Reply With QuoteRussia isn't really a good comparison on any level, unless Greece has some massive secret room full of natural resources that they've neglected to tell anyone about.
And staying on the Cross of Euro for decades doesn't?Originally Posted by DarthMasta
As others have asked, are Argentina and Russia pariahs? I'm not saying Greece flipping its creditors the bird and going on a floating drachma will lead to clouds and unicorns - it'll probably be a goddamn nightmare. But the "be a good little boy" plan is even worse. It's so bad that they're going to wind up defaulting and going off the Euro sooner or later anyway, at which point their current self-immolation will have been almost for nothing.Sure, it might allow for a country to print like mad, but Greece is not the USA, they can't print, print, print, and still have the International community to play ball with.
Russia isn't really a good comparison on any level, unless Greece has some massive secret room full of natural resources that they've neglected to tell anyone about.
Russia isn't a good comparision because Greece is apparently completely without anything it can sell for export!
I'll be damned, Tim, there's a wiki page for currency unions. With the exception of the Euro, looks like a lot of "big power, neighboring very very much small er economy countries, and probably informal" thing to me. Palestine getting listed as an informal union with both Jordan and Israel is hilarious.
I suppose the natural resources card does make Russia sui generis in terms of recent defaulters.
But again: Can Greece get out of its current situation via cooperation and austerity? "Just a few more decades of misery, hopelessness, stagnation, unemployment and civil strife, while we magically fix huge entrenched tax, corruption and economic problems, and then we'll be a prosperous Euro-state again?"
Greece isn't a dictatorship.
Last edited by Jason Townsend; 06-19-2011 at 06:54 PM.
Frankly, I think greece is turbo boned no matter what they do.
The question now is whether it's going to bring down the eu. I'm getting the feeling that the answer is yes.
Giving them more money at this point seems like it's just throwing good money after bad.
Well, "bringing down the EU" is far too melodramatic. As in the institutions somehow vanish? The practical worse case scenarios are a contraction of its institutions and/or of the Eurozone's memberships.
European economies may have hard times ahead as a result of all of this, but that's more "bringing down Europe's economy" than bringing down the EU as an institution.
If all the EU can offer Greece is to max out on the next credit card (and that's pretty much what loan after loan is), then eventually, the people will vote for a government that will pull out of the Euro. It's only sane to try something different, once we're sure whatever we've been trying isn't going to work.
And I do think this crisis might bring down the EU. Not just the economy, but the institution itself. It's hard to keep the pretense of a Union going when very clearly there isn't one. When the public opinion on each country is very much against other countries in the Union. And getting worse.
Like with my previous question to you: Do you have anything to back up that claim?
According to EU surveys, support for the EU has fallen since the crisis, but not dramatically so.
Support in 2008 was: 48% positive, 35% neutral, and 15% negative.
Support in 2010 was 38% positive, 40% neutral, and 20% negative.
So only an increase in negative views from 15 to 20%. Not exactly "the end of the union" is it?
Until we have mainstream parties going with the "Get out of the EU now!" card, I won't really have anything to back my opinion on. :D
I hope I'm wrong. I'm a federalist, and I think the EU is a worthwhile project, and probably the only shot for Europe to remain relevant in a world of ever larger entities.
As for the no monetary union has ever worked, seems I was remembering it wrong (last time I looked at the subject was when the EMU was starting).
Monetary Unions
So, can Greece get out of the hole?
As someone living in a country that's apparently following a similar script, I'm very much interested in what's going on there. Did the government do the "right" thing? Did it try to solve the issues affecting the Greek country? Or was it all a lipstick on a pig situation, and the government hasn't really tried to fix things?
The way I see it, they didn't really have any choice at this moment. Until they can pay their own expenses without borrowing, they can't avoid cuts. Either they make the cuts that the EU demands, or they are forced to make the same cuts (or worse) because they won't have enough money. Once they get their spending down to the point where they can afford to pay it through their own tax revenue alone, then they have a real choice.
The CW among the economists I follow is that Greece cannot pay back its debt, regardless of how much austerity they impose. Some form of default or restructuring is inevitable.
There are a couple of wrinkles:
1) The country's bondholders throughout the rest of the EU aren't really interested in restructuring. They don't want to admit they are holding onto a bunch of bad debt.
2) Restructuring would have to be done in a way to prevent a default. There are a lot of credit default swaps on Greek debt that would be triggered in the event of a default. This would probably trigger another financial crisis in Europe.
I see two possible long-term outcomes:
- Europe pulls its collective head out of its ass with regards to fiscal union and organizes a true bailout. This would probably look something like restructuring plus straight up fiscal transfers to help Greece get out from under its debt load.
- Greece pulls out of the Euro, defaults, triggers a European crisis, ends up as a semi-pariah for a decade in international financial markets while it figures its shit out.
Lately I have read up on the issue a bit, here's my understanding:
The problem with the first outcome is that it would be a free lunch for Greece and a perverse incentive for everybody else. They fucked up their debt, and now that they can't repay the EU walks in and saves them. Why would countries who were fiscally responsible (Germany and to a lesser degree France) accept that, and what message would it send to countries like Italy, with an ever bigger debt problem and a ruling elite clearly unwilling to take any kind of austerity measure and lose consensus if at all possible?
The problem with the second outcome is that it may really lead to the dissolution of the EU, because if Greek fails other countries - Italy - will find themselves in a very difficult situation. Italy can narrowly manage its 120% of annual PIL debt, but even a slight increase in the interests asked for new debt and renewals of the old one could be the tipping point. Until now the interest rates have been relatively low because of the implicit guarantee of Italy being in the Eurozone. If suddenly it's made evident that being there is no guarantee at all, it's not unlikely the risk on Italian debt will be negatively re-evaluated, and bigger interests will be asked, that could easily lead to a default. And if Italy goes down it's very likely Spain and maybe Portugal will follow. At that point the Euro will be a discredited currency, Germany will want out, and the EU will be weakened if not destroyed. Also good luck convincing European citizen an unified currency is a good idea in the next 100 years, if the Euro fails spectacularly.
So, uhm, personally I hope Greek citizens will take it for the team and avoid a populist default, because their situation would still be completely fucked up, maybe even worse on the long run. So since it's basically their fault they got into it, they could avoid bringing down the whole fucking EU with them. This would at least give Italy and Spain some time to pull their head out of their asses and take some moderate austerity measures while they are still in time.
Short reply since I'm on my phone: either the EU is a union or it isn't. If it truly isn't (as seems to be the case), expecting Greece to take it on the chin to preserve appearances is kind of ridiculous.
the EU is not a union yet, it's in the process of becoming one.
Greece shouldn't take it on the chin to preserve appearances, but because it's really its own fault (the default would have happened even if they weren't in the Eurozone) and because it's not like the alternative is clearly better for them, especially if you think on the long run. Sure, a default may be less traumatic for the next few years or a decade, but then they find themselves a small country, with low productivity and education levels, with a weak currency, with no natural resources, with the EU (if it survives) understandably not too eager to let them in again any time soon, and they'll have to make massive cuts anyway.
And I don't think the EU should just expect them to act responsibly, I mean, give them some incentive, help and all, but still they should be expected to suffer through some hard austerity measures, 'cause other countries in a similar situation should have very strong incentives to drag themselves out of it before the rest of the EU has to bail them out.
There's not a lot of evidence countries who default suffer significant long-term consequences, compared to the alternatives available; see Argentina and Russia. Neither is a shining example of prosperity, but defaulting worked out surprisingly well.
Not quite apples to apples, both of those countries have abundant natural resources, something Greece is lacking.
Do you have a model where that matters?
You need to be presented with a model where defaulting on a nation's debt matters?
Russia is obviously in its own category for how important oil and gas was in recovery, and to a lesser extent Argentina may have been in a better position to default than Greece; I've never seen that comparison done in detail. Still, there's no blueprint, default still seems no worse than going along with national suicide at gunpoint. They'll default anyway, there's no way extreme austerity, mass-privatization, mass-unemployment and more rigourous taxation will be sustained politically; Greece is a democracy.
The long term consequences wouldn't be limited to those of the default per se, there would be additional ones due to not being in the EU anymore.
There are important reasons why most countries wanted to get in back when the Eurozone was established, some (Italy and Greece for example) were willing to make significant sacrifices to be allowed to, and willingly adopted much needed austerity measures. The EU in general has been a very positive influence on mediterranean countries, bringing free market, social and human rights, development aids, consumer protection, incentives to maintain a degree of fiscal responsibility (not nearly enough as it has become apparent, but it was worse before). Freedom to move around, to escape a stagnant economy and seek work elsewhere; all in all the EU has been a fantastically successful institution. I don't mean to say every policy supported by the EU was good - the agricultural subsidies for example are its biggest expense and they are at best useless imo - but being out of it is like missing the last train to a full modernization and integration among the first world economies. The price will likely be very steep.
Anyway I better clarify I'm mostly out of my depth when discussing the Greek financial crisis or the future of the EU, but I try to keep myself informed because I'm a citizen and I'm quite invested in it, since I have on multiple occasions experienced the positive influence it had on my country and even on me directly.
What I'm curious about is if there's a real reason to expect having certain categories of exports to make default a more viable way to recover from a foreign-denominated debt crisis easier. Everyone acts like it's obvious, but I don't see a particularly obvious reason. Greece is apparently 60% manufacturing and 20% agriculture; [url=http://en.wikipedia.org/wiki/Economy_of_Argentina]Argentina[/url ] is apparently 55% agriculture by contrast.
"The EU acts as a forced modernization program for second-tier economies" is an interesting idea I haven't heard much on.
Last edited by Jason McCullough; 07-04-2011 at 01:57 PM.
While the worst case scenarios would be a serious blow to the EU I don't see a way for it to "fail" or completely dissolve.
Cooperation is just too beneficial for all nations involved.
Even a complete meltdown would retain certain EU frameworks simply because they are so beneficial (Schengen, trade related stuff, political cooperation on various levels).
In a worst case scenario I'm not sure Shengen would resist, but sure, a complete collapse of the EU is not likely. It's just a risk that wouldn't be negligible if countries started to default left and right - and that again is not likely but the risk is bigger if Greece opens the way.
Anyway a failure of the Euro system - or even if Greece or other countries had to exit - would be a significant blow to future European integration, which I see as very desirable.
Maybe the degree is debatable, but the tendency itself is crystal clear to me.
You guys in the US have no idea, but here it had to be the EU who came to us saying hey guises maybe having an antitrust law would be neat - and we got one. Then they kindly reminded us it was better if the regulatory agency wasn't directly dependent from the executive - and we complied. In the meanwhile they suggested reserving a legal monopoly to the state for the production, distribution, import&export of electricity, water, natural gas, telecommunications, public transportation and various other stuff wasn't maybe the best idea. Not that the government has to stay out of them, but at least allow private initiative to compete (regulated, of course, but with that I have no problem). Right now they are trying to convince us that if a civil try lasts for more than a decade and an half, that's not really access to justice in the meaning usually recognized abroad. Our customer protection law is heavily based on a minimum platform imposed by an EU directive; same for label content regulation. Basic stuff like that.
And it's not just the economy, the EU is like an insurance our government will have to keep some minimum level of decency in its action - and unfortunately it's not a moot point, sometimes it really is reassuring to know we can't fall too low while we are still in.
Really? I mean, EU law affects about 80% of its member countries' laws, and the common market is, whatever anyone might say, the most developed part of the EU by far. The desire to become part of the EU was probably the single most significant factor in moulding the Post-Soviet bloc economies into more-or-less mainstream European economies.
I lived through the Asian Financial Crisis. Which was driven by a similar dynamic (people & banks borrowing massively in a low interest rate environment, then getting hosed) They all had massive devaluations, and survived.
So do I De_Treville, so do I. Of course, in the opposite direction to you (I guess!) I'm comfortable with the EU as a customs & standards union - the common market - but there is a definite "democracy deficit" to the EU as it stands. Which is also why I strongly support EU expansion - the more cats, the harder to herd. Turkey/ Albania should certainly be in the EU long term.Anyway a failure of the Euro system - or even if Greece or other countries had to exit - would be a significant blow to future European integration, which I see as very desirable.
It's not in the opposite direction, I was focusing on the unified market side of EU integration 'cause we were discussing Greece and the possibility of its exit from the Eurozone, but I agree there is a democracy deficit and I fully support more integration of the political institutions as well. For example I think the EU Parliament slowly expanding its power and scope of action is a very positive tendency. About future expansion to other countries, sure, long term that's the direction I'd like to see. Short term only if it doesn't get us into other situations like this, 'cause the integration is still a delicate process that is best accomplished steadily but not too quickly to minimize the risk of setbacks and pitfalls.
The reason the EU doesn't want Greece to default is because of contagion risks. If it were only Greece I doubt they would have bothered to bail them out last year. The market consensus is still for a default in the next 5 years. Economically speaking Greece needs to default but Politics always trump economics.
The ESFS/IMF bailout isn't helping Greece either. Rather it's bailing out the various EU banks by allowing them to recoup the full value of their investment in Greek bonds instead of taking large losses at the current market rate. For instance right now Greek 10y are trading at 56.117 on the ask, 5y are at 55.16 and 30y are at 46.332. Another stipulation is that Greece needs to privatize state owned assets to the tune of 50 billion by 2015 which only benefits those who buy them at the bargain basement prices those will end up selling for. The bailout if it was to benefit Greece should have focused on buying bonds at the market price and allowing Greece to repurchase them at those prices when they matured, not forcing them into paying par value when they have such a large and clearly unsustainable debt. Looks like Goldman and friends win yet again. No risk all reward.
Regarding CDS on Greek bonds, the net notional is only 5 billion so it's just a drop in the bucket that would have to be paid out if the ISDA declared a credit event. If the Credit Rating Agencies were to declare a default then any public entity holding Greek bonds that were classified as hold to maturity would have to write the bonds down to the market prices under GAAP. As of right now there's currently $407 billion USD outstanding in Greek debt.
Greece announces referendum on austerity measures. Is there any way to interpret this other than: fuck you world, we're defaulting!
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