Will Europe Survive?

[Giant Communist Robot]

I saw an interview of Kenneth Rogoff in the Financial Times; he says there is more drama on the way from Europe. Quickly checking the numbers I see EMU unemployment at 10.4%--but this is only part of the story. Germany comes in at about 6% and Spain comes in with cardiac arrest at nearly 23%. How bad can things get there? Manufacturing is contracting too, except in Germany where there is a smidgen of growth.

In the Rogoff interview he actually spoke mostly about chess. He had been the highest rated player in the world for his age at one point (16 I believe). After a conversation with the 18 year old Karpov he knew he couldn't be the best and switched to economics.

[Giant Communist Robot]

Not wanting to continue punditry, I have looked at some numbers for Greece in order to find a marginally informed opinion. OECD's forecast for this year is -3%, up from last years' -6%. Next year they expect some tiny growth. Their gross government debt is about 180% of GDP. The Maastricht Treaty limits the ratio to 60%. I guess the rest of EMU closed their eyes while this was happening.

Looking at the components of their GDP, any forecast growth will be coming from Gross Fixed Capital Formation and Exports. For the Fixed Capital, I think they are expecting to sell some derelict airports and port facilities. I'd have to say this idea seems like something. Something doubtful. This is where they are pinning their hopes for the future.

As for Exports, maybe Germany and France have agreed to buy more Greek goods. A big problem is that the public sector is about 40% of the GDP. With their government assuming austerity measures and spending less it is a very steep hill for them to climb. I'll bet against them.

I think a default now followed by sound accounting would be best for them, but not for the rest of Europe. Germany actually benefits from this insane relationship. Guess which way they'll go?

I read one opinion that it will take two decades for Greece to climb out of this hole.

[Haggis@wk]

I read one opinion that it will take two decades for Greece to climb out of this hole.

Or overnight if they just default and walk away from their debt, a likelier scenario in my opinion.

[Giant Communist Robot]

Or overnight if they just default and walk away from their debt, a likelier scenario in my opinion.

I think most of the Greek debt is held by European banks.

[Haggis@wk]

I think most of the Greek debt is held by European banks.

As it was for most of the previous five defaults; your point?

Greece has defaulted on its external sovereign debt obligations at least five previous times in the modern era (1826, 1843, 1860, 1894 and 1932)

The first recorded default in Greek history occurred in the fourth century
B.C.

The Greek government told rebellious lawmakers on Saturday to back a deeply unpopular EU/IMF rescue in parliament or send the nation down "an unknown, dangerous path" to default and international economic isolation

emphasis mine.

As I said, they’re setting themselves up to walk away from this whole mess……

[Giant Communist Robot]

I didn't see in the link where it said that European banks hold most of the debt.

Consider the European banking system is fragile, and the EMU economy is weak.

[Giant Communist Robot]

...and so we wait to see if the ECB will decide to contribute to a Greek restructuring deal. If they do, Greece could receive the first tranche of their second bailout. This is a comedy.

[Giant Communist Robot]

Another possibility for Greece is civil war or a military coup. Things don't look good over there. Some points:

Greece is a net importer

Government spending has financed imports

Accounting tricks have hidden Greece's true state

Greeks are refusing austerity measures insisted upon by ECB

Bailouts haven't solved the problem

French and German banks, already weakened by the recession, have an unknown exposure to Greek debt

The Fed has opened a window for Europe to borrow at low rates

...this won't end well.

[Giant Communist Robot]

Joachim Fels, chief economist at Morgan Stanley, in a note to clients repeated his assessment that policy makers shouldn’t rule out the “really, really bad scenario” of Greece leaving the monetary union.

[Haggis@wk]

Look at the bright side, lots of Athens isn’t burning

Your main source of hard currency is tourism and you scare all the tourists away? Yeah, that's a good idea.

[Giant Communist Robot]

When I said this was a comedy I was thinking of Northrup Frye's theories of literary criticism. But something bothered me about it so I looked it up. I was wrong, it's a satire.

[Giant Communist Robot]

Moody's downgrade of Italy is worrisome. Too big to bail. Unlike Greece, they have an economy that actually produces something, so they still have a chance to recover.

Germany has said they want Greece's debt reduced to 120%--the significance of this number is that it is the same for Italy.

[Giant Communist Robot]

The IMF says the adverse effects of the austerity policies has yet to occur in Greece. No one doubts that it will. Meanwhile, Greece continues as the Eurozone's version of Schrodinger's Cat. If they had a larger manufacturing or agricultural base it would help, but they have a service based economy and any change might be painful and certainly would be years away. This seems to be a case where their level of prosperity has been artificially achieved by borrowing. For their future I see more riots and a possible coup.

I'm not sure the EMU will allow an outright default by Greece due to the exposure of European banks. Some say Europe is already in recession, and a torpedo to their banking system will sink their economy and end hopes for a nearby recovery. Their message to the Greeks seems to be that Greece is not a prosperous country and will have to live with a reduced quality of life, something that less than thrills the Greeks. "Orderly default" and austerity are what the EMU want, but will the Greeks cooperate?

I'm also not sure Greece leaving the EMU would be a good solution. If Greece has a failed economy, they can at least expect some kind of help if they stay. Leaving might make things worse for them. Would the IMF be a lender of last resort? Only if they met conditions just like the EMU wants now.

It's not as if Greece is the only problem in Europe. The news has been very quiet about the PIIGS. Portugal is on the agenda and expect Europe to praise their efforts at austerity. A sort of hint to Greece. But it doesn't mean Portugal's problems are solved. Italy needs to be nursed back to health, too.

[Shapley]

As Haggis notes, the Greeks have a long history of default, or Seisachtheia. I think I mentioned before, however, that today's Greeks are less thrilled by the idea, because their pensions are entwined in the debt, and a 'casting off of burdens' would include casting their pensions into Limbo. They don't mind casting off debts to others, but aren't too keen on casting off debts to themselves.

Solon of Athens created a new class of citizen with the original Seisactheia: those citizens impoverished by the loss of debt owed them. Methinks that might be the largest class in Greek society if it were to recur today. Thus, I think, they are looking for some sort of structured default that picks and chooses the debts cast aside.

The idea of simply spending and borrowing less does not seem to have entered their minds, as of yet...

[Haggis@wk]

[url=http://www.telegraph.co.uk/finance/financialcrisis/9082843/Greek-economy-spirals-down-as-EU-forces-final-catharsis.html Greek economy spirals down as EU forces final catharsis[/url]

A Greek default and traumatic ejection from the euro moved a step closer last night after eurozone finance ministers cancelled a crucial meeting, accusing Athens of failing to flesh out austerity cuts.

Occam's Razor: "simpler explanations are, other things being equal, generally better than more complex ones."

Tick...tick...tick...

[Giant Communist Robot]

A Greek default and traumatic ejection

I've read that there is no legal mechanism for ejecting a nation from the treaty, but they may chose to leave voluntarily.

[Haggis@wk]

I've read that there is no legal mechanism for ejecting a nation from the treaty, but they may chose to leave voluntarily.

Germany drawing up plans for Greece to leave the euro

Plans for Greece to default, potentially leaving the euro, have been drafted in Germany as the European Union begins to face up to the fact that Greek debt is spiralling out of control - with or without a second bailout.


tick...tick...

[Giant Communist Robot]

Well, regarding my post, I read the link and the headline is misleading. Nowhere does the article say Greece can be forced out, but the Germans are making plans if they leave. Simple as that. The Greeks have Germany and France over a barrel. If they don't bail the Greeks, they will suffer. If they bail them, then more of this Greek torture is on the way.

[Haggis@wk]

The latest news from the Financial Times: the new Greek package agreed last night will almost certainly fail — just like all the other bailouts agreed over the last two years. A memo leaked to the Financial Times says that even under the most favorable scenario, Greece will likely need yet another bailout.

[Giant Communist Robot]

One thing I've noticed is that no one thinks Greece can reach Maastricht levels in anyone's lifetime.