a similar function for Europe?

      Let’s say Greece defaults and the German and French banks take a hit.
      As you suggest, the Germans and French gov’ts can bail out their banks and assume the costs.

      Or, the ECB could purchase French and German gov’t bonds (create Euros and monetize the debt) to fund the losses.

      Could the ECB use this mechanism to equalize intra European debt levels to keep the overall EURO debt levels within the Maastricht guidelines as each country renegotiates their debt?

      It’s in the ECBs interest to support the Euro, but it’s not in any indivual contry’s interest per se to support the Euro.

  8. Andrew Bissell

    Greece should just tell every last one of their creditors to stuff it. Investor memories are so short and people are grasping for so much yield, they’d be back and tapping the international bond markets in a few months.

    1. DownSouth

      Andrew Bissell,

      That would be the logical thing to do. It’s eventually what Argentina did, but only after its president and finance minister fled the country in the wee hours of the morning to avoid being lynched by angry crowds.

      The current leadership of Greece are died in the wool neo-liberals. Neo-liberals believe that the rich fucking the poor is the natural order of things, they see nothing wrong with this, and trying to disabuse them of this creed is like trying to convince Pope Ratzinger that it’s not OK for priests to fuck little boys. Good luck with that one.

      No, there will first have to be a change in political leadership in Greece. If it goes well as it did in Argentina in 2002, then you get a positive resolution. If not, if it goes poorly like it did in 1930s Germany, or in Mexico following the 1995 crisis, then you have a monster on your hands.

      1. Eric

        I lived for a couple of years in Athens in the mid-’90s. What sticks in my mind is the intensity with which Greeks would approach the task of not paying taxes. While it is quite likely that the poorest Greeks will be harmed by whatever happens to Greece’s debt, if anyone at steps up with even 1 more Euro to support them, the majority of Greeks will be laughing up a storm at the continuing success of getting by with minimum effort.

          1. Dan

            If that were truly the average mentality, they would be able to solve their problem overnight. The tax evasion stats for Greece (in other words, the black market) are 26%. The overall EU average is 19%. Even if Greece converged with the rest of Europe on this score, how much would things change? The size of the bureaucracy is by degrees a much bigger factor than attitudes toward paying taxes.

  9. Edward Harrison

    This is Edward Harrison. I am not “of the school that anything to ward off speculators is a step in the right direction in the least.” This mis characterizes the post I wrote.

    It is the governments of Europe who have their heads buried in the sand and believe this band aid solution will solve the problem – which they pin on speculators.

    In fact, we shall see later in the year that this solution is nothing of the sort. It may have warded off speculators for now. However, the underlying problem remains – i.e. public sector debt by a sovereign that does not print money in its own currency. As I have said at Credit Writedowns, I believe that Greece will eventually default.

    1. Alexandra Hamilton

      Well, maybe. On the other hand, who exactly would be bailed out here. Is it really Greece? I don’t think so. Greek debt is held by a bunch of French, German and Swiss banks who would take a huge and direct hit if Greece were to default. This could have a destabilising effect on the banking system, which would lead to the national governments having to bail out the banks yet again.
      Either way, the EU pays for it.

      1. reskeptical

        Very good point. One of the aspects I find so fascinating in the discussion is the debt of the Swiss banks. Switzerland isn’t even in the EU and yet Swiss banks have the second largest holding of Greek debt.
        Posters concerned about the fortunes of the lower classes in any possible (probable) Greek default need to consider the rate at which the most priveleged have increased their wealth even since the crisis in late 2008.

  10. Edward Harrison

    What I said is “Below are a few salient points that are likely to be made in order to ’sell’ this deal to a sceptical European voting public.”

    The governments want this problem to go away. But it will not because the Eurozone as presently constituted will not work. The fact that Greece has now gone to market with a seven-year bond speaks to the short-term palliative effects of the deal. But, the reality is nothing has changed whatsoever.

    The point of my post is that this was the best outcome we could expect from a euro zone that has 16 members with different agendas and veto power. It is an extend and pretend kind of solution. Will it work? In my opinion, no.

  11. Jamisia

    I say the EU would have been far better of had it implemented Warren Mosler’s proposal: the ECB prints €1 trillion and spends it on the EMU per capita. It’s neither bail-out nor reward for bad behavior if the ECB dictates that it is only used to lower public debt. That would’ve provided relief not only for Greece, but also Portugal, Spain, Ireland and so on. The end.

    The best option for Greece and the others, now that Merkel has effectively killed the EU, is to default and, more important, not issue any new debt afterwards. Sovereigns finance themselves. They’re “government” to pay benefits, pensions and aim at full employment, everything else is crap.
    Will they do this? No, of course not! Meaning it’ll have to get a whole lot worse before anyone in power suggests anything remotely sensible..

  12. RueTheDay

    What I see here is a concerted effort by a few European governments to assure the market that, “the problem is under control, nothing to see here, continue your rally” without actually addressing or even acknowledging the scope of the underlying problem.

    Reminds me of the Dubai situation in many ways. “Here’s some money to pay your immediate debts, now go resume the boom.”

    We’re going to have another global crisis in a few years, it’s almost certain.

  13. charcad

    It is astonishing that the words “rescue” and “bailout” are being applied to the headfake announced by the EU for Greece last week.

    You’re astonished.

    I’m sure this is just rhetorical astonishment for literary effect. It’s a demure pose that preserves the image of Girl Scout idealism. Yves, I can’t believe you’re genuinely sitting there with your mouth hanging open, speechless in amazement.

    As for me, this kind of Rube Goldbergesque non-solution solution was completely expected. It’s the only thing pan- Euros in EU conclave ever do. And they’ll be found completely capable of repeating this approach for years, even as Greece and other European states descend into riots, terrorism, starvation, anarchy and civil war. I hope no one here believes that (as a purely hypothetical example) the appearance and spread of minefields into former children’s playgrounds would rouse the conscience of Europe into action? I can assure you it will not.

    They have done just enough to persuade (ir)responsible parties in Greece that further intransigence will extract more subsidy from non-Greeks.

    I otoh would have been astonished had “Euros” done anything else.

  14. Ginger Yellow

    “The aspect that puzzled me most was the announcement that a rescue would come in the form of a loan at market interest rates. This surely must imply that the market would not be willing to lend money to Greece at market interest rates. That is an absurd proposition.”

    It is of course absurd, but it’s hardly unique to this bailout. Pretty much all the government bailouts to banks have been done on “market” terms, even though the whole problem was that there was no market for the risk. Rather hilariously, the UK government asserted that the fee it charged for insuring a third of the balance sheet of the two largest banks in the country was at a market rate – as if any private counterparty, or even combination of counterparties, could take that risk at any price.

  15. Anonymous in Wonderland

    Gee, guys, I am reading the comments … Has any of you been in Greece recently?

    1. Spectral

      By reading some news the situation is getting bad, on the edge of lawlessness. Robberies, shotting, bombs.

      Today, Afghan refuge boy is killed by planted pipe bomb.

    2. Vinny

      I live in Greece. Nothing has changed here lately, nobody I know has been affected by this crisis, and our lifestyle is just as great as ever. Right now we’re all looking forward to Easter, and then a lazy summer at the taverna by the beach.

      Western nations don’t understand us. We are an eastern nation, with different values. Please don’t try to turn us into German-style workaholics, because it is not going to work. We are self-sufficient, but if you guys and gals insist on sending us 20 or 30 billion Euros, we promise we won’t refuse your gift.


      1. Dan

        Over the last 10 years, Greece has spent 150 billion on military hardware. The budget deficit is not yet 300 billion. So, even though Greeks may be satisfied earning less than Germans, there are other answers to the debt problem much further afield than simply looking at cultural characteristics.

        Remember, we in the USA got our start by refusing to pay taxes to a corrupt government. The key is, exports/imports. Where is your money going? How much money is coming into the country from outside. Shipping and tourism, your two biggest industries, are excellent things to have in good times, since both of them do not rely on the internal efficiency of Greeks, but for heaven’s sake, Greece needs to run a surplus, because in bad times, shipping and tourism are the first to go.

  16. Hugh

    I am surprised anyone would take this bailout seriously even for an eye blink. It was so obviously bogus. Compare for example a surgeon who in full surgical regalia enters the patient’s room, waves a handful of smoking, strange-smelling foliage over the patient, and then leaves saying the patient will receive the bill in the morning to one where the patient is examined, the decision is made to go forward, prelimary tests are done, the surgery is scheduled, the patient enters the hospital, is taken off food, is taken to the operation room, is prepped, the surgical team arrives and lays out the surgical kits, the surgeon and anethesiologist show up, and the surgery is done. What we got with this bailout was the first but what we should have been expecting was the second.

    Remember too that there is a worldwide dearth of political, and economic, leadership. Merkel, Sarkozy, Brown? Does anyone think for a moment that any of these people have it in them to reform and restructure European policy and institutions? What we see in Europe is that in boom years national antagonisms were papered over but not eliminated. Now in the face of a general downturn they are reasserting themselves. In the absence of more global leadership, European states are reverting to form. They are looking out for their own interests without regard for, and often at the expense of, their neighbors. If they can’t get Greece right, how in the world are they going to deal with the economies of Spain and Italy?

  17. Spectral

    To use this phrase “governments of Europe” is kind of ridiculous. European Commission is smokescreen and dream of ruling aristocracy how to enrich themselves, how to conquer new markets/Lebensraum.

    Anyone remember Vote-Until-Get-It-Right rule implemented on Ireland, Holland and France in view of European Constitution? What is “governments of Europe” for? Bureaucracy in Bruxelles and Strasbourg sitting in fancy buildings. It is nothing less than neocolonial mechanism of two major countries to force and subject “peripheral” economies/countries to its will.

    Greece has signed everything what is asked for to access EU. At the EU summit, franco-german leaders discussing about Greece faith and, now IMF is on its way, with “rescue package” and “austerity measure”.

    Greece maybe should default, but EU must fall apart.

    1. Dan

      I read recently that all the EU funds and subsidies combined (together with the cost of running EU affairs from Brussels) amounts to 1% of European GDP. If that’s true, then the EU and the Eurozone are a beast much like NAFTA than they are anything like the USA.

  18. Dan

    The hue and cry over bailing out Greek people is interesting. We don’t want to create a moral hazard. Of course, the same people loved the bank bailouts because it came without a moral hazard. None whatsoever.

    As part of the deal last week, Germany demands that Greece buy billions of tanks, submarines and airplanes from German defense industry.

    Now, why wouldn’t Germany ask for a total austerity package so that Greece can actually make a go of it? Why a piecemeal approach? Greece spends $15 billion a year on their military, and that amounts to $21,000 a person for every member of the bloated bureaucracy (the average salary is $12,000). Quick math tells me that a reduction of Greece’s military procurement budget to just below the Euro average saves Greece $12 billion. So, we have loud clamor for austerity measures in the bloated bureaucracy (I support those) but nothing about the rest of the waste.

    And we know now why Greece has a horrible trade imbalance. Like a crackhead, it must go to the crackhouse (i.e. EU partners selling it things it doesn’t need).

    Greece is caught between the Scylla and Charybdis. All its loans come with strings attached. If it did the right thing and slashed a military budget that is more than 3x that of the Euro average, it would instantly slash its annual budget deficit. Its savings would be worth more than the total amount that the IMF can possibly provide it in loans (11 billion euro). But that would upset the military industrial complex of its benefactors. So, to save Greece, Greece must go further into debt. How perverse.

    One can’t even argue that this is corporate welfare since Greece has no defense industry.

  19. Anonymous in Wonderland

    At this stage, the Greeks have no intention to default or leave the euro-zone.
    One advice to all: Refrain from prophesying about Greece, it is a strange bird.

  20. Andrew Bissell

    I love how we have now reached the point where any major losses in a bank’s portfolios (such as on Greek bonds) instantly establishes that the government “has to” bail them out. It’s dismaying that even posters on this site, who should know better, are thinking like this.

    Bail out their depositors if you must, but let the banks fail!

  21. Dan

    Andrew, if the banks fail, then what do you do about all the insurance paper that’s out there. We know there has been a lot of speculation in the CDS market on Greek debt. and we know given the Lehman-AIG fiasco that the insurance on the debt is valued many times over the defaulters total worth (and debt). In other words, it may not be a matter of a few banks failing. I’m sure you’re aware that the German state bank, KfW, was itself totally exposed a couple years ago, and the US taxpayers bailed them out.

    In other words, you have to do a lot more than simply cover depositers. I’m not disagreeing with you, and I’ve come around to this point of view, but if huge banks fail, then someone has to step in and lend. The answer is: the government becomes a direct lending institution.

    1. Andrew Bissell

      Assuming that there is any demand for new credit offered (an assumption that I think has scant supporting evidence), the private market will be more than willing to step in and lend once it can again find reasonable compensation for the risks of doing so. The quickest way to get to this point, IMO, would be a massive systemwide restructuring and partial default/conversion-to-equity of public and private debts. But as long as the government continues propping asset prices and failed lenders that will never be the case.

      Credit lent to finance productive enterprises has an important role to play in economic growth, but over the longer term we need equity to take the place of a great deal of this debt so that we are no longer in the position of “needing someone to step in and lend.”

  22. sean

    Interest rate swaps inverted for the first time last week on 10 year treasuries which is the global benchmark for sovereign lending.

    So now some private companies are more credit worthy than some sovereign nations.If greece defaults and a cascade of other countries follow suit who then will fund their short term needs? Surely not the IMF ,it would need far more resources.

    In such an unstable world reverting to feudal organisation is it possible that large corporations may step in where sovereign governments cant.For instance some form of debt for equity swap where a corporation funds a bankrupt city in Greece or anywhere and in return the city cedes equity in local government services which becomes a new cash flow for the company.

    This may be a fanciful example but if there is widespread default following a Greek one then new forms of political organisation become inevitable.

    Here in Ireland the political,legal and business establishment has been exposed as virulently corrupt but clinging to power zealosly.There is a sense they would be all deposed and maybe a la 19th century Revolutionary France mode if the ECB were not buying back sovereign bonds purchased on their behalf by Irish zombie banks ( to keep right with the Maastricht treaty) and thus continue funding the current needs of the Irish State.

    70% of current tax revenue is servicing social welfare recipients in Ireland.If there is a default there will be social chaos and disorder.I suspect the situation is similar in other PIIG countries.
    It is perhaps time to start thinking what the new political and social orders will look like following default.

  23. Dan

    The economic crisis has caused a lack of faith in institutions, and when that happens, political upheaval follows. Corporations propping up people just sounds fantastic to me, so I will go with the other possibility, and that is retrenchment (assuming there’s still enough food within each country’s borders and assuming there will be distribution methods). I don’t expect any of this to come to pass. I suppose we are kicking around disaster scenarios.

    It’s clear that the shock caused by convergence between western economies and the third world has happened all too quickly.

  24. Panayotis

    Please, All of you advising Greece, stay home and do something else (what?)! Greeks can take care of themselves now they realized that the EU has nothing to do with solidarity towards people but a lot to do with bailing oyt banks! Actually, Greek people have low private debt and tax evade 40% of their income. As they say Greeks are rich (300 billion in assts abroad alone) and Greece is poor. I agree with Vinny! Why work like the Germans? They can keep their euro and stuff it you know where! As far as military spending is concerned Greece is the border to Europe and faces threats from Turkey that among other things is sending many illegal immigrants over the border to Greece. Maybe as a last wave of good bey and good riddance we can send most of them over Northern Europe since we cannot support and nobody wants to help!!!!

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