Greeks bearing gifts

[peterbirks]

A very interesting article highlighted by William Whyte on Facebook this morning at http://baselinescenario.com/2010/03/11/the-coming-greek-debt-bubble/
which kind of nails the situation perfectly.

For those of you too lazy to actually read it, the general thrust of the article is that
(a) Greece is in desperate trouble,
(b) the "solutions" being offered are the equivalent of taking out another credit card to pay off the debt on your current credit card,
(c) (although the article kind of hedges itself later on in the article) a disaster is inevitable because political realities make impossible the solutions needed to prevent it.

It's this last point which is the most telling, because it indicates that, as usual, we are asking the wrong question. At the moment the question is "how do we solve the Greek debt problem"? This could, if you wish, be classed "how do we solve the western world debt problem?" -- the only difference being that one is a problem that can be put off a few more years longer than can the Greek problem.

So, lots of economists come up with "solutions", and politicians nod their heads and say "absolutely", and then go away and do something else, something that won't cause political collapse.

Some of the numbers pointed out by Baseline Scenario are frightening, and show how unsustainable the situation is. By the end of 2011 Greece's debt will be about 150% of GDP. Should Greek debt rates rise to 10% (a perfectly reasonable level, given the state of the economy's finances), then Greece would need to send 12% of GDP abroad every year after 2012.

That number compares with the following:
(a) France compelled Germany to repatriate 2.4% of its GNP from 1925 to 1932;
(b) After the Latin American crisis of the early 1980s, the countries concerned had to transfer 3.5% of GDP.

Both requirements were unsustainable and both led to defaults. So what chance on earth has a country got of sedning more than 10% of its GDP abroad, just to service its debt?

Absolutely none.

The political "solution" (see credit card analogy, above) is to say that the current talks with Greece have led to significant progress, so, yes, we should buy newly issued Greek bonds. Here a direct quote is necessary, because I can't see how anyone could improve on it:

The French and Germans are apparently actually encouraging banks, pension funds, and individuals to buy these bonds – despite the fact senior politicians must surely know this is a Ponzi scheme, i.e., people can get out of Greek bonds only to the extent that new investors come in. At best, this does nothing more than postpone the crisis – in the business, it is known as “kicking the can down the road.” At worst, it encourages less informed people (including perhaps pension funds) to buy bonds as smarter people (and big banks, surely) take the opportunity to exit.

Quite.

At this point the writer seems to lose his bottle, and come up with "what needs to be done". Since this entails not a €20bn financing plan, but a €180bn financing plan, he might as well say "we should invent a perpetual motion machine" or come up with Percy's solution to Blackadder's debt problem in Blackadder II. "I shall work out how to turn lead into gold", he said. Nice idea, but, sorry mate, it ain't gonna happen.

So, the question that we should be asking is "what shall we do when the whole thing blows up?"

But here things get problematic, even for economists. It's actually a tougher question than the "how do we stop it blowing up?" question. For the latter has lots of answers that would work, but none which would be politically feasible. The problem with with the "what shall we do when it blows up?" question is, well, we don't know exactly how it's going to blow up, or when it's going to blow up.

So, what do we know?

First, that Greece will default. This is not as much "the sky is falling" as people think. It won't be pleasant, but we have a relatively modern precedent in the Argentinian default. It will mean that a lot of pension funds abroad will suffer, but the pain will be dispersed. All of us with pension "promises" will find them a bit less likely to be fulfilled. But, since these promises aren't going to be fulfilled anyway, it's a marginal rather than a catastrophic addition.

Second, that Greece will probably cease to be a democracy. This could lead to a domino effect of non-democratization that will last 30 years or more. Countries with little democratic tradition begin to get parties that call for "a strong leader". Once again, this won't be pleasant, and once again we have precedent in South America (Chile, Argentina).

Third, that the western attitude of gung-ho capitlism solving all problems through the wonders of the market is, well, dead. We will see a significant change in the "consensus", away from free-marketeering and towards significantly stronger controls. This, inevitably, will lead to throwing out the baby with the bathwater, so 30 or so years after that, when I shall thankfully be dead and gone, the pendulum towards the free market will begin again.

The great irony (and horror) of this, is that the French will have won. A system that was attacked from just about everywhere from the mid 1990s onwards, when the "Anglo-Saxon" market model was touted as the only way forward, yes, that system of government meddling, will have proved to be the right one. Not because at the time it was for the best, but because it managed to prevent excesses occurring that led to greater disasters later on. The only farce here is that the French are also encouraging the current (non) solution to the Greek problem. While they can enforce their own answers at home, they can't do it abroad.

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Comments

[bryangb.livejournal.com]

I like the line about Ponzi schemes. But then that's banking and government finance all over, isn't it? We have bought and sold our grandchildren's labour, never mind our children's, and the only way any of it can ever be paid for is by forcing succeeding generations to join in with the fraud.

timeo danaos et dona ferentes

[real-aardvark.livejournal.com]

You might want to rethink that french thing.

The logical thing for Germany (opps, the EU) to do would be to do some sort of quantitative easing in respect of Greek bonds. Yes, that would mean printing money and buying a helicopter or two. But, the thing is, it's a tiny amount of money by EU bonds standards, and it would drop the yield curve by ... well, I have no clue. Probably enough to make restructuring of Greek debt worthwhile.

Otherwise, say goodbye to the Euro. I think I was betting on this at the end of 2012. I think you were suggesting that the problems would occur around 2014/2015.

Politically, however, it won't happen; not least because the German constitution prohibits it.

Incidentally, there will be a "French bubble." They're insane. It's only a matter of time before the markets catch up with this fact.

Timeo Danaos, revisited

[real-aardvark.livejournal.com]

I could be sarky and point out that Greece has democratic traditions dating back twenty five centuries or so (and don't try quoting Sparta back at me). I could be even sarkier and point out that fifth century Athens was quite keen on strong leaders (Solon, Pericles, etc).

But, essentially, you are absolutely correct in your premise. I'd argue that you're wrong in your one-size-fits-all analysis (Greece is most definitely not equivalent to Latin America), and I'd argue that Greece is more likely to descend into anarchy rather than dictatorship, but perhaps that's besides the point.

There are two points here that I feel should be made, specific to the subject under discussion:

(1) A large part of the problem in Greece is due to the swollen and entirely non-transparent military budget. (And yes, I'm well aware of the fact that this was part of the deal to get rid of the Colonels. It's been thirty years. Thirty years is a long time in geopolitical history.) I don't care whether they default or not. This problem has to be addressed and fixed, asap. I have yet to see any EU musings on this point.
(2) Assuming your analysis, and assuming that the tenth member state descends into military/fascist dictatorship, what on earth are the EU and the ECB going to do about that? I look forwards to the German Constitutional Court explaining that one away. "We have both kinds of government here -- democracy, and dictatorship!"

There's actually a third point, to do with your/William's link. If, let's say, 50% of Greek sovereign debt is owned by French and German citizens and/or fundholders, it doesn't really make a lot of sense, either to Sarkozy or to Merkel, to let the bloody place slide into default.

There are no easy answers. There may, indeed, be no answers. But, as you say, it's about time hoi en telei started asking the correct questions.

[jiggery-pokery.livejournal.com]

For those of you too lazy to actually read it, the general thrust of the article is that
(a) Greece is in desperate trouble,
(b) the "solutions" being offered are the equivalent of taking out another credit card to pay off the debt on your current credit card

The terribly belated comment that I am about to make is principally to check my own understanding.

I believe that the situation in practice is comparable to taking out a credit card with a relatively reasonable interest rate, offered by the Bank of Euroland, to pay off the accumulated debt from credit cards at relatively silly interest rates which were the only ones for which the Greeks were accepted.

This may well prove to be too little too late, but surely it's a way of attempting to decrease the damage to some extent and actually bring about the prospect of Eurozone neighbours helping each other out in practice.

[peterbirks.livejournal.com]

Roughly see today's post, Chris. Yes, the interest rate is lower (the price paid being that the lender has more control over your fiscal policy). Your last sentence in the key, and I address this in the post of May 18th (today).

PJ