Question on Greek Financial Crisis

[Tarek Morgen]

List of countries by external debt - Wikipedia, the free encyclopedia



my shock was so big I never analyzed the data.

that is the external debt, not the public debt which is the issue of the current crisis.

[Doktor]

that is the external debt, not the public debt which is the issue of the current crisis.

Yep, I have seen it after the first shock passed me ;)

The data there had nothing in common with other things I know.

Still, it is a serious indicator how much money will get out of the certain economy sooner or later. Actually whenever the debt becomes mature.

[snapper]

The inevitable is coming -"we're doomed". The recession will be nastier and harder because we spent money on saving the banks and then broke Governments instead of letting markets and investors have their say. I would add this to my long spiel earlier: IF the markets are to be representative of general thought then they must be further opened to the public such that we can switch investments for next to no price, otherwise it is purely the decison the bankers and investment managers.

[Doktor]

Well you are doomed, we are not. 25% public debt with 60% external debt :Dancing-Banana:

But, we are on the path ;)

[Mihais]

You realize that when Eurozone goes bust we go straight into hell. :tankie:

[Doktor]

Yes I do, but the feeling of not being in such a debt is good. Wish we were 200% in debt and Eurozone safe, but that's not the case.

[snapper]

Mihais is right - this won't stop at Euro countries - this will spread to the US and global. Even if only Europe goes back into recession then lack of exports and imports drag others in... Who does Makedonia trade with? Well lets say 100% Serbia and them, who they trade with? So lets say 100% Russia; and them? No the buck is about to stop.

[Doktor]

EU is our biggest trading partner with Germany, Italy and Greece in top 5. I know what you are saying.

[snapper]

"Italian lawmakers are poised to give final approval to a beefed-up austerity plan intended to insulate their country from the financial wildfire raging on the eurozone periphery.

The senate, the upper house of parliament, voted for the plan by 161 to 135 with three abstentions. On Friday it goes to the lower house, the chamber of deputies, where Silvio Berlusconi's conservative government has a slimmer majority.

The prime minister has turned the division into a vote of confidence, which means any of his followers considering a rebellion knows that it could bring down his government. The opposition is due to vote against the package, but in the national interest has agreed not to present amendments.

President Giorgio Napolitano called the rapid passage of the four-year budget a "miracle". Berlusconi's finance minister, Giulio Tremonti, evidently delighted with the progress so far, told the members of the senate: "We are different but not too divided."

Fears that the plan might be watered down set off a run on Italian bonds and shares last week that only abated when the country's otherwise bitterly divided politicians agreed to a common front on Tuesday. It is clear, however, that Italy is not yet out of the woods.

The vote came as a team from the International Monetary Fund gave its approval to the cost-cutting measures implemented by Ireland. But Ajai Chopra, deputy director in the IMF European division, who led the mission to Ireland, said the true measure of success would be job creation.

"The key objective here is to get growth going again and to create jobs and to bring down the unemployment rate and I think that's going to be the true mark of success of this programme," he said.

The Italian austerity measures are designed to eliminate the country's budget deficit by 2014 so that it can begin to pay off its vast debts, which amount to 120% of GDP. Officials said the revised package would trim the deficit by an extra €8bn (£7bn). But its small print will be pored over by analysts, wary that some measures will prove to be either unspecified or scheduled for implementation after 2013, when a general election is due.

Earlier, the first auction of longer-term Italian bonds since the start of the scare attracted sufficient buyers. But they demanded far higher returns than had been expected, including an all-time record of 5.9% for holding 15-year paper.

As the outcome became known, the stock market briskly reversed. Having risen 0.3% before the auction, the FTSE MIB index of blue-chip shares fell sharply before recovering to close 1.07% lower on the day at 18,640.

Banks and insurance companies – big holders of government debt – took the brunt of the losses.

In the bond markets, the premium that investors demanded for holding Italian, rather than safe-haven German, benchmark paper shot back through the psychologically significant barrier of three percentage points. It later settled to close at 2.88 percentage points.

Among the deficit-cutting measures added to package were pension cuts and additional health charges. In its revised version, the four-year plan also contains pledges of privatisation and deregulation aimed at boosting growth.

The bond auction pushed the gross yield on Italy's five-year treasury bonds to 4.93%, the highest level since June 2008 and a full percentage point above the level at the last offering. Demand exceeded supply by 100% for the five-year bonds, and by 50% for the 15-year bonds.

Ireland is still on course to meet its fiscal targets despite its debt being downgraded to junk status this week, according to the global institutions that bailed out the Irish Republic.

The latest report from the European commission, IMF and European Central Bank said yesterday that "all targets" in the Dublin government's programme had so far been met.

This assessment is a boost to Ireland's credibility, given that the global credit-ratings agency Moody's downgraded the country's financial status to that of Portugal's earlier in the week.

"I am pleased that the mission has concluded that Ireland is meeting all of the conditions and targets of our programme," said the Irish finance minister, Michael Noonan. "We have met the fiscal targets. We have met the banking targets. We have met the structural reform targets."

Noonan said he was especially pleased that financial sector reforms had occurred ahead of schedule, including the mergers of Allied Irish Banks and EBS and of Anglo Irish Bank and Irish Nationwide building society, and the plan to recapitalise Irish Life & Permanent."

Markets soothed by Italy's austerity plan | Business | The Guardian

More people paying for Government bail outs of banks... More short term patching...

[snapper]

"Eurozone crisis: What would a break-up look like?
Comments (205)
Eurozone notes being withdrawn from an ATM Greek bank deposits have already started to fall

Nearly everything that eurozone leaders have done in response to the euro crisis has been done in the name of preventing contagion.

But guess what. It's already here. Because (nearly) everything those leaders have done, after large amounts of dithering, has ended up making the situation worse.

In the past 24 hours we have seen: Spanish and Italian bond yields head over 6%; the value of shares in three of Britain's leading banks fall by 6-7% yesterday, as a result of European stress tests which they passed; and the gold price hit an all-time record of $1600 per ounce. (British bank shares have since gone back up again).

Phew. It makes you wonder where we'd be now, if Europe's leaders had NOT been so focussed on limiting contagion.

The events of the past week have taken the eurozone crisis into (yet) another new phase - and ratcheted up the pressure on eurozone leaders as they prepare for their special summit on Thursday in Brussels.

There is now much talk about an "end game" for the euro, with serious commentators now suggesting that the break up of the single currency is a realistic possibility.

But how, exactly, would the euro break up? Until now, that is where the conversation stopped - because even if we could see the case for countries leaving the euro, it was tricky to see how they would get from here to there.

Not any more. Now we can see very clearly how it would happen, thanks to a highly illuminating disagreement between the German government and the European Central Bank (ECB).
Switching accounts

Let me explain how an exit could come about, then go back to the argument with the ECB.

Most countries suffering financial crises have one crucial weapon at their disposal: they can print money. That means, even if they have to default on their foreign currency debt, they can always print enough domestic currency to stand behind the deposits in their banks.

As we know, that is not the case for countries in the eurozone. As Roger Bootle and Ben May point out in a very useful note for Capital Economics, this means that countries in the euro are vulnerable to a particular kind of crisis which could not really happen elsewhere.

All you need is for domestic deposit holders to start worrying that their country was about to leave the euro, and start putting their money in, say German bank accounts, instead.
Bank deposit graph

In fact, the signs are that they have started to do just that: Greek bank deposits have fallen by nearly 15% in the past year.

But on this scenario, it's not strictly necessary for people to go to the trouble of opening German bank accounts. If ordinary Greeks simply withdraw euros in cash and hoard it under their beds, you get the same effect.

In either case, the upshot is that you get Greek banks going to the Greek central bank to get extra euros, which the Greek central bank has then to get from the ECB.

At the limit, all of Greece's bank deposits leave the Greek banking system - and end up as liabilities on the balance sheet of the ECB.
Doomsday scenario

We're not there yet. But as I've discussed many times (see, for example, my blog of 8 December 2009), the ECB has been acting as the backstop for Greek banks, providing them with emergency cash against increasingly iffy collateral in the form of Greek government debt.

This is the lending that would stop if Jean-Claude Trichet makes good on his threat to stop accepting Greek debt as collateral in the event of a "selective default".

But you can see that a doomsday scenario for Greece - and the ECB - could develop without this. You just need everyone in Greece to start taking seriously the idea that their euros are about to turn into drachmas, and start hoarding euros or opening foreign bank accounts.

In that case, you're not just talking about the ECB sitting on a lot of Greek government debt. You'd be talking about it sitting on the entire liabilities of the Greek banking system. And no amount of collateral in the world is going to cover that.
Government debt graphic

In these circumstances, the ECB would be looking at massive potential losses in the event of a sovereign default, or a Greek exit from the euro.

And just to be clear, ECB losses will ultimately have to be borne by its shareholders - the European governments.

The amounts involved are not small, especially if you look beyond Greece. Greek total bank deposits are roughly equivalent to 80% of government debt. Portuguese bank deposits come to more than double the amount of government debt.

Add them all up, the bank deposits of the five periphery countries come to about 230% of German GDP. Is it really plausible that German - or Finnish - taxpayers would consent to taking on even a fraction of those liabilities? Implicitly, that is the question that European leaders need to consider in the run up to the summit.
Present crisis

In the event of a serious run on all Greek banks, there would be three possibilities: eurozone governments agree to guarantee all of those liabilities; or the ECB could cut off funding, forcing the collapse of the Greek financial system; or the eurozone could decide to allow or force Greece to get out of the euro.

As Bootle and May point out, all of these options are bad. But it's not clear that Greece leaving the euro would be the worst, for Greece or for the rest of the eurozone.

None of this is to say that Greece is about to leave the euro. But you can now see how an apparently technical dispute with the ECB, over the nature of default, actually runs right to the heart of the problem.

Critics say that the ECB is forcing a crisis, by insisting that it will cut off funding for Greek banks in the event of a default. But the reality is the crisis is already here. What the ECB is doing, rather, is forcing governments to decide how it is going to be resolved.

The leaders who will meet in Brussels on Thursday still have the power to decide whether this crisis is going to end with much greater integration and burden-sharing between the governments of the eurozonemuch greater integration and burden-sharing between the governments of the eurozone - or a dramatic break-up. But they are increasingly losing control of the timing."

BBC News - Eurozone crisis: What would a break-up look like?

Not entirely sure Germans will stand for "much greater integration etc.." and even then not sure that even the figures would work. If Italy goes nothing will work anway and the game is over.

[snapper]

So now effectively Ireland and Portugal are alowed to default: "It also included a 2% reduction in the Irish Republic's interest payments....With respect to the two other countries under the programme, Ireland and Portugal, we are going to reduce rates and lengthen the maturities of the loans granted by the European monetary fund but we will exclude any private sector involvement." and we buy more time with Greece... 109bn Euros and borrow back from the banks: "Banks and other private investors will contribute 37bn euros to the package."

BBC News - Eurozone agrees new 109bn euros Greek bailout

Everything is therefore 'fine'. Watch next for a run on the banks. Short of the 'fiscal union', following from the single currency and inherent in it's basic nature, the current 'Eurozone' is was always and remains now doomed. I predict 3 months maximum.

"Greece is set to lead the eurozone's first-ever default as European leaders agreed that the private holders of Greek debt will take a hit of €50bn over three years." http://www.telegraph.co.uk/finance/f...n-bailout.html

[snapper]

"Moody's Investors Service has today downgraded Greece's local- and foreign-currency bond ratings to Ca from Caa1 and has assigned a developing outlook to the ratings."

http://www.moodys.com/research/Moody...ocid=PR_223246

[snapper]

Next move for Euro countries? No doubt we have all heard the term 'fiscal union' - expect to hear alot more of it! What is this likely to actualy mean?

At present Governments borrow for themselves, thus Greek borrowing is dependant of the strength of the Greek economy, since the Greeks pay it back also. In effect Greek Government Bonds are in 'Greek Euros'. Fiscal union would do away with this. Bonds would be issued and repayed on a Eurozone wide basis and all debts would be repayable by the entire Eurozone. Instead of Bonds being issued by the Government in Athens on the basis of the strength of the Greek economy they would be issued by Brussels on the strength of the Eurozone economy...

This is a bit like the US where the federal Governments sells bonds for federal programmes and the State Governments collect local taxes to run local services. There the similarity ends... Unlike the US we don't vote for Senators, Congressmen or President. If you think the EU Government is half as democratic as the US you have lost the plot long ago. Yet in fiscal union those who raise the bonds, probably the European Central Bank (ECB), would need to power to levvy taxes to pay the bonds back. They would also naturaly decide how the money is spent. Firstly I am not quite sure I trust the EU to do this as their accounts haven't been signed off for over 15 years. Secondly we may as well stop having elections since our national Governments will no longer be able to issue bonds (there will be no 'national debt' but a 'Eurozone debt') nor decide where investments are made. Nor will they be able to set taxes outside the say so of the EU Superstate so in effect they will become meaningless... You'll still have your MEP but of course they are a waste of expenses and European decisions are currently taken by the Council of Ministers, but as national Governments become meaningless the power of the Council of Ministers will decline. In short fiscal union would be the single greatest loss of democracy in Europe since the fall of Communism.

Doubtless some of them will argue that fiscal union will save the euro.... it might. Who will pay the armies? Europe. Who will raise the taxes? Europe. Who got us into this mess? Europe. Who decides what Europe does? Not us...

[Doktor]

^^^I don't see why Germany and France would want this. I mean if we suppose their politicians are sane ;)

[snapper]

Because they would, in effect, be in the largest economies and so be in charge? I do hope the Germans will say no and they probably will. I suspect this card WILL be played though before they let go of the Euro project. If they should fall for this insane escape recipe we 'Europeans' outside the eurozone will be pressured to join in - kinda like Napoleons Continental System.