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Greece May Be First EU Default
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Greece May Be First EU Default

  #11 (permalink)
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Fat Tails View Post
Greece did not change at all.

There were no reforms.

Harry, can you provide examples of other developed countries that suffered a similar call for austerity and inability to borrow funds, where they did reform and did change?

To me all of this is simply normal politics, and every industrialized nation suffers most of the same problems.

Mike

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Big Mike View Post
Harry, can you provide examples of other developed countries that suffered a similar call for austerity and inability to borrow funds, where they did reform and did change?

To me all of this is simply normal politics, and every industrialized nation suffers most of the same problems.

Mike


Back in 2009 the situation was pretty much the same in Spain, Portugal, Greece, Cyprus, Ireland.

What is specific about Greece is tax evasion and cronyism.

Greece already had a public deficit prior to the financial crisis in 2009.

This was not the case for Spain, Cyprus or Ireland.

The Greek nomenclatura is rich, but does not share with the poor.


Here is an excerpt from an article by Herakles Polemarchakis (published in 2011):

"Larissa, with about 250,000 inhabitants, is the capital of the agricultural region of Thessaly in central Greece. A rather faceless locale, but it is the talk of the town in Stuttgart, the cradle of the German automobile industry, and, particularly, in the Porsche headquarters there. The reason? Larissa tops the list, world-wide, for the per-capita ownership of Porsche Cayennes, the pricey SUV. The proliferation of Cayennes is a curiosity, given that farming is not a flourishing sector in Greece, where agricultural output generates a mere 3.2 percent of GNP in 2009 (down from 6.65 percent in 2000) and transfers and subsidies from the European Commission provide roughly half of the nation’s agricultural income. A couple of years ago, there were more Cayennes circulating in Greece than individuals who declared and paid taxes on an annual income of more than €50,000, a figure only slightly above the vehicle’s list price.
The surreal situation in Larissa offers an apt metaphor for the predicament of Greece itself. By the end of 2009, Greek public debt stood at 127 percent, the deficit at 15.5 percent and the current account deficit at 11 percent of GDP. In addition, the outgoing conservative government had failed to address these long standing problems and had succeeded in driving the country to the brink of bankruptcy. At the same time, it had consistently misreported statistics to European authorities, compromising the credibility of the country at a time when it needed it most."


Source: Bulletin of the Economics Research Institue, Spring Term 2011, Warwick University


The Greek problem is a home made problem, and as long as the Greek government is unwilling to address it, the IMF and the other states of the European Union should not continue to pour billions of Euros into Greece.

Greece is a small country, and they have already borrowed a fat € 40,000 ($ 45,000) per capita - which of course will never be paid back.

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Debt per capita:

https://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Here is the top few sorted by per capita:

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Germany is quite a bit higher than the USA. Greece is less than Germany, USA, UK, Netherlands, Hong Kong, France, Sweden, Singapore, Australia, Spain, New Zealand... well you get the idea.

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Fat Tails View Post
The Greek problem is a home made problem, and as long as the Greek government is unwilling to address it, the IMF and the other states of the European Union should not continue to pour billions of Euros into Greece.

I don't disagree. But I also think the problem is systemic, all industrialized countries suffer the same politics and debt.

I enjoy this conversation and your view, so let me engage you: Let's pretend for a moment Germany was under the ire of all, instead of Greece. What would be your defense of Germany that is not true of Greece?

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Big Mike View Post
I don't disagree. But I also think the problem is systemic, all industrialized countries suffer the same politics and debt.

I enjoy this conversation and your view, so let me engage you: Let's pretend for a moment Germany was under the ire of all, instead of Greece. What would be your defense of Germany that is not true of Greece?

Mike


There are many economics professors who call the end of capitalism.

I do not believe that the end of capitalism is near, but I believe that capitalism requires a strict set of rules.

There is a small book by Bruce R. Scott "The Concept of Capitalism". It is an easy read.

Bruce Scott has since published the fully fledged version of the book, which is called "Capitalism: Its Origins and Evolution as a System of Governance", but I have not read it.

Bruce R.Scott compares capitalism to a soccer game.

Both should be set up as a three level organization.

-> Organized Sports: (1) Political Authorities / Associations (2) Institutions, Regulations and Referees (3) Officially Sanctioned Games
-> Organized Capitalism: (1) Political Authority (2) Instiutions, Regulations and Regulators (3) Formal Markets

The financial crisis is a result of

(1) a lack of institutions that set up regulations across the entire market
(2) a lack of regulators to implement the rules
(3) absence of formal markets

Have a look at CDOs , synthetic CDOs, credit default swaps, etc. These unregulated instruments were at the origin of the financial crisis, not the regulated markets such as stock or futures exchanges.

The basic misunderstanding about capitalism is that there is no governance needed. This idea goes back to the invisble hand described by Adam Smith. Of course the invisible hand works to some extent when applied to microeconomics. But it has huge shortcomings, when a single market participant or a group of market participants are powerful enough to have an impact on the economic framework and overall conditions.

Game theory easily allows to identify some of the cases

-> the tragedy of the commons (goods not being accounted for, such as biodiversity, environmental damage, carbon dioxide emissions)
-> monopolies developing in mature markets

In order to make capitalism work, there needs to be a set of carefully designed rules and there needs to be a powerful regulator supervised by a political institution to make the rules work (going back to Locke and Montesquieu to allow for separation of powers).


To answer your question:

No meaningful difference between Germany & Greece. Indeed, all industrialized countries suffer from the same politics and debt. The main problems are not being addressed. Civilization is a huge ponzi scheme which will shortly run out of fuel. The main problem of our current civilization is free riding.

Free riding needs to be sanctioned. Allowing for free riding is moral hazard. Greece in its way is similar to Lehman Brothers. They have accumulated debt and still ask for new money. If you hand the money over to them, you basically approve free riding. This would have a major impact on the behaviour of Southern European Governments. Portugal, Spain and Italy would be tempted join the free rider's club and increase their budget deficits and thus threaten the entire Euro-Zone. Greece is a small country, but who can pay for Italy & Spain with France arriving behind?

Robert Axelrod has shown in his excellent book "The Evolution of Cooperation" that sanctioning bad behaviour is necessary. Co-operation basically means to start with a co-operative strategy. But once you find out that cooperation is not successful, then tit-for-tat strategies become more effective. If someone slaps you on one cheek, don't offer the other cheek! Greece, being a comparatively rich country, asks for solidarity from other European countries, but does not even properly tax its nomenclatura. The shadow economy accounts for something like 24%! I think they can fix their problems, if they are forced to do so.

Again, the tragedy is not Greece, but it is Ukraine and Syria, where per capita income is 10% of that of Greece.

But I love the little Greek restaurant round my corner and will probably visit Greece later this year.

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Big Mike View Post
Debt per capita:

https://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Here is the top few sorted by per capita:

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Germany is quite a bit higher than the USA. Greece is less than Germany, USA, UK, Netherlands, Hong Kong, France, Sweden, Singapore, Australia, Spain, New Zealand... well you get the idea.

Mike

Looks like a table of gross external debt. This includes public and private debts and does not take into account debt owed by other countries. For example, Luxemburg, which comes on top of the list is a net creditor.

I think we are confusing gross external with sovereign debt.


This is a table with the sovereign debt:

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Japan and Greece are both countries with a high sovereign debt. But as they are rich, the external debt they have is comparatively low. It is just that the state is less rich than the (undertaxed) private individuals.


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Germany is quite a bit higher than the USA. Greece is less than Germany, USA, UK, Netherlands, Hong Kong, France, Sweden, Singapore, Australia, Spain, New Zealand... well you get the idea.

I'm going to try to explain what's all the fuss about Greece. Not what the people in the street think but the politicians.

The problem is not how much debt they have. As you pointed out other european countries have even bigger debts than Greece. The big problem is that the new government refuses to make it's payments by borrowing more money, because as you said it's a ponzi scheme and kicking the can down the road will only delay the problem. This is a HUGE problem for the other countries' politicians.

Since Greece started using the €, it can no longer print it's own money to pay it's debts (which taxes the greeks). Now it has to borrow money from a bank that borrows from the ECB (the ECB can't directly lend to a country). In the last financial crisis no bank wanted to lend more money to Greece, and the natural course of action was to default. The thing is it would've been a disaster for german and french banks who were the main lenders. Instead of that there was a transfer from private to public risk.

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Now the ones in trouble if Greece defaults are other countries' politicians because how are they going to explain to their voters that they will have to implement more austerity because they made horrible investments? So obviously now they're blaming it all on the greek people and the media are saying that those evil greeks doesn't want to pay us back after we lent them money out of charity.

The problem doesn't stop there. Just like Greece, in countries like Spain are starting to arise several political parties that put in doubt the payment of the debt (Podemos, etc...). If Syriza wins without repercusions, people will be more confident to vote for those parties. Greece is 2% of the Eurozone, Spain or Italy are much bigger. If they stop paying that's when the shit will hit the fan and the entire house of cards could fall apart. Not only for the direct lenders. The ECB can never loose money, so if a country stops to pay (the bank that lent them money, so the bank can't pay the ECB) the rest of the Eurozone members will have to pay for them.

So the problem is that politicians are terrified of a contagion effect (not only economic but also political).


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Malthus View Post
I'm going to try to explain what's all the fuss about Greece. Not what the people in the street think but the politicians.

The problem is not how much debt they have. As you pointed out other european countries have even bigger debts than Greece. The big problem is that the new government refuses to make it's payments by borrowing more money, because as you said it's a ponzi scheme and kicking the can down the road will only delay the problem. This is a HUGE problem for the other countries' politicians.

Since Greece started using the €, it can no longer print it's own money to pay it's debts (which taxes the greeks). Now it has to borrow money from a bank that borrows from the ECB (the ECB can't directly lend to a country). In the last financial crisis no bank wanted to lend more money to Greece, and the natural course of action was to default. The thing is it would've been a disaster for german and french banks who were the main lenders. Instead of that there was a transfer from private to public risk.

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Now the ones in trouble if Greece defaults are other countries' politicians because how are they going to explain to their voters that they will have to implement more austerity because they made horrible investments? So obviously now they're blaming it all on the greek people and the media are saying that those evil greeks doesn't want to pay us back after we lent them money out of charity.

The problem doesn't stop there. Just like Greece, in countries like Spain are starting to arise several political parties that put in doubt the payment of the debt (Podemos, etc...). If Syriza wins without repercusions, people will be more confident to vote for those parties. Greece is 2% of the Eurozone, Spain or Italy are much bigger. If they stop paying that's when the shit will hit the fan and the entire house of cards could fall apart. Not only for the direct lenders. The ECB can never loose money, so if a country stops to pay (the bank that lent them money, so the bank can't pay the ECB) the rest of the Eurozone members will have to pay for them.

So the problem is that politicians are terrified of a contagion effect (not only economic but also political).

Excellent points here.

It is not broadly understood that the money that has been lent to Greece in the various bailouts did not go to the Greeks so they could continue to live it up on other people's money. It went right out again in payments to the private European (French and German) banks that would have taken large losses if Greece had just defaulted. The Greek bailouts were roundabout, and somewhat disguised, bailouts of commercial banks with public money on the part of the non-Greek authorities.

In the meantime, the Greeks -- who certainly had been wildly improvident, reckless and even deceitful, or their governments had, for a pretty long period of time -- have been enjoying such an "easy" life as a depression with 25% unemployment and a reduction of GDP of about the same.

a) Yes, they brought great trouble on themselves.
b) But the intense austerity required of them by their creditor nations and institutions produced great hardship and, predictably, did not improve their ability to repay any loans. (Low GDP = little spare cash for loan repayment.)
c) The predictions of the economic impact of austerity were that the Greek economy, once returned to a "sound" basis, would grow and enable repayment. These have not worked out. There have been assorted explanations for this, including more blaming the Greeks. But it still has not worked.
d) When a debtor simply cannot pay, and has no real prospects of being able to pay, a default is in the cards. You can negotiate a debt reduction, or get relief through bankruptcy, or just stop paying. But no money = no repayment.

Politics aside, and moralizing aside, the economic facts on the ground are that Greece will not repay what they owe.

If this can be accommodated within some agreement between the parties to reduce the debt (unlikely), then Greece can remain in the Euro and perhaps recover. If the troika does not agree, then Greece will quickly default, run out of Euros and go onto its own currency, essentially dropping out of much of the economic life of Europe. Either option will be very difficult for Greece.

But having its own currency, which would certainly be strongly depreciated vs. the Euro, would seriously improve its exports (cheap vacations for Europeans in sunny Greek isles....) and so perhaps would be a path out (after more chaos, misery, and inability to import very much.) This would not be as good an outcome as debt relief, but may be all they can get.

@Malthus is also very right about the long-term politics. If Greece declines to pay and drops out, populist parties in Spain, Portugal, Italy, etc. are likely to get very interested -- especially if Greece can make a go of it and succeed. This could be bad for the Euro area, at least in terms of its continuing cohesion, and is almost certainly on the minds of the northern European governments.

We don't know how this will play out yet, but it is moving at a very fast pace. We're living in interesting times.

Bob.

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I remain perplex with the current strength or lack of weakness in the euro, taking into account
that whatever the outcome of Greece will be, the impact for the euro is bad

- default : Europe looses the previous loans
- agreement : Europe puts more money, which is a path to future hostage into the Greek debt (amount too big to loose)

and many other political risks, for other countries

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rleplae View Post
I remain perplex with the current strength or lack of weakness in the euro, taking into account
that whatever the outcome of Greece will be, the impact for the euro is bad

- default : Europe looses the previous loans
- agreement : Europe puts more money, which is a path to future hostage into the Greek debt (amount too big to loose)

and many other political risks, for other countries

Private creditors still give money to Greece - about 3bn € on Wednesday and about 2 bn € today -
for fresh IOUs (most of it 3 months maturity); Tuesday's IOUs pay 2.97% p.a. (if there's no default).
3-month Euribor, the reference rate for the Eurozone for this maturity, is at -0.018% p.a. (the "-" is no typo).

Indirectly, you give the reason yourself why the Euro isn't as weak as many have expected:

Creditors, not only EMU countries, lose the previous loans if Greece defaults.
This first stage already means risk sharing among EMU, IMF, ESM, and private creditors.

Second point is the character of these losses:
A paper loss would become a "real" loss - but this time for taxpayers without throwing good money after bad.
Only private creditors wouldn't be able to get the windfall profits that they might collect in the case of a bailout.

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