What is the endgame for this mess:
French banks are ready to participate in the rescue of Greece by extending the maturity of their holdings of debt issued by that country, President Nicholas Sarkozy said Monday.
A plan is being worked on between the government and French lenders to reinvest, between now and 2014, 70 percent of their holdings of Greek debt into new securities with a duration of 30 years, he said.
Mr. Sarkozy said he hoped that the other European countries would adopt a similar plan. Germany had previously pushed hard to obtain a tough, compulsory private sector involvement in the Greek bailout but backed down amid opposition from France and the European Central Bank.
“We’ve been working on this with the banks and insurance companies,” Mr. Sarkozy said at a news conference in Paris. “We’re committed to going from a principal — the voluntary participation of the private sector — to concrete reality.”
Not a financier, but it seems like we (Europe in particular) have spent the last two years bailing water from one end of the sinking ship to the other. Will this do anything?
Of course, I should note the GOP in America is spending their time looking for weak spots in the hull to dynamite, so I suppose the European response is a step in the right direction.
burnspbesq
It appears to mean (1) kicking the problem down the road and (2) protecting the shareholders of French banks form the poor underwriting practices of their managers.
It’s mostly driven by French domestic politics. Sarkozy has to run for re-election next year.
In my view, a Greek default is inevitable. All other things being equal (which they never are), my inclination would be to face reality now.
Poopyman
Seems like they’re just kicking the can down the road. And I’m not even sure how much this (alone) helps Greece. I didn’t see what fraction of Greece’s total debt is owned by France. It is, of course, done with the hope other debt holders do the same. But even if they all did, again, what does it do besides kick the can down the road?
AAA Bonds
It’s me, I’m Greek debt
4tehlulz
it’s the derivatives, not the default they’re afraid of.
Chris
Interesting that the contrast is between a German plan to compel private sector involvement, and a French plan based on the voluntary participation of the private sector.
I don’t know enough about the economics or the politics to tell what’s going on: it’s possible Sarkozy’s just going with the “more flies with honey than vinegar” approach. But it’s my observation that the private sector rarely does anything just for the sake of a “pretty please.”
PeakVT
I don’t know, but if I was Greek I would be pissed at how many state-owned properties are being auctioned off, especially since there doesn’t seem to be much progress in fixing the tax evasion problem. Tax increases have been passed, but nothing guarantees that they will increase revenue by much.
This excerpt from Griftopia on the privatization of parking meters in Chicago is old, but relevant.
Comrade Javamanphil
Heh. Although I think you give them far more credit for having a strategery than they deserve. From my vantage point, they are just laying dynamite everywhere they can.
Linda Featheringill
A good portion of this country is trying to keep everything from sinking but the entire Republican party seems to be trying very hard to destroy our economy. At least the Europeans are trying to keep the boat afloat.
David Fud
Greece’s economy is a wreck and will get worse. So, it really doesn’t matter unless the banks take a haircut. Greece will default at some point, and will suffer through Japan-style deflation (or worse) until they can stimulate their economy. It would be better for Greece and the world economy if they did it now, but the banks don’t want to go insolvent to prop up Greece.
Now the question is will the rest of the troubled EU peripheral countries start down the same road? Will the Euro stay intact in those countries? Without the ability to intervene in their economy by printing money, Greece and the rest of the periphery are on a road to massive deflation in the style of the Great Depression.
JGabriel
burnspbesq:
I could be wrong, but this looks a back door loan extension / restructuring.
Actual restructuring is off the table (because that would be a default), so Sarkozy is arranging a workaround: pay off 100%, but we’ll loan you back 70% for another 30 years — effectively it’s like a restructured loan to pay back 30% now with a thirty year extension for the rest.
.
Linda Featheringill
I’ve been thinking about the Republican insistence on bringing down the economy in order to achieve something or other.
Once upon a time, I thought they were all racist pigs and would suffer through a lot of hardship just to get rid of that black man in the White House. But I’m beginning to think that some of them are not racists at all. They are just using people who are prejudiced and bigoted. They are trying to tear down our present matrix of power and means of getting stuff done, to replace it with something else, probably not latter-day, socially liberal democracy.
It is the specter of this replacement system that worries me.
Edited for clarity.
Chris
@ Linda –
And at least those of their people going out in the streets are protesting in the right direction. We could use more of them and less fucking teabaggers begging for the destruction of society over here.
cathyx
Greece is selling their public assets to pay off their debt. That way everything that the public owns collectively will be owned privately. That is and will continue to happen here too.
Just Some Fuckhead
It is my understanding the banks in Europe at the most risk by a Greek default reinsured with the US and UK so if the investments go bad, our financial institutions are on the hook and then they will prolly need another taxpayer bailout.
Also see, House of Cards.
JGabriel
4tehlulz:
No, dammit! It’s the elite, not the proletidity.
Wait, what?
.
Chris
@ PeakVT –
Slightly OT, but related: a while ago, blogger Rahul Mahajan commented on the post-Thatcher/Reagan obsession with privatizing public industries. The reason behind the privatization fad, people were told, was that the private sector was more efficient than the public sector (crosses self while speaking profession of shut-up-that’s-why faith), and that it would therefore help revitalize the economy.
In fact, as Mahajan pointed out, the captains of industry were only interested in assimilating public companies in two cases: 1) if they could make money by breaking them up and selling them off as soon as they’d acquired them, or 2) if the public company was already turning a profit. In other words, only in cases where the reasons for privatization didn’t apply.
Good thing “paying down the debt!” has come along as a new mantra to justify their privatization fetish. The old one was getting pretty, well, old: after 2008, no one outside of the U.S. can credibly claim that the private sector’s more inherently efficient.
Poopyman
@ Linda F:
The word is sedition. Pass it on….
(Emphasis mine.)
Judge Crater
It would simply extend the debt slavery of Greece for several more decades. The big European banks have made their bed (loaning out billions of Euros to Greece and other small and fragile economies) and now they don’t want to sleep in it.
Giving Greeks (and the Portugese and Irish) euros to spend, which is what the EU common currency achieved, was great for banks and big corporations in Europe. In effect it gave the banksters big new markets in the same way that sub-prime lending in the U.S. gave mortgage lenders millions of potential homeowners to fleece. It was the same mentality – lending money is profitable, at least short term. When it became obvious to the banks that they weren’t going to get paid back by Greece, they want sovereign taxpayers to take the fall. (Just like what happened in the U.S.)
They (the Greek debt holders) also want to get their pound of flesh by having the Greeks sell off public assets to private sector companies. And guess who will finance this forced privatization? The big French, German and UK banks.
What a deal, eh.
Judge Crater
It would simply extend the debt slavery of Greece for several more decades. The big European banks have made their bed (loaning out billions of Euros to Greece and other small and fragile economies) and now they don’t want to sleep in it.
Giving Greeks (and the Portugese and Irish) euros to spend, which is what the EU common currency achieved, was great for banks and big corporations in Europe. In effect it gave the banksters big new markets in the same way that sub-prime lending in the U.S. gave mortgage lenders millions of potential homeowners to fleece. It was the same mentality – lending money is profitable, at least short term. When it became obvious to the banks that they weren’t going to get paid back by Greece, they want sovereign taxpayers to take the fall. (Just like what happened in the U.S.)
They (the Greek debt holders) also want to get their pound of flesh by having the Greeks sell off public assets to private sector companies. And guess who will finance this forced privatization? The big French, German and UK banks.
What a deal, eh.
DZ
In the short term, it means that I can continue making excellent money shorting Euros.
Fucen Pneumatic Fuck Wrench Tarmal
france, germany the more prosperous, larger economies have made a killin on throwing in their lot with the poorer countries because it means they have gotten the business of financing them. now, perhaps those loans and investments aren’t as secure. do they sheer the lamb many times, or skin it once.
the basic mismatch of economies trying to run on the same track means something like this was inevitable.
what it means is germany and france are 10x more fucked than we are. then again, they stood to gain the most from being able to protect domestic production without openly starting a tariff war. their currencies would otherwise have been much higher, and they would be more prone to imports.
dmbeaster
20 years ago we went through a similar cycle with South America debt extended by BofA, etc. They ended up eating most of the loan principal.
As Atrios keeps saying, this is about the Europeans bailing out their own banksters who made the loans.
Montysano
@ 4tehlulz #4
This. Once the deal starts to go down and those who are on the hook for the derivatives are unable to pay, then the fun starts. Warren Buffet wasn’t just talking out his ass when he called derivatives “financial weapons of mass destruction”.
burnspbesq
@Judge Crater:
Nice rant, but massively over-simplified. Greece is not Ireland is not Portugal is not Spain.
Ireland, the situation with which I am most familiar, is nothing but an old-fashioned property bubble, made worse by a political culture in which the ruling party was far too chummy with the real estate development community. As long as Ireland refuses to give up its 12.5. percent corporate income tax rate on trading profits, it will still be one of the preferred locations for multinationals to set up European operations, and will still have something resembling a healthy economy. There is much work to do (see, e.g., Fintan O’Toole, Enough is Enough (2010)), but Ireland is likely to come out the other side looking not so shabby.
Roger Moore
@Poopyman:
But Obama can’t possibly be lawful authority. Just look at his skin color. Where in the Constitution does it say a nigger can become President? Besides, the Constitution guarantees a Republican form of government, so resisting Democrats is Constitutionally mandated.
Judas Escargot
IMO, the FIRE sector is slowly digesting the economies of their host countries before our very eyes: Nearly three years into the crisis, and I still couldn’t tell you if I believe this was done on purpose or not.
In other news: The Chinese premier is in London this week. Presumably to discuss terms for Europe’s (economic) surrender.
daveNYC
Extend and pretend, with the added bonus that Greece ends up selling off a lot of its assets in the process.
Villago Delenda Est
First two posts called this.
They’re kicking the can down the road.
The real problem is that the old safeguards put in place to prevent precisely this situation were removed by Ferengi swine on both sides of the Atlantic.
Now everyone gets to pay for the limitless greed of a few.
geisha gurl
Interesting discussion/perspective from across the pond:
http://golemxiv-credo.blogspot.com/2011/06/why-this-crisis-is-not-over-part-2.html#comments
It’s the same on this side.
Tim Connor
Krugman has an interesting post about the Argentine economy’s performance after its default. Greece may be a different case, I don’t know. But the Argentine experience tends to make one believe that default would be Greece’s smart move.
Remember, modern capitalism has an attention span of less than 90 days.
http://krugman.blogs.nytimes.com/2011/06/23/dont-cry-for-argentina/?gwh=126B9BF8DFBB0058F0D7FF21B24F4920
Krugman also has a follow-up post where he explains that he never said that defaulting made Argentina a paradise on earth.
Duh.
http://krugman.blogs.nytimes.com/2011/06/26/not-a-does-not-imply-b/?gwh=3B897C0B8CACD8D83EEC4206E3A85B75
Xenos
Poopyman – The French government is left holding twice the debt as the German government, and the French and German banks hold roughly equivalent amounts. But the German public is much more pissed off about the default than the French public, which has seen some bank failures and spectacular incompetence in their public figures already.
The Greeks will get their default, about ~40 haircut on the debt, and it will be a humiliation for the Germans who have needlessly tried to make a stand on this point. Now that the rest of Europe is remembering post-war Germany has had succeeded in part due to a bond default in the 50s and war reparations default in the 90s, the German public will need to learn some humility.
As for kicking the can down the road – one group that desperately wants that are the bankers, who need some more time to pass to run out the statute on civil and criminal prosecutions. Everything can be faked until clawbacks become legally impossible, and then the bankers will change their tune right quick.
Judge Crater
@burnspbesq
I didn’t mean to imply that Ireland and Portugal and Spain were all identical in they way they got in trouble. Ireland did/does have a massive property bubble. But, as in all these cases, it has been the banks that acted irresponsibly, made large profits, and then left the taxpayer (and the citizens of Ireland and Greece) with the bill. The Irish Banks that basically failed were, I believe, nationalized with the debt going on the sovereign balance sheet.
Ireland, despite have many positive economic factors, is a tiny economy that has been kicked around by its larger neighbors. The prospect of a common currency sounded great to these smaller countries, but it simply made them fodder for the greed and misfeasance of multinational banks.
daveNYC
It’s the same stupidity that had people saying that opposing war [x] meant that you were objectively pro-[dictator y]. You get the same thing with people saying that communism didn’t work, when technically, it just didn’t work as well as capitalism.
JGabriel
Tim Connor:
The situation is a bit different. It really depends on what kind of terms Greece can get from its creditors. If they want to push Greece into a decade or longer period of high unemployment, restricted growth, and punishing conditions for workers, then, yeah, Greece is better off defaulting.
There are advantages to staying with the Euro, however, and Greece would probably be better off not defaulting, and staying in the monetary union, if they can get tolerable terms.
Argentina, on the other hand, really had nothing to gain, or anything worth preserving, by keeping the peso pegged to the dollar at the time it defaulted.
.
Pococurante
It means:
It should surprise no one that Goldman-Sachs were the architects of Greece’s original debt…
daveNYC
I’m not sure there are any advantages to being in the Euro that make up for giving up control of your currency to Germany. No small part of the hurt they’re dealing with is due to not being able to devalue their currency and the German tinfoil hat level of anti-inflation paranoia.
To be more exact, they were the architects of the products that allowed Greece to hide the extent of their debt and which also blew up the cost of their debt.
Montysano
From James Kunstler’s latest:
We are running out of road down which the can may be kicked.
Xenos
DaveNYC- Having in-laws in rural Greece, I heard about the difficult adjustment to the Euro back in 2002. Prices for necessities shot through the roof, and if it were not for the massive injection of Euros through public financing of the economy Greece would have suffered a severe contraction.
The result was akin to the property bubble in the states – massive amounts of cash were sloshing along, with easy funds for every hair-brained scheme and a lot of graft and cheating to get grants, file insurance claims, expand non-existent businesses, and so on. So the Greeks need a slow walk past the graveyard before they find salvation.
Nonetheless, as Krugman predicted, Greece was set up to fail, and that was assuming the Euro stayed stable instead of, under German pressure, being steadily more dear. What we are seeing now in Athens is like a decade of deflation packed into a few months. Whether they cheated or not, the Greeks are right to be pissed.
Comrade Dread
Seems like it’s the equivalent of a bank telling a delinquent mortgage holder that it will refi their current debt for a new 30 year note, and let them defer a payment or two.
France is hoping that the world economy is on the rebound by then and Greece will be able to make its payments. Personally, I think it’s going to get worse, and they’ll end up taking a bath on the debt eventually anyway.
handsmile
I’m a long-time resident of a neighborhood in Astoria, Queens (NY) where until recently, Greek was the language heard most often along the streets and in shops. I’ve developed a fair number of Greek acquaintances. As they and their visiting homeland friends/relatives tell me, the political tinderbox of Greece becomes a little drier each day. (Yes, I acknowledge the maxim that anecdote is not the plural of data, but find these accounts to be illuminating as to the lived consequences of financial theoretical calculations.)
Civil unrest is rampant, fury escalates with the government of George Papandreou and the Panhellenic Socialist Movement (PASOK) party he leads. His government will likely lose a second vote-of-confidence (after squeaking through last week’s vote) once the details of new austerity measures are disclosed and placed before legislators. Massive pressure is being applied by Western financial institutions to buttress Papandreou because the government’s collapse heralds default. The counterweight to such pressure is the domestic outrage at draconian wage, benefit, and pension cuts, tax increases, and the proposed privatization of state assets. The dynamic in Greece may well be the tectonic tension of unstoppable force versus immovable object.
The domino board of the Eurozone continues to be rattled by the domestic political convulsions of its major players Germany, France, Italy, and Spain.
And another thing: I’m no economist, but sure am a pedant when it comes to the misuse of “principal/principle” (see Sarkozy’s quote above). just how many adults wrote/edited the copy for that article? Now if you’ll excuse, I have to get back to guarding the lawn against young hooligans.
Svensker
@ handsmile
Donkeys, Mr. Dick! Donkeys!
On topic — Goldman orchestrated Greece’s creative financing and they are orchestrating the response to the blow-up by making sure they get paid, no matter who else suffers.
geisha gurl
Some more from David Malone…
http://golemxiv-credo.blogspot.com/2011/06/truth-threats-and-imf.html
bjacques
cathyx and a lot of others got it right.
Among the bailout conditions of Greece are a big selloff of public assets, like the railroads and national lottery. No doubt a lot of good land, too. All at knock-down prices, of course. The rumor about Greece having to sell the Parthenon was true in a sense. It’ll be like losing the Elgin Marbles a second time.
The more “stable” countries did this ages ago, but there are still plenty of public goods for the looting. The UK’s David Cameron wants (or wanted) to dismantle the NHS by changing it so it can’t be run by a state body (dropping all the paperwork on the GPs and firing the administrators). In the Netherlands, there’s a (partly ideologically-driven) push to gut cultural funding. The knock-on effect is to free up some lovely canal-side properties formerly occupied by lower-tier museums (like the Theatre Museum in Amsterdam), and maybe release to the market some treasures the slimmed-down museums can no longer afford to store. Both countries have been at this for awhile, with the UK’s 32 years (and still counting) of Thatcherism and 10 years of conservative “reforms” in NL). People in the “good” countries have for years been swallowing the same medicine now prescribed for Greece, only in smaller doses.
The greatest treasure being sold off is the least tangible–social democracy, the idea that life for the average citizen doesn’t have to be one of shitty jobs and shitty service and watching the elite swan to the head of the line. Europe is rapidly heading in the direction of a Republican’s idea of America should be.
It’s fun to damn the Greeks for being lazy and crooked and deserving of their fate, but the rot starts at the top. Nominally liberal politicians steal as much as the conservative ones do, and nothing changes, and you pay 10% of your annual salary in bribes, and now you have to cough up to prop up the whole shithouse for a little longer? (And Goldman-Sachs will short the shit out of your bonds anyway.)
Give the debtors a haircut, knock a few zeroes off the fortunes of politicians richer than their nominal salaries should allow (ditto for those who benefited from them), pursue tax money as if it was Osama bin Laden’s personal stash, shut down tax havens, and enact real banking reform NOW.
Or no fucking deal.
Judge Crater
@bjacques
Exactly Right! But the same thing is now going on at the state level in the U.S.
The economic Recession is forcing big cutbacks on states. The Tea Party governors are, of course, taking it out on public employees and, where possible, Unions. In addition, they are “privatizing” state functions and services and selling off the cash flows from state and municipal infrastructure (parking meters, toll roads, parks, etc.) to corporate entities.
Goldman Sachs, among others, is putting together a multi-billion dollar fund to invest in, er, capitalize on these liquidations of public resources. It’s the perfect storm for vulture capitalism: each economic downturn means starving the government beast at the local, state and federal level, cutting taxes for the wealthy and corporations to “stimulate” the economy, and carving out new chunks of the commonwealth to pay for increasingly privatized services.
Soon “Equal Rights under Law” will be replaced in our democracy by notions of “shareholder value” and electing a new board of directors.
Judge Crater
@bjacques
Exactly Right! But the same thing is now going on at the state level in the U.S.
The economic Recession is forcing big cutbacks on states. The Tea Party governors are, of course, taking it out on public employees and, where possible, Unions. In addition, they are “privatizing” state functions and services and selling off the cash flows from state and municipal infrastructure (parking meters, toll roads, parks, etc.) to corporate entities.
Goldman Sachs, among others, is putting together a multi-billion dollar fund to invest in, er, capitalize on these liquidations of public resources. It’s the perfect storm for vulture capitalism: each economic downturn means starving the government beast at the local, state and federal level, cutting taxes for the wealthy and corporations to “stimulate” the economy, and carving out new chunks of the commonwealth to pay for increasingly privatized services.
Soon “Equal Rights under Law” will be replaced in our democracy by notions of “shareholder value” and electing a new board of directors.
lawguy
The point is that the elite are trying to get the rest to cover their asses, and succeeding by the way.
It is the banks that are on the hook. Let the banks tank and start all over since that way will be the least harmful for the average citizen.