This should be interesting:
The Greek government was plunged into chaos on Tuesday and faced an imminent collapse, as lawmakers rebelled against Prime Minister George Papandreou’s surprise call for a popular referendum on a new debt deal with Greece’s foreign lenders.
Such a collapse would not only render the referendum plan moot, it would likely scuttle — or at least delay — the debt deal that was agreed on in Brussels last week, putting Greece on a fast track to default and possible exit from the monetary union of countries sharing the euro currency.
Analysts said that Mr. Papandreou’s call for a referendum was a last resort, meant to gain broader political support for the unpopular austerity measures in the deal without forcing early elections that would only worsen the country’s political and economic turmoil.
But after weeks of mounting pressure, one Socialist lawmaker quit the party to become an independent, reducing Mr. Papandreou’s majority to 152 seats out of 300 in Parliament, and another six Socialists wrote a letter calling on Mr. Papandreou to resign and schedule early elections for a new government with greater political legitimacy. Together, the developments made it doubtful whether his government would survive a confidence vote planned for Friday.
Meanwhile, the center-right opposition New Democracy party on Tuesday stepped up its calls for early elections. Its leader, Antonis Samaras, has opposed most of the austerity measures the government accepted in exchange for foreign financial aid. Mr. Samaras has said that if he were in power, he would try to renegotiate the terms of Greece’s arrangement with its principal foreign lenders, known as the troika: the European Union, the European Central Bank and the International Monetary Fund.
“Mr. Papandreou, in his effort to save himself, has presented a divisive and extortionate dilemma,” Mr. Samaras said on Tuesday. “New Democracy is determined to avert, at all costs, such reckless adventurism.”
I’ve read a number of people who think the eventual outcome, no matter what happens, is a Greek default and exit from the Euro. We’re just delaying the inevitable, as they see it. So why not just do it and get over with it? At any rate, the markets are down sharply because of the news, which makes this TDS piece even more amusing (skip to the 9 minute mark).
BGinCHI
Kthug is a must-read right now on this:
http://krugman.blogs.nytimes.com/2011/11/01/eurodammerung/
JPL
@BGinCHI: Well that was a depressing read. I know it’s five o’clock somewhere.
Linda Featheringill
I saw the headline this morning and thought that Greece would be the most important news of the day.
What will happen? I don’t know but of course that won’t prevent me from speculating anyway.
The Greeks will reject the whole package, opt out of Euro, fuss and fight a lot, and then recover and be more prosperous in the long run.
European markets will go crazy, Japanese markets will commit suicide, and US markets will go into up-and-down seizures.
Worldwide recession? Maybe.
catclub
Without reading K-thug first: LGM has a post up with some interesting comments.
I think it is a very smart move by Papandreou. Either the people approve the austerity measures ( unlikely) or the rejection comes now and is not a direct rejection of Papandreou himself and his negotiations.
I thought that the exuberance of the stock market over the proposed settlement last week was way over done. An intense case of whistling past the graveyard. All of the gains from last week have been eaten back now, right?
4tehlulz
Lol Greece 1 yr: 199% interest
BGinCHI
@JPL: Look on the bright side: when Greece goes off the Euro, we’ll be able to travel there and eat all the flaming cheese we can get for pennies.
Good for us, shitty for average Greeks.
Does anyone know, seriously, whether the advent of the Euro was good for average folks in Greece and Spain (for example)? Those two countries used to be seriously cheap to visit before the Euro. But I always thought that was probably bad for people. The Euro meant higher prices, but did it translate to a better income for, say, restaurant owners and so on?
catclub
Well, K-Thug is already beyond Greece and on to Italy. I feel slow.
Violet
Where’s our troll who shows up when the markets are up boasting about making $3,000 just this morning? Dammit, I demand to know if baklava futures are up!
BGinCHI
@Linda Featheringill: If the markets really freak I expect to be able to retire when I’m 164. On the plus side, the iPhone will be amazing by then.
PeakVT
So why not just do it and get over with it?
It takes a lot of planning to switch currencies, and in this particular instance it needs to be done entirely in secret. Perhaps the Greek government feels it can’t pull the switch off. There’s also the issue of external private debt, which would increase substantially in a new devalued drachma. However, I don’t know how much there is, as most Greek private borrowing may have been done from local banks.
Related: this article on a Greek MP is worth reading.
JPL
Also, too.. This is good news for John McCain. If you enjoyed the first great recession, you’ll have a blast if Greece goes under.
catclub
@BGinCHI: I always thought that the Euro was really a good deal for US tourists in Europe, but unnecessary for Europeans.
As far as helping the common man, I saw various articles saying that the Euro onset was an opportunity to raise prices on simple things like a cup of espresso or bagette to match the new currency. No decreases happened. Funny thing rounding.
jl
Optimum currency area
http://en.wikipedia.org/wiki/Optimum_currency_area
” Specifically, Keynesian economists argue that fiscal stimulus in the form of deficit spending may be necessary to fight unemployment, which is not possible if states in a monetary union are not allowed to run sufficient deficits.”
The deficits, for countries like Ireland Spain, Portugal and Italy, refer to countercyclical fiscal policy to keep unemployment from rising too high in a recession (largely triggered by financial insanity in the US). These countries followed all the neoclassical macro rules (if not the micro rules for places like Italy) and could not escape their non optimal currency area, Keynesian fate.
Apparently this aspect of crisis is too rarified or hard to explain for the cheer leaders and leaderettes who report financial news.
Punchy
I say we use some Greece to cook Turkey, cuz dammit I am Hungary.
4tehlulz
This is good news for Jon Corzine.
Campionrules
@BGinCHI:
The link escapes me, but if I remember correctly, Greece made wide ranging adjustments to the increase in COL that the Euro would bring. I believe a wide range if increases in government salaries – which doesn’t sound like much until you consider that a large portion of the workforce is employed by the government.
This is going to be shitty. If the greeks withdraw from the Euro- and bear in mind that there is no formalized process for this – they need to hope for an Argentina like turn around.
Unfortunately, this may not be likely due to the actual economic structure of the Greek nation and the fact that the overall deficit problem that they are facing is not created solely by overzealous lending by European Banks.
The greek infrastructure is riddled with corruption, and inability to collect basic taxes and a government that was lying for years to the EU about its actual stability.
A default may be the only viable options but it’s going to be rough go for the average greek. Very bad most likely. I hope not, but all signs point to an even greater break down in basic services.
The Moar You Know
The Greeks don’t want to pay the Goldman Sachs tax, nor work until they’re 90. How astute of them.
I’m ashamed that the Greeks have far more dignity and self-worth than the trampled-on, self-hating servile American middle class. They could teach us a thing or two about liberty and freedom.
Linda Featheringill
@BGinCHI:
Retire when you’re 164:
I understand. I’m 67 and am still working hard and bringing in little money. Maybe I’m ahead of my time. :-)
Yevgraf
What I love is how this all came about due to a rating downgrade. Greece was paying its debts, but then suddenly, the MOUs decided to up the servicing costs.
jl
@Linda Featheringill: If people are willing to downsize to putt putt, they could still play golf at 164. Damn kids are spoiled today.
4tehlulz
Obligatory lazy greeks and italians/hard working northern euros smear.
BruceK
I’m in the middle of it, and not looking forward to what happens next. The country is not united on what to do next – not from what I can tell.
About all I’m sure about is that there’ll be more strikes and protests, and the hooligans will try again to smash as many windows and stoops as possible and try to set fire to anyone who doesn’t let them have their fun.
I think I may need to invest in a fire extinguisher, a filter mask, and one of those Maglites rated for cops, the ones with about half-a-dozen D-cells?
Paul W.
@catclub:
Wait, what? The euro has made my two trips to the continent way more expensive than if I had just gone to Spain pre-Euro. I was getting an exchange rate of .7 dollars per Euro or something stupid when I went in the past 2 years.
PeakVT
@BGinCHI: I think for a time the Euro did benefit the average person. You can dig through the OECD statistics if you really want to know. But, regardless, people gotta eat, like, now. And right now a Euro with very low inflation isn’t helping Greece, Spain, and Portugal.
jl
@4tehlulz: What kind of bagel is good with that?
peach flavored shampoo
Maybe the Greecian people can sell a few of the vowels in their last names to raise a few ducats.
Shinobi
I think I need a diagram to understand what is going on in Greece and Italy.
Campionrules
@Yevgraf:
This is clearly not true.
Greece has been misreporting it’s economic status for at least a decade in order to keep within the EU’s monetary guidelines.
Public debt in Greece is 126 percent of the GDP
This is an fundamental problem with the Greek government. A real sovereign debt crisis, unlike the one here in the U.S.
Yes, the banks lent to them and Yes, the EU required austerity measures in order to bail them out but this is real governmental crisis and it’s not going to get any easier unless they can figure out a way to bring the spending under control. I repeat, Greek Debt = 126 percent of their GDP. That’s not sustainable.
catclub
@Yevgraf: Just remember, if you want a loan you cannot have it because you need the money. If you _don’t_ need the money then the bank is willing to loan it. Apparently the Greeks went from one case to the other and the bankers wanted more money.
@4tehlulz: lol
Marc
It’s a bit more difficult than the traditional morality play. The banks conspired with the Greek government to pile up enormous debt. But the Greek government actively lied about their finances, tax evasion is endemic, and the government is extremely corrupt. This really is a case where no one looks good. (I’d say something similar about Iceland or Ireland – places where the government embraced reckless policies that were enthusiastically adopted by the public.)
By contrast, what happened to Portugal or Spain is much more like an organized mugging of sovereign states by the financial sector.
4tehlulz
@BruceK: Match you flashlight needs with 1/your penis size with this nice handy chart!
burnspbesq
@BGinCHI:
You might want to ask the average Argentine and the average Icelander about that.
catclub
@Campionrules: “I repeat, Greek Debt = 126 percent of their GDP. That’s not sustainable.”
Primarily because they do not print their own currency.
Plus it depends on the interest rate. Japan has an even higher total debt and can still issue bonds that pay about 1% interest. (I do agree that the Greek economy does not have anywhere near the resources of the Japanese one, but the debt ratio is not the determining factor.)
cyd
I hope the Greek government has a drachma reintroduction contingency plan ready to rumble, as soon as capital controls are put in place. But this would require actual competence, so we’ll see.
DZ
@Linda Featheringill:
No, the Greeks will not be better off if they collapse and default. They will be screwed for decades. The Argentinians were able to pull it off, because everyone gave a bit and society began to work again. No one in Greece will give an inch. You cannot endlessly spend money you do not have. So, they will go back to Drachmas, print a few billion of them and make everything far worse than it already is. All private capital has already left Greece for safer havens, no one will loan money to Greece – they are screwed.
Cargo
I recommend the book “Boomerang” by Michael Lewis about Greece, Ireland, Iceland, Germany, and the US’ reactions to the credit bubble and resulting debt crises. Greece is famously riddled with corruption, tax evasion and graft. But the only way they can meet these austerity measures is to, basically,stop being Greeks and become Germans. That’s not likely to happen. Thus, default.
stickler
Who gets burned if Greece goes off the Euro?
All those French and German banks that loaned them piles of money without doing due diligence.
jl
Greece is a side show, a macro carny freak side show, but a side show never the less.
The problems will be the effect on economies that were sound before the crisis, and should not have problems financing their deficits, but will:
Portugal
Spain
Italy
France
As we work up the chain the Euro crisis will get worse.
The deal was already showing itself to be ineffective before the Greek government (or was it one official) decided to delay, and hold a referendum that might blow it all up a couple of months from now.
The Greek economy is not big enough to destroy the Euro. If the speculative attacks continue, and deficit/bond market crises reach up to threaten Italy, there is where the Eurozone system blows up.
catclub
@Paul W.: The US dollar was absurdly strong in the late 90’s and weakened substantially
over the past dozen years. That is not the fault of the Euro.
The charts would make you blame Clinton for having dollar that is too strong and Bush for weakening the dollar (but for some reason all the blame is on Obama for the weak dollar.) We actually want a weaker dollar – which is what we mean when we demand that China not manipulate its currency, but actually saying ‘weak dollar’ is verboten.
I meant that the convenience of having only one currency is easier for tourists.
PeakVT
@Shinobi: It’s two different stories. The Greek government is flat broke. The Italian government has a lot of debt, too, but it’s been able to sustain its budget deficits because they haven’t been that big, and interest rates have been low. However, the uncertainty has boosted Italian bond yields, and if it has to roll 300 billion Euro at a much higher rate, it would be in trouble. Search Krgthulu’s blog for Italy for more.
4tehlulz
@Shinobi: It’s all George Soros’s fault. He misread that memo from the Elders.
BGinCHI
@Paul W.: Spain just got flat-out more expensive when the Euro went in. For visitors. So, again, I’m not sure how much that benefited folks, but:
@PeakVT: I take your point here. Probably better in the short run and not so good once the entire economy starts to drag.
Wonder what Goldman Sachs fingers we’ll find in this shit pie once it’s all said and done?
Dave
The problems with Greece go deeper than bad fiscal planning. The government is notoriously corrupt. And the Greek Orthodox Church plays a huge role as well. They are the second largest landowner in Greece and pay no taxes. Their priests and employees are considered government workers and get paid by the government.
There are structural problems in Greece that go beyond the Euro and unless those are fixed, I don’t think it matters what the Euro countries try to do.
Yevgraf
@Cargo:
I just read Boomerang. Lewis is a good writer, a funny writer, but he still has a tendency to buy into the fiction that ratings mean something.
They don’t. They’re mathematical alchemy designed to make dumbassed self-important white people feel secure about things that will make white people invest money, and bear less relation to reality than the stats and picks in the Daily Racing Form.
When Greece got downgraded, the Greeks were paying their debts.
Linnaeus
@Shinobi:
Ask, and it shall be given you. (A graphical explanation of the problem).
Linda Featheringill
@Punchy:
Groan!
BGinCHI
@burnspbesq: Huh? Apples and oranges with Iceland.
The Argentina example is closer, and I agree that defaulting can be useful. It will matter a lot what the Greeks do in the aftermath.
Or, the after math.
Montysano
If, by “it”, you mean face reality, force the banks to mark to market (i.e. face their insolvency), and flush the fraud out of the system, I’m all for it. It will suck hard to a few years, though.
I’m afraid that when that finally happens, we’ll discover that MF Global is just the tip of the iceberg and that all major banks have dipped into depositors’ accounts in a last-ditch effort to stay afloat. If that happens, the DFHs at OWS will have lots of new friends.
DZ
@jl:
Sorry, but that’s just idiocy. France is fine. It will have serious problems, but it’s fine. France has a very productive economy, the others don’t. France does not have a corrupt government, the others do. Italy is already a nightmare with debt = 120%+ of GDP. France is 82%. Terrible but better. Spain and Portugal have been in trouble for years, mostly based on the same stupidity that has infected the Greeks. France is not in trouble today, the others have been for years. Get the facts first.
scav
OT Guard reporting that the city of London is reported to be suspending action against the St. Pauls Camp. busy day.
Shinobi
@PeakVT: @Linnaeus: Thanks! That graphic just proves that this shit is confusing.
I think I would do better if every time I read the words bond or yield my brain didn’t suddenly start wandering in the opposite direction.
“uncertainty has boosted Italian bond yields……Why am I not looking at an adorable video of Corgi’s, that’s better.” Some people with math, me with finance. We shall overcome.
MTiffany
Stickler @36 above beat me to it: French and German banks are holding a buttload of Greek gov’t debt, and those banks are already under enormous pressure to take a haircut on those bonds. As I understand it: if (okay, not if, but when) Greece defaults, all those greek gov’t bonds essentially become worthless, which will spark a (liquidity or credit, can’t rememeber which) crisis in the insitutions holding those bonds, requiring the ECB to put a together a TARP-style bailout program to keep the Eurozone from imploding so completely that it kills the Euro and plunges the world economy back into recession.
http://www.reuters.com/article/2011/10/21/us-france-greece-banks-idUSTRE79K5X220111021
Zifnab
@4tehlulz: Why would anyone bother buying their debt at that point. No one can pay 200% interest, that’s insane. Getting a bond with that rate would be the equivalent of lighting your money on fire on the assumption that the ashes would be worth price the value of the paper currency in a year.
Yevgraf
PS – Can we ever get to the notion that it should be far more attractive to invest in active enterprises that own facilities, capacity and have labor to do stuff, as opposed to sinking increasing dollars into static parcels of real estate?
Zifnab
@BGinCHI:
Well, is the Greek public system internally stable? Assuming they axed all the debt and ran their government straight off the tax revenue, how far below deck would they be? Because I can’t imagine their interest payments are helping their bottom line.
I think Greeks would be more amenable to higher taxes, lower benefits, and the like if they didn’t think all the pain was just going to feed some foreign debt holder. People wouldn’t feel robbed if they believed they were buying public sector services rather than paying down the public sector credit card.
catclub
@Dave: “And the Greek Orthodox Church plays a huge role as well. They are the second largest landowner in Greece and pay no taxes. Their priests and employees are considered government workers and get paid by the government.”
Another example to bolster the case that the First Amendment does NOT mean the separation of church and state!
jl
@DZ:
” Spain and Portugal have been in trouble for years, mostly based on the same stupidity that has infected the Greeks. ”
Not according to the European central bankers before the crisis.
Yevgraf
“Uncertainty” is the chickenshit copout used by raters and substantial white men of bidness for the last hundred years whenever they pick the numbers or colors to bet before the spin of the roulette wheel.
Yevgraf
“Uncertainty” is the chickenshit copout used by raters and substantial white men of bidness for the last hundred years whenever they pick the numbers or colors to lay the waqer on before the spin of the rovlette wheel. (FYWP)
j low
@burnspbesq: This.
catclub
@MTiffany: My understanding is that the debt itself is not that big, but the CDS insurance is much larger and _much_ less well known.
Part of the proposed 50% haircut included an ‘agreement’ that this was NOT equivalent to a default, which would invoke all of the default clauses of the CDS insurance.
It was stated that the CDS holders were not powerful enough to have _THEIR_ contract enforced, while the ones holding AIG CDS were paid 100% in 2008. So a contract is only as good as the strength of the holder in the negotiation.
catclub
@Zifnab: No one is paying 200%. The yield is 200% because the cash value is so much below face value. The Greeks sold a 5% bond for about $95.
and will effectively pay back $100.
Now you can buy that bond for $33 and the Greeks will still pay back the same $100 (so 200% interest on $33) — if they don’t default first.
Aye, there’s the rub.
BruceK
@catclub: Oh, the Greek Orthodox Church is written into the Greek Constitution as the official church of Greece.
Not being Greek Orthodox can make one the Other in all sorts of ways, from the subtle to the jaw-dropping.
Brachiator
Because defaulting and exiting the Euro will not solve Greece’s problems.
The BBC news site has a good background piece on the issue, Eurozone crisis explained
Have the GOP presidential pretenders weighed in on this issue?
Yevgraf
Y’know, there used to be a fairly well known principle at contract and insurance law called “moral hazard” – that there were some contracts so risky, stupid or borderline criminal that they couldn’t be enforced as a matter of law, because there would be such a temptation to misuse them. You tended to see it most invoked on things like enforcement of gambling debts or determinations as to who a person or business could ensure.
Then came the CDS, where people with no relationship to a transaction could bet on whether or not it would fail. Suddenly, the terms of contracts became iroclad and absolute, regardless of what you were insuring, and the only invocation of the term “moral hazard” came about the time that evil librul folks talked about principal writedowns in bankruptcy.
Campionrules
@Zifnab:
One of the reasons that this might not be a good idea – to try and run the country off straight tax collection – is that this is one of the reasons Greece has a borrowing issue anyways.
Tax evasion is a terrible problem and has been for years. Estimates range from 15-30 Billion dollars a year that goes uncollected. (About the size of the current greek deficit)
If you raise taxes I’m not sure how this particular problem would get any better. Institute a devalued Drachma and this could get potentially worse.
Bludger
I blame the Olympics.
Villago Delenda Est
The elites are idiots. Everywhere.
They’ve demonstrated, repeatedly, that they’re idiots.
When the tumbrels come for them, I will not shed a tear.
DZ
@jl:
I don’t know where you get your information, but that’s just flat out untrue. European bankers have been pressing Greece, Italy, Spain, Portugal and Ireland to get their shit together for years – since before the meltdown in the U.S. They were living completely unsustainably and they still are. The Spanish and Portuguese kept promising reforms to get more loans, but they never did anything useful.
jl
Just to be clear, my last comment was not a prediction of what will happen, it was giving the scenario of how the Euro system might unravel, even though the economy of Greece is insignificant compared to other countries in the system.
As for country X being ‘fundamentally sound’ the whole point of how an optimum currency area unravels, if there are no mechanisms for sharing risk and evening fiscal burdens, is that ‘fundamentally sound’ economies can find themselves unable to finance deficits with the common currency.
As the Kthug says, economics is not a morality play. If the PIIS were less rotten than the G, which was common wisdom before the financial panic, it makes no difference now. And the fear is that F will be swept up in the mess if the PIIS run into more problems.
Yevgraf
@Villago Delenda Est:
I had an extremely liberating moment when i realized that the elites reside within the same IQ distribution curve as the population as a whole, and are simply either members of the lucky sperm club or lucked into a couple of decent connections to help them along. It isn’t that they work harder than the guy doing their gardening – it is that they inherited well.
Villago Delenda Est
@jl:
Unfortunately, for 27% of the American electorate, that’s exactly what it is.
Having money is more important than cleanliness in being godly.
Nevgu
Bahahaha….Wrong Again Cole giving an opinion on Greek debt crisis. Now THAT is funny!
Like Paris Hilton giving an opinion on the latest Boeing 787 design.
jl
@DZ: Obviously a difference of opinion here. Regardless of problems in P and S in terms of structural reforms, at a macro level they should not experience problems paying back their loans, but now they may, due to the effects of financial crisis and recession.
You also seem to think I am predicting France will get caught up in the mess, I was giving the scenario that experts fear.
You got a problem with that scenario, take it up with Krugman, he has a blog.
Edit: I think K’s viewpoints should be considered seriously, he is one of the founders of modern theory of national currency runs, and it is one of reasons he won his prize.
Sentient Puddle
@Zifnab: I’m sort of tempted. If Greece defaults, the world economy goes to shit and losing my investment money will be a relatively minor concern. And if Greece manages to limp along for another year, mad profits!
Rhoda
Completely OT: But Romney apparently has a Madoff problem.
h/t to rikyrah @PragmaticObotsUnite
I guess it just got easier to run the Kennedy playbook against Romney if he’s the nominee. We’ll see if Perry can take advantage of this.
Villago Delenda Est
@Yevgraf:
Harrison Ford has said this well…his success has every bit as much to do with dumb luck as his own hard work…perhaps even more so. He’s eternally grateful that luck favored him, and has no illusions about how his fame and fortune came about.
Unlike entitled scum like the entire Bush crime family, Bill “ask me anything, and I’ll be wrong!” Kristol, or Grover Norquist, trustifarian asswipe.
piratedan
@Linnaeus: ty that was extremely helpful
Scott P.
Not true. Spain and Ireland were running large budget surpluses before the crisis.
ericblair
@Yevgraf:
Depends on the industry: a lot of them are smart and driven, but there are a lot of other smart and driven people out there who didn’t make it to the top. If you listen to the life stories of the bigwigs, you can usually identify a couple of key points where they lucked out. The ones who didn’t luck out don’t get to tell their stories to everybody.
So, there’s a big survivor effect here: a lot of the people who made it to the top lucked out in key points in their lives. I’m thinking this tends to distort your perception of risk quite a bit, since, hey, I’ve taken big risks before and it’s worked out great, right? Except lucking out in the past doesn’t mean you’ll luck out in the future, and you’re left with some smart and motivated people who are overconfident in their abilities and figure they’re on a permanent roll.
So we’re all fucked.
beltane
@Rhoda: Mitt Romney has a son named Tagg? Who do they think they are, the Palin family?
Chris
@Villago Delenda Est:
“I have had scientifically provable luck from time to time. […] Being in the right place at the right time and then doing the right thing. You cannot get where I got without luck. Bags of it. Fucking bags of it. You can be as good as I am or better. You can be incredibly more attractive and charming and capable and still be shit out of luck. The only thing that I have done that is not mitigated by luck, diminished by good fortune, is that I persisted. And other people gave up.”
I agree. Incredibly rare to see a rich man so candidly admit it, and the main reason I respect the guy.
Brachiator
@Zifnab:
I don’t think this is quite right. Greece has been dealing with massive tax noncompliance issues for decades. From a February 2011 NYT article:
It’s almost comical.
PeakVT
@DZ: That’s not true. Both Ireland and Spain had balanced budgets before the crisis. In both countries the primary issue was a massive property bubble. Portugal has some structural issues (including higher inequality than the US) but has mostly been dragged down by Spain.
amk
Euro crisis ? What euro crisis ? The fucking chinese will save us.
j low
Anybody know how many of the CDS’s BofA just moved from investment subsidiary into FDIC insured would be involved in a Greek default?
MTiffany
@catclub: I didn’t even think to take into account the possibility of CDS exposure.
What I was basing my (albeit rank amateur) opining on was this article from the Guardian from back in September: http://www.guardian.co.uk/business/2011/sep/13/socgen-boss-plays-down-fears
Warren Terra
Everyone seems to be commenting as if this was thousands of miles away and across the ocean – but according to one thing I’ve heard, the American financial system is actually heavily exposed by its sales of reinsurance products to institutions that have invested in Greek bonds. Think AIG, all over again.
That’s pretty much a first-order effect on our economy, beyond the obvious second-order effects on the world economy if the Eurozone’s unified currency and economy splinters. Which it well might; as Krugman has repeatedly pointed out, the Euro was introduced with no provisions for if a member country had a major fiscal crisis – a circumstance that was more of a “when” than an “if”.
ed drone
@Campionrules:
It always has confused me, that austerity seems to be the only medicine in the financial pharmacy for places like Greece, when simply collecting the taxes actually owed would solve their problems and ensure against at least some future ones.
Is Greece the libertarians’ nirvana, where one pays as little tax as he can get away with? And if so, what does this say about the arguments for low taxation, when the culture stresses low revenues for government, while sensibility stresses paying for what you get?
Ed
catclub
@Brachiator: Due diligence.
The Eurozone should have known all this about the Greek mal-system when they were considering letting the Greeks join the Euro. Who benefits from ignoring it all, instead?
I bet the Turks might even be glad they were NOT allowed to join.
Canuckistani Tom
@Villago Delenda Est:
I thought we weren’t supposed to tell him the odds?
Brachiator
@catclub:
I was listening to a BBC news story about Greece earlier this week. One of the guests noted that Greece should never have been allowed to join the Euro because it did not fully meet all necessary requirements.
a quick google search finds a lot of retrospective finger pointing. For example:
I don’t know. It’s almost as though some of the economists thought that the benefits of the Euro would be greater than any problems posed by countries with weak economies.
Barry
@DZ: “All private capital has already left Greece for safer havens, no one will loan money to Greece – they are screwed.”
Isn’t that the point already? As far as I can tell, the European bailouts of all these countries are really just signed over to the German and French banks. If you’re in a situation where every thing that you have now and will have is committed to paying off unpayable debts, the only question is when do you default.
daveNYC
@Yevgraf:
Totally wrong. “Uncertainty” is actually financial speak for “fear”. Anytime anything funky goes down in financial markets, everyone runs screaming for ‘safe’ investments. Usually that’s US treasuries, so that’s nice for us.
Pretty much this. Finance tends to be tough to do well in year after year. As people move up the food chain, you tend to end up with either stupidly lucky people, or ones that are pretty damn smart, but have also learned all the wrong lessons about balancing risk and reward. Not to mention their egos have their own zip code.
The few who do well using their brains, manage to keep their heads regarding risk, don’t have silly egos (relatively speaking), and also realize how luck played into what they do, are actually pretty interesting people.
They’re also a tiny minority, though a lot of them do have good blogs.
Villago Delenda Est
@Brachiator:
Tax evasion seems to be the Greek national pastime.
The connection between the services provided by the state and your own well being, and the need to fund those services, is not just lost in this fucked up country.
Barry
@DZ: “Spain and Portugal have been in trouble for years, mostly based on the same stupidity that has infected the Greeks.”
I don’t know about Portugal, but please read Krugman about
Spain.
Nemesis
US markets rallying on news the proposed Greek vote on austerity is essentially dead.
Barry
@DZ: “I don’t know where you get your information, but that’s just flat out untrue. European bankers have been pressing Greece, Italy, Spain, Portugal and Ireland to get their shit together for years – since before the meltdown in the U.S. They were living completely unsustainably and they still are. The Spanish and Portuguese kept promising reforms to get more loans, but they never did anything useful.”
From your statement, the elite world banks were happy for years to lend to screwed-up places, when it was clear that they weren’t getting their stuff together.
Sounds like some elite bankers should go to prison for making fraudulent loads.
And again, read Krugman.
Scott P.
Full name: Dabney Taggart Romney.
Barry
@jl: “Edit: I think K’s viewpoints should be considered seriously, he is one of the founders of modern theory of national currency runs, and it is one of reasons he won his prize.”
And has been the most consistently correct guy on all of this, for about a decade now.
Rafer Janders
@DZ:
I don’t know where you get your information, but that’s just flat out untrue. European bankers have been pressing Greece, Italy, Spain, Portugal and Ireland to get their shit together for years – since before the meltdown in the U.S. They were living completely unsustainably and they still are. The Spanish and Portuguese kept promising reforms to get more loans, but they never did anything useful.
Well, no, that in itself is flatly untrue. Ireland, Portugal and Spain were actually considered to be doing quite well before the financial crisis, and European bankers were not, in fact, “pressing them to get their shit together” — quite the reverse, they were handing out loans left and right. I’ll quote Krugman:
Yes, Greece had big debts and deficit. Portugal had a significant deficit, but debt no higher than Germany. And Ireland and Spain, which were actually in surplus just before the crisis, appeared to be paragons of fiscal responsibility — the former, said George Osborne, was “a shining example of the art of the possible in long-term economic policymaking.”
We know now that the apparent fiscal health of Ireland and Spain rested largely on housing bubbles — but that was by no means the official view at the time.
http://krugman.blogs.nytimes.com/2011/05/01/fiscalization-and-hellenization/
chopper
@Nevgu:
listen to this guy, he made $3000 last week!
chopper
@Nemesis:
based on a statement from one greek MP. gotta love the markets.
eemom
@The Moar You Know:
As the house Greek, I am pleased to endorse this comment.
I know my poor people are fucked, but I’ve been proud as hell of the ferocity with which they’ve been fighting back.
BruceK
@eemom: As an Athens resident, I was slightly heartened to see that protestors were actually trying to blockade the hooligans out of the protests.
It just intensified my depression a couple of days later when I saw marble steps off Syntagma pulverized down to the steel frameworks.
Samara Morgan
prediction.
germany and the frogs will have to bail greece.
they all share the same currency, you intransigent cudlips.
moo, moo
PeakVT
It’s not much of a rally if the market hasn’t made it back to the open, let alone yesterday’s close.
rikryah
you’re telling me nobody saw this coming?
fasteddie9318
What’s Greek for “keep the government out of my Medicare?”
Yevgraf
@The Moar You Know:
That’s what happens when you’ve got a history of a total occupation within living memory, as opposed to the fake bullshit of “Lincoln oppressed us by taking away our slaves, and Lyndon Johnson oppressed us by making us allow negroes to vote and participate in community economies”.
J. Michael Neal
@Yevgraf:
No. In this case, “uncertainty” is the worry that Italy (the country you were referring to) won’t be able to pay its debts. A lot of it hinges on the fact that monetary and fiscal policy are conducted at different levels in the Eurozone. Worse, the monetary is essentially controlled by the Germans.
Right now, the ECB is setting rates that are approximately appropriate for Germany. As a result, those rates are far too high for countries like Italy. The fear is that they will trigger a recession in Italy.
Italy has been running what is known as a primary surplus, which means that the amount that they are paying in debt service is greater than the total deficit. For a country running a primary surplus, servicing their debt isn’t any sort of problem *as long as GDP is growing faster than the interest on the debt.*.
That’s an enormous caveat, and a recession blows a big hole in it. If growth is lower than the interest rate, then the debt/GDP ratio keeps going up and the problem gets worse. A monetary policy appropriate for Germany increases the likelihood that this is what will happen.
That’s what the market fears: impaired economic growth will lead to the debt/GDP ratio to explode, followed by eventual Italian default. This turns into a vicious cycle, because countries need to roll over their debt, since it’s all fixed term. When a bond matures, it needs to be paid off. The mechanism for this is that the country sells another bond to pay off the previous one. Unfortunately, the country can’t just sell a new bond at the same interest rate that the old one paid. They have to discount the bonds to the market rate.
So, the interest rate that they are required to pay slowly ratchets up as bonds mature. As this interest rate goes up, the chances of growth exceeding the interest rate goes down. And so bondholders become more fearful of default and demand still higher interest rates.
That’s what is going on, and it is not just a speculative attack. That may be a part of what is going on, but just how much of the problem that is is not well understood. There is real fear of a default.
This is also why your point that Greece and the other countries were currently paying off their debt may be true, but it is also completely irrelevant. The interest rates that they need to pay is about the future, and the present only matters to the extent that it provides evidence of what that future will be.
I really wish that people who don’t understand anything about finance wouldn’t act like we should take their explanations seriously.
J. Michael Neal
What the hell am I in moderation for?
J. Michael Neal
@Marc:
This is also untrue. The Spanish government is one of the few sucked into this mess that can genuinely claim to be a victim. Greece and Ireland have no one to blame but themselves. Portugal, Italy and Belgium (a country teetering that no one has mentioned yet) had help in getting into trouble, but were perfectly happy to have that help.
But what happened to Spain isn’t really a mugging by the financial sector, unless by “financial sector” you mean “the European Central Bank.” That’s the source of its problem.
As I said above, the Eurozone’s monetary policy is not conducted at the same level as fiscal policy, which leads to some huge problems and is why some of us thought the Euro was a bad idea in the first place.
Over the life of the Euro, and to a large extent even the EMS before that, monetary policy has effectively been set by the Germans in a way that is appropriate to the German economy. This meant that before 2008, interest rates were too low in the periphery countries like Spain and Italy. This was the primary fuel for the Spanish housing bubble. Had the Spanish government been in control of its own monetary policy, the set of events we saw would likely have been very different.
With the financial crisis, monetary policy for the periphery went from too loose to too tight almost overnight. All of the debt (private debt rather than public in the case of Spain) that had accumulated so fast was suddenly impossible to service.
What has happened is that we have found out that when monetary and fiscal policy aren’t coordinated, mountains of private debt can quickly turn into a sovereign debt problem. While the Spanish government didn’t run deficits prior to the crisis, it was forced to do so in order to prop up the economy and the banking sector when things went belly up.
We’re looking at the results.
Rome Again
Funny, I heard Mitt Romney say something similar about the U.S. housing market recently, and he got raked over the coals for it.
Gotcha! :P
J. Michael Neal
@The Moar You Know:
I’d have more sympathy for them if it weren’t their refusal to pay their taxes that was the primary cause of the problem. While I think that immediate default is a better (or at least less horrifyingly bad) option for the Greeks than stringing this out, the pain is largely self-inflicted. Yeah, monetary policy wasn’t ever conducted properly for them, either, but pretty much the whole country engaged in a conspiracy to exacerbate the problem. It’s been known for decades that the government was falsifying its numbers, and the Greeks kept reelecting them anyway.
Of course, I have pretty much the same level of sympathy for the banks that the Greeks are in hock to. The two sides of those exchanges deserve each other. I just wish the rest of us weren’t also in the boat that they’ve been shooting holes in.
Marginalized for stating documented facts
“Reckless adventurism.” “The fast track to default.” “Loss of credibility.”
Sounds like Obama’s America to me.
This grafitti pretty much sums it up.
freddie
Oohhh!, Paul Ryan let loose some talking points from RNC T.P.’s to his constituency, the people who voted for him. Lets go into a lather…..boring.