Greece pulling out of the euro?

[bigbadwolf]

New article in Der Spiegel. This suggests all kinds of consequences -- for the Eurozone, for world financial markets, for exchange controls (Greece will almost certainly have to impose such controls if it reintroduces the drachma).

 

[Andy D.]

They would be silly to do it. What Greece needs is to put the safe guards in place to prevent this from happening again, and try and make the best of a bad situation until they turn their economy around.

 

[DominiConnor]

There is a considerable amount of brinkmanship here.

German voters are not very impressed with Greece which has chosen not to sort its economy out for the last 30 years.
So Merkel has to somehow placate them.

When the Greek Communist party seem to be the one with one of the most rational positions, you are screwed.
Somehow Greeks seem under the impression that their economic failure is someone else's fault, even though they are in a democracy and could have chosen leaders who were smarter than Sarah Palin, understood economics better than Jimmy Carter, were less corrupt than Putin and were tougher than Kermit the Frog.

They chose not to do so, and get violent with those who suggest that they might like to work for a living, so the Greek government puts out this idea to placate them and to scare Merkel.

For some demented reason Greece is treated like sovereign country rather than a spoiled child and they could leave at any time.
But the day they do, their German sugar daddies stop paying the bills.
That would be horrible for German (and other EU) banks, but the key problem is that as an EU state it's citizens can simply leave and go somewhere that runs itself better, like Italy. Again, when Italy seen as less badly run than your home state, you are in trouble.

Greece simply cannot afford its current level of spending unless it can borrow, and if it defaults then that is effectively impossible for some years. They'd have to lay off millions from its grotesquely bloated civil service, which will basically cease to function through loss of (the few) useful staff and the inevitable strikes.

Almost inevitably that leads to a vicious circle of deflation and their currency would take on Weimar levels of inflation before it collapsed.
The Greek police aren't the most competent at the best of times, and these won't be, armed civil disorder would seem inevitable.

So Greeks will leave., wouldn't you ?

There is the Scottish solution of course.

Britain is a currency union, so old that most English people have forgotten that it bought Scotland from the Scottish after they screwed up their economy big time. Although England and Scotland had been at war for since there was an England and Scotland (and arguably since before the Romans), economic necessity drove Scotland into England warm embrace.

Greece has not shown that it can exercise sovereignty competently, it is a gun in the hand of a drunk teenager.

We need to disarm it.
Scotland lost control of its currency to London, and today has a pretend government which gets an allowance from the grown ups in London. It gets to play with education, snow clearing (done badly), and health, but dangerous toys like defence are kept out of its reach.
Also, at any time if it does not behave these can be taken away, as happened with Northern Ireland when it's various factions of Christian started murdering people at an unacceptable rate.

That can be adapted for Greece. Let it continue to mismanage education, run a 3rd rate health system, repair minor roads and repair ancient monuments, and let grown ups from other states do the rest.

 

[Andy D.]

Britain is a currency union, so old that most English people have forgotten that it bought Scotland from the Scottish after they screwed up their economy big time.

Dominic - Well whilst the Darien project may have brought England and Scotland together, Salmond is intent on taking it apart.
Frankly I wish the Scots all the best and think they should go it alone now. I'm sure they will be perfectly fine running their own economy, and will no doubt get along just fine in the EU as another small state.

England would be sensible to dissolve the Union, get reforms underway over governance, and maybe try and spear-head a reform movement in the EU. In my opinion getting rid of the Unionist and the nepotistic establishment (both Left and Right) would be a boon.
The Tories, Labour, and their cheerleaders, whether they be Guardian or Telegraph have had their chance and not done an especially great job.
Time for a change.

 

[bigbadwolf]

Pertinent article at Bloomberg today:

Greece needs to slice more out of the budget, the European Commission said on May 13 after forecasting a deficit of 9.5 percent of gross domestic product in 2011, above the 7.4 percent target set when Greece was bailed out last year.

Greece’s debt will balloon to 157.7 percent of GDP in 2011 while the economy slumps for the third year, the forecasts showed, fueling doubts whether the country will generate enough growth to pay its bills.

Eighty-five percent of international investors surveyed by Bloomberg last week said Greece will probably default on its debt, with majorities predicting the same fate for Ireland and Portugal.

Club Med will leave the Eurozone (but not the EU). The bailouts are just cosmetic measures to keep intact an unsustainable status quo. The German voter knows this. The Eurozone will be roughly Mittel Europa eventually.

 

[bob]

That can be adapted for Greece. Let it continue to mismanage education, run a 3rd rate health system, repair minor roads and repair ancient monuments, and let grown ups from other states do the rest.

Yes, as I've said elsewhere on this forum on essentially the same topic, this I think is what the fiscal consolidation process looks like for the EU: The core gradually gains all real fiscal control over the periphery through an extended debt crisis. I think memories of two continental European wars keep this process from escalating into violence, although it could get to look a lot worse if the talk of leaving the Euro or defaulting shows signs of becoming more than that.

At some point, the smart thing is for the core or ECB to basically acquire periphery debt and issue either EU consolidated debt or core debt to finance the purchase. Given that they're paying anyway, why in the world would they pay Greek / Portugese / Irish financing rates rather than their own? With an extension of the IMF vehicle or ECB liquidity operations they could essentially forgive the debt privately in return for far-reaching concessions.

I expect the status quo to continue for a while, though, since in essence the insane periphery yields offer a back-door way for the core to deliver money directly to their big banks to help shore up capital against losses on bad assets. (The process of monetization in the US is accomplishing essentially this same goal by different means.) One big difference in the EU case is that it looks like they will require the banks to hold a lot of this bailout money as regulatory capital, whereas in the US the banks will be much freer to deploy it. (Either to grow the economy, if you're an optimist, or leverage it to the moon and blow up into another crisis that requires another bailout, if you're a pessimist.)

 

[bigbadwolf]

A piece at Channel 4 News:

It is the EU ministers and officials beginning to turn the tanker around on their hitherto dogged insistence that all EU sovereign debts will be honoured before 2013. Their wriggle room on this insistence, is that reprofiling might be agreed voluntarily with creditors rather than coercively applied.

If reprofiling sounds like a slightly weaselly made-up word, well that’s about right.

There are formal definitions which revolve around extending out bond maturities by a few years. In this instance it appears that the EU wants to perform minor surgery on Greece’s outstanding debts, but wants to fall short of a “credit event” which enables holders of Credit Default Swaps to cash in their bets, and allows them to say they are keeping to their no default promise made at the Deauville summit.

What a timid and craven lot, playing with words and playing with half-measures. At some stage they have to bite the bullet. The status quo of the last ten years is dead, is a zombie.

Off topic, but if this account is at all reliable, it looks like Greek civil society is beginning to unravel:

"It has been less than 12 months since this crisis began, but little stories that illustrate the change keep bubbling up," Kouki says. "The city full of homeless people looking for food in dustbins; friends fired without compensation, or accepting wage cuts; police officers beating up citizens who protest, schools and hospitals shutting; teachers and doctors losing their jobs; journalists censored; trade unionists persecuted; racist attacks downtown."

The government has been unable to convince the public as well as its lenders that the structural adjustment plan implemented for more than a year now is succeeding in dragging the economy out of the crisis.

According to official figures, the number of unemployed is climbing every month - it is currently 15.4 percent.

This is the reason the "austerity measures" are unpalatable, and why Greece can't pay, won't pay.

 

[ChrisN]

Would someone like to clear a few things up for me?

First of all let me say that I do agree with the following:

1) Greece has been unable to control its finances.
2) The corruption is big in Greece but this is no news. It has been going like that for at least 20 years.

Now my questions are the following:

1) Where has the EU been for so long when Greece's debt was growing year after year? Why did they expect for Greece to reach the point of no return before they intervened?

2) Greece, due to its debt, was reducing wages, reducing pensions, etc so it could cope with repayments. At the same time, and as the situation was getting worse, Greece was getting downgraded by the rating agencies almost every week, therefore the interest rates on loans were going up (correct me if I am wrong)

Now the EU (or shall I say Merkel) wants to lend money to Greece so Greece can repay the original loans and at the same time reduce the wages, pensions, cut budgets even more. How is Greece supposed to get on its feet and stabilise and grow if the repayments (mostly due to the out-of-proportion interest rates it is getting charged) are like 80% of the loans? How is that going to help Greece? I can only see it as controlled bankruptcy.

Greece is pushed to get a loan at ridiculous rates to repay old loans but effectively from the loans the end position is for Greece to owe more, since the money left after the repayment is so little that Greece will need to borrow more. And the cycle continues.

As you may have understood I am Greek. However I am not arguying here, I just want to understand a bit better what has happened and how is EU safeguarding its members before the crisis and how is it helping during a crisis. To be honest we were far better before Euro, since nothing was so expensive in Greece.

And as Dominic said, yes Greek would leave and I did leave Greece (before the crisis though) but I won't go back now that is in such a bad state. As far as I can see, Greece is in a lot worse state than before the IMF stepped in.

 

[bigbadwolf]

1) Where has the EU been for so long when Greece's debt was growing year after year? Why did they expect for Greece to reach the point of no return before they intervened?

It's a case of "see no evil, hear no evil, speak no evil." While the property asset-bubble continued, with low interest rates, the German, French and British bankers were content. They turned a blind eye towards Greek corruption (which has been going for as long as I can remember) and Greek tax evasion. And towards declining Greek competitiveness, as being yoked to the euro coupled with high domestic inflation meant. And towards high budget deficits. All these things are linked, by the way. In the old days, the Greek government coped by letting the drachma slide against other currencies as it engaged in corruption, winked at tax evasion, and paid for unaffordable public programs and high wage increases. Since joining the euro, the budget and current account deficits have been paid for by an influx of euro loans from North European banks. In turn, by spending more than they were producing, Club Med countries like Greece, Spain, Portugal, and even Italy have kept North European factories humming. With the implosion of the asset bubble, all this has come a cropper.

Now the EU (or shall I say Merkel) wants to lend money to Greece so Greece can repay the original loans and at the same time reduce the wages, pensions, cut budgets even more. How is Greece supposed to get on its feet and stabilise and grow if the repayments (mostly due to the out-of-proportion interest rates it is getting charged) are like 80% of the loans? How is that going to help Greece? I can only see it as controlled bankruptcy.

As I've said before, either Greece has to leave the Eurozone and/or the creditors have to take a massive "haircut." The present status quo, where Northern European banks lend unplayable money to Club Med, which in turn racks up current account deficits with Northern Europe, is unsustainable.

Greece is pushed to get a loan at ridiculous rates to repay old loans but effectively from the loans the end position is for Greece to owe more, since the money left after the repayment is so little that Greece will need to borrow more. And the cycle continues.

It's a loan shark's wet dream. But now the bankers are asking for their pound of flesh. And the sentiment on the Greek streets is turning very ugly.

 

[ChrisN]

Totally agree. And as you mentioned, I am 29 years old and tax evasion and corruption has been going on easily since before I was born!

Thanks for taking the time to reply mate!

 

[ChrisN]

Would you agree though that something must have been done earlier?

I am the first one to say that Greece is on the fault, but even if it was treated as a spoiled child (like Dominic set it), how many times will you let the damn child fall on his face? Help it (or make it) see better the next time...

Well... that's my view anyway!

 

[bigbadwolf]

Would you agree though that something must have been done earlier?

Hindsight is always 20/20. In my opinion, Club Med shouldn't have been allowed into the Eurozone. Greece, for example, never fulfilled entry conditions but was allowed in with a nod and a wink.

 

[ChrisN]

+ 1 on that. But since they did accepted it into the Eurozone, they should have done more to protect not only Greece but the Eurozone as a whole.

 

[bigbadwolf]

+ 1 on that. But since they did accepted it into the Eurozone, they should have done more to protect not only Greece but the Eurozone as a whole.

The Eurozone was and is a half-baked idea. To work, it would probably need a federal structure like the US, with one central bank, and the ability to (centrally) tax and apportion funds. In my exceedingly humble opinion this is the only way this sort of currency union could have worked. It was an elite-driven project: North European bankers in cahoots with Southern European politicians and tax-evading and money-laundering rich. The average German has never really felt any bond with the average Greek and the average Finn has felt no affinity with the average Portuguese. As has now become clear. So the German government want the Greeks to embrace austerity -- which will mean violent demos in Greek streets and a testing of the legitimacy of the Greek government. And the Greek government would prefer more no-string loans -- which will mean anger and resentment in German streets. There's no good way out of this -- except for the bankers to take a haircut. Meanwhile (as I see it) the timorous and diffident EU bureaucrats and central bankers, who jump at their own shadows, timidly discuss half-measures and play with semantics, trying to stave off the inevitable, trying to buy time (but for what?).

 

[Andy D.]

ChrisN - From my last experience of being in Greece, there are a number of areas that the government should be targeting.

Walk down a street in any of the larger tourist areas like Kos for example, and check out many of the shops that cater to tourists. Here you will see myriad pirated goods, Oakley sunglasses, Burberry aftershave and so on and so forth.

There is a black market in pirated goods, that is very obviously not only going untaxed, but I presume thoroughly illegal. If shops in say the UK, Germany, Sweden etc. were engaging in similar, they would be closed down pretty quickly.
If I cast my mind back about 10 years ago, I remember seeing some street vendors in England selling pirated playstation games on the street - in a very short amount of time the cops were all over them.

The whole tax evasion, corruption, piracy etc. has to be targeted by the government and knocked on the head. It's damaging to the Greek economy and to businesses with legit goods who want to set up shop in Greece.

 

[ChrisN]

I totally agree. Tax evasion and corruption in Greece are in ridiculous levels.

However no matter the degree that the above are eliminated, there needs to be some help from the outside, i.e. the interest rates need to go down, so the money borrowed are not spent on repaying the interest., etc. You get what I mean...

Having said that, it doesn't mean that the corruption and tax evasion do not need to be addressed. That should be a priority!!!

 

[bigbadwolf]

Insightful essay by Martin Feldstein (Harvard prof, Reagan advisor):

The Greek government, the European Commission, and the International Monetary Fund are all denying what markets perceive clearly: Greece will eventually default on its debts to its private and public creditors. The politicians prefer to postpone the inevitable by putting public money where private money will no longer go, because doing so allows creditors to maintain the fiction that the accounting value of the Greek bonds that they hold need not be reduced. That, in turn, avoids triggering requirements of more bank capital.

But, even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels. That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming.