Marshall Auerback video
Category Archives: Greece
How Rescuing Greece Could Destroy the World
euro zone update- markets yet to discount the discounts
The issues I’ve been discussing over the last year or two while now crystallizing, remain highly problematic.
The idea of Greek default transformed from being a Greek punishment to a gift, with the pending question: ‘If Greece doesn’t have to pay, why do I?’- threatening a far more disruptive outcome that is yet to be fully discounted.
That is, should Greek bonds be formally discounted, the consequences of merely the political discussion of that question will be all it takes to trigger a financial crisis rivaling anything yet seen.
And note, also as previously discussed, that there has yet to be an actual Greek default, and that all Greek bonds have continued to mature at par, as there has yet to be an acceptable alternative.
So what are the alternatives?
1. Continue to fund Greece with terms and conditions.
2. Don’t fund Greece which forces:
a. Greece is forced to limit spending to actual tax revenues
b. Greece moves back to the drachma
And what are the ‘terms and conditions’?
Austerity is always the lead demand, which slows both the Greek economy and to some extent the euro zone in general.
Additional demands currently include discounting Greek bonds to bring down their debt to GDP ratio to ‘sustainable’ levels. However, after 8 months of negotiations, this has proven highly problematic, probably for reasons yet to be fully disclosed. And, as just discussed, there may be a growing awareness that discounting opens Pandora’s box with the politically attractive question ‘if Greece doesn’t have to pay, why do we?’
So what actually happens?
My best guess, and not with a lot of conviction, is that nothing is concluded before the coming maturity dates, and the ECB winds up writing the check to support short term Greek funding to buy more time for more inconclusive discussion. So, again as previously discussed, seems like this is the solution- death by 1,000 cuts and reluctant ECB bond buying when push comes to shove to keep it all going.
And, currently, the catastrophic risk I’d highly recommend immediately hedging is the risk that Greek bonds are formally discounted, rapidly followed by a global discussion of ‘so why should we have to pay?’ Possible immediate consequences of that discussion include a sharp spike in gold, silver, and other commodities in a flight from currency, falling equity and debt valuations, a banking crisis, and a tightening of ‘financial conditions’ in general from portfolio shifting, even as it’s fundamentally highly deflationary. And while it probably won’t last all that long, it will be long enough to seriously shake things up.
Irish want debt concession if ECB aids Greece
As previously discussed, once Greece does it, it’s compelling for everyone else to do it.
It’s the classic fallacy of composition.
When someone stands up at a football game to get a better view,
it quickly makes sense for everyone else to stand up as well.
Yes, you can say they all are better off if everyone stays seated,
but once one goes, all go.
So expect a serious shock wave to quickly depreciate all euro debt.
Irish want debt concession if ECB aids Greece
Feb 8 (Reuters) — Ireland would see any European Central Bank contribution to the restructuring of Greek debt as a precedent that would boost Dublin’s efforts to ease the burden of its own sovereign debt, the country’s finance minister said on Wednesday…
Greek options
There is probably not much voter support for returning to the drachma.
The voters would probably rather have the Germans run their finances than their own leaders.
They’ve seen past drachma financial dramas, with interest rates spiking for everyone, not just the govt, rampant inflation, and a collapsing currency as well as high unemployment.
With the euro none of that happened, so it’s not obvious the currency is the problem.
What does seem obvious to them is that their leaders are the problem.
So I expect the austerity measures to pass, as the alternative is 0 deficit spending.
And if discounts are ‘granted’ the politics quickly move towards same for the rest of the euro member nations.
Portugal Union Leader Wants Debt Renegotiation
Yes, as previously discussed, the obvious political move is to demand the same discounts as Greece.
Especially with the pending Greek ‘restructure’ and ECB check writing to support the banking system seemingly making the euro stronger and not causing inflation.
And the ‘sustainability maths’ is just about the same for all of them as well, particularly given the current slowdown.
Once the markets realize the politics are moving in that direction, all euro member nation bonds again become suspect and the crisis enters the next stage, resulting in the ECB pretty much funding everything, one way or another.
It’s just a question of how it all gets from here to there.
Portugal Union Leader Wants Debt Renegotiation
By Axel Bugge and Daniel Alvarenga
Feb 7 (Reuters) — Portugal must renegotiate its debts rather than impose harsh austerity measures to overcome its economic crisis, the head of the country’s largest trade union said on Wednesday, threatening to step up strikes if the government pushed on with cuts.
Armenio Carlos, head of the CGTP union, told Reuters Portuguese workers would take a stand against attacks on labor rights, which he said were part of the government’s sweeping economic reforms promised under a 78 billion euro ($103.29 billion) bailout.
“What we defend is the renegotiation of debts, in terms of deadlines, in terms of interest and in terms of the amount,” Carlos said in an interview, adding that the country’s bailout had made it impossible to meet its obligations.
Portugal’s debt currently equals about 105 percent of gross domestic product.
“We are being confronted with a neo-liberal attack on workers’ rights,” he added, saying the government’s recent labor reform, making it easier to hire and fire, could spark a growing wave of protests.
The union leader, a former electrician and an ex-Communist lawmaker who took over as head of the CGTP a week ago, warned that with the austerity policies demanded by the bailout, Portugal was heading down the same road to ruin as Greece.
PM RTRS – GREEK POLITICAL LEADERS’ MEETING ON BAILOUT PACKAGE POSTPONED TO WEDNESDAY–GREEK GOVT OFFICIAL ….
PM RTRS – GREEK POLITICAL LEADERS’ MEETING ON BAILOUT PACKAGE POSTPONED TO WEDNESDAY–GREEK GOVT OFFICIAL ….
Postponed again?
Who would’ve thought?
EU Leaders to Agree on Rescue Fund, Balanced Budget
No let up on the austerity demands, which are now to be legislated via balanced budget rules.
EU Leaders to Agree on Rescue Fund, Balanced Budget
Jan 29 (Reuters) — European Union leaders will sign off on a permanent rescue fund for the euro zone at a summit on Monday and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.
The summit – the 17th in two years as the EU battles to resolve its sovereign debt problems – is supposed to focus on creating jobs and growth, with leaders looking to shift the narrative away from politically unpopular budget austerity. The summit is expected to announce that up to 20 billion euros of unused funds from the EU’s 2007-2013 budget will be redirected towards job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.
But discussions over the permanent rescue fund, a new ‘fiscal treaty’ and Greece will dominate the talks.
Negotiations between the Greek government and private bondholders over the restructuring of 200 billion euros of Greek debt made progress over the weekend, but are not expected to conclude before the summit begins.
Until there is a deal between Greece and its private bondholders, EU leaders cannot move forward with a second, 130 billion euro rescue program for Athens, which they originally agreed to at a summit last October.
Instead, they will sign a treaty creating the European Stability Mechanism (ESM), a 500 billion-euro permanent bailout fund that is due to become operational in July, a year earlier than first planned. And they are likely to agree the terms of a ‘fiscal treaty’ tightening budget rules for those that sign up.
The ESM will replace the European Financial Stability Facility (EFSF), a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.
Leaders hope the ESM will boost defenses against the debt crisis, but many – including Italian premier Mario Monti, IMF chief Christine Lagarde and U.S. Treasury Secretary Timothy Geithner – say it will only do so if its resources are combined with what remains in the EFSF, creating a super-fund of 750 billion euros ($1 trillion).
The International Monetary Fund says an agreement to increase the size of the euro zone ‘firewall’ will convince others to contribute more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.
But Germany is opposed to such a step.
Chancellor Angela Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until leaders meet for their next summit in March. In the meantime, financial markets will continue to fret that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.
“There are certainly signals that Germany is willing to consider it and it is rather geared towards March from the German side,” a senior euro zone official said.
The sticking point is German public opinion which is tired of bailing out the euro zone’s financially less prudent. Instead, Merkel wants to see the EU – except Britain, which has rejected any such move – sign up to the fiscal treaty, including a balanced budget rule written into constitutions. Once that is done, the discussion about a bigger rescue fund can take place.
Japan Sees Its Public Debt Exceeding A Quadrillion Yen Next Year
THEN they’ll be the next Greece…
Japan Sees Its Public Debt Exceeding A Quadrillion Yen Next Year
Jan 26 (Bloomberg) — Japan’s Finance Ministry said the country’s public debt will probably exceed a quadrillion yen for the first time next year, adding pressure on Prime Minister Yoshihiko Noda to raise taxes to restore the nation’s finances.
Greece hopes for debt swap deal by end of week
So it could be that the creditors have agreed to swap their bonds for 30 year bonds with ‘half their face value’ but maybe also with about equal economic value, which can in theory be done if the coupon and quality of the new bonds is high enough.
But, again, seven months of negotiations shows it’s not all that easy to come to agreement, and also that for reasons probably not entirely disclosed the bond holders have substantial bargaining power.
Greece hopes for debt swap deal by end of week
Jan 26 (AP) — Greece is aiming to complete negotiations on its debt swap deal by the end of the week, the government’s spokesman said Wednesday, adding that the talks were at their “most delicate phase.” Charles Dallara, head of the Institute of International Finance will head back to Athens on Thursday for the negotiations on a bond swap, known as the Private Sector Involvement. Athens is trying to get its private creditors to swap their Greek government bonds for new ones with half their face value, thereby slicing some euro100 billion ($130 billion) off its debt. The new bonds would also push the repayment deadlines 20 to 30 years into the future.