Greecing the wheels of capitalism
May. 9th, 2011 02:22 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksI'm not the greatest of fans of Wolfgang Münchau in the Financial Times, but he's written a rather perceptive piece on Greece and the eurozone's woeful response to the country's financial crisis. He was also rather spot-on about Portugal and on what he termed "economically illiterate parliamentarians of the north".
It looks as if the world and, more importantly, those economic illiterates of the north, are finally coming to realize that fudged solutions, which various European institutions have been coming up with for a couple of years now in an attempt to put off the Greek, Irish and then Portuguese crises, are not permanent. The EU has spent two years putting off the problem until another day, because that is the only way that agreement can be achieved among the various interested parties. The final, BIG, problem - that the euro can only survive if there is political federalism - has not yet even been talked about. But some of the smaller problems are reaching the point of no return.
Münchau observes (and this is one of the reasons that I am not one of his greatest fans) that
This is eurothink. There never were any easy options for dealing with Greek debt, apart from the ones which have been adopted, which consisted of not dealing with Greek debt at all – just postponing the day when one would have to face the 'real' problem.
And that 'real' problem is, quite simply, that the problem is systemic.
So, what have they discussed and decided that they can't do?
(1) Greece exits the euro:
Objection: Too risky, too complicated. No procedure in place because of the idiots who put the whole thing together in the first place assuming that if you did not make an exit possible, there would be never be a need for an exit to happen. A rather basic error on the principles of causation there.
(2) Greece haircuts the lenders:
Objection: German banks are counting Greek debt at 100% (well, all of the European banks are counting it at 100%, but it matters most in Germany), and the 'Stress Tests', laughably, allowed them so to do. A haircut would not just kill the Greek banking system (not necessarily a disaster -- the Irish banking system is effectively dead, but things are carrying on); it would also hit the ECB for about €100m and could, quite possibly, push the German banking system into an Ireland-style crisis. Much though the irony of that appeals to me, it would be fairly bad news all round. That doesn't make it the wrong decision, but it would certainly be a fairly miserable one.
(3) 'Voluntary' restructuring. Europe's last "put it off until another day" solution, and a default in all but name. The appeal of this is that it enables banks in Greece and Germany to pretend for a bit longer that eventually they will get paid and that "something will turn up" to repair Greece's systemic deficit.
Objection: The downside is that, now, this might not be enough.
There are other clever accounting tricks being thought up that are really smoke and mirrors, and my guess is that one or more of these will be adopted. Suppose, for example, you restructure Greece's debt in such a way that the Greek banks' sovereignty over senior debt is subordinated to a new "super senior" debt. This is quite a neat little trick (because the Greek banks could pretend that their creditor status remained the same, while the owners of the super senior debt could state that they came first in the queue) and I am sure the German banks would quite like this answer. Unfortunately it's a move in the direction of eurozone bonds, and German politicians most definitely do not want this (and probably couldn't sell it to the German taxpayer).
These internal differences should not come as a surprise, but to many people they do. Just look at 'Britain' and the different interests of the banks and taxpayers. If the German banks gain, the chances are that the German taxpayer loses. Politicians and banks are therefore not infrequently on opposite sides when it comes to defining "a solution".
As Münchau says nearer the end, when he gets back on track,
I think Münchau is putting it a bit strong here. This is a debt crisis. Münchau's line that the peripheral countries' sovereign debt is tiny relative to the eurozone's GDP fails to address the fact that (a) Spain hasn't yet joined that rather unelite group, (b) Italy is a pile of shit being kept together and afloat by eurozone financial juggling, and (c) that the systemic imbalances of trade are so enormous that, smallish though those debts might be at the moment, they are only going to get bigger.
But, of course, Münchau is a federalist. He WANTS more power for the Eurozone nutters and the European Commission and the European Parliament. He seems to believe that this will provide a miraculous solution to all the eurozone's problems. That, of course, is palpable bollocks. A quick look at Mississippi in the past 150 years is all you need to see that. Monetary union and political union hasn't helped Mississippi, and a union that saw Greece and Ireland become the modern equivalents of Mississippi and southern Kentucky would not make the cut. So, he's wrong in saying that it isn't a debt crisis, and, although he is right in saying that it is a political crisis, he's wrong in thinking that political union will solve it.
Münchau doesn't want to hear the "break-up of the euro" argument because a unified currency is vital to his (political) dream. But anyone who looks at it from outside the Benelux ivory tower will see that, if the choice is between one currency and a single government, or more than one currency and separate governments, there is only going to be one winner.
So it's not a question of if, but, rather "when and how"? My money would still be on some smoke-and-mirrors debt-rejugling in Greece. More interesting is the potential blocking of the Portuguese bailout by the Finns, or the refusal by Portuguese parliamentarians to accept the terms imposed. Either of these ccould lead to a situation where Portugal defaults "just like that".
The second possibility is my old favourite - Spain. Much of the Spanish banking system is structurally as fucked as was the Irish banking system. And the cause is the same -- property loans and property construction came to be too high a proportion of the entire Spanish economy. Banks are, basically, brokers, and if they balls it up on the lending side, they are in deep trouble. You then have two choices - let them go bust, or bail them out, with the second choice begging the more important question "who foots the bill?"
With Ireland the taxpayer got the worst of it. In Greece, as far as I can see, there are no taxpayers (and the exodus of Greek money is helping keep the London property market afloat) so the ECB faces a bigger problem. In Portugal there just isn't a solution in sight, but I daresay everyone is on holiday this week, so no-one will notice.
Spain, even though the problem is probably the greatest, has the advantage of having more things to fall back on. But when I look at the numbers of international companies with Spanish interests, they make depressing reading. Economic activity (and pricing) up virtually everywhere apart from Spain. Perhaps the economy could be kick-started again by paying people to knock down half-finished buildings. That could be a fun project for the ECB or its new incarnation.
++++++++++++++
It looks as if the world and, more importantly, those economic illiterates of the north, are finally coming to realize that fudged solutions, which various European institutions have been coming up with for a couple of years now in an attempt to put off the Greek, Irish and then Portuguese crises, are not permanent. The EU has spent two years putting off the problem until another day, because that is the only way that agreement can be achieved among the various interested parties. The final, BIG, problem - that the euro can only survive if there is political federalism - has not yet even been talked about. But some of the smaller problems are reaching the point of no return.
Münchau observes (and this is one of the reasons that I am not one of his greatest fans) that
"the eurozone is running out of easy options for dealing with Greek debt".
This is eurothink. There never were any easy options for dealing with Greek debt, apart from the ones which have been adopted, which consisted of not dealing with Greek debt at all – just postponing the day when one would have to face the 'real' problem.
And that 'real' problem is, quite simply, that the problem is systemic.
So, what have they discussed and decided that they can't do?
(1) Greece exits the euro:
Objection: Too risky, too complicated. No procedure in place because of the idiots who put the whole thing together in the first place assuming that if you did not make an exit possible, there would be never be a need for an exit to happen. A rather basic error on the principles of causation there.
(2) Greece haircuts the lenders:
Objection: German banks are counting Greek debt at 100% (well, all of the European banks are counting it at 100%, but it matters most in Germany), and the 'Stress Tests', laughably, allowed them so to do. A haircut would not just kill the Greek banking system (not necessarily a disaster -- the Irish banking system is effectively dead, but things are carrying on); it would also hit the ECB for about €100m and could, quite possibly, push the German banking system into an Ireland-style crisis. Much though the irony of that appeals to me, it would be fairly bad news all round. That doesn't make it the wrong decision, but it would certainly be a fairly miserable one.
(3) 'Voluntary' restructuring. Europe's last "put it off until another day" solution, and a default in all but name. The appeal of this is that it enables banks in Greece and Germany to pretend for a bit longer that eventually they will get paid and that "something will turn up" to repair Greece's systemic deficit.
Objection: The downside is that, now, this might not be enough.
There are other clever accounting tricks being thought up that are really smoke and mirrors, and my guess is that one or more of these will be adopted. Suppose, for example, you restructure Greece's debt in such a way that the Greek banks' sovereignty over senior debt is subordinated to a new "super senior" debt. This is quite a neat little trick (because the Greek banks could pretend that their creditor status remained the same, while the owners of the super senior debt could state that they came first in the queue) and I am sure the German banks would quite like this answer. Unfortunately it's a move in the direction of eurozone bonds, and German politicians most definitely do not want this (and probably couldn't sell it to the German taxpayer).
These internal differences should not come as a surprise, but to many people they do. Just look at 'Britain' and the different interests of the banks and taxpayers. If the German banks gain, the chances are that the German taxpayer loses. Politicians and banks are therefore not infrequently on opposite sides when it comes to defining "a solution".
As Münchau says nearer the end, when he gets back on track,
"Europe's political elites are afraid to tell a truth that economic historians have known forever: that a monetary union without a political union is simply not viable. This is not a debt crisis. This is a political crisis".
I think Münchau is putting it a bit strong here. This is a debt crisis. Münchau's line that the peripheral countries' sovereign debt is tiny relative to the eurozone's GDP fails to address the fact that (a) Spain hasn't yet joined that rather unelite group, (b) Italy is a pile of shit being kept together and afloat by eurozone financial juggling, and (c) that the systemic imbalances of trade are so enormous that, smallish though those debts might be at the moment, they are only going to get bigger.
But, of course, Münchau is a federalist. He WANTS more power for the Eurozone nutters and the European Commission and the European Parliament. He seems to believe that this will provide a miraculous solution to all the eurozone's problems. That, of course, is palpable bollocks. A quick look at Mississippi in the past 150 years is all you need to see that. Monetary union and political union hasn't helped Mississippi, and a union that saw Greece and Ireland become the modern equivalents of Mississippi and southern Kentucky would not make the cut. So, he's wrong in saying that it isn't a debt crisis, and, although he is right in saying that it is a political crisis, he's wrong in thinking that political union will solve it.
Münchau doesn't want to hear the "break-up of the euro" argument because a unified currency is vital to his (political) dream. But anyone who looks at it from outside the Benelux ivory tower will see that, if the choice is between one currency and a single government, or more than one currency and separate governments, there is only going to be one winner.
So it's not a question of if, but, rather "when and how"? My money would still be on some smoke-and-mirrors debt-rejugling in Greece. More interesting is the potential blocking of the Portuguese bailout by the Finns, or the refusal by Portuguese parliamentarians to accept the terms imposed. Either of these ccould lead to a situation where Portugal defaults "just like that".
The second possibility is my old favourite - Spain. Much of the Spanish banking system is structurally as fucked as was the Irish banking system. And the cause is the same -- property loans and property construction came to be too high a proportion of the entire Spanish economy. Banks are, basically, brokers, and if they balls it up on the lending side, they are in deep trouble. You then have two choices - let them go bust, or bail them out, with the second choice begging the more important question "who foots the bill?"
With Ireland the taxpayer got the worst of it. In Greece, as far as I can see, there are no taxpayers (and the exodus of Greek money is helping keep the London property market afloat) so the ECB faces a bigger problem. In Portugal there just isn't a solution in sight, but I daresay everyone is on holiday this week, so no-one will notice.
Spain, even though the problem is probably the greatest, has the advantage of having more things to fall back on. But when I look at the numbers of international companies with Spanish interests, they make depressing reading. Economic activity (and pricing) up virtually everywhere apart from Spain. Perhaps the economy could be kick-started again by paying people to knock down half-finished buildings. That could be a fun project for the ECB or its new incarnation.
++++++++++++++
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Great topic :)
Date: 2011-05-09 05:25 pm (UTC)Joan Kuree
jammer products (http://cellphone-jammers.com/)
My Name Is Bond, Greek Bond
Date: 2011-05-14 01:31 am (UTC)But I don't really understand bonds.
Here's a simple question. What on earth does one Greek government bond (bought in the last offering) have to do with another (bought in some putative Greek nonexistent future)?
To me, these are two entirely separate pieces of paper, even with gilt edges and yea a broken promise.
Or, to put it another way: why are there not two markets: one in (diseased) pre-owned Greek government bonds, guv, good runner, got a bit of work to be done, change the spark-plugs and a few bits of suspension here and there and you're good to go ... and one in (insane, only the ECB would possibly contemplate this, and even then under the rack) proposed Greek bonds.
I mean, I just don't get this.
I don't understand the market, basically. No sane human being would want to own a Greek bond at 100% of the issue price. No sane human being would want to own a Greek bond at 93.5% of the price (I forget the ECB rescue rate, but it was something like 6.5%).
In fact, as far as I can see, and you will be glad to hear that I am taking a short-cut (if not a haircut, ho ho): no sane human being would want to own a Greek bond at even 40% of the issue price.
Plus which, the wonders of compound interest are going to make that 40% less and less appealing every single goddamn day.
Apologies if you've already pointed this out.
Liked the three alternatives, btw.
... although I don't expect the Twin Towers of Benelux to like them very much.
We need a Hobbit.
Tennessee Valley Here We Come
Date: 2011-05-14 01:35 am (UTC)There are probably quite sensible ways that Spain can get around this sort of thing, but unfortunately they're still chasing up the criminal bastards who built the stuff in the first place.
Nacionalisation, por favor ... which would immediately cause a problem with Las Espanas, as opposed to Espana.
Viva Robert Johnson
Date: 2011-05-14 01:44 am (UTC)Funny how people come to the crossroads, sign a mouldy piece of paper without reading it, and sell their soul, inni'?