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Greece sinking fast
September 13, 2011 6:12 AM   Subscribe

Yields of 2-year Greek government bonds have been skyrocketing today, and are currently at 76%. Credit default swaps show Greece with a 98% chance of default. Confidence in the Eurozone as a whole has been tanking recently after a series of setbacks that leave a political solution looking increasingly unlikely. There was a timely, gloomy discussion on RT yesterday on European and worldwide political/economic prospects
posted by crayz (173 comments total) 7 users marked this as a favorite

 
The Euro is doomed.
posted by delmoi at 6:24 AM on September 13, 2011 [1 favorite]


Well, something is doomed. The hydra that is European politics hasn't quite chosen what yet...

Thanks for the post, but, please let's not go treating RT as a serious source. Think of it more like Fox News, pointed outward, except actually owned by the Kremlin.
posted by Vetinari at 6:27 AM on September 13, 2011 [9 favorites]


I love love love the FT calling Merkel and Sarkozy "Merkozy" like "Brangelina" . Anyhoo Greece and Portugal should just default, the EU should start issuing its own bonds, and the EU should demand more control over fiscal policy going forward.

Or they should abandon the Euro. But I don't think that option is anywhere near as appealing as the average Bild reader does. But WTF do I know.
posted by JPD at 6:27 AM on September 13, 2011 [4 favorites]


Der Speigel: Germany Plans for Possible Greek Default

David Smith, Only a fiscal union will hold the eurozone together:
But it is not too late. And the crisis is, as I say, entirely capable of being solved. This is because the eurozone’s overall fiscal position is quite healthy, and certainly much healthier than Britain or America.

Though France has just unveiled an austerity package, including a 3% tax levy on high earners, and Germany’s Ifo index points to weaker growth ahead, the eurozone does not have a big deficit problem.

OECD figures show that the eurozone’s overall budget deficit last year, 6% of gross domestic product, was significantly smaller than that of Britain, 10.3%, and America, 10.6%. By next year, according to the OECD, the eurozone deficit will be down to 3% of GDP, compared with 7.1% for Britain and 9.1% for America.

The eurozone picture is even better when its underlying fiscal position, adjusted for the cycle and excluding debt interest, is taken into account.

While Britain had a deficit of 5.7% of GDP last year on this basis and America 7%, the eurozone’s was just 1.1%. By next year, according to the OECD, the eurozone will have an underlying budget surplus of 0.9% of GDP, compared with deficits of 3% for Britain and 5.8% for America...

The task for the eurozone is to harness the overall health of its public finances. If it could do so, the eurozone sovereign debt crisis could be solved.
posted by TheophileEscargot at 6:27 AM on September 13, 2011 [2 favorites]


Oh, and according to Krugman the resignation of Juergen Stark from the ECB (European central bank) is a signal that there isn't going to be any kind of dramatic policy to save things, which means probably Greece will have to default.
posted by delmoi at 6:27 AM on September 13, 2011 [1 favorite]


Thanks for the post, but, please let's not go treating RT as a serious source

I was going to say the same thing, but vacilated between flagging, starting a metatalk thread, or doing nothing.
posted by JPD at 6:28 AM on September 13, 2011 [1 favorite]


Yeah... RT is not really ever a great source except for live footage of shit going down.
posted by dazed_one at 6:28 AM on September 13, 2011 [1 favorite]


Is the IMF just waiting/pushing for the abandonment of the Euro so they can get the money back to the investors, then let the new currencies go to ruin? (just like they did in Asia)
posted by Homemade Interossiter at 6:30 AM on September 13, 2011 [1 favorite]


Philip Rösler can't keep his mouth shut, but he's saying what I think the majority of Germans are thinking. And with the Germans thinking this, then as delmoi says, the Euro as it is today is doomed.
posted by moonbiter at 6:31 AM on September 13, 2011


Love the way the German government gets all bent out of shape about solving a problem largely caused by German and French bank gambling debts.
posted by GallonOfAlan at 6:31 AM on September 13, 2011 [6 favorites]


I love love love the FT calling Merkel and Sarkozy "Merkozy" like "Brangelina" . Anyhoo Greece and Portugal should just default, the EU should start issuing its own bonds, and the EU should demand more control over fiscal policy going forward.
If the EU issues bonds, who gets the money? In the U.S. the federal government borrows money and uses it to pay for national policy. Sometimes they give money back to the states, but it's not tied at all to how much the state pays in. And on top of that national projects often benefit states that don't pay that much in taxes.

Are French and German voters going to be OK with their tax dollars going to infrastructure projects in Greece and Portugal, the way California and NY voters pay for roads in Alabama and Mississippi? Right now it doesn't seem like it.
posted by delmoi at 6:32 AM on September 13, 2011


I'm all in on the Greek two-year. Fate favors the bold!
posted by diogenes at 6:33 AM on September 13, 2011 [12 favorites]


But it is not too late. And the crisis is, as I say, entirely capable of being solved. This is because the eurozone’s overall fiscal position is quite healthy, and certainly much healthier than Britain or America

this is a little weird though. Part of why the EU's current fiscal position is in better shape is because the largest economies have chosen fiscal restraint as a solution to their economic downturn. If you are even remotely Keynesian you would reject this policy out of hand. If you actually had a unified, rational fiscal policy, you would intentionally be in worse shape that these numbers imply

Is the IMF just waiting/pushing for the abandonment of the Euro so they can get the money back to the investors,

The IMF shareholders are basically the G-7. Its moving cash from one pocket to the other.
posted by JPD at 6:33 AM on September 13, 2011


But it is not too late. And the crisis is, as I say, entirely capable of being solved. This is because the eurozone’s overall fiscal position is quite healthy, and certainly much healthier than Britain or America.


David Smith is comparing an actual bad budget deficit in Britain, say, with an imaginary figure that encompasses German strength and Irish/Spanish weakness.
posted by TheAlarminglySwollenFinger at 6:34 AM on September 13, 2011


I'm all in on the Greek two-year. Fate favors the bold!
posted by diogenes at 8:33 AM on September 13


If you're not careful, you're going to wind up living in a barrel.
posted by TheWhiteSkull at 6:37 AM on September 13, 2011 [22 favorites]


If the EU issues bonds, who gets the money? In the U.S. the federal government borrows money and uses it to pay for national policy. Sometimes they give money back to the states, but it's not tied at all to how much the state pays in. And on top of that national projects often benefit states that don't pay that much in taxes.



If you want to have the Euro in the short- to medium-term, you have to have a common fiscal policy, the first step in doing that is issuing ECB debt. Full Stop. If you want the Euro to survive long-term you need to surrender a lot more sovreignty to the EU on spending. To your point, the lack of desire to do the later is probably why the whole thing is doomed in the end. But you'd rather manage an exit when times are ok. If you are German you also need to consider the importance of the Euro zone as both your maquiladora and your main market before you get so excited about its collapse, or become too focused on government finances as a morality play.

Are French and German voters going to be OK with their tax dollars going to infrastructure projects in Greece and Portugal,

Already been going on for years though. They don't like it, but have viewed it as the price of the EU.
posted by JPD at 6:39 AM on September 13, 2011 [1 favorite]


delmoi: "If the EU issues bonds, who gets the money?"
The same EU institution which receives payments from member states? It's not like the EU having money is a new invention.
posted by brokkr at 6:40 AM on September 13, 2011


France has just unveiled an austerity package, including a 3% tax levy on high earners

What is wrong with America that we can't be more rational like this?
posted by DU at 6:40 AM on September 13, 2011


"Yields of 2 year bonds are at 76%" -- when I click the 76% link I don't understand what that means. The "76.11" I see there doesn't have a unit. Can someone explain what the yields should be? Is that 76% down from something? Or lower than it should be? The graph I see on the linked chart just goes up.

Apologies for my innumeracy and financial ignorance.
posted by artlung at 6:41 AM on September 13, 2011


If you're not careful, you're going to wind up living in a barrel.

How apropos.
posted by JaredSeth at 6:42 AM on September 13, 2011


RT defined itself in the first part of its history by overtly propaganda-y and inviting all kinds of conspiracy theory crackpots onscreen to diss the West. Since then its tried to become more respectable, and invited more serious and credible experts as commentators... but it still likes to retain a strong dose of the attitude from the first part of its history. I note here that two of the experts listed are Michael Hudson and Jeffrey Sommers who would appear both to be respectable academics and contributors to the academic-y tinfoil hat wearing crackpot website http://www.globalresearch.ca/
posted by Bwithh at 6:42 AM on September 13, 2011 [1 favorite]


Well, to be fair, shit is kind of going down now...

Greece is looking to fire twenty thousand public employees, by which they mean "pay them sixty percent salary for a year unless they find another public sector job." Italy wants the Chinese to lend them money as part of China's divestment of its low-yielding and no-longer-AAA American debt; China replies with a more-or-less nonanswer. Merkel would prefer to delay an "orderly Greek default" until 2013, and still considers kicking Greece out of the zone to be off the table... she is (as Moonbiter links in English) having trouble keeping her coalition in line on these points... (links in German from NZZ, which is basically the Swiss WSJ without the Murdoch editorial page and paywall — translations here: [1] [2] [3])

The EU is not really set up to make major changes to respond to major crises quickly. It will learn in the coming weeks, whether it wants to or not.
posted by Vetinari at 6:44 AM on September 13, 2011 [1 favorite]


please let's not go treating RT as a serious source

I was curious while originally watching the video, and read about RT's odd origins, but frankly the commentary itself seems surprisingly lucid, and the perspectives are not ones I've found in more mainstream news sources. Given that and the prescience of Hudson's New Road to Serfdom[pdf] predicting the housing collapse back in 2006, it seemed worth adding
posted by crayz at 6:45 AM on September 13, 2011


Yields of 2 year bonds are at 76%" -- when I click the 76% link I don't understand what that means. The "76.11" I see there doesn't have a unit. Can someone explain what the yields should be?


the yield should be low single digits. For example a US two year at the moment is south of 2%.
posted by JPD at 6:47 AM on September 13, 2011


this is a little weird though. Part of why the EU's current fiscal position is in better shape is because the largest economies have chosen fiscal restraint as a solution to their economic downturn. If you are even remotely Keynesian you would reject this policy out of hand. If you actually had a unified, rational fiscal policy, you would intentionally be in worse shape that these numbers imply
There's so much weirdness in this comment it's hard to know where to begin. No one is predicting, for example, that the US dollar will fail and states will start printing their own currencies.

Secondly, A true Keynesian would make a couple of points:

1) Much better automatic stabilizers in central EU countries due to their welfare states meant that, not only would their citizens be less traumatized, but also that they would keep spending money. The US did a bit of this by extending unemployment benefits, but not by much.

2) The economic situation in the periphery of the EU is absolutely terrible. Look at the unemployment rate in Bulgaria or Latvia or something.

3) The important thing is that there are austerity measures in the US and UK. The UK has had tax hikes and while there has been some federal austerity the real killer is the state governments. With less tax revenue they've been slashing funding left and right

There is FAR LESS money being spent in the US by government over all then there was before the crash in 2008. That means that while the Obama stimulus may have helped (according to models) it wasn't even enough to counteract state budget cuts.

So really, the argument is based on totally wrong premises. Plus it isn't like people think the US Dollar will disintegrate and that states will have to print their own currencies.
The same EU institution which receives payments from member states? It's not like the EU having money is a new invention.
Their budget is like €144.05 billion per year, compared to €2533 billion for the U.S. government ($3.456 trillion).

There's no comparison.
posted by delmoi at 6:48 AM on September 13, 2011


it seemed worth adding...

which is why I made a little inline comment as opposed to taking it to the grey. But IMO it should stay on the dodgy-by-default list with the Daily Mail nonetheless...
posted by Vetinari at 6:49 AM on September 13, 2011


On the Swiss idea, the other big news of the last week was the Swiss Central Bank declaring they will not allow the CHF to decline below 1.2 to the EUR. Given it was at 1.1 when they made the announcement it was a little wild.
posted by JPD at 6:49 AM on September 13, 2011


@artlung

76% put simply is the return you (in theory) would get back if you bought Greek bonds. Sounds great, but that yield is so high because the bonds are worth hardly anything.

Yield is inversely proportional to the price of a bond. So if the bond is worthless, the yield will be very high because you'd be mad to buy it (the chances are very small of the bond maturing because Greece will default.

The German 2-year bond at present yields 0.4 percent right now, for comparison.
posted by TheAlarminglySwollenFinger at 6:51 AM on September 13, 2011 [1 favorite]


Artlung, put simply, yield is a function of price and interest rate. Because there is an aftermarket for debt, a debt with a face value of $1000 might be bought for $900, $600, $300, whatever. Since you are due $1000 at maturity (plus interest), your yield reflects both the interest rate and the accretion from, say, $600 to $1000 over the remaining life of the note.

This is why they say yield and price move inversely. As more people buy a debt instrument, the price goes up, but the yield goes down, because the yield, in part, reflects the discount at which you can buy the debt. As the debt becomes more risky, the price goes down, but the yield goes up.
posted by Admiral Haddock at 6:51 AM on September 13, 2011 [2 favorites]


Yields of 2 year bonds are at 76%" -- when I click the 76% link I don't understand what that means.

It means you give them $100 and they give you $300 back in two years. Except I'm pretty sure Greece didn't issue the bonds at 76%... it's more like they issued $100 bonds with a $6 return, but those $100 bonds are being sold for $2 now since people are so sure they will be worthless. Or something like that.
posted by smackfu at 6:52 AM on September 13, 2011 [4 favorites]


delmoi you read far far far too much into my comment. The only point is that aggregating up the fiscal deficits of the EU is basically meaningless, as the economies themselves are heterogeneous, and there are great disparities in size between them. Not to mention the lack of unified fiscal policy means they aren't behaving in a way you would expect given the issue in the peripheral countries.
posted by JPD at 6:53 AM on September 13, 2011


If you want to have the Euro in the short- to medium-term, you have to have a common fiscal policy, the first step in doing that is issuing ECB debt. Full Stop. If you want the Euro to survive long-term you need to surrender a lot more sovreignty to the EU on spending

Yep and it's now looking like that's politically (even "legally") impossible:
This ruling by the German Constitutional Court does allow the EFSF to operate as planned. Most commentators have focused on this. However, the language of the decision means there can be no eurobonds and no "supra-national" fiscal agent because these are in violation of the German constitution.
So, what left but the crying?
posted by crayz at 6:54 AM on September 13, 2011


Yields of 2 year bonds are at 76%

Yield is essentially "expected profit at sale". Say the face value of the bond is €1,000, with 10% return: when the bond matures, you get €1,100. If you can buy that same bond now for €600, because nobody believes it will be paid at maturity, you get €500 profit in the (now unlikely) event it does pay off, or 83% in this example (not far off from your 76%)...

In order for that sale to happen, though, the holder of the bond (someone who likely paid very close to the €1,000 face value) has to want to sell for €600, taking a 40% loss — they are looking for an exit before they get completely screwed.

"76% yield" translated into English basically means "RUUUUUUUUN!"
posted by Vetinari at 6:54 AM on September 13, 2011 [8 favorites]


@arthung: Yield is a unitless measure of return on a bond, in this case (we can speak about yields on a number of financial products, though they're calculated differently).

Essentially, Yield is the IRR (Internal Rate of Return), which is the solution to the question: "Given the current bond price, at what rate do I need to discount all of the cash flows (coupons) and principal in order to arrive at said price".

In other words, if I bought this bond and poured all of the coupons into more bonds (reinvestment) as I received them at the same price, I would make that % return on my investment. If you bought Greek bonds now and reinvested your coupon flows into more bonds, you would make 78% on your investment.

Reinvestment (the ability to buy bonds at these distressed prices) is the reason why 78% is only an approximation. Theoretically, a coupon payment would be a sign of strength, which should raise the price of the bond, reducing the yield, and making it impossible to capture a true 78% return.
posted by teabag at 6:54 AM on September 13, 2011 [3 favorites]


If you're not reading Greek economist Yanis Varoufakis's blog for analysis, you really should be.
posted by RogerB at 6:54 AM on September 13, 2011 [6 favorites]


Is there an easy way for me to buy $100 worth of Greek debt today? I kind of like the idea of placing this kind of small bet on a historic economic crisis, and even if they default and I lose the hundred that would still be kind of cool.
posted by Aizkolari at 6:55 AM on September 13, 2011


Thank you, Finger and Haddock.

That sounds a bit like "printing money" which leads to inflation, is that concept relevant to these bonds?
posted by artlung at 6:55 AM on September 13, 2011


It's a major problem that Greece appears to be a bottomless pit. It's not clear that a second bailout isn't just throwing good money after bad. Now in Greece the tax collectors are striking. This on top of the extremely weak tax collection that Greece had before. If the government can't pay its workers and can't collect income, then its insolvency is a fact, not a product of the EU balking.
posted by cotterpin at 6:55 AM on September 13, 2011 [1 favorite]




As for the question at hand, or the post, the first thing I was going to ask was: WTF is RT.com?

Thanks to mefites, I'm going to discount them as a source.

Essentially, this question is a political one. But personally, I don't understand how Greece can avoid default. Their tax collectors are striking, which makes it even less likely they'll be able to manage their debt obligations.
posted by teabag at 6:57 AM on September 13, 2011


@RogerB can you highlight a recent, interesting post of Yanis'? I can't quite navigate his blog well.
posted by teabag at 6:59 AM on September 13, 2011


That sounds a bit like "printing money" which leads to inflation, is that concept relevant to these bonds?

Not really. Yield is a market force--it's buying an asset at a discount and then computing your rate of return. Every debt has a yield that may be higher or lower than the stated interest on the instrument--it's just the market's way of valuing the risk of the issuer.
posted by Admiral Haddock at 7:00 AM on September 13, 2011 [1 favorite]


Is there an easy way for me to buy $100 worth of Greek debt today?

Put the money in an envelope and send it over to me - Dr Dracator Genuine Handcrafted Artisanal Greek Debt is the finest on the market.
posted by Dr Dracator at 7:02 AM on September 13, 2011 [6 favorites]


That sounds a bit like "printing money" which leads to inflation, is that concept relevant to these bonds?

It would be if Greece controlled the ECB, which they don't.

Imagine if Greek debt were issued in gold (this happened a lot in the past). Greece can't create gold out of nowhere, so they would have to buy gold by taxing their citizens in order to pay their bonds.

Now replace gold with Euros. Greece can't create more euros anymore then it can create more gold.

The problem here is that the interest on the bonds is so high that, IIRC Greece couldn't pay back it's bonds even if they taxed their citizens at 100%!. I'm not sure, but I think Their debt is larger then their GDP and It's growing faster then their GDP. Again I'm not sure on the exact figures, but basically what I remember is that it's simply physically impossible for Greece to pay back it's debts, unless it grows it's economy massively, which is impossible with all the austerity measures.

So basically they're fucked and it's been known they would be fucked for a long time -- not withstanding some more and much larger bailouts. Which won't be happening.

What might happen, though is that if Greece leaves the Euro, they might convert all their bonds to new Greek notes. If they do that, and there's massive inflation after the conversion, they'll have no trouble paying their debts. But those Greek notes won't be worth nearly as much.

The other probability is that they just declare bankruptcy and tell everyone they are going to only pay 10% of the face value of their bonds, or something like that.
posted by delmoi at 7:03 AM on September 13, 2011 [4 favorites]


JPD: Switzerland badly needs to sink its currency, as its export-manufacturing and tourism industries (read: basically all of its industries) were getting hammered by normally high prices going higher. Nobody could afford to buy Swiss, even moreso than usual. The announcement was a big, big thing here — people went office to office yelling "Welcome to the Eurozone", and I work at a university, in a group that has nothing at all to do with economics or finance.

Tying the Franc to the Euro is certainly a good way to get it to lose money, but the only way to do it is by buying Euros and selling Francs. So the national bank is going to end up with a whole bunch of foreign reserves in a falling currency with an uncertain outlook. But that's the next problem to solve...
posted by Vetinari at 7:04 AM on September 13, 2011


dammit. <edit-window>to get it to lose value</edit-window>: buying Euros itself is a good way to lose money.
posted by Vetinari at 7:06 AM on September 13, 2011


Yeah - FT Alphaville did a little thing on PPP using a basket of goods bought in Geneva and just across the border in France. It was pretty amazing how out of whack the CHF was.
posted by JPD at 7:09 AM on September 13, 2011




Merkel would prefer to delay an "orderly Greek default" until 2013...

Isn't it a rule that the moment someone starts to talk about an orderly default is when the disorderly default begins?

also, Fortune Favors the Bold!
posted by ennui.bz at 7:10 AM on September 13, 2011


As of yesterday it now "... costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greece’s debt for five years using credit-default swaps, up from $5.5 million in advance on Sept. 9," according to CMA Datavision.
posted by mojohand at 7:11 AM on September 13, 2011


Isn't it a rule that the moment someone starts to talk about an orderly default is when the disorderly default begins?



it is the equivalent of waving a read flag in front of every guy in an $800 cashmere half zip and $200 jeans in Mayfair, Greenwich, and Geneva.
posted by JPD at 7:12 AM on September 13, 2011


Oh, goodie. There's at least $600bn in CDS out there spread among the Euro-zone countries in crisis. There are those that are sanguine about this not turning into another Lehman, but the CDS they may be worthless and what then?
posted by ob1quixote at 7:12 AM on September 13, 2011


read=red
posted by JPD at 7:13 AM on September 13, 2011


There's at least $600bn in CDS out there spread among the Euro-zone countries in crisis.

fucking NYTimes should know better. That's gross, Net is what matters. That number is magnitudes smaller.
posted by JPD at 7:14 AM on September 13, 2011 [1 favorite]


For comparison, the Ireland 2 year yield is currently at 9.45%, down from a high of about 23%.
posted by exogenous at 7:15 AM on September 13, 2011


it is the equivalent of waving a red flag in front of every guy in an $800 cashmere half zip and $200 jeans in Mayfair, Greenwich, and Geneva.

I can't get past imagining some bizarre mixed metaphor involving bulls and bears... If you wave a red flag in front of banker, do they turn into a bull? Do they charge? Charge what...
posted by ennui.bz at 7:15 AM on September 13, 2011 [1 favorite]


As a non-financial person who hates thinking about money, Planet Money has been helping me understand a lot of this.
posted by maryr at 7:16 AM on September 13, 2011


For comparison, the Ireland 2 year yield is currently at 9.45%, down from a high of about 23%.

Which is to say that in exchange for not defaulting on their debts the Irish get to pay ruinously high amounts in interest.
posted by ennui.bz at 7:18 AM on September 13, 2011


@JPD most journalists and laymen at best simply don't understand these products or at worst are out to demonize them. The GS/Congressional hearings made me gnash my teeth.
posted by teabag at 7:22 AM on September 13, 2011


fucking NYTimes should know better. That's gross, Net is what matters. That number is magnitudes smaller.
Sure, sure, but what happens if someone in that chain goes bankrupt along with Greece? That's what happened in 2008 with all the mortgages. First the mortgages went bad, then the companies insurance those mortgages went bad, which in turn meant the companies that hedge their mortgage exposure got screwed, and so on.
posted by delmoi at 7:24 AM on September 13, 2011


That's what happened in 2008 with all the mortgages. First the mortgages went bad, then the companies insurance those mortgages went bad, which in turn meant the companies that hedge their mortgage exposure got screwed, and so on.


doesn't work like that
posted by JPD at 7:26 AM on September 13, 2011


Also you are mischaracterizing the chain of events that occured during the crisis. The failure of the mortgage insurers and monolines (the biggest of which haven't actually failed BTW) didn't have much to do with the losses taken by the banks. AIGs failure actually had very little to do with the actual cashflows from the bonds, but rather some stupidly worded contracts, and the implosion of a business that had nothing to do with insuring mortgages.
posted by JPD at 7:28 AM on September 13, 2011 [2 favorites]


please let's not go treating RT as a serious source

I kept thinking they were going to show the movie Shaft everytime their bizarre wah-laced theme music came on.
posted by chococat at 7:30 AM on September 13, 2011 [1 favorite]


A lot of talk here is focussing on the economics, but it's really moot. The real problem is governance. A system where it takes 17 national parliaments to agree anything is inevitably unable to respond to fast moving crises like these.

A solution would be fiscal integration, but that also entails a reduction in democracy for all euro zone citizens (the EU is already undemocratic as it is).

So the one political solution needed to fix the economic problem is not really palatable for anyone.

So yes, the euro is doomed!
posted by TheAlarminglySwollenFinger at 7:31 AM on September 13, 2011 [1 favorite]


That's what happened in 2008 with all the mortgages. First the mortgages went bad, then the companies insurance those mortgages went bad, which in turn meant the companies that hedge their mortgage exposure got screwed, and so on.

My concern is Euro-zone banks with positions in Greek bonds having their capital ratios met when those bonds are declared worthless. So there is concern here.
posted by Ironmouth at 7:35 AM on September 13, 2011 [1 favorite]


So yes, the euro is doomed!

Wow, that was quick! What if Germany annexed Greece, would that help?
posted by Meatbomb at 7:35 AM on September 13, 2011 [3 favorites]


The only people in the world less comfortable than, well, basically all of Europe, with the noun "Germany" right next to the verb "annex", are the Germans themselves. (Although the populist right wouldn't mind the islands.)
posted by Vetinari at 7:39 AM on September 13, 2011 [1 favorite]


Well, Günther Oettinger has floated the idea of sending in EU officials to collect tax from the Greeks. http://www.spiegel.de/international/europe/0,1518,785365,00.html
posted by zemblamatic at 7:40 AM on September 13, 2011 [1 favorite]


This isn't a fast moving crises. It was pretty clear that this was what was going to have to happen to Greece back in early 2010. The last 18 months was just stalling, buying enough time to give the IMF's just-add-austerity brand of economic policies another chance to discredit the institution.

For what purpose, I can't fathom. Maybe some Eurocrats thought that two years of devout praying might just halt the inevitable. Or maybe someone especially cynical wanted a chance to buy some nice islands and other pieces of Greek real-estate but needed a year to free up their cash.
posted by kithrater at 7:41 AM on September 13, 2011 [1 favorite]


Wow, that was quick! What if Germany annexed Greece, would that help?

Well... from the Euroskeptic Telegraph newspaper:
Germany’s EU commissioner Günther Oettinger said Europe should send blue helmets to take control of Greek tax collection and liquidate state assets. They had better be well armed. The headlines in the Greek press have been "Unconditional Capitulation", and "Terrorization of Greeks", and even “Fourth Reich”.
That's somewhat exaggerated. The WSJ describes the plan more calmly:
Cynics will say that many Greeks just won’t pay [higher taxes] at all. One of them is Germany’s representative on the European Commission, Guenther Oettinger, who proposes that the European Union relieve Greek tax officials of their duties and replace them with Northern European accountants and enforcers.
I'd love to see more about what, specifically, he said.

He's a bit of a nut though... also called for the flags of EU states who've been bailed out to be flown at half-staff on EU buildings.
posted by Jahaza at 7:42 AM on September 13, 2011


Darn you zemblematic!
posted by Jahaza at 7:45 AM on September 13, 2011


JPD: "fucking NYTimes should know better. That's gross, Net is what matters."

I freely admit that I'm not in the industry and only know what I read in the papers. With that in mind, I have an honest question: Will the difference between net and gross matter if the counter-parties crap out?
posted by ob1quixote at 7:45 AM on September 13, 2011


Sort of. Agree on the Greek point (of course with benefit of hindsight). But the speed with which Italy, even France have been dragged into the market turmoil is very fast. In April, you'd have been given a funny look if someone told you Italian 10-year-bonds were going to hit 6 percent.
posted by TheAlarminglySwollenFinger at 7:46 AM on September 13, 2011 [1 favorite]


Good Krugman here
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 8:56 AM on September 13


Wow, Krugman validates something Kunstler said recently: "I really don't quite see how the Euro currency gets through to the end of this week."
posted by AugieAugustus at 7:48 AM on September 13, 2011 [2 favorites]


...who proposes that the European Union relieve Greek tax officials of their duties and replace them with Northern European accountants and enforcers

This seems like the concept proposal for really good reality tv show. Can't wait to watch...
posted by ennui.bz at 7:50 AM on September 13, 2011 [4 favorites]


Has anyone seen any articles (or care to comment personally) about what life will be like in Greece for ordinary people after a default? I have a lot of family over there (including my parents who are there the next two months) and all I can I remember is how bad it got in Argentina when they dropped their peg to the dollar. I'm really quite worried about them.
posted by longdaysjourney at 7:51 AM on September 13, 2011 [1 favorite]


The Krugman link is paywalled. Does anyone have a different link?
posted by enn at 7:53 AM on September 13, 2011


enn: Try this one or this bookmarklet.
posted by longdaysjourney at 7:54 AM on September 13, 2011 [1 favorite]


The Krugman link is paywalled. Does anyone have a different link?

Just open it in a different browser. If you use Chrome, you can use incognito mode. If you don't use chrome you can download it and use incognito mode.
posted by delmoi at 7:56 AM on September 13, 2011 [3 favorites]


But the speed with which Italy, even France have been dragged into the market turmoil is very fast

The basic gist seems to be these governments and banks are all interconnected, and if there's not enough political will to fix tiny Greece, where is this train going to end? It's become clear the leaders of Europe don't have an answer
posted by crayz at 7:57 AM on September 13, 2011 [1 favorite]


Has anyone seen any articles (or care to comment personally) about what life will be like in Greece for ordinary people after a default? I have a lot of family over there (including my parents who are there the next two months) and all I can I remember is how bad it got in Argentina when they dropped their peg to the dollar. I'm really quite worried about them.
They may be better off, if they don't default the government will have to tax the hell out of everyone while cutting social services to the bone so that they can pay back German bankers.
posted by delmoi at 7:57 AM on September 13, 2011


Will the difference between net and gross matter if the counter-parties crap out?

If a counterparty fails for a CDS there is a mechanism to net out the exposure. It won't be perfect, but the actual risk to the system is substantially similar to the net exposure. Unlike in the mortgage crisis most of these systems were set up with the risk of a default in mind. These were always viewed as "risky" the mortgage stuff was not - that's why those failures were so poorly handled.
posted by JPD at 7:59 AM on September 13, 2011 [1 favorite]


RT defined itself in the first part of its history by overtly propaganda-y and inviting all kinds of conspiracy theory crackpots onscreen to diss the West. Since then its tried to become more respectable, and invited more serious and credible experts as commentators... but it still likes to retain a strong dose of the attitude from the first part of its history.

This is the difference I tend to see between Fox News and RT. There seems to be a higher proportion of actually-reasonable stories on RT, but the really slanted political stuff passed off as fact is till there. Though maybe it only seems that way from the outside, IDK.

And I don't mean to bash Fox unnecessarily, they just seem buffoonish to me a lot of the time, which makes me have a hard time understanding how they get taken seriously. RT is in many respects a lot scarier, because it actually seems real.
posted by thegears at 8:01 AM on September 13, 2011


Yeah but how do you stop the mother of all bank runs? If I had 100 euros in a greek bank right now I'd be wondering if I should move it to some other bank, under the assumption I might wake up tomorrow with drachmas instead. How can there be an orderly exit?
posted by crayz at 8:01 AM on September 13, 2011


The basic gist seems to be these governments and banks are all interconnected, and if there's not enough political will to fix tiny Greece, where is this train going to end? It's become clear the leaders of Europe don't have an answer

Absolutely. Remember in early 2008, when all the talk was "subprime containment" and how emerging markets were "decoupled" from the developed world financial system?

The same denialism is at work right now in euro zone governments, except with the potential for even greater disaster.
posted by TheAlarminglySwollenFinger at 8:15 AM on September 13, 2011 [3 favorites]


delmoi: No, in default ordinary Greeks are going to be absolutely stuffed. Part of the Greek state's problem is that Greece the country simply doesn't make much that anyone else really wants. They're a second world (wonderful, vibrant) country that engineered their way into the Eurozone through playing accounting games & then later outright lying about the finances of the country via weird off-balance sheet derivative contracts (with Goldman Sachs et al) and then used cheap borrowing in €s to cover the gap between national income & expenditure for years afterwards.

If and when Greece defaults, Greek quality of life will plummet even further. This is why Greece hasn't just left the € and devalued already: doing that simply isn't enough because even after the devaluation Greece will still be left with an economy that doesn't to earn sufficient foreign currency to pay for it's imports & no-one will be lending it anything in the short term.

(All the above is my personal reading of the situation based on what I've read elsewhere.)

Argentina is about right unfortunately. It's not going to be pleasant: Right now Greece is dependent on the kindness of strangers & that flow of money may be about to dry up altogether. The markets certainly believe that a default is inevitable.
posted by pharm at 8:24 AM on September 13, 2011 [1 favorite]


If and when Greece defaults, Greek quality of life will plummet even further. This is why Greece hasn't just left the € and devalued already: doing that simply isn't enough because even after the devaluation Greece will still be left with an economy that doesn't to earn sufficient foreign currency to pay for it's imports & no-one will be lending it anything in the short term.
Uh, what? It sounds like your mixing up the economy and the government. It's not the government who pays for imports, it's the people. It's true that if people can't get credit, they'll have to import less, but, so what? The Greek people will take a hit in terms of quality of life, and that will kind of suck, but they're already being forced to take those hits and still have the crippling debt problem.


If the government defaults then two things will happen 1) It won't have to make payments on current debt, and 2) It probably won't be able to borrow money very effectively.

So on the one hand you have less money coming into the government by new borrowing, and less going out through interest payments. Greece will have to run a balanced budget. But at least people will feel like the money is going to them, and that they're not being taxed to the bone simply to pay off german bankers.
posted by delmoi at 8:38 AM on September 13, 2011 [3 favorites]


When Russia and Argentina defaulted, it probably was a net positive for the people of those countries -- after a few yaers of hardship, their governments are now running a fiscally tight ship for the first time ever.

Greece is a little bit different because if they default, they'll never be taken seriously as a full EU member again. That has implications for imports and exports, tourism, labor mobility, etc. Of course that doesn't mean they shouldn't default, it just means they've got more to lose when they do so.
posted by miyabo at 8:59 AM on September 13, 2011 [1 favorite]


God the amount of shadenfreude is burning out my soul at the moment. (tee hee)

I remember sitting with my colleagues from all over the eurozone while they laughed at me for having to have two currencies in my wallet (Sterling and Euros). Oh, how they told me that Euros were so much better and that it was far smarter to have a single currency so everyone would get richer. And how they were saving money because they didn't have to change currency anymore.

Then I asked them - "I live in a currency union, it's called the UK. We have to move huge amounts of money around inside that union to keep things stable. Just like in the USA. How much money do you contribute to the poorer ends of Europe?"

They were convinced it was just temporary, and as soon as East Germany got rich, they'd no longer have to spend money on the poor bits. Now they have to pay out the *entire debts* of an *entire country* just to keep their own money stable. Ooops. (tee hee)

Still, I hope it doesn't hit my currency union too badly. I hope our previous governments haven't signed us up to too many nasty surprises.
posted by Hugh Routley at 9:08 AM on September 13, 2011


I think the problem with the Euro (aside from the fact that Greece faked their economic data and should never have been allowed to join), is that the ECB is too weak and scared to protect it. The Fed would be doing much bolder things at this stage of a monetary crisis.
posted by East Manitoba Regional Junior Kabaddi Champion '94 at 9:14 AM on September 13, 2011


I don't think it's that the ECB is too weak and scared -- just deluded.

Under Jean-Claude Trichet they have an anti-inflation ideologue who doesn't understand that keeping inflation near 2 percent isn't something to be proud of a large chunk of the euro zone is rotting in economic hell!

The ECB is being bold right now, but in a really, really, loony way.

My guess is Trichet's policy stance will be talked of in the same terms as Smoot-Hawley.
posted by TheAlarminglySwollenFinger at 9:26 AM on September 13, 2011 [5 favorites]


delmoi: The problem is that Greek runs a large deficit to keep government spending going. Every day, it spends more money than it takes in taxes.

If the Greek government defaults, it can't borrow in the short term. So overnight, it can't afford to run the government.

For a large organization, it's very difficult to instantly cut spending. Even if you fire a bunch of people, you have to get their redundancy payments from somewhere.

In the short term, default means going from super-austerity to hyper-austerity. It's not going to be pretty.
posted by TheophileEscargot at 9:31 AM on September 13, 2011 [2 favorites]


Hugh, it's not your currency you should worry about yet, it's the state of your banks when pressure is applied to them. Then watch your currency.

There sure seems to be a whole lot of "Ha Ha, your side of the boat is on fire!' going on with this crisis.

When bond holders have to mark to market at zero, we'll soon find out how interconnected the finance community really is.

I think when we look back at this disaster, the intransigence of bold holders to negotiate a haircut will be one of the largest cases of financial mishandling in this century. Their investors will take much larger losses than if they had merely forgiven a lot of bad debts.

But I'm sure they will still tell themselves their self-acquitting morality tales to justify their huge losses, denying their own responsibilities as managers of the largest groups of investments in the world. Innocent little financial managers, laid low by those tricksy borrowers.
posted by dglynn at 9:32 AM on September 13, 2011 [12 favorites]


I think when we look back at this disaster, the intransigence of bold holders to negotiate a haircut will be one of the largest cases of financial mishandling in this century.

The is kind of reductive though. Part of why they didn't take the haircuts was because from a rational loss minimzing perspective the right thing for the ECB, and the EU by extension, to do was put forward some sort of bailout. That's why people didn't agree to the haircuts. They thought it was a rigged game of chicken - the EU had more to lose by a failure of the exchange offer than the bond holders did (incidently I think implied recoveries are closer to 50% than 0, but whatever). The miscalculation was the politics of it all. If the "Economics as morality" crew did have a populist appeal in N. Europe, then not tendering would have worked.

In this case politics won out over reason. Oh wait. Where else could that possibly be going on....
posted by JPD at 9:41 AM on September 13, 2011


That sounds reckless to me, JPD.

The defense of assets requires a stable market, otherwise your holdings suddenly go from being great leviathans plying the financial waters to mere playthings for God's wrathful ocean.

What was the downside if they were wrong about their decision to play "chicken"? Is it financial calamity for their investors? That sounds like a huge case of risk mismanagement, in service of ameliorating what have proven to be bad decisions in investing in risky sovereign debt.

Somebody go tell the bond firms to take their lumps as every other market participant has since 2007. If the stupid scorpions want to make it to the other side of the river, they can't sting the frog they are riding on halfway across.

I know, it's in their nature.

So bond firms to avoid losses on investments they chose, and in an attempt to be self appointed doom-bringers to moral hazard, will now further annihilate their investors funds on an altar of ideological purity. How unprofessional.
posted by dglynn at 10:01 AM on September 13, 2011 [2 favorites]


Jahaza: "I'd love to see more about what, specifically, he [Günther Oettinger] said."

This is what he specifically said (in German).
posted by moonbiter at 10:04 AM on September 13, 2011 [1 favorite]


FT Alphaville did a little thing on PPP using a basket of goods bought in Geneva and just across the border in France. It was pretty amazing how out of whack the CHF was.

Link for those interested. They also did the same basket in Australia. The breakdown (for the lazy):

Pringles sour cream & onion chips
Milk (1L)
Butter (8oz)
Smiling Cow cheese (8oz)
Mars bar
6 eggs
Loaf of French bread

CHR: 24.80 (28.25 USD)
AUD: 24.78 (25.61 USD)

For comparison, at my local supermarket the same items totaled $16 including tax.

But then, we don't get free health care or affordable college educations, so it's probably a wash.
posted by Civil_Disobedient at 10:16 AM on September 13, 2011


And all this talk of how Greece isn't 1st world-enough to play with the big boys because they don't have nuthin' the rest of Europe would like to buy is horseshit. They've got more sun and beaches and glorious weather most of the year than the whole of Northern Europe combined. The two biggest problems are: 1. lazy, entitled government employees; 2. they don't pay their fucking taxes.

Greece needs to privatize their tax collection.
posted by Civil_Disobedient at 10:25 AM on September 13, 2011


Greece needs to privatize their tax collection.

No potential for abuse there!
posted by one more dead town's last parade at 10:28 AM on September 13, 2011 [10 favorites]


So bond firms to avoid losses on investments they chose, and in an attempt to be self appointed doom-bringers to moral hazard, will now further annihilate their investors funds on an altar of ideological purity. How unprofessional.

I don't know who these mythical "bond firms" are. Most of the greek debt is held by Eurozone banks, so the default (and the haircuts) could end up forcing a recapitalization in a few cases - that is probably more expensive than just backstopping greece. That's why the banks were betting on the backstop. It makes sense for everyone. The bank failures will end up being foisted on the taxpayer anyway. You ask why the banks own the debt? Because the regulators told them to. The risk weightings were zero - why? Because the countries wanted to encourage them to buy as much as they could.

You can't pick which side is a morality play and which is about economics. You seem to think the banks are where math doesn't matter, the anti-bailout crowd thinks its the greek budget that qualifies.
posted by JPD at 10:37 AM on September 13, 2011 [3 favorites]


Again, Greece isn't even the problem. It's the effects on German, French, and British banks, and investors then questioning the viability of those banks. Focusing on Greece and it's moral failings is like blaming the financial crisis of 2007 on that California strawberry picker with a $400k mortgage that never had any payments made.

Investors made bad choices, and as those investments fail we will find out how the potential risks were managed. If recent history is an indication, financial professionals will turn out to have been poor judges of the risk they have exposed themselves too.

And then the music stops, and everyone races for not enough chairs.
posted by dglynn at 10:42 AM on September 13, 2011 [1 favorite]


But the music is being played by the ECB. And you are right, the problem isn't greece the real problem is what greece says about the abilities of the ECB. And "moral failings" have no place in this discussion. I've never made that argument - you are actually the person who made that argument.

Investors made bad choices, and as those investments fail we will find out how the potential risks were managed. If recent history is an indication, financial professionals will turn out to have been poor judges of the risk they have exposed themselves too.


I don't even know what this means. The greek bondholders didn't make a bad decision - they actually made the right decision -. The problem is that the politicians who had to also make the right decision, have made the exact wrong one. And because of this, and because the politicians will have to pay to recapitalize the banks that fail because Greece, Portugal, Italy or Spain default, it will end up costing more than if you just backstopped the Greeks.
posted by JPD at 10:59 AM on September 13, 2011


I think the thing that confuses me - is what the bad investment was. Was it buying the Greek bonds in the first place? Or not agreeing to the lame deal the French and Germans tried to put together. I was addressing the later, if its the former I think the important thing to recognize is that many of the buyers of those bonds were doing it for non-economic purposes - i.e. close ties to the state, and their state telling them "it would be good if you bought these"
posted by JPD at 11:08 AM on September 13, 2011


What was the downside if they were wrong about their decision to play "chicken"? Is it financial calamity for their investors? That sounds like a huge case of risk mismanagement, in service of ameliorating what have proven to be bad decisions in investing in risky sovereign debt.

Risky sovereign debt? Greece was (until last year) a member of the EU in good standing. My idea of 'risky sovereign debt' is bonds from countries like Venezuela or Indonesia, where the internal politics are so opaque that you you don't know whether they'll adopt a new constitution or lock up the leader of the opposition on any given day. It's all very well to complain about the intransigence of bondholders, but you need to remember that risk management is also part of the ECB's duty, and indeed of the EU and its member governments. The whole EU is founded on the idea of mutuality, and it's disappointing to me (as a European) to see that there is not a coherent plan in place to deal with the contingency of defection/bad faith on the part of one member government (Greece, hiding its poor fiscal position from the other members while the problem got worse).

Personally, I'm for Eurobonds. Treaties can be amended or referendums held if necessary. And to those who object to the idea of fiscal union and complain that it's undemocratic, I have three things to say: first, if we're all in the same boat and it's taking on water, then the insistence on exclusive possession of individual buckets is no more than a childish attempt to deny the unpleasant situation out of existence; second, we have copious historical evidence for the proposition that technological change and intense intranational competition in a small geographic area usually ends up with people shooting at each other; third, federal government is often a more effective counterweight to national government than internal opposition, as seen with human rights legislation and competition policy. I invite people who want to whine about the possibility of an EU superstate to go back to the mid-20th century and bloody well stay there.
posted by anigbrowl at 11:08 AM on September 13, 2011 [1 favorite]


I would just like to say that this: "Ha Ha, your side of the boat is on fire!' is pretty funny and painfully appropriate.
posted by Horatius at 11:21 AM on September 13, 2011 [1 favorite]


...The bank failures will end up being foisted on the taxpayer anyway...

Why is that a foregone conclusion?
posted by de void at 11:22 AM on September 13, 2011


Why is that a foregone conclusion?


They will be. The French and Germans are already talking about it.

You might wipe out the shareholders, but then the governments will step in and nationalize them. And right now most of these banks have perpheral EU holdings > equity anyway.
posted by JPD at 11:32 AM on September 13, 2011


Never understood why governments would choose to keep poorly risk-managed banks afloat instead of letting them fail and simply starting new ones with the capital they might have used to bail out the old ones.

Let the shareholders and bondholders suffer, as they rightly should, let management and executives twist in the wind, as they rightly should, and welcome all the workers to the new bank.
posted by de void at 11:37 AM on September 13, 2011 [1 favorite]


delmoi: "Uh, what? It sounds like your mixing up the economy and the government. It's not the government who pays for imports, it's the people. It's true that if people can't get credit, they'll have to import less, but, so what? The Greek people will take a hit in terms of quality of life, and that will kind of suck, but they're already being forced to take those hits and still have the crippling debt problem. "

You're missing the fact that even if they default on 100% of their debt, Greek taxes don't cover current expenditure (or at least they didn't last time I checked). So in the absence of EU bailout money, even if they default their standard of living is going to fall even further, or else they're going to have to quit the € and rely on currency devaluation to make up the difference, which comes to the same thing in the end although the pain may be spread around slightly differently.
posted by pharm at 11:42 AM on September 13, 2011


Satyajit Das from August 11th on "the European Banking Authority (“EBA”) completed tests on European banks to demonstrate their “solvency” under conditions of “stress”.

Seems so familiar....

I think the thing that confuses me - is what the bad investment was.

It's the one going to zero value.

No one thinks they are making a bad investment, ever. In the US investors assumed that AAA ratings for various forms of mortgage bundles meant they were essentially riskless. That turns out to have been incorrect.

It also turns out that financial professionals creating products that acted as insurance against defaults by things rated AAA believed they were getting free money, because AAA meant that the risk of default was functionally zero. Their risk management was also poor, adding to the misery of an already miserable situation.

Purchasers of Greek bonds made a lot of assumptions that seemed to infer greater safety than was apparent in just the numerical analysis. Those presumptions are turning out to perhaps not apply. Hence, bad investment.

JPD, you and I do agree that institutions working together to mitigate the damage to prevent the spread of economic disorder would prove to be cheaper than just letting the chips fall where they may. But there doesn't seem to be much interest in taking that action, politically, financially, or morally. If bond holders indicated a willingness to accept less returns on Greek debt, then maybe the ECB could convince it's participant states that there was some plausible way to resolve these debt issues. That might result in bond holders getting some of their investments returned, and avoid a larger crisis.

I believe bond holders have matches, but they are up to their knees in gasoline. Responsible managers of investments have concerns other than only those investments, and now would be a good time to act to protect the vast bulk of their holdings by forgoing the returns on some percentage of their investments.

Or they can sting the frog and drown with the rest of us.
posted by dglynn at 11:43 AM on September 13, 2011


Again, Greece isn't even the problem. It's the effects on German, French, and British banks, and investors then questioning the viability of those banks. Focusing on Greece and it's moral failings is like blaming the financial crisis of 2007 on that California strawberry picker with a $400k mortgage that never had any payments made.

This is stupid. Greece' government acted badly. So does someone who takes out a mortgage with no means or intention of paying it. The difference is that the problems in the US real estate market resulted from large numbers of people overextending themselves, with some misreporting their financial position in order to fit the requirements of a contract of adhesion. This was dishonest, but since it appeared that any real-estate purchase would rise in value, many buyers had a reasonable expectation that they would be able to meet their obligations by reselling the property they had bought and viewed the mortgage as something akin to a short-term revolving credit facility rather than the long-term financial commitment it actually was. This delusional view spread through the retail and investment banking sectors as well, largely because they did not understand each others' business models. The retail bankers thought the investment bankers found their financial products impeccably creditworthy, and the investment bankers thought that the retail bankers had drawn the same conclusions about the mortgagees; essentially, they outsourced the due diligence parts of their businesses to each other without realizing that they had done so, and both mortgagees and securities buyers were happy to believe that the banks were handing out free money and that they'd be fools not to take advantage.

Greece's government was not a securities buyer or a house buyer signing a contract of adhesion with a large faceless financial institution. It was an actor with full agency, input into fiscal and monetary policy, and all the responsibilities of a fully enabled actor. Cripes, the Greeks originated the concept of a constitutional republic and of democracy, not to mention a large chunk of fundamental mathematics. It's not like the Greek government went on a sightseeing tour to Brussels and somehow woke up in Amsterdam with a suitcase of cash, a bad hangover and a usurious financial contract tattooed on its back. Greece acted rather irresponsibly, overestimated its financial luck, and is now seeking help from the neighbors. Certainly, it would be nice if the debt could be wiped out, but it would also be nice if the neighbors stuck by their mutual commitment to support each other in terms of both fiscal assistance and in maintaining fiscal discipline.

Investors made bad choices, and as those investments fail we will find out how the potential risks were managed. If recent history is an indication, financial professionals will turn out to have been poor judges of the risk they have exposed themselves too.

You seem to be under the impression that all the bondholders are filthy rich private individuals who are trying to extract the last drop of financial juice from the Greek economy before heading off to raid some other economy. I wish people would bear in mind that government bonds are most often bought by other governments, insurance firms, pension funds, and other large financial concerns that invest in bonds because they are (in general) low-risk financial instruments compared to stocks or derivatives. Those large entities try to make prudent and rather conservative investments because their primary interest is in providing long-term financial security rather than quick profits. Since Greek bonds are essentially the checks written by the Greek government, I think it's quite reasonable for the bondholders to have believed that the Greek government was also committed to the long-term financial security of the Greek people as well as Greece's fellow Eurozone members.

If we were talking about the failure of High Risk Greek Odyssey Corporation, then I'd agree that sure, bondholders should have known that there was a high chance they'd lose all their money. but actually we're talking about the failure of what was supposed to be a sensible and fiscally sound European country that had put its bad fiscal habits behind it many years previously. Blaming the bondholders is like an alcoholic falling off the wagon and then blaming his wife for being upset about it. After all, she should have known he was an alcoholic and anyway he only drinks because she nags him so much, amirite?
posted by anigbrowl at 11:47 AM on September 13, 2011 [2 favorites]


anigbrowl: "Blaming the bondholders is like an alcoholic falling off the wagon and then blaming his wife for being upset about it."

Plenty of blame to go around anigbrowl.
posted by pharm at 11:58 AM on September 13, 2011


You seem to be under the impression that all the bondholders are filthy rich private individuals who are trying to extract the last drop of financial juice from the Greek economy before heading off to raid some other economy.

They are large pools of money whose investment choices are made by financial professionals. Grandma's pension investments are managed for her.

I wish people would bear in mind that government bonds are most often bought by other governments, insurance firms, pension funds, and other large financial concerns that invest in bonds because they are (in general) low-risk financial instruments compared to stocks or derivatives.

Not this time apparently.

Those large entities try to make prudent and rather conservative investments because their primary interest is in providing long-term financial security rather than quick profits.

Some of their investments are failing.

Since Greek bonds are essentially the checks written by the Greek government, I think it's quite reasonable for the bondholders to have believed that the Greek government was also committed to the long-term financial security of the Greek people as well as Greece's fellow Eurozone members.

Turns out they were wrong. And it looks like their investments are failing. They can possibly reduce their losses by addressing the current circumstances, or they can lose all this investment and damage other investments they have made in unpredictable ways.

I fail to see how anything I have been saying implies a cabal of monocle wearing douche bags out to rip off the world. I just think their current financial position allows them room to influence their fate, and I am interested in whether they are smart enough to take advantage of that and prove themselves to be ready defenders of the investments they have been entrusted with managing.

Sheesh, I thought the financial types were supposed to be hard nosed. Pick up your game, people.
posted by dglynn at 12:06 PM on September 13, 2011


I invite people who want to whine about the possibility of an EU superstate to go back to the mid-20th century and bloody well stay there.

I'm an American whose been traveling/living in and out of Europe for a while now, and it all feels pretty integrated and cohesive. A short time ago, I would have had no doubt that you'd see some sort of United States of Europe (and certainly not called that) within say, 20 years. It's been clearly progressing in that direction for a long time now

The problem is it now seems that gradualism was too gradual. The EU of 20 years from now may have been able to easily manage this crisis. The EU of today does not appear able to do so, in popular sentiment or political will. The EU is still a set of competing nations with a relatively small central political whole. There's a federal european government that is far, far too weak to deal with this crisis in its nascent currency and between its quasi-states

I think the real question is, is there any time left to create and legitimize viable "federal european" institutions that can deal with this problem. There would really need to be some sort of constitutional convention and votes of ratification by member countries, and it just doesn't look like anything remotely like the necessary political will exists to do that. Most countries are instead becoming increasingly nationalist

It might be absolutely true that we can sit here and see clear as day that an EU superstate would be the best possible way to resolve this crisis, and just as true that today, creating such a superstate is no longer actually possible. What then for Europe?
posted by crayz at 12:10 PM on September 13, 2011 [1 favorite]


Let the shareholders and bondholders suffer, as they rightly should, let management and executives twist in the wind, as they rightly should, and welcome all the workers to the new bank.

...minus their pension funds or insurance pools, which were invested in nice conservative financial instruments. Like, er, government bonds. When are you fiscal moralists going to wake up to the fact that the world is not in fact divided into empty-handed workers on one side and effortless capitalist parasitism on the other? Many workers, probably most in the developed world, have savings accounts or life insurance policies or employment-related pensions of some kind or other. These financial instruments make them market participants, albeit indirect ones whose investments are managed on their behalf. It's not like their money goes into some giant physical pool of cash that somehow grows under the power of its own financial gravity. It's invested, and some of the money was invested in bonds from countries like Greece or Ireland that appeared to be on the path of long-term economic growth over the last decade.

If the shareholders or bondholders are wiped out, the result is not just some fat cats running out of cigars or champagne, it's workers being told that another chunk of their pension has disappeared because those reckless, reckless fund managers made the total noob mistake of thinking that the Greek government's financial statements could be relied upon.

It's not that I like or admire fund managers in particular, but there seems to be this attitude of 'poor Greeks, everyone knows they're useless with money so anyone who bought Greek bonds was trying to rip them off anyway - nobody in their right mind would lend money to Greece and expect to actually get it back.' This is wildly irresponsible and does a disservice to any Greek person who did pay their taxes or take their debts seriously, because it says they might as well not have bothered. There's also the assumption that it's all Somebody Else's Problem, when in fact the interconnectedness of the financial system means that we are all, to a greater or lesser extent, in this together.
posted by anigbrowl at 12:15 PM on September 13, 2011 [4 favorites]


I fail to see how anything I have been saying implies a cabal of monocle wearing douche bags out to rip off the world. I just think their current financial position allows them room to influence their fate, and I am interested in whether they are smart enough to take advantage of that and prove themselves to be ready defenders of the investments they have been entrusted with managing.

Sheesh, I thought the financial types were supposed to be hard nosed. Pick up your game, people.


Really? Like Really? Dude you don't make any sense. The bondholders are being hard nosed. They have sat there and done the math. The exchange offer was a bad deal. They bet on the EU wanting to avoid a default. They were wrong. They'll take their lumps. End of story. The exchange offer was a bad deal, because Greece was still going to default no matter what w/o an EU backstop, it was just going to take longer. And the "security" the EU was offering was funky. The math worked out to a 70% haircut. Expected recovery in a default is 50% or so and obviously an EU backstop makes you whole. All you needed to think was that the likelihood of the EU bailing out greece was greater than 50% for it to make sense to reject the exchange offer.

It remains to be seen whether the bondholder decision was right, but it was a classic prisoners dilema, and they played the game like the person they were playing against was rational. They weren't. Know they have to wait and see how the game ends up.

But its all so circular, that the EU being irrational means they are going to end up writing a check anyway. The banks knew this, and therefore assume the probability of a bail-out was even higher than simple logic would have told you.

You talk about how morality doesn't come into it, but yet you keep harkening back to some argument that seems predicated on a parable.

It's not that I like or admire fund managers in particular, but there seems to be this attitude of 'poor Greeks, everyone knows they're useless with money so anyone who bought Greek bonds was trying to rip them off anyway - nobody in their right mind would lend money to Greece and expect to actually get it back.'

Yes exactly - most of the entities that hold the Greek bonds were implicitly told by the local governments to both buy them, and that the EU would stand behind them.
posted by JPD at 12:21 PM on September 13, 2011 [1 favorite]


Oh wait - is it possible you think the current bondholders are who decide to put Greece into default? No Greece will default because it can't find new bondholders, so they can't meet their near term obligations, and their are cross default terms in everything.
posted by JPD at 12:22 PM on September 13, 2011


They are large pools of money whose investment choices are made by financial professionals. Grandma's pension investments are managed for her.

...by managers whose primary obligation is to the fund participants.

Turns out they were wrong. And it looks like their investments are failing. They can possibly reduce their losses by addressing the current circumstances, or they can lose all this investment and damage other investments they have made in unpredictable ways.

And yet you think all the risk should devolve onto the fund managers (and thus, implictly, onto Grandma), but you're curiously silent about how much responsibility Greece should bear for misreporting its finances, failing to collect taxes consistently and so on. You keep talking about 'their investments' as they were purely speculative and discretionary. In my view it's the European governments that need to pick up their game and come up with a realistic plan to deal with the debt crisis as a European problem instead of engaging in this ongoing finger-pointing. As I've said above, I think that means moving towards fiscal union and mutual guarantee of each others' debts rather than stopgap measures. The majority of the bondholders are ultimately the people of Europe themselves, who don't see why their private pensions or insurance policies should automatically be downgraded every time their elected representatives fuck up. Saying the investments failed and need to be written off is the same as saying that Greece shouldn't be forced to put its fiscal house in order, and saying that they should be kicked out of the Euro (not directed at you particularly) is equivalent to saying that it's better to arbitrage the problem away with an extra currency than it is to deal with the actual math.

Blaming the market is essentially a divide-and-conquer strategy from the European governments at a time when most people are asking for a systemic solution, in writing. It's the job of the national and European governing institutions to maintain fiscal stability within the Eurozone, and trying to place the blame on the market here amounts to saying 'it's your fault for trusting me.'

The problem is it now seems that gradualism was too gradual. The EU of 20 years from now may have been able to easily manage this crisis.

Agreed completely. I think it's essential for a resolution to take place, because the collapse of the Euro would lead to so much financial friction and so many recriminations that the most likely result would a continental-size repeat of the breakup of Yugoslavia, and war within a decade.
posted by anigbrowl at 12:34 PM on September 13, 2011 [2 favorites]


does a disservice to any Greek person who did pay their taxes or take their debts seriously, because it says they might as well not have bothered

The problem is that Greeks don't pay their taxes or take their debts seriously. Any Greek that has paid their full tax owed is indeed a chump.
posted by Meatbomb at 12:37 PM on September 13, 2011


When Russia and Argentina defaulted, it probably was a net positive for the people of those countries -- after a few yaers of hardship, their governments are now running a fiscally tight ship for the first time ever.

From Argentina, here's a hearty LOL for you as I keep watching the government running down our central bank reserves and the public pension funds to hide the fact that they have spent like drunken playboys for the past 2 years to win the coming elections. Thanks for the smile in a grinding work day, heh.
posted by Iosephus at 12:42 PM on September 13, 2011 [3 favorites]


but there seems to be this attitude of 'poor Greeks, everyone knows they're useless with money so anyone who bought Greek bonds was trying to rip them off anyway - nobody in their right mind would lend money to Greece and expect to actually get it back.' This is wildly irresponsible and does a disservice to any Greek person who did pay their taxes or take their debts seriously, because it says they might as well not have bothered.

Bullshit. It was understood by many at the time of the Greek entry into the Euro, that they were cooking the books. Any responsible money manager owes it to his clients to do minimal research, and not to simply take any statement from any other entity at face value. It's like the debt ratings by the rating agencies here in the US - all bought and paid for by the entities issuing the debt and then submitting to the rating agencies for review. When you have that sort of conflict of interest - rating agencies living off of the fees paid by corporations to have them evaluate their debt, well, only an idiot relies on such ratings - which indeed proved to be worthless.

Nobody talks about blaming "the upright honest tax paying Greek" - we're talking about systemic issues the Greek economy. You can substitute "Nigerian" "Zimbabwean" or whatever - the problem is not the individual citizen - it's the system. I cannot believe you're resorting to cheap misdirection in trying to peg caution with regard to sovereign debt of a deeply troubled country as equivalent to a bigoted doubting of "the honest Greek".

Greece should never have been admitted to the currency union. They were, under false pretenses, and anybody with half a brain knew that. At which point, it's the obligation of bond buyers to look squarely at the reality, and not conveniently take the word of the debt issuer with zero due diligence, just so they can pocket their fees. And the same goes for Italy.

The currency union expanded way too fast. It should have been a very gradual process, with select countries vetted thoroughly over many years before joining. It would still have been beneficial to the EU, to have even just started with a handful of countries like Germany and France in the Euro. There really was no compelling reason to rush.
posted by VikingSword at 12:44 PM on September 13, 2011 [2 favorites]


again - most of the Greek debt was owned by Banks and quasi government entities, not investment funds.

Here is a list

(ZeroHedge, but this is the sort of thing they are good for)
posted by JPD at 12:52 PM on September 13, 2011 [1 favorite]


Any Greek that has paid their full tax owed is indeed a chump.

O hai there. I learn so many things here!
posted by Dr Dracator at 12:58 PM on September 13, 2011


Thank you, JPD. Banks and quasi-gov it is.

They should be the ones deferring repayment and considering partial forgiveness.

In default they get zero, plus other troubles.
posted by dglynn at 1:00 PM on September 13, 2011


In default they get zero, plus other troubles.


no they don't. that's not true. stop saying that. If they really got zero the math on accepting the awful exchange offer would be very different.
posted by JPD at 1:02 PM on September 13, 2011 [1 favorite]


$360B borrowed at 5% means service is $18B/year.

This should be manageable, if the consequences of not managing are agreed to be terrible.

no they don't. that's not true. stop saying that.

I can learn. Explain to me why Greece defaulting on it's debt payments doesn't mean that the banks and quasi-gov institutions get zero? Greece would make partial payments?
posted by dglynn at 1:07 PM on September 13, 2011


Essentially yes. What would really happen is you would swap the existing debt for new debt that was some combination of coupon and par value that the parties all agreed was a reasonable sustainable outcome.

Greece could tell their creditors to get lost, but then they wouldn't be able to regain access to the credit markets for a very long period of time - which would just be piling damage on. It wouldn't be in the Greeks medium term interest. There are some examples of countries repudiating debts, but those were extreme cases (mostly a despot running up totally insane debts for vanity projects or arms).
posted by JPD at 1:11 PM on September 13, 2011


So JPD is that the point at which haircuts might be administered that would theoretically allow Greece to have some opportunity of managing it's debt?

It seems a shame that we will have to get to that match striking before interested parties couldn't reach a compromise solution.

Obviously, servicing Greek's total debt at $18B/year is no prize, but that seems less worse than all the plagues of locusts predicted by the loss of confidence in various institutions brought on by Greek default.

Or is it in fact that Greek default will just be another step in a situation being managed? Is Greek default not a disaster that will have far ranging and adverse consequences?
posted by dglynn at 1:23 PM on September 13, 2011


The problem is that any Greek default, even a partial one, will blow up the European banks. Perhaps the European banks ought to blow up, but no one is going to like the consequences when they do.
posted by pharm at 1:27 PM on September 13, 2011


Greece could tell their creditors to get lost...

Even if they do this, isn't that what credit default swaps are for? As long as the companies backing the swaps priced the risk correctly and have sufficient capital they should be able to weather the storm and even if some can't it will mostly be okay as long as there are enough issuers right?
posted by VTX at 1:30 PM on September 13, 2011


http://en.wikipedia.org/wiki/Argentine_debt_restructuring

The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms. Among these bonds, some are indexed based on the future economic growth of Argentina.

The terms of the debt exchange were not accepted by some of the private debt holders (amounting to a quarter of the debt). The IMF used to lobby for these holdouts, but its position has been greatly weakened by the anticipated payment made in January 2006.


That looks like bondholders taking a haircut in Argentina's default.

Assuming reforms in taxes and collections, is Greece's debt manageable if 3/4ths of it is reduced by 2/3rds with the remaining 1/4 holdouts awaiting further negotiations?

360B * .75 * .33 = 90B + 90B in holdouts requesting further terms. Using Argentina as model, can Greece survive that debt load?
posted by dglynn at 1:40 PM on September 13, 2011


a greek default does two things for the rest of the Euro Zone
)It requires a few banks to recapitalize
)more importantly it signals the ECB is totally impotent when it comes to solving fiscal crisis.

The later is far more important because it signals game on to the crowd of speculators who look at the fiscal situations in other countries and figure they are untenable w/o some form of fiscal reforms, and they are willing to bet that isn't going to happen for political reasons. So essentially you've marked Italy or Spain. And if they default, forget it - even if the ECB wanted to they don't have enough firepower to clean up the mess.

The problem is dglynn is that a haircut is a default. The weird one Markozy came up with was designed to not techinically be one, but that doesn't really matter. If you let the default happen in any form, then you basically say the ECB doesn't have the ablity to protect Eurozone members.

Even if they do this, isn't that what credit default swaps are for? The payout on a CDS is 1-recovery, so yeah if you had a CDS on Greece you would get paid out. However the conventional wisdom is that most of the big holders are unhedged. Also it seems as though Markozy are very focused on figuring out a solution that fails to trigger CDS. Not to mention there is a huge legal black hole with respect to how CDS behave depending on what nations laws the bonds were issued under, and under certain forms of exchange agreements. Basically there are a bunch of really specialized lawyers in NY, London, and Athens who staring down the biggest pipeline of billable hours any lawyer has ever seen.

If you want to follow along your best blog source is FTAlphaville. The often make some errors in the posts, but there are enough people in the comments who set them right quite quickly, and they are very good at posting original documents - for example they had a paper from a lawyer on the CDS issues mentioned above that was quite interesting if way over my head.
posted by JPD at 1:42 PM on September 13, 2011 [2 favorites]


The problem is that any Greek default, even a partial one, will blow up the European banks. Perhaps the European banks ought to blow up, but no one is going to like the consequences when they do.

I think it's really far more serious than this. From a US perspective, it's as if the state of Mississippi was in serious financial trouble, and unable to pay its state employees and government bills, and because of legal and political gridlock the federal government refused to bail it out and so now the entire state was going to default and perhaps leave the dollar currency

Oh and also, Florida and Texas and Oregon and Hawaii have similar, deepening problems, and the gridlock doesn't look much more able to solve their problems than it does Mississippi's

This is not even slightly just a bank crisis
posted by crayz at 2:03 PM on September 13, 2011 [2 favorites]


I think the idea of the bank crisis as an issue is that becomes the next step after defaults, which then would lead to the whatever is worse than that you are thinking of crayz.

I think you are right that the fear is that the end of all this is a bigger mess than one might imagine.

With consequences so large, it's interesting that the parties involved can't muster whatever it is that's needed to address theses circumstances. Guns of August and all that.
posted by dglynn at 2:14 PM on September 13, 2011


Bullshit. It was understood by many at the time of the Greek entry into the Euro, that they were cooking the books. Any responsible money manager owes it to his clients to do minimal research, and not to simply take any statement from any other entity at face value.

Bullshit yourself. Eurostat and the EU financial ministers professed themselves satisfied by 2004. What are fund managers supposed to do, assume every other EU government is pulling a fast one on them?

Nobody talks about blaming "the upright honest tax paying Greek" - we're talking about systemic issues the Greek economy.

the systemic issues are that tax enforcement in Greece is lax to the point of outright corruption, the labor market is absurdly inflexible, and the entire Greek government has been subject to regulatory capture by a patchwork of economic rent-seekers. But don't dare suggest anything resembling economic liberalization, rigorous accounting, or greater competition because those are, you know, evil tools of The Man. So instead we get people on MeFi cheering when Greek taxi drivers go on strike to maintain their industrial protections by strangling Athenian tourism for brief periods.

The Greek economy is awash in corruption, but politically speaking Greece is critical to the EU project. The very name 'europe' derives from the Greek language. For all their faults, Greece and Rome are the cradles of European civilization. Instead of saying they should never have been admitted to the Euro and promoting monetarist shell games, it's time to admit that the governance was bad, the Greek socioeconomic approach of the last few decades has failed, and count up the losses in the same currency that everyone else in Europe uses, the Euro. Having established the cost of the failure, the other countries need to accept that sharing a currency and sharing a fisc are two aspects of the same process, formally get behind the Greek debts that they themselves signed off upon, and help the Greeks retool their economy, inclusive of paying taxes on time.
posted by anigbrowl at 2:21 PM on September 13, 2011


"However the conventional wisdom is that most of the big holders are unhedged."

Because, from what I understand of EU banking regulations, sovereign debt was considered nearly zero risk so there is little to no insurance required on those assets. (Disclaimer: not a banker.)
posted by introp at 2:22 PM on September 13, 2011


I think the idea of the bank crisis as an issue is that becomes the next step after defaults, which then would lead to the whatever is worse than that you are thinking of crayz.

Exactly. The fall of the European banks could be the Credit-Anstalt of our Great Recession.
posted by pharm at 2:25 PM on September 13, 2011 [1 favorite]


All this talk of assigning blame is doing is convincing me of this fact: "The market", by itself, unreguated and unmanaged, cannot be trusted to adequately distribute societies resources in an efficient way. According the theory we've been operating with for the past thirty years every involved party, from the Greek government, to investors in Greek bonds large and small, should have figured out a way to create a sustainable deal for themselves that came out to their advantage. Clearly they did not. Assigning "blame" at this stage of the game is pointless.

Lets not forget that, much like the American citizens who overextended themsleves to pay for neccessities like shelter and education before the 2008 crash, every dollar of debt that Greece took out that it presumably cannot pay back eventually found its way somewhere else, where it allowed another economic entitiy to carry out economic activity in the form of the production or consumption of goods or services. In other words, Greek debt meant, among other things, German jobs. Everyone benefited from Greece overextending themselves before the 2008 crash, which is why nobody did anything.

Now it looks like the world might plunge into another period of economic turmoil, punishing "saint" and "sinner" alike, all in the name of returning the economy to some imagined state of "balance" that never existed and is rooted in a metaphysical concept left over from 16th and 17th century notions of intelligent design.
posted by eagles123 at 2:43 PM on September 13, 2011 [2 favorites]


"The market", by itself, unreguated and unmanaged

Wait a minute - where is this unregulated paragon of laissez-faire? Because last time I looked, the EU actually had a very highly developed regulatory framework. Not a perfect one by any means, but a fairly proactive and muscular one, with a pretty strong political mandate behind it to create a single market in everything from agricultural commodities to financial services, and some rather toothy enforcement powers for competition, consumer rights and so on.

I see what you're driving at, but European capital markets do not strike me as an unregulated free-for-all and that seems to invalidate your whole premise.
posted by anigbrowl at 2:53 PM on September 13, 2011


^^^^^^^

Just because regulations exist doesn't mean that they actually do anything, or were meant to do anything. It is hard to regulate against something that is considered impossible anyway. In general terms the increasing acceptance (or reacceptance) of the idea that markets are inherently self regulating lead to a series of decisions, in not only the drafting of regulations but in the decisions made by the regulatory agencies themselves in the implementation of those regulations, that put market participents into a situation where they were both allowed, and sometimes forced, to take on risks that they themselves could not possibly manage.

Think of it through the metaphor a game. I'll use American (NFL) football because it offers a good example from its recent history. Participents in a game generally assume reasonable risks associated with playing the game provided that they and other participents adhere to the rules and other norms of appropriate play. Recently, it came to light that repetive collisions contribute to the development of dementia, which lead the NFL to make rule changes governing kickoffs and other authorities connected with football to reconsider their training programs. Should football participents be blamed for not guarding themselves against a risk they did not know existed? Especially in light of the need to guard themselves against known risks, as well as other considerations that come with playing a game; like winning?

Now consider that the market, unlike football, is not a "game" that people or other economic entities can choose whether or not to play. That fact narrows the range of choices that these individuals or organizations have, especially when the authorities governing the game and many of the experts studying it claim that is it impossible for them to really "hurt" themselves.
posted by eagles123 at 3:29 PM on September 13, 2011 [1 favorite]


Eurostat and the EU financial ministers professed themselves satisfied by 2004. What are fund managers supposed to do, assume every other EU government is pulling a fast one on them?

Who in the world thinks this is satisfactory? A bunch of politicians, who decide, for political reasons to bum rush Greece into the monetary union? And that report you link to, far from bolstering your case, completely undermines it. From the very report you linked to, two salient quotes:

"Finance Minister George Alogoskoufis said on Tuesday that the matter had ended of wrong fiscal data given by Greece to the European Union in past years, following a report released by the bloc attributing responsibility for the affair."

and

"The European Union's finance ministers on Tuesday released their conclusions on Greek fiscal data in past years, following an enquiry by Eurostat, the EU's statistics agency.
The conclusions include a decision to return to the question of how governance may be improved in the EU's statistical system.

The full text of the conclusions is as follows.

"The figures on the budget deficit and public debt of Greece for the period since 1997, as set out in the final report by Eurostat, confirm that, on the basis of ESA95, the budget deficits have been consistently above the reference value since 1997 and that the debt to GDP ratio has not diminished and approached the reference value as required by Article 104 of the Treaty.

The Council acknowledges the initiative of the Greek government and its close co-operation with Eurostat to settle long-standing open questions on budget statistics and to bring them in line with the ESA 95 requirements.

The scope and size of the past revisions in the Greek case are unprecedented and very serious, particularly as regards the overall credibility of the multilateral surveillance framework."
[emp. mine, VS]

What utter transparent bullshit. Consistent and blatant lying and cooking of books on a massive scale, repeatedly exposed - but, hey, now they promise "but not anymore". Or to quote Morrissey from "Sweet and Tender Hooligan":

"He was a sweet and tender hooligan, hooligan
And he said that he'd never, never do it again
And of course he won't (oh, not until the next time)"

Let us just sing along. You ask "What are fund managers supposed to do, assume every other EU government is pulling a fast one on them?" Fuck yeah! Of course they should. That's the whole purpose of research and due diligence - to look beyond bland assurances of the interested parties. If that weren't so, we'd always take the word of any government as to their fiscal condition, and therefore there would never be such a thing as a run on a currency or any sort of arbitrage. Arbitrage exists, because we bet against whatever position the other party holds, and not simply take their word for it.

And in this blatantly obvious case, it was a transparent sham - no particularly Sherlockian skills were required. What happened is that the bond buyers knew they were buying trash, but counting on the taxpayers to again socialize the losses.

the systemic issues are that tax enforcement in Greece is lax to the point of outright corruption, the labor market is absurdly inflexible, and the entire Greek government has been subject to regulatory capture by a patchwork of economic rent-seekers. But don't dare suggest anything resembling economic liberalization, rigorous accounting, or greater competition because those are, you know, evil tools of The Man. So instead we get people on MeFi cheering when Greek taxi drivers go on strike to maintain their industrial protections by strangling Athenian tourism for brief periods.

I don't know whom you are addressing yourself to, but it never was my position that the Greek tax system made any sense or that corruption is not a giant problem or anything else - obviously Greece is in a huge mess. My point was very simple: Greece was not in any kind of shape to be admitted to the monetary union.

Instead of bum rushing them, there should have been stringent conditions of reform, verified through exacting investigations - perhaps spanning decades, or however long it would take - before allowing them to join the currency union. I noticed that there appear to have been a whole bunch of conditions attached to Turkey joining the EU - and that's been going on for decades. This should have been the case with Greece and Italy at the very least.
posted by VikingSword at 3:33 PM on September 13, 2011 [3 favorites]


Yeah, Krugman's saying the same thing: rushing countries into the Eurozone was never a good idea, but it's exactly how we got to this point. But now the ECB isn't prepared to deal with the consequences of their irresponsibility - in fact their strategy right now is "bury head in sand." If Greece fails, confidence in the ECB collapses, and there goes the rest of us, too. That's why Greece isn't about Greece, it's about what will happen if Italy and Spain are next. Greece has to be bailed out, even if you find it morally repugnant. The alternative is much, much worse.
posted by mek at 3:42 PM on September 13, 2011


The alternative is much, much worse.

I don't know that. I don't think anyone can prove that. I think it's not very simple (understatement of the year), but you could extract Greece from the currency union, and eventually Italy. Yes, it would be hell. But you know what? You may have to do it anyway, given the political and economic realities.

And really, what is wrong with starting small? Why not have just a handful - bah, even only two to begin with - countries operating on the Euro, like Germany and France? It would bring confidence to the currency and eventually others could join when they are truly ready. Of course, it's too late now, and I'm not advocating anything quite as extreme. I think the Euro can survive and thrive with Spain and Ireland in it - because the problems of Spain are much more contained to the banking sector specifically and are confidence driven (unlike Greece and Italy, where the problems are not of confidence, but of fundamentals).

In the end, it is my belief that the best course of action - of the unappetizing choices left - is for Greece and Italy to leave the Euro.
posted by VikingSword at 3:48 PM on September 13, 2011


Who in the world thinks this is satisfactory? A bunch of politicians, who decide, for political reasons to bum rush Greece into the monetary union? And that report you link to, far from bolstering your case, completely undermines it.

You did notice where the report was dated 2004, yes?

Let us just sing along. You ask "What are fund managers supposed to do, assume every other EU government is pulling a fast one on them?" Fuck yeah! Of course they should. That's the whole purpose of research and due diligence - to look beyond bland assurances of the interested parties. If that weren't so, we'd always take the word of any government as to their fiscal condition, and therefore there would never be such a thing as a run on a currency or any sort of arbitrage.

Ah, so you're saying that all the EU finance ministers were in on a conspiracy to deceive the markets, then. And fund managers should have found out the truth by using their legal powers to carry out investigations of the governments they oversee. Oh, wait, they don't have any such powers. But since they work in finance it's all their fault anyway. We can't have taxpayers socializing bondholder's losses, not even Greek ones on whose behalf the bonds were issued in the first place. It's all the fault of the people who bought them.

I noticed that there appear to have been a whole bunch of conditions attached to Turkey joining the EU - and that's been going on for decades. This should have been the case with Greece and Italy at the very least.

Right, because the holdups to Turkey's entry are all financial and have nothing to do with the history of the Ottoman Empire or the facts that Turkey was a secretive military dictatorship until quite recently, had had a number of minor wars with Greece, and the two countries still have an unresolved territorial dispute over Cyprus.

And really, what is wrong with starting small? Why not have just a handful - bah, even only two to begin with - countries operating on the Euro, like Germany and France? It would bring confidence to the currency and eventually others could join when they are truly ready.

You realize, I assume, that people in Euroland spent decades debating these very questions and organizing the legal and intergovernmental infrastructure required to merge multiple currencies into the Euro? They didn't just cook the idea up and throw caution to the wind because it sounded like it might be a bit of fun. So you think Greece and Italy should leave the euro? Well, that's a brilliant idea. How about we take California and a few other states back out of the dollar, because nothing strengthens a currency by reducing the number of places where you can spend it. Monetarism and Mercantilism FTW!
posted by anigbrowl at 4:14 PM on September 13, 2011


You did notice where the report was dated 2004, yes?

So? Greece was a mess back then, and continued to be a mess.

Ah, so you're saying that all the EU finance ministers were in on a conspiracy to deceive the markets, then. And fund managers should have found out the truth by using their legal powers to carry out investigations of the governments they oversee. Oh, wait, they don't have any such powers. But since they work in finance it's all their fault anyway.

Unquestionably, ideology guided many decisions, or more broadly, non-fiscal reasons (even the EU project as a whole was conceived partially as a way integrate Germany into an economic fabric and forestall future armed conflicts). Is that a conspiracy? That's an odd word to pick here - how about other priorities steamrolling over fiscal criteria which were established earlier, and when these criteria were not being met (as they clearly were not with Greece), well, they were just papered over. Happens all the time - sound fiscal or economic decisions are not made in a vacuum, there are other considerations, and when there's a conflict, politicians tend to make statements and assurances completely divorced from reality, kicking the can down the road and hoping for the best. Fund managers don't need "special powers" - they just need the ability to read a text, such as the farcical document you linked to, and elementary reasoning skills; it is their job to evaluate risks - how confidence inspiring is that document you linked to? I wouldn't put a plugged nickel into a bond from Greece - unless I figured that when push came to shove, the taxpayers would be compelled to step in, this way I make my vigorish, and minimize my true exposure. But let's not pretend that it took anything other than the ability to breathe, to see the house of cards that the fiscal Greece was and is and will continue to be in the absence of extremely radical reform.

Right, because the holdups to Turkey's entry are all financial and have nothing to do with the history of the Ottoman Empire or the facts that Turkey was a secretive military dictatorship until quite recently, had had a number of minor wars with Greece, and the two countries still have an unresolved territorial dispute over Cyprus.

Oh for fucks sake, of course that is so - my point was not that FISCAL reasons prevented Turkey from being allowed to join the EU. My point was completely different - the FACT that preventing a country from joining - on whatever grounds - is not unprecedented. The point was - if they can prevent Turkey from joining because of cultural/political reasons, they can just as easily prevent Greece/Italy/X from joining for financial reasons and W/X/Y/Z for yet other reasons. Joining is not a right - it is something that must be agreed to, and must be in the mutual interest of all the parties. There must be more upside than downside.

Allowing Greece to come in, despite being an unfixed shambles, makes as little sense as having an unreformed alcoholic or drug addict get unsupervised access to the household credit card just because they made noises to the effect that they are on the wagon at the moment. Have them fix their problems first, and only then, do they get to join.

You realize, I assume, that people in Euroland spent decades debating these very questions and organizing the legal and intergovernmental infrastructure required to merge multiple currencies into the Euro? They didn't just cook the idea up and throw caution to the wind because it sounded like it might be a bit of fun.

Of course, I was alive, and living in Europe for some of those decades. The point is they fucked up, never mind how long and hard they organized. They established a set of criteria for joining. When the criteria were not met, they went ahead anyway. FAIL. As a matter of fact, pretty much no one met the criteria fully - which tells you right there, that the whole thing was built on flimsy foundations. Political considerations overtook - and once that happens, and you forgive Germany's small sins, what right do you have to deny Greece, since we already abandoned fiscal and economic criteria and all we are left with are political considerations? Back to the drawing board is what should have happened - start small and sustainable.

How about we take California and a few other states back out of the dollar, because nothing strengthens a currency by reducing the number of places where you can spend it. Monetarism and Mercantilism FTW!

This is ridiculous and not worth addressing, given the vast differences between the U.S and European situations. But there is a point to be made - while Europe has had different currencies for all of their history, and it worked, a monetary union is nonetheless highly desirable - unquestionably. But it should not have been rushed, and it should have been done in a sustainable and gradual fashion, because the vastly different political, economic, cultural, linguistic and historic factors in the constituent states do not lend themselves to the same fiscal measures as the U.S. states. Europe evolved over millennia, and drastic changes need not happen in the span of a few years; highly complex problems deserve to be solved in a time frame that's realistic.
posted by VikingSword at 4:53 PM on September 13, 2011 [1 favorite]


delmoi: The problem is that Greek runs a large deficit to keep government spending going. Every day, it spends more money than it takes in taxes.

If the Greek government defaults, it can't borrow in the short term. So overnight, it can't afford to run the government.

For a large organization, it's very difficult to instantly cut spending. Even if you fire a bunch of people, you have to get their redundancy payments from somewhere.

In the short term, default means going from super-austerity to hyper-austerity. It's not going to be pretty.
Well, if Greece drops the euro and goes to it's own currency, then they can print money to pay their public employees. So rather then laying off workers, they give everyone in the country a paycut. After that exports will be cheap, tourists will come for low prices and things will stabilize over time.

That's what needs to happen, but with greece on the euro, it can't.
Greece needs to privatize their tax collection.
The problem probably has more to do with people hiding assets then simply not paying taxes on their reported income. Do you really think privatizing tax assesment is a good idea?
Never understood why governments would choose to keep poorly risk-managed banks afloat instead of letting them fail and simply starting new ones with the capital they might have used to bail out the old ones.
That's what Iceland did, and it's worked out fantastically for them. Of course, it would have been completly impossible, they only have 300k people in their country. On the other hand Ireland did the opposite: It nationalized it's banks and instituted austerity measures, and as a result has suffered greatly.
You're missing the fact that even if they default on 100% of their debt, Greek taxes don't cover current expenditure (or at least they didn't last time I checked). So in the absence of EU bailout money, even if they default their standard of living is going to fall even further
Government spending != "Standard of living" Certainly people who are getting checks from the government are going to have a problem, but that's not everyone.

As I said, if greece defaults, it's going to have to run a ballanced budget. If it doesn't default it's still going to have to run a ballanced budget eventually and make huge interest payments. So the "end state" of a successful non-default is still worse then the "end-state" of a successful default.

Also, bringing up grandmas and stuff. Lame. People need to take responsibility for the investments they make. You heard the same argument during the BP oil spill about how making them pay for it was going to hurt poor pensioners in the UK or whatever. Ridiculous.
posted by delmoi at 7:15 PM on September 13, 2011 [1 favorite]


Well, if Greece drops the euro and goes to it's own currency, then they can print money to pay their public employees. So rather then laying off workers, they give everyone in the country a paycut. After that exports will be cheap, tourists will come for low prices and things will stabilize over time.

Alternatively, you could just give everyone a paycut and cut the price of exports, without the expense and instability of ripping the currency union apart and switching Greece back to the drachma. Kindly explain what benefit you think will accrue from adding a worthless currency to the equation, since it won't provide any additional purchasing power to the people living there.

On the other hand Ireland did the opposite: It nationalized it's banks and instituted austerity measures, and as a result has suffered greatly.

I suppose that's why the coupons on Irish bonds are at only 8.5%. I think there are some significant differences between a country of only 300,000 people with only 2 significant exports (aluminum and fish), and one ten times its size. For one thing, Ireland hasn't had to impose capital controls or limit people's access to foreign exchange. Everyone seemed to be having a good time at my sister's wedding in Ireland 2 weeks ago, but I guess they were all just shamming, and brought the sackcloth and ashes back out as soon as I was out of earshot.

As I said, if greece defaults, it's going to have to run a ballanced budget. If it doesn't default it's still going to have to run a ballanced budget eventually and make huge interest payments. So the "end state" of a successful non-default is still worse then the "end-state" of a successful default.

What? A few paragraphs ago you were saying they should go back to having their own currency and inflate their debt away by just printing lots of money. Now you think they'll automagically run a balanced budget by being shut out of the capital markets. Well hey, this is your big chance. All you have to do is persuade the Greek government to adopt Bitcoin and their problems will just fade away. Your place in financial history will be assured.

Also, bringing up grandmas and stuff. Lame. People need to take responsibility for the investments they make. You heard the same argument during the BP oil spill about how making them pay for it was going to hurt poor pensioners in the UK or whatever. Ridiculous.


But apparently there's no need to take responsibility for the debts you run up - just declare it's a brand new day and boom, financial stability is restored. How dare those irresponsible bastards lend us money and then insult us further by asking us to pay it back! The very idea!
posted by anigbrowl at 7:59 PM on September 13, 2011


But apparently there's no need to take responsibility for the debts you run up - just declare it's a brand new day and boom, financial stability is restored. How dare those irresponsible bastards lend us money and then insult us further by asking us to pay it back! The very idea!

This is really where the whole fiscal responsibility household metaphor goes totally out the window and fails to describe anything relevant to the actual situation. What matters now is Greece's actual financial capabilities, and the consequences for future ECB policy and the Eurozone more generally, not how much you think they ought to pay. If we go by your sense of entitlement, we're all doomed.
posted by mek at 8:12 PM on September 13, 2011


This is really where the whole fiscal responsibility household metaphor goes totally out the window and fails to describe anything relevant to the actual situation.

What household metaphor? Treasury bonds are government debt, by definition.

What matters now is Greece's actual financial capabilities, and the consequences for future ECB policy and the Eurozone more generally, not how much you think they ought to pay. If we go by your sense of entitlement, we're all doomed.

My sense of entitlement? You mean, the sense of entitlement that stems from the promise to pay a certain coupon written on a Greek treasury bond and offered for sale by the Greek government?

First, why is the failure of the Greek government to collect taxes, make its labor markets competitive, or keep some sort of control over its debt ratio the fault of the bondholders? No bond investor ever told a government to ignore revenue and make the economy as uncompetitive as possible. Second, how does arguing for the issuance of Eurobonds and fiscal union amount to leaving Greece to face the problem on its own, pray tell?

I don't think you have the remotest idea what you're talking about.
posted by anigbrowl at 8:36 PM on September 13, 2011


Bondholders assume risk. What more is there to say?
posted by mek at 8:48 PM on September 13, 2011 [2 favorites]


Debtors assume debt. I hate finding myself on the same side as the banking industry on this one, but Greece (and to a lesser extent the other EU governments that enabled it) pretty much embodies the concept of 'moral hazard' here. It's not like they were being thrifty and sensible and the financial crisis suddenly made a mess of their carefully-laid plans.
posted by anigbrowl at 8:52 PM on September 13, 2011


Which is exactly why bondholders shouldn't be surprised when Greece is unable to pay back its debts. Ironically I am on the side of a bailout, that is, if one's goal is to maintain the eurozone, it seems the best option. My point is simply that the "blame game" is totally counterproductive, as our decision-making process should seek the best fiscal outcome, not the best in terms of perceived moral righteousness.
posted by mek at 8:57 PM on September 13, 2011


Government spending != "Standard of living" Certainly people who are getting checks from the government are going to have a problem, but that's not everyone.

Total expenditure == Total income. Given that Greek government expenditure is a large chunk (probably greater than 50% at this point although I don't have figures to hand) of Greek expenditure, the knock on effects of another significant drop in state expenditure will be felt by everyone in the country. This is basic macroeconomics surely?

If the private sector was willing and able to pick up the slack, then it wouldn't be a problem but I don't believe that the Greek private sector is capable of doing so right now.
posted by pharm at 12:28 AM on September 14, 2011


I think you've got to kick Greece out of the Euro to give it both a chance to devalue its currency and recover (via exports and tourism) in the short term and to give it a powerful incentive to reform its government and economy in the long term. Giving this regulation-bound, renteir-dominated state the protection of the ECB has turned out horribly, and it seems to me that one of the best ways to incentivize reform in Greece is to dangle Eurozone membership in front of them as has been done with so many Eastern European countries.
posted by Aizkolari at 3:49 AM on September 14, 2011 [1 favorite]


I suppose that's why the coupons on Irish bonds are at only 8.5%.
And an unemployment rate of just 15%! Sounds awesome!
But apparently there's no need to take responsibility for the debts you run up - just declare it's a brand new day and boom, financial stability is restored. How dare those irresponsible bastards lend us money and then insult us further by asking us to pay it back! The very idea!
Why should individuals be held responsible for debts issued by other people? It makes sense for a government to pay back debts because it will allow them to borrow in the future, but that's only worth so much.

Capitalism isn't about morality.
posted by delmoi at 11:25 AM on September 14, 2011


UBS forecast that the exit of a weak country from the Eurozone would cost of 40-50% of the GDP in the first year alone.

Popular misconceptions include the idea that a country will be able to stimulate growth by simply leaving the Euro, that a country can be expelled from the Euro by other member states, or that a strong economy could leave the Euro without significant consequences. All of these arguments are wrong.

posted by ersatz at 11:32 AM on September 14, 2011 [2 favorites]


In general, I agree that defaulting isn't immoral. However, in this specific case Greece is not just going to default, it's going to default on part of its debt and send most it to other European countries. Which is not a nice thing to do to one's neighbors.
posted by miyabo at 1:14 PM on September 14, 2011


It's not nice, but it's better than the alternatives, even for those very neighbours. If option A is "help Greece" and option B is "domino effect toppling Italy and Spain", well, I bet Italy and Spain will be happy to oblige. And obviously neither of these options involve just cutting Greece and blank cheque. It's just that Germany that is too short-sighted to recognize that its current prosperity is directly related to these eurozone ripples, and that a threat to the eurozone is also a threat to their economic future.
posted by mek at 3:19 PM on September 14, 2011


Late in the discussion, but some notes on various things that have been said here:

- Greece is in a depression. Not a recession. We' ll have lost a bit over 13% GDP between 2009 and 2011. And that's if the recession doesn't completely go off the charts in the final semester of 2011. 2012 seems likely also to be a recession year. There are hungry people in significant numbers in Athens, homelessness, 16% unemployment even during August which is the tourist month with the peak number of jobs created. Youth unemployment nation-wide is at 40%. Unemployment benefits are running out already for a lot of people (400 Euros/moth for a year). And tax-induced inflation has increased prices by 10% over the last two years, while salaries have dropped 10-30 percent in nominal value - 40% in most areas of public employment. Suicides have shot up. Everyone is taxed to their limits, mostly indirectly or by property taxes. Infrastructure is deterioriating, school books were not ready by the beggining of the school year, etc.
- It is not true that "most Greeks do not pay their taxes" in general. This report might have some shortcomings but the picture it describes is basically sound: tax under-reporting is largest at both ends of the income spectrum, but the mass of tax-evasion comes from the upper decile and the (large numbers of) self-employed. This is a simple picture but I think qualitatively correct. One other thing to consider is that the Greek government corruption makes paying your taxes seem like something that will feather some corrupt bureaucrat's or oligarch's nest. So the Greek government "retaliates" by jacking up regressive indirect taxes and considering all self employed to be tax evaders by default. The majority that generally pay their taxes (and both public and private sector employees and pensioners do, as tax is deducted from their pay) at tax-evasion rates comparable to those in the US, are the major victims of all of this. The rich avoid taxation magnificently and in many ways, a proliferation of offshore companies registered in obscure tax havens are but one of the ways they achieve that.
- Guess what? In a society rife with corruption it turns out depression + austerity = more corruption. VAT tax used to be avoided in higher priced items. Now you eat lunch in some places and they ask you if you want to pay "with or without a receipt".
- If Greece defaults it will have to issue its own currency, either in parallel with the Euro, or in place of the Euro. This would depreciate with respect to the Euro massively. Gas at the pump and for heating will thus become excruciatingly expensive (gas at the pump due to a monstrous increase in gasoline tax is now at 1.7 Euro per liter), and induce food scarcity, which could be met by increasing local production but locals would still have to pay the same price that the goods will be exported at, in Euros. Rough. Staying in the Euro after default, without an agreement of some sort of aid with the EU Commission, would be even worse I think.
- However if it is a question between unending austerity and default (which I hope it won't be), I would take the latter. Living in the kind of austerity we're talking about here, you realize that it is nothing less than extremely toxic socioeconomic sabotage, whose scars will be marking Greek society for decades to come. It dissolves society.
- Greece's debt was pretty much steady at 90% (+/- 15%) GDP for 15 years. It shot a bit up after the crisis of 08, after the government borrowed massively to support the local banks. The destruction of industry and agriculture and the decision to turn Greece into a service economy, was hailed in the mid-90s as the epitome of modern forward-looking economic policy. External trade balance plunged further and remained at incredibly negative territory.
- The thing is that Greece had large GDP growth for most of that period, the EU was praising it for its achievments. It also had record profits. And record transfer of these profits to banks abroad. I mean huge amounts are rumoured to have been shifted to Switzerland alone. A lot of money was diverted to foreign real estate. Could a significant fraction of these deposits be taxed, Greece would not be in the mess it is now.
- At the same time, working Greeks were seeing raises rise roughly as inflation. But at the same time more uninsured jobs, more dead-end service jobs and more precarious jobs. The yound were locked at 700 Euro jobs with no prospects even before the crisis.
- Greece does have industries: Shipping, Tourism, Construction, Mining, Agriculture etc. Shipping is huge (I think the world's largest commercial fleet) but it doesn't pay taxes (otherwise it threatens to move somewhere else). Tourism you can't depend on. Construction is down 60% from 2009... Exports have been rising but mostly because of the increase in exports of refined petrol products.
- Young educated people were leaving in droves before 2009. Now every kid with any ambition or talent is talking about leaving the country as fast as they can.
- The social tensions are immense. There is no way in which Greece remains for long a stable democracy (already police violence and media propaganda have reached Middle Eastern levels) under a regime of austerity. Yet they can't even roll in the tanks, since the army has made noises that it will refuse any unconstitutional orders to intervene internally.
- Threatening to default (or even defaulting) back in May 2010, would have resulted in the least bad of all possible worlds. Right now, with the current government being called quislings and traitors and massive daily protests all over Greece, we're heading into the unknown full speed - and we might just be the canary in the coalmine...
posted by talos at 5:27 PM on September 14, 2011 [9 favorites]


Greece is being strangled by the Euro, and the only sensible way out is for them to abandon it. This of course does not mean the EU should therefore no longer help Greece, quite the opposite - they should launch a mini-Marshall Plan, contingent on radical reform (reform in concert with the Greeks, and not as a dictate). After all, Greece would still be in the EU, even if not part of the Euro currency union.
posted by VikingSword at 11:01 PM on September 14, 2011 [1 favorite]


Yes Viking, the only sane way out seems to be for Greece to leave the € and receive a Marsall plan-style aid package to prevent it collapsing altogether.

talos: Unfortunately, Greek debt to GDP figures were essentially fictional: the Greek government had hidden huge liabilities "off-balance sheet" via opaque derivative transactions with various investment banks.

I watched Newsnight on the Beeb last night & the commentators they had in the discussion (a German, Greek & someone else) were unanimous in concluding that Greece would have to leave the €. The person from Greece also made the point that many times in the past when a currency union has fallen apart the resultant societal stress has led to war within a decade. Which is what terrifies pretty much everyone of course.
posted by pharm at 1:07 AM on September 15, 2011


Also, if there's one thing that the financial crisis ought to tell us it's that GDP growth funding by borrowing can be false: eventually the piper has to be paid and if that borrowing has not gone into productive assets but into consumption goods instead (eg housing over and above basic shelter needs) then eventually all that GDP has to come back out of the economy again. If the rest of the economy is failed to grow at the same time then the cost of the debt repayment will result in GDP falling like a rock.
posted by pharm at 1:18 AM on September 15, 2011


(Apologies for thread squatting) It was Costas Lapavitsas, an economist from the University of London. He was fairly apocalyptic generally in fact: pointing out that the Greek economy is simply collapsing. 20% unemployment, barter economies returning to parts of Athens, hospitals unable to purchase basic supplies. Revolution is round the corner if the European authorities can't come up with a solution. A little earlier Ed Balls (who normally annoys me intensely even though I ought to be sympathetic with his positions) laid the blame for the total lack of European leadership with the Germans, saying that they needed to either realise that they needed to pay up to hold the € together, or they should leave the € themselves.

If you're able to watch it (sorry non-UK people!) , that whole segment on Newnight is worth your time I think.

Oh wait, it's on Youtube too. Part 1, Part 2.
posted by pharm at 1:50 AM on September 15, 2011 [1 favorite]


Unfortunately, Greek debt to GDP figures were essentially fictional: the Greek government had hidden huge liabilities "off-balance sheet" via opaque derivative transactions with various investment banks
Yep, and I'm willing to bet that this was known to the EU Commission. And no one cared as long as government procurement contracts went to German and French companies.

I submit that I can remember clearly (as I was repeating that myself) people pointing out (in the early 2000s) in Greece, that GDP growth through borrowing is not sustainable and that there has to be a sea-change in the structure of the economy. At that time the Serious People tut-tuted these warnings as coming from an antiquated view of the economy reassuring everybody that Greece was now strong and that in the new economic environment old rules didn't apply.

Lapavitsas and Varoufakis (although both from the left) disagree on leaving the Euro. Varoufakis claims that there is no national solution and that among horrible solutions, defaulting outside the Euro is one of the worst.

We had a discussion at the European Tribune over the issue and JakeS, a Danish economist, had made a powerful case for leaving Euro (self-link). I would agree if I had the slightest indication that the current (or some plausible future) government is capable to oversee this very difficult transition. I also think that switching to the drachma amidst the coming world recession (and surely the EU recession) might be much more problematic than advertised.
posted by talos at 2:54 AM on September 15, 2011 [2 favorites]


I suspect the EU commission didn't know the full facts talos, but only because they didn't go looking in case they found something they'd rather not.

I agree that the Greek government seems incapable of managing such a transition effectively; the whole thing is a disaster for the ordinary Greek citizenry.
posted by pharm at 5:28 AM on September 15, 2011


talos, acting unilaterally would present problems, however. The Greek government couldn't make the necessary payments for wages, pensions, the health system etc. even if we defaulted on the whole debt. Not to mention the economic and political costs of leaving the Eurozone unilaterally. JakeS advocates 'IMFed' countries should act in concert, but if Greece and Portugal pulled the plug at once, the resulting Eurodomino would bring about that recession (or depression).

Fair point about the Greek government not being able to oversee such a sea change. They doubled the latest property tax within three days and they had to be cowed into taxing Church-owned buildings that are not churches, at a time when the finances of salaried employees are stretched to the breaking point.

- Young educated people were leaving in droves before 2009. Now every kid with any ambition or talent is talking about leaving the country as fast as they can.

Even people who had never considered leaving the country or people who had already entered the job market. Many young people would have studied abroad, anyway, but people who wanted to live in Greece are changing their mind and try to avoid returning.
posted by ersatz at 8:51 AM on September 15, 2011


Unfortunately, Greek debt to GDP figures were essentially fictional: the Greek government had hidden huge liabilities "off-balance sheet" via opaque derivative transactions with various investment banks

Yep, and I'm willing to bet that this was known to the EU Commission. And no one cared as long as government procurement contracts went to German and French companies.


Exactly correct. This is the same mentality the world over among a certain class of financiers and politicians - close your eyes to the obvious house of cards, as long as you can collect the fees right now. Kick the can down the road - let other people (and taxpayers) deal with the problem... after all, I got mine. We saw the exact same thing here in the U.S. - everyone knew liar loans and massive fraud were the very heart of the bubble, and yet why should you stop doing what you're doing... you're getting fabulously wealthy, and nobody ever gets to face any legal consequences. There is nothing uniquely Greek about this.

Leaving the Euro by itself is not the solution - in the absence of massive support from the EU and reforms, Greece faces a catastrophe down the road. It is imperative that the EU act now, immediately - because Italy is just a breath away from being next. And that's a very frightening prospect.
posted by VikingSword at 11:04 AM on September 15, 2011


Yep, and I'm willing to bet that this was known to the EU Commission. And no one cared as long as government procurement contracts went to German and French companies.

Exactly correct.


No this is entirely too cynical. There is no evidence to support this either. Stop comparing the situation to the US. They have nothing in common.

The Euro became a political grands projets, and it would have been seen as massively embarassing to the politicians if the effort failed, so they turned a blind eye to all of the manipulation that was going on. It wasn't about the profit motive.

I mean at its fact its silly, given the banks the mostly profited from the transactions taken to hide the debt (which BTW everyone knew about) weren't even located in the Eurozone.
posted by JPD at 12:01 PM on September 15, 2011


No this isn't about jobs only. It's about exports, public works and arms deals. The evidence to support complicity was offered last year by Eurogroup chief Jean Claude Junker himself:
Eurogroup chief Jean-Claude Juncker said Friday that Greece's financial woes were well known among top EU officials but kept quiet until the crisis erupted last year.

"It was quite obvious that one day Greece would have to face this kind of problem, and we knew that this problem would occur," Juncker told a forum on the sidelines of the International Monetary Fund and World Bank meetings in Washington.

Juncker said German and French officials along with European Central Bank chief Jean-Claude Trichet had for some time been discussing "the perspectives of what was not at that time known as so-called Greek crisis."

"I could not go public with the knowledge that I had," he added.

"The Greek crisis could have been avoided, but not starting last year, starting two or three decades ago," the European finance ministers chief said.

Juncker said he tried at one point to seek a solution to the problems with an unnamed Greek prime minister who told him: "I am governing a country of corruption.
posted by talos at 12:17 PM on September 15, 2011


Jobs I meant banks
posted by talos at 12:18 PM on September 15, 2011


Arms? Who were the Greeks going to buy Arms from if not the other members of the EU?
Public Works? The EU infrastructure funding programs for the periphery pre-dates the Euro.

Your quote only supports what I said, that it was always all about politics.
posted by JPD at 12:25 PM on September 15, 2011


ersatz: I was until recently against a massive unilateral default. I still am, I suppose, but I wonder now: how worse could it possibly have been if we defaulted back in 2010. Would Greece be better in that scenario by know? At least with some sort of prospect other than mass pauperization, even in the medium term? Would the ECB and the other proponents of Hooverian wingnuttery be willing to compromise if the Greek government threatened to bring the whole eurozone down unless something less destructive for the economy and the society was on offer?
posted by talos at 12:25 PM on September 15, 2011


These are good questions. There has been a sea change in the European political climate (the prospect of Eurobonds, of further fiscal union, and the existence of the ESFS), but the resilience of the Greek economy and society has been sorely tested in the last year and I doubt they can take much more. We will very probably be in uncharted waters either way.
posted by ersatz at 4:30 PM on September 15, 2011


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