Wolf and Authers on Greece

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Greece’s second bailout has been agreed, but a leaked eurozone report suggests the heavily indebted country will need yet another. John Authers, FT’s Long View columnist, discusses with Martin Wolf, FT’s chief economics commentator, whether this latest package can possibly work.

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Source: John Authers, Financial Times, February 21, 2012.

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A Greek or world tragedy?

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This article is a guest contribution by By Paul Sandison*.

I do think it is possible to use the recent post-August 2011 pullback to re-enter the markets to trade, if one has no illusions about the long-term cycle. Presently it does look as if the market has absorbed so much bad news that the good news is making itself felt. So I think it is possible we may see a rally, but for how long? A day or two, a few weeks or months, only to fall back severely? Why do I think there must ultimately be a grave shakedown? Many people seem to have concluded that 2008 was the equivalent of the 1929 crash and all we have to do now is crawl slowly upwards.

I disagree. At the start of the Great Depression the downward steps in the stock market from 1929 to 1932 were in the absence of monetary stimulation. This time around the quantitative easing QE, numbers QE1 and QE2 have masked the underlying problem of a lack of competitiveness and output in the U.S. and ‘lifted all boats’. However, I believe a continued liquidity surge is unsustainable in the long run, not least because the United States is not starting from scratch with its injections of liquidity. Furthermore, the liquidity has to a considerable extent been used to prop up banks rather than stimulate production and employment, with the result that the economic recovery has been weak.

In my humble opinion I believe 2008 was the equivalent of the 1925 Florida housing bubble bursting, 2011 was the equivalent of the 1928 stock market rumblings, and the year end of 2012 plus early 2013 will be our equivalent of what happened in 1929.  Only this time the trigger of the entire crisis was far greater than any housing bubble in the state of Florida. This time it was and still is countrywide. The aggregate effect of the various nefarious mortgage schemes such as sub-prime, Alt-A, etc. was the $56 trillion of imploded housing wealth in the U.S. It is this black hole that is still creating poverty and a fall in aggregate demand in the economy, which is why there is such sluggish growth despite the payout of food stamps to keep demand for essentials up and prevent deflation.

However, there are limits to how long the food stamps can continue. The first limit is called politics. The second limit is the financial markets, which at some point, perhaps quite soon, are going to call the bluff of whoever is in the White House, Congress and the Senate because of the sheer unsustainability of the present U.S. creation of debt. Plus there is a mountain of sovereign debt in Europe, and when the national and international rows of dominoes fall the effects will reverberate across the globe. Unlike in the 1930s, the financial system is now global and so interconnected that everyone on the planet will be affected at each successive collapse.

Today the creditors of the Greek banks are baulking at taking the haircut of 50% demanded of them by the technocrat Greek government, headed by Lucas Papademos who formerly worked in the European Central Bank. This demand comes in turn from the agreement between the ECB and the IMF as a condition if Greece is to be able to receive the next tranche of loans to survive the next few months. That the creditors should baulk should not surprise anyone. They are being invited to take a 50% cut in the value of their investments. The Greek banks will be offered loans from the IMF to make up for their nominal loss of liquidity.

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Paul Sandison, 64, is a social critic of contemporary society. Although born in South Africa, he has lived in Europe for nearly 40 years. His forebears include an ancient ancestor to King Niall of Ireland and Charlemagne. Paul is currently promoting American and European arrangements of contemporary Irish music. His hobbies are reading, development economics and jogging.

Source: Paul Sandison, January 17, 2012.

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Picture du Jour: Country exposure to Greek debt

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“Greek drama is now no longer confined to the literature class,” says economist Asha Bangalore of The Northern Trust  Company. “The current Greek economic drama will be enshrined in economic history books and economic/financial policy studies.

“As the crisis has unfolded, it has frequently been challenging to find a succinct representation of the exposure to Greek debt. Thanks to the folks at the BBC, here is that picture.”

Source: BBC

Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, November 3, 2011.

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Due dates for Greece’s debt payments

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How long does Greece have to pass the referendum, get the money, and pay off its debts? This chart below should provide the answer. It comes courtesy of Erwan Mahe of OTCexGroup (via Business Insider) and shows when Greece’s big debt payments are due. It is clear that the bail-out monies need to be in by the middle of December. I would therefore not be surprised to see the referendum taking place a week or two before that.

Source: Business Insider, November 2, 2011.

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50% Greek debt “writeoff” best for economy, says Credit Suisse

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Bob Parker, senior adviser of Credit Suisse Asset Management, talks about the European Central Bank’s role in the region’s debt crisis, Greek bonds and equity market volatility.

Source: Bloomberg, October 14, 2011.

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Greece – a threatening scenario looming

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This article is a guest contribution by Dr Stefan de Vylder*, well-known Swedish economist.

Once upon a time a group of friends formed a club with certain common rules for economic behaviour. No-one was – in theory – allowed to incur debt above a level established by the statutes. And no-one was allowed to leave the club. Both rich and poor friends were granted membership, but thanks to the solid economic position of the wealthier members, every member of the club was regarded as creditworthy. The rather indolent banks were, for a long time, of the opinion that no member of such a fine club could ever default on its debt.

As time went by, more and more members were welcomed into the club. After ten years the membership reached seventeen. But by then the cosy atmosphere had been replaced by rising tensions, largely as a result of growing income disparities between the individual members. One of the members had become a multimillionaire, another a well-to-do physician. The club also contained a couple of teachers and nurses. But there were also a couple of construction workers who had lost their jobs in the wake of a financial crisis as well as a careless fellow, who had never learned to manage his own economy.

Now even the banks began to have cold feet. Perhaps some of the members of the club suffered not only from illiquidity, i.e. a temporary lack of liquid funds, but also from insolvency, i.e. are unable to service their debts even in a medium-term perspective?

The wealthier members of the club were increasingly concerned. Things were not working smoothly any more. The annual midsummer parties were not what they used to be.

To postpone the day of reckoning, the club began to extend loans to the poorer members.

The richer members – who just a couple of years earlier had applauded the rising consumption and welfare among the poorer ones – started to bully their less fortunate friends. “You have been living beyond your means”, they shouted in chorus. “Lazybones!” To extend new loans – at a high rate of interest – the club’s board of directors demanded a reduction in the order of 20-30 per cent of the poorer members’ disposable incomes. “But if we do that, the real burden of our debts will be even heavier, and more difficult to service”, whined the low-income and unemployed members. “That is your problem” was the answer.

One board member however raised a pertinent question: “Is it really our responsibility to bail out our poorer members? Shouldn´t the banks, who have lent so much without asking questions about the borrowers’ creditworthiness, be forced to foot part of the bill?”

“No way”, said the board majority. “A debt restructuring would make the financial markets more nervous. The important thing is to make sure that the banks get their money back. A better solution is to put our destitute friends under guardianship and force them to pay.”

Such clubs do not exist, the reader might argue. But unfortunately, we have such a club: The European Monetary Union, EMU. A club with the wrong membership and an incompetent management. To create a monetary union with a large number of countries with completely different economic conditions and development paths, but with a common currency and a common rate of interest, is simply not good for the maintenance of friendship between the member countries. What we have seen so far of mutual accusations, rising nationalism and even ugly xenophobia is just the beginning. The EMU is set up for conflict.

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Source: Dr Stefan de Vylder, June 26, 2011.

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