Bollitics - Ireland, the Euro and the future of the EU

[snowychap]

You got the gambling analogy completely wrong...

Would you care to explain why you think that?

...also I can't see any reason to engage with you on these forums. You are an antagonist.

No, Conor, I'm disagreeing with you (which I've pretty consistently done on economic topics).

It just sounds like you can't take someone disagreeing with you (you seemed perfectly happy to engage with me one post back when I said something that you agreed with).

[PIW]

This problem in Ireland? did Gordon Brown and Labour cause that as well?

[Gringo]

Yes

[CVByrne]

sorry phone trouble, duplicate posts

[CVByrne]

The gambling analogy was two fold.

1) The economists and journalists who champions the bank bosses and property soft landing can't suddenly turn around and have credibility in their current opinions of a soft landing and evil bank bosses. It's Hypocrisy.

2) You have to think of the risks involved when you bet, when you make decisions you have to think of the consequences if things went wrong. I wouldn't bet if I couldn't afford to lose the money I bet. So I wouldn't take a mortgage out because the repayments would be too much, instead of thinking "I'll cope, this is an investment, when I sell this property I'll make money."

3) You try to make sure their is a level of confrontation in any attempt of discussion, I agreed with your post so you felt necessary to dig up your opinion on me based on posts from years ago to get this confrontation. I have no interest in wasting hours in a pointless no end confrontation with you. So I will refrain from getting involved if I feel you're simply going to waste my time. I actually got involved in this thread because of posters like for example peterms, some good debate can be had with him and others.

[snowychap]

The gambling analogy was two fold.

That's an explanation of your analogy and it was unnecessary as it was obvious from what you posted.

I took your gambling analogy and played with it to explain what I thought the situation was.

I agreed with your post so you felt necessary to dig up your opinion on me based on posts from years ago to get this confrontation.

I'm sorry but that clearly shows that you haven't read my previous posts in response to you in the last few pages of this thread and that you did not fully understand my post and what the catalyst for that post was.

As far as digging up something based upon 'years ago' - it was taking in to account the opinion you have expressed on numerous occasions (in a number of threads on economic matters where you have posted a similar viewpoint as you have in this thread) to explain the comments that I have made about the opinions you were proffering in this thread, i.e. it was putting your condemnation of the poor suckers in debt, governments and others in to some sort of context.

I have no interest in wasting hours in a pointless no end confrontation with you.

Well, don't then.

Stick to debating rather than threatening to take your ball home.

[peterms]

This is interesting.

A group of students were asked to do a simulation involving cross-cancellation of debt between eight EU countries. The idea behind it is that countries are both debtors and creditors, so a sensible place to start is by cancelling out sums which two parties owe to each other.

Headline results:

The aim was to uncover the amount of interlinked debt between Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany; and then see what would happen if they attempted to cross cancel obligations.

The results were astounding:

* The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%

* Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt

* Three countries - Ireland, Italy, and Germany – can reduce their obligations such that they owe more than €1bn to only 2 other countries

* Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP

* France can virtually eliminate its debt – reducing it to just 0.06% of GDP

The website has some interesting visuals illustrating the effect, and a link to the full report.

It's a little more complicated by the debt having different maturity dates, but it's not that hard.

I wonder why our governments prefer to whip up hysteria about unmanageable levels of debt, and tell us we have to cut everything in sight and flog off public assets to the private sector, rather than start by removing the illusory parts of the problem?

[tonyh29]

A group of students were asked to do a simulation involving cross-cancellation of debt between eight EU countries.

isn't that just pyramid selling in reverse for want of a better phrase , only instead of selling a product that doesn't exist they are not selling a product that doesn't exist :confused:

on paper it does appear an interesting concept though

[peterms]

A group of students were asked to do a simulation involving cross-cancellation of debt between eight EU countries.

isn't that just pyramid selling in reverse for want of a better phrase , only instead of selling a product that doesn't exist they are not selling a product that doesn't exist :confused:

on paper it does appear an interesting concept though

You put your finger on it with the phrase "doesn't exist".

A great part of the debt we are dealing with comes from dodgy loans made on overvalued or non-existent assets, concealed by deliberate subterfuge.

People have the idea that loans that were made were based on real assets, where the lender had to forego some benefit in order to make the loan and therefore should be compensated. In reality, much of it was credit created out of nothing by banks who didn't have the money they lent, and who lent it to people who couldn't repay it. I don't think we want to destroy or sell real public assets in order to pay these imaginary sums.

As well as cancelling out some debt and credit, we should repudiate other parts of the debt. Cross-cancellation is not the complete answer, but it may be part of it.

[ender4]

would that cross-cancellation actually work then?

surely it can't actually be true?

[peterms]

would that cross-cancellation actually work then?

surely it can't actually be true?

If the debts are sovereign debts owed by one nation to another, yes. But behind that, there is a web of private debt which has either been socialised, or lent on the basis that it will at some point be repaid, so the headline figures in the study won't give a completely accurate picture of what each nation-state "owes" each other.

The authors of the study recognise this:

We recognise that our numbers are not accurate. The assumptions being used mean that our data will not reflect the real position of each country. However this a learning outcome in itself – not only is this web of debt suffocating the European economy, but it exists within a cloud of confusion. The data required to write off interlinked debt should not be hard to find, and reliance on assumptions and estimates reveals the lack of transparency about the current debt positions.

The confusion they refer to is quite deliberate. It was engineered at an institutional level by those engaging in sub-prime lending. It was stoked by credit rating agencies lying about the strength of institutions. It is furthered by disguising who are the real beneficiaries of the bank bailouts. It involves the deception of talking about Greek or Irish debt, when the money is actually owed by German, French and lots of other other banks, and the bailouts are intended to benefit them. And above all, it involves the story that these debts have been caused by excessive public spending, when in fact they are mainly private debts.

It's very hard to settle on sensible policy proposals in this sea of confusion. The exercise they conducted is an attempt at showing how clearing away some part of the confusion can help to see the remaining problem more clearly. And of course clearing away the confusion is the very last thing the banks and bondholders want.

[Awol]

If the debts are sovereign debts owed by one nation to another, yes. But behind that, there is a web of private debt which has either been socialised, or lent on the basis that it will at some point be repaid, so the headline figures in the study won't give a completely accurate picture of what each nation-state "owes" each other.

Well yes but as you say the bulk of the debt is cross continent inter-bank lending, giving us the following scenario when Greece does eventually default:

In Germany, Bank A has lent £1M to Bank Y in Greece, while Bank B has borrowed £1M from Bank X in Greece.

If you forgive the debt, the immediate effect is that Bank A in Germany and Bank X in Greece now have holes in their balance sheets. They are showing cumulative loses of £2M (The true number of course is somewhere between 10's and 100's of billions for the big institutions).

You could say that Banks B and Y should compensate Banks A and X for the losses they've suffered, but then they'd have to raise new loans to do it and it's back to square one.

Writing off the loans means that the banks that lent the money get hurt and the banks that borrowed it don't.

The situation in the PIGS is the most expensive game of musical chairs ever, when the music stops whoever is left standing has to pay for the debt that can't be repaid. That can either be the ECB, other more solvent states like Germany or China that have lent money to Greece, banks like RBS or possibly institutions like pension funds.

The fact that the ECB has been accepting Greek debt from banks as collateral for other lending to Greece, means it will be particularly heavily hit when default happens. Throwing in Portugal, Ireland (maybe) and Spain = continent wide financial meltdown.

When Greece inevitably goes belly up there are going to be some very big losers. The only question in my mind is how fast and far the contagion spreads - for example, if Bank A in Germany cannot afford the £1M loss, it may collapse and bring down Bank B with it. This is why our policy makers are quietly shitting themselves and 'austerity' is all the rage.

Only my opinion but once Greece goes and the domino effect starts, the next crisis could make the last look like losing 50p down the back of the sofa. The only possible way out is to subsidise Greece for as long as possible in the hope that big European banks can recapitalise enough to weather the coming tsunami. That requires the German tax payer to display unprecedented solidarity with a country whose people barely pay any taxes and often retire at 50 on massive state pensions...

...a hard sell.

[leviramsey]

Very interesting piece in Barron's (owned by News Corporation) saying that the only plausible way out in Greece is for the bondholders to take a haircut.

Europe should make Greece restructure its debt -- swiftly.

It would require delaying interest payments and an orderly reduction of the total debt by 50%. And with 327 billion euros outstanding, we don't recommend this lightly. Usually, Barron's staunchly advocates full repayment to bondholders. But the choice for Greece's bondholders, as we see it, is to accept 50 cents on the euro now -- or 30 cents or worse down the road.

Failure to restructure will bring about further societal and economic ruin. With Greece's unemployment rate at 15%, biding time until an eventual default could throw the country into a depression, incite more unrest and drag all of Europe into deep recession. It could even cause Europe's common currency, the euro, to unravel and shake the foundations of the European Union itself.

Except for a few brave lenders who have whispered in recent weeks that Greece get debt relief, Europe's official approach has been to muddle along and hope the problem will go away. It won't.

Last week, in its latest Band-Aid attempt, the government announced new austerity measures that will extract a further EUR6.3 billion ($9.1 billion) from its receding economy -- through job and wage cuts and new taxes -- a desperate effort to make up for missed budget targets set in last year's EUR110 billion bailout by the EU and International Monetary Fund.

Not only are steps like that insufficient; they'll bring disastrous economic side effects. The austerity measures already imposed on Greece by its lenders have severely hurt the Greek economy, which shrank by 2.1% in 2009 and 4.5% in 2010, and which will probably contract by a further 3.5% this year. Greece's bondholders are effectively stepping on the country's neck making the prospect of a full repayment less likely.

Delaying a debt restructuring by even one or two years would mean that the amount to be recovered by bondholders could shrink from 50% to 30%, according to Citigroup. Delay a few more years and the amount recovered could be next to nothing.

Another bailout won't help. "Greece is bankrupt," says Mark Grant, head of structured finance at Southwest Securities. "To give Greece more money makes no sense. It just means they get more money they can't pay back."

The better course is to allow Greece to write down its debt now and try to get its economy growing again. Not that a writedown would be painless. With Greece's public debt at EUR327 billion, a 50% writedown means roughly a EUR160 billion loss for creditors. Many of them are Greeks themselves, of course. Greek banks would need complete recapitalization.

The European Central Bank, which is adamantly against restructuring of any kind, holds an estimated EUR40 to EUR50 billion of Greek debt and more in loans -- so the ECB would need more capital to absorb the blow. The money would have to come from wealthier EU members like Germany and France. Such countries have a huge stake in avoiding a European recession and in keeping the euro intact.

Since the common currency was adopted in 1999, companies in industrially advanced countries like Germany and France have found it far easier to export to European countries that are less competitive, including Greece, Spain, Ireland, Portugal, and Italy -- the very countries that now find themselves with debt problems.

Letting the euro unravel would be an economic tragedy for Germany and France. Short-term a Greek restructuring could send the euro down sharply.

The market is already anticipating a restructuring of some kind. Depending on maturity dates, Greek bonds are trading at 45 to 75 cents on the euro.

A 50% write-down of Greek debt would cause losses of tens of billions at Europe's commercial banks. But most of them could absorb the blow. If a few couldn't, they could either look for new capital or merge with stronger banks. It's likely that a Greek restructuring would increase speculation that similar moves would soon follow in other debt-laden European countries such as Ireland and Portugal. And such write-downs could well happen. But those countries do not need such drastic action, and even if they do, the write-downs may not be as much as 50%. One estimate from Credit Suisse showed that a 32% write-down of Greek, Irish, and Portuguese debt would cost Europe's commercial banks EUR200 billion, eliminating a year of profits before reserving for loan losses.

By allowing Greece to keep limping along when it needs major surgery, European officials are propping up Continental banks that would have failed. That may seem laudable to some, and it may preserve banking jobs in the short run, but it has caused lingering uncertainty and hurt long-term economic growth.

Contrast Europe with the US, where in the most recent financial crisis, the government allowed a surprising number of major financial players to fail or be bought in fire sales. The US now has a stronger banking system -- and a stronger economy -- than Europe's.

Short of a restructuring, the only other solution would be a Eurobond, where Greek paper could effectively be swapped for bonds backed by the entire Eurozone, akin to the way Brady bonds helped ease the Latin American banking crisis in the US two decades ago. Yet the Germans and other countries, despite their talk of solidarity with Greece, won't back Eurobonds: the political will isn't there.

A wise lender would have to conclude that the Greeks have given just about all they can. The only choice left is a restructuring -- and if that doesn't happen soon, a vast array of bondholders will be wiped out.

Sovereign defaults have been dealt with time and again. Bondholders know they're going to take a loss. But by taking steps to relieve some of the debtor's obligations, they can avoid total loss.

[peterms]

If the debts are sovereign debts owed by one nation to another, yes. But behind that, there is a web of private debt which has either been socialised, or lent on the basis that it will at some point be repaid, so the headline figures in the study won't give a completely accurate picture of what each nation-state "owes" each other.

Well yes but as you say the bulk of the debt is cross continent inter-bank lending, giving us the following scenario when Greece does eventually default:

In Germany, Bank A has lent £1M to Bank Y in Greece, while Bank B has borrowed £1M from Bank X in Greece.

If you forgive the debt, the immediate effect is that Bank A in Germany and Bank X in Greece now have holes in their balance sheets. They are showing cumulative loses of £2M (The true number of course is somewhere between 10's and 100's of billions for the big institutions).

You could say that Banks B and Y should compensate Banks A and X for the losses they've suffered, but then they'd have to raise new loans to do it and it's back to square one.

Writing off the loans means that the banks that lent the money get hurt and the banks that borrowed it don't.

The situation in the PIGS is the most expensive game of musical chairs ever, when the music stops whoever is left standing has to pay for the debt that can't be repaid. That can either be the ECB, other more solvent states like Germany or China that have lent money to Greece, banks like RBS or possibly institutions like pension funds.

The fact that the ECB has been accepting Greek debt from banks as collateral for other lending to Greece, means it will be particularly heavily hit when default happens. Throwing in Portugal, Ireland (maybe) and Spain = continent wide financial meltdown.

When Greece inevitably goes belly up there are going to be some very big losers. The only question in my mind is how fast and far the contagion spreads - for example, if Bank A in Germany cannot afford the £1M loss, it may collapse and bring down Bank B with it. This is why our policy makers are quietly shitting themselves and 'austerity' is all the rage.

Only my opinion but once Greece goes and the domino effect starts, the next crisis could make the last look like losing 50p down the back of the sofa. The only possible way out is to subsidise Greece for as long as possible in the hope that big European banks can recapitalise enough to weather the coming tsunami. That requires the German tax payer to display unprecedented solidarity with a country whose people barely pay any taxes and often retire at 50 on massive state pensions...

...a hard sell.

I think we have to have a lot more transparency over this whole issue.

Which part of these debts are sovereign debts? The mutual cancellation works for those, though the differing maturities and hence values of the debts mean that someone will have to spend a few minutes with a calculator - not beyond the wit of our financial geniuses, I expect.

Which part are private debts? Those are for the banks to sort out, and like any other debt, if it's not possible to collect it, then it gets written off.

And which are private debts which we and other nations seem to be covering? That's the interesting category. What exactly are the debts? Are they legally enforceable? Are they genuine, or are they part of the fraudulent network of transactions carried out in secrecy jurisdictions by tax dodgers? In which case, they can whistle for the money.

Surely the starting point for this whole debt business is to examine in great detail and openly report on exactly what these debts are, not take at face value the claims made by the people who want us to stump up for their "losses". Anyone who wishes the public to take on their debt without a full and open accounting of exactly what it is, how it arose, and how it relates to other transactions they have been engaged in, should be sat in a small room and played a loop of the Laughing Policeman for a very long time.

[peterms]

Very interesting piece in Barron's (owned by News Corporation) saying that the only plausible way out in Greece is for the bondholders to take a haircut.

Interesting indeed. The approach seems to be about the interests of the bondholders, not the Greeks, and it reads like a calculation of exactly how much the bondholders can wring out of the country without actually killing the patient.

They seem to be proposing an orderly restructuring while keeping Greece in the Euro. Perhaps an article written more from the perspective of the Greeks would discuss a wider default rather than negotiating down the level of repayment, and leaving the Euro in order to have a sovereign currency with the wider range of policy options that comes with that.

Another perspective on this in the Guardian.

Is defaulting really 'political suicide'?

Would it be political suicide for Greece to default on its debts – or a smart move?

From George Bush to George Osborne, many stupid and disingenuous things have been said during the financial crisis. But some sort of prize really ought to go to Lorenzo Bini Smaghi.

His seat on the executive board of the European Central Bank makes Bini Smaghi one of the most important economic officials on the continent. He votes on whether interest rates in the eurozone should go up or down. He's had a hand in the bailouts to distressed nations within the single-currency club. And two weeks ago he warned the struggling Greeks: "Default or debt restructuring is a dramatic economic and social event for the country which experiences it – I would call it political 'suicide'– which leads many into poverty."

What's wrong with this argument? Well, to use a technical term, it's balls. More precisely, it's the sort of everyone-says-it-so-it-must-be-true balls that's been a hallmark of European policy-making ever since the banking crisis broke out.

When it comes to spouting conventional nonsense, Bini Smaghi has a fine pedigree. In 2007, he wrote: "The Irish example shows that it is possible to prosper in the monetary union while having a higher potential growth rate than the rest of the union." It was the spectacular wrongness of this conclusion that prompted bloggers to award the eminent central banker a new name: BS.

Right now, though, BS has many friends. Hardly a day goes by without a heavyweight from Frankfurt or Brussels warning Athens that unless it keeps on paying its loans in full and on time, dire consequences will unfold: investors will never lend to the government again, nor will foreign businesses come to the Med.

Even those who can see that this is impossible for prime minister George Papandreou, with his weak, divided government and wrecked economy, can barely bring themselves to use the word default – they talk instead of reorganisation or restructuring. Last week, a spokesman for the European Commission floated the idea of debt re-profiling. This, he assured journalists, was "a different concept from debt restructuring. It doesn't involve . . . the same players and doesn't have the same consequences." Reports that he was waltzing on the head of a pin throughout the briefing are yet to be confirmed.

At its best, this is economic diplomacy by euphemism; at its worst, it is pin-striped loan sharkery. Either way, what's largely missing from this debate is any discussion of what the evidence shows for countries that do default. Which should perhaps not come as a surprise because, if it were more widely disseminated, voters in Greece, Ireland and Portugal might well be calling far more loudly and confidently for their governments to renege.

Over the decades, economists from Ken Rogoff to Barry Eichengreen have queried the notion that default is, to use Bini Smaghi's term, "suicide". But the best recent paper I have come across on the subject is from October 2008, just after Lehman Brothers collapsed, and was written by Eduardo Borensztein and Ugo Panizza at the International Monetary Fund. Given that the IMF spends most of its time telling bust governments to keep to the path of fiscal rectitude, you might expect these two to write about the dangers of default. Far from it.

First, Borensztein and Panizza put together a history of countries that defaulted between 1824 and 2004. Then they look at the short- and long-run consequences of the default. Their conclusion? "The economic costs are generally significant but short-lived . . . we almost never can detect effects beyond one or two years."

It's true, as Bini Smaghi and his colleagues claim, that investors don't lend to countries that welch on their loans – but the informal embargo lasts for months. The IMF researchers show what the governments of Argentina and Russia could tell you from recent experience: markets have fairly short memories. Even the interest rate on loans to disgraced countries falls within a couple of years from the punitive to the near-normal.

None of this is to say that national bankruptcy is as easy as checking into a spa. Angry creditors have a nasty habit of setting Manhattan lawyers on poor African countries if they think they stand a half a chance of getting their dollars back. But coming clean and admitting that you can't pay your loans is a viable option for an administration that has run out of other options.

Athens is now at that point. Under the weight of historic spending cuts, the Greek economy has come apart faster than an MFI bookcase under a pile of Encyclopedia Britannicas. Its budget overdraft has rocketed way past international officials forecasts, and going by markets yesterday investors would only be willing to lend to Athens at a 17% interest rate. You could get better terms from your credit-card company.

So why doesn't Athens just give up? Surely not because its economy would do any worse, but because the banks, in Germany (which holds $26bn of Greek debt) and France (which owns $20bn) and in Greece, would then have another brush with insolvency. But the answer would be to deal with the banks – by giving them more money or just taking them over – rather than crucify an economy.

For Costas Lapavitsas, an economist at the School of Oriental and African Studies just back from Athens, the situation represents only one thing. "It's the triumph of the banks," he tells me. "The lenders in Greece and abroad are being given preferential treatment over the Greek people."

[LondonLax]

Defaulting on loans is theft.

You can't just borrow money, cook the books to hide your inability to pay, spend the money on early retirement pension schemes and ambitious restorations of antiquities and then turn around and say "Sorry! We've spent all the money, you can't have it back".

[peterms]

Defaulting on loans is theft.

You can't just borrow money, cook the books to hide your inability to pay, spend the money on early retirement pension schemes and ambitious restorations of antiquities and then turn around and say "Sorry! We've spent all the money, you can't have it back".

An interesting view. I have some sympathy with it, as I am sure many will.

Some other propositions, to test the water.

Lending on loans you know to be dodgy and expecting the public to cover the cost of your foreseeable loss is unacceptable. Making such loans without the collateral to pay the loss is fraud, and should be prosecuted as such.

Speculating on commodities is murder. Playing the market to drive up the cost of essential foodstuffs and then short them to make money while people starve as a consequence of your actions is murder, and you should be tried for it.

Paying £554m to 200 staff at Barclays, while you pay £653m as dividends to shareholders who funded the £51bn of equity capital which enabled those profits to be made, is theft.

Defaulting on loans is in my view regrettable, but a lesser crime than any of these three examples, and especially the second. Making loans is a risk business, you know there's a chance it won't be repaid, and you price the risk accordingly. Which is why Greece is paying eyewatering rates at the moment - the speculators have priced in the risk of default.

They seem to want the risk premium without the risk. Nice work if you can get it.

[CVByrne]

Speculating on Commodities is murder. Woah that's a bit of a serious statement.

[peterms]

Speculating on Commodities is murder. Woah that's a bit of a serious statement.

Yes, and it's too sweeping a statement. If I were making the argument seriously rather than putting forward propositions which I see as on a level with "default is theft", I would frame it more narrowly.

I would say for example that speculating on food prices, and more specifically the prices of staple foods without affordable access to which we know people will die, is morally equivalent to murder.

That seems to me to be an entirely defensible position, and one which governments ought to adopt as a matter of urgency if they are serious about tackling world hunger.

We didn't used to allow speculators to manipulate the prices of essential foods, and we somehow managed. But they lobbied to be allowed to open yet another room in the casino, and foolishly, someone let them. The result is many millions of avoidable deaths.

Some background info here.

There's also an interesting correlation between wheat prices and the emergence of social unrest in Arab countries in the last few months...

[CVByrne]

Do you not think that the opening up of markets while not perfect has spread wealth to a degree in the western world. Standards of living have steadily climbed every decade.