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Greece and the continuing Eurozone fiscal crisis.
Saint Madness
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Registered User regular
This has been mentioned in a few threads but considering the potential fallout from this crisis I think it deserves it's own thread.
There are currently 3 Eurozone countries which are wards of the IMF and European Union.
Portugal
In March of this year, the Portuguese minority government attempted to pass a range of austerity measures through its parliament but was defeated at the voting stage, the Prime Minister subsequently resigned but remained on as caretaker until elections were held in May.
However in April, faced with soaring bond yields, the caretaker government called on the EU and IMF for financial assistance.
They are getting €78bn in total.
Ireland
Hey that's me!
Ireland went through a very large real estate bubble during which our construction sector borrowed huge sums of money from our banks in order to build vast numbers of houses.
On 29th September 2008, shortly after the collapse of Lehman Brothers it became apparent that the Irish banking system was in serious trouble. The Prime Minister and Finance Minister decided to issue a blanket bank guarantee, without advising our own Central Bank, the ECB or the EU.
That decision has cost us €70bn so far. The collapse of our construction industry in the aftermath of the bubble bursting, along with austerity measures imposed by the government to try and reign in our budget deficit has sent unemployment to over 14%.
In November 2010, Ireland was bailed out by the EU & IMF to the tune of €85bn. We are supposed to return to the private bond markets in 2013.
Finally we get to the country currently dominating global financial news.
Greece
In 2009 George Papandreou of the centre-left PASOK party became the Prime Minister of Greece.
He revealed that Greece's budget defecit was not the 3.7% of GDP previously stated but 12.5%. It went to 15.4% that November.
In May 2010 the EU and IMF assembled a €110bn bailout package for Greece which was conditional on privatisation of State assets and austerity measures.
However, Greece has missed nearly all the targets set for it by the EU & IMF and it is becoming increasingly apparent that it will not be able to return to the private bond markets to finance itself as was originally planned.
Papandreou is facing revolt within his own party over the reforms he is attempting to bring in, the EU & IMF want the Greek oppossition parties to consent to the austerity measures as well, which has led to a political crisis to accompany the fiscal one. Mass protests are sweeping the country.
The EU is doing what it does best in a crises, going to complete shit with every country out for itself.
At the time of this writing the EU has agreed "in principal" to continue funding Greece, it needs €12bn before the middle of July or it starts defaulting.
Here are a few charts from Der Spiegel which lay out the raw data:
Der Spiegel and The Economist both provide the best reading for lay people like myself on this situation.
I will try to add to the OP a bit.
There are currently 3 Eurozone countries which are wards of the IMF and European Union.
Portugal
In March of this year, the Portuguese minority government attempted to pass a range of austerity measures through its parliament but was defeated at the voting stage, the Prime Minister subsequently resigned but remained on as caretaker until elections were held in May.
However in April, faced with soaring bond yields, the caretaker government called on the EU and IMF for financial assistance.
They are getting €78bn in total.
Ireland
Hey that's me!
Ireland went through a very large real estate bubble during which our construction sector borrowed huge sums of money from our banks in order to build vast numbers of houses.
On 29th September 2008, shortly after the collapse of Lehman Brothers it became apparent that the Irish banking system was in serious trouble. The Prime Minister and Finance Minister decided to issue a blanket bank guarantee, without advising our own Central Bank, the ECB or the EU.
That decision has cost us €70bn so far. The collapse of our construction industry in the aftermath of the bubble bursting, along with austerity measures imposed by the government to try and reign in our budget deficit has sent unemployment to over 14%.
In November 2010, Ireland was bailed out by the EU & IMF to the tune of €85bn. We are supposed to return to the private bond markets in 2013.
Finally we get to the country currently dominating global financial news.
Greece
In 2009 George Papandreou of the centre-left PASOK party became the Prime Minister of Greece.
He revealed that Greece's budget defecit was not the 3.7% of GDP previously stated but 12.5%. It went to 15.4% that November.
In May 2010 the EU and IMF assembled a €110bn bailout package for Greece which was conditional on privatisation of State assets and austerity measures.
However, Greece has missed nearly all the targets set for it by the EU & IMF and it is becoming increasingly apparent that it will not be able to return to the private bond markets to finance itself as was originally planned.
Papandreou is facing revolt within his own party over the reforms he is attempting to bring in, the EU & IMF want the Greek oppossition parties to consent to the austerity measures as well, which has led to a political crisis to accompany the fiscal one. Mass protests are sweeping the country.
The EU is doing what it does best in a crises, going to complete shit with every country out for itself.
At the time of this writing the EU has agreed "in principal" to continue funding Greece, it needs €12bn before the middle of July or it starts defaulting.
Here are a few charts from Der Spiegel which lay out the raw data:
Der Spiegel and The Economist both provide the best reading for lay people like myself on this situation.
I will try to add to the OP a bit.
Saint Madness on
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The way I see it, Greece is screwed, even if its debt was suddenly zero it still has huge problems with protectionism, corruption and tax evasion.
It's a real shame to see an honest man like George Papandreou get steamrolled by this crisis (which is mostly the fault of his own grandfather's decisions).
How far does this have to spread before the euro itself goes? Spain maybe? I think I have some deutschemarks somewhere.
To clarify, the Government is trying to pass the reforms but the EU/IMF want the Opposition to consent to them as well.
The Opposition just want to bring the Government down and return to power, if it manages that, it will most likely take the exact same decisions Papandreou is trying to take right now.
http://www.usatoday.com/money/autos/2007-10-09-auto-exec-pay_N.htm
Meanwhile, intrade is giving 30% odds that at least one country will abandon the Euro this year.
Who knows? It might also be their only chance to NOT collapse totally.
Paul Krugman argued that the last time a currency zone broke up was the Austro-Hungarian Empire. We're in really unknown territory here.
edit- this is what he actually said
Wow. That sounds really familiar.......
Doesn't it?
The IMF is getting really antsy about the whole thing turning into the second GFC in almost as many years.
It's pretty much the case where it would most likely happen in the reverse order: massive financial system collapse, and then the Greeks respond by going back on their own currency. They are in really bad shape, and the way the rest of the Eurozone and the ECB have responded leave little confidence that it will end well for Greece. Greece is in a situation where they can't reasonably pay off their loans, and all they are getting offered is more loans to try to paper over the problem and kick the can down the road.
There has been a vaguely similar situation in the past though, where Argentina had its currency pegged to the dollar for a decade but was then forced to drop the peg in the face of crisis. They had to default on their public debt and there was a massive financial meltdown, but they were able to start recovery eventually.
Edit: And on the Irish question it's a similar matter of time before they realise that their government has no money because they are paying to prop up foreign banks.
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Everyone agrees to look the other way on the Cyprus issue.
Default goes into bank runs and financial system collapse. There will be a rush for the exits on Greek debt and banks, which will cause damage in the greater Eurozone, particularly in the other European banks holding that debt. But you wouldn't have armies knocking on the door or anything like that trying to get paid back for money that isn't there.
Seriously, though? If they default on the bailout debts, they'll probably end up switching governments every few years, being unable to borrow any money or fund any development. Won't be pretty, that's for sure.
The downside includes that Portugal and Ireland may well need to be bailed out in the same fashion once bondholders see that we're willing to let sovereigns go bust. But yields are already high; I don't know how much more they'd rise. It would also be seriously unpopular in Germany and France as they'd have to pay for it all. Welcome to the transfer union.
Finally, Greece will still need to deal with the uncompetitiveness problem. Since external devaluation is off the table (common currency) that only leaves internal devaluation. So we're talking years of falling wages and prices along with the high unemployment and debt deflation bankruptcies. All the while the government would lose fiscal sovereignty to foreign nations who are dictating the bridge loan terms. It would probably help to send in a bunch of eurocrats to help straighten out the tax collection system and fight corruption. All of that would of course go over swimmingly with the Greek.
I see no alternative to the above. Leaving the Euro would result in exactly the financial disaster they're trying to avoid. And I have serious doubts that they could achieve the levels of austerity necessary to avoid default considering the size of their public sector and generally poor bureaucracy.
There's also what Iceland did: give everyone the finger and let the central bank go bankrupt and let all the foreigners watch their saving accounts go down the drain.
Sorry, brain fart.
As for Iceland, it had a commercial banking sector collapse, the central bank is still around. They're getting loans from the IMF as I recall. They also didn't have any deposit insurance, and I think they rejected the bill offering to pay foreign depositors back in a referendum.
That would be France and Germany then.
Leaving the Euro would entail all the chaos of a collapsed peg and a currency switch.
Maybe not really relevant but it was quite funny, saw in a paper the other day. There was a satellite image of a wealthier Athens suburb and it said that according to official tax documentations there should be swimming pools on 324 properties - but in reality there were swimming pools on over sixteen THOUSAND properties in the suburb.
It's just hilarious, 2% were apparently being honest.
The economist claims that both Russia and Argentina benefited from their defaults (although there was an initial contraction, they recovered nicely, and shortly). Of course, apples =/= oranges and all that, Argentina's economy was in better shape than Greece's, I believe, and Russia has that sweet sweet oil money to fall back on.
The crises occurred because the previous economic structure were unsustainable, so, yes, after a (traumatic) adjustment to a sustainable system, growth improved. The point is that adjustment can be very damaging; the costs are far from evenly distributed and there is typically no government strength to organize welfare and infrastructure and so on in a reasonable manner. So you get food shortages and looting and such.
The tax collection stuff and inability to produce accurate numbers gives the whole thing a third world aura.
Just anecdotes but it shows how separated the people are from the government and how little they care/understand about the issue.
No, really.
Prior to the Euro's launch Greece's financial health was not strong enough to meet membership requirements for the Euro. Goldman Sachs constructed a series of financial instruments with the sole purpose of allowing Greece to move debt off its balance sheet - effectively hiding it - at the cost of increased interest rates on that debt. This gave a false impression that the Greek economy was up to snuff and they were allowed in.
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Honestly, I still envisage a domino effect if Greece defaults or goes back to it's own economy. Portugal would follow suit, then Ireland (depending on how they're feeling), then possibly Spain.
The liabilities of a central bank consists of the money they have created. They neither pay interest on that money nor can money holders redeem it. Their assets consist of whatever the central bank purchases to put that money into circulation, usually government debt. So I still don't understand how a central bank could go bankrupt. Central banks aren't backed by the power of taxation. They are backed by having a magic bank account into which they can type any amount of money. Imagine you could log into your online banking and just type any amount you wanted into your account balances. How could you bankrupt?
Look how small the absolute amounts are though. I doubt we would see any bank runs or collapses among German or French banks from those amounts. They've already had to write down those holdings by over 50% anyway, so most of those losses have been realized.
FWIW, state-level central banks here borrow from the ECB; they have no authority to create more money.
The populist headlines write themselves: "We now work to 67 so that the Greek can retire at 50."
Subtitle: "And they are the ones demonstrating."
and I doubt Greeks really appreciate what default or currency switch would entail, so Greece might not fight especially hard to stay
(this is a problem of leaders signing a pact that implicitly entails fiscal and political union without selling it as such)
One not-especially-optimal possible outcome is a live demonstration of the consequences of default, in Greece, nudging the other borderline nations into action...
Printing more money.
That worked so well in 1923.
Right Germany?