Greece

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StuBee
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Re: Greece

Post by StuBee »

A few interesting articles at the Financial Post. Are they serious :shock: ?
http://business.financialpost.com/2011/ ... kest-hour/
http://fullcomment.nationalpost.com/201 ... nce-again/

This appears quite dramatic to say the least!!!
Any opinions (from anyone with more knowledge than me---i.e. more or less anybody who condescends to respond :) )?
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Re: Greece

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It's going to be the classic battle between printing and cutbacks. It seems that with Germany in charge it will be cutbacks that win with some psuedo-printing to calm the markets from time to time. Either way Europe (and other countries in the same situation) are in for a lot of pain.

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Re: Greece

Post by ghariton »

StuBee wrote:A few interesting articles at the Financial Post. Are they serious :shock: ?
http://business.financialpost.com/2011/ ... kest-hour/
http://fullcomment.nationalpost.com/201 ... nce-again/

This appears quite dramatic to say the least!!!
Any opinions (from anyone with more knowledge than me---i.e. more or less anybody who condescends to respond :) )?
That first article covers a lot of ground. What part of it do you want feedback on?

Ah well, lawyers are trained to speak whether or not they have something to say, so here goes.

Europe's southern fringe has been living beyond its means for over a decade. In the old days, they would get in debt, and then de facto reduce that debt by devaluing their currency. Financial markets, knowing that, would not lend them much, or only at high interest rates. That limited the amount of debt they could accumulate. Once they started using the Euro, they could no longer devaluate their currency. Loans to them seemed safer, and foreign lenders (especially German and French banks) were willing to lend them as much as they wanted, at very low interest rates. After all, it was thought, all members of the Eurozone more or less guaranteed each other's solvency. (That was a big mistake. Even in a tight federation such as the U.S., individual states and municipalities can default on their bonds.) Plus a number of countries, the most egregious being Greece, systematically lied about their financial situation.

Fast forward to two years ago. Newly elected Prime Minister George Papandreou declares to the world that Greece's financial situation is abysmal. (It's not clear to me why he did this then. Perhaps he was just more honest than his predecessors.) If you held Greek bonds, what would your reaction be? Right.

Because Greece's bonds were denominated in Euros, the customary solution of devaluation was not available. Indeed, the only way Greece could improve its financial situation was through "internal devaluation", i.e. reduce nominal salaries and wages, etc, etc. (Under devaluation scenarios, real wages fall, but because nominal wages stay constant or even increase, everyone is fooled into thinking that there is no austerity -- or at least not as much.)

Normally, Greece would then default on its sovereign (i.e. government-issued) debt. Normally that would not be a big deal, but this time it was, for two reasons.

(1) If Greece has been lying about its finances and defaults, who else? Suddenly investors question lending to Ireland and Portugal, then Spain, then Italy. Soon it might be France and Germany itself. (I note that even the Germans have experienced difficulty selling bonds recently.) Contagion might imperil every member of the Euro Zone.

(2) German banks (and Fench banks) hold a mittful of bonds issued by the countries in question. It would be politically very difficult to let them take the losses. (There are many further complications. E.g. many sovereign bonds have been insured against default. Will the insurers survive?)

So Germany has a very strong interest in no defaults (voluntary "haircuts" are another, and more acceptable, matter). But Greece et al are broke,. and likely can't pay interest or indeed refund principal much longer. What to do?

The European Central Bank can guarantee Greece's loans, either directly or as a lender of last resort to Greece. But the ECB's money is mainly German money. So we are talking of Germany basically taking on Greece's debt. You can imagine how politically popular that is with ordinary Germans. In addition, essentially the ECB would be increasing tjhe supply of Euros very significantly. The Germans firmly believe that would lead to inflation, and possibly hyper-inflation. (For those on this forum who doubt that, I'm just reporting on German beliefs, not commenting on their validity :wink:).

And not only would Germany have to take on the present Greek debt. They would be taking on an open-ended commitment to take on (or guarantee) all future Greek debt as well. Essentially, they would be creating huge "moral hazard", i.e. the Greeks would spend and the Germans would pay. (Sounds like my household :wink:).

So the least of the conditions that the Germans would attach would be a veto over future Greek budgets. Depending on how concerned they were, they might want more detailed control over government spending, taxes (and their collection) and so on. Of course, they could not expect to do this directly -- that would be imperialism. So they would do it through the European Commission or another such body, with strong German control. This is the German imperialism, and take-over of Europe, that some fear.

I prefer to call it federalism, somewhat as in Canada. A central body has a rather weak control over provincial finances, but full control ove the financial system.

Of course, there would be ongoing problems. In particular, it is not clear how long ordinary Germans are willing to transfer money to Greeks. On the other hand, Alberta has been transferring money to Quebec and the Atlantic provinces for decades now, so perhaps "transfer federalism" can work for long periods of time. But it does take some central fiscal authority, which Europe doesn't have.

The alternaitve is to let Greece default. Very unpleasant for ordinary Greeks, but who cares apart from them and their relatives? The real concern is instability in the other Eurozone members, and the losses to German and French banks.

Difficult choice for Angela Merkel and Nicolas Sarkozy. At least the two are getting along on a personal basis. There was a photo in the weekend paper of the two hugging and having a merry old time. Good thing Dominique Strauss-Kahn isn't the French President.

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Re: Greece

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Thanks for your lengthy response ghariton. You have helped me better understand the situation.
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Re: Greece

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ghariton wrote:On the other hand, Alberta has been transferring money to Quebec and the Atlantic provinces for decades now, so perhaps "transfer federalism" can work for long periods of time. But it does take some central fiscal authority, which Europe doesn't have.
I'd suggest that Canada also has a sense of 'national cohesion', (i.e. "We're all in it together"), that Europe doesn't have.........(perhaps the Germans can reclassify transfers as 'Foreign Aid'?).
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Re: Greece

Post by Dennis »

I also thank you George for your informative summary.

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Re: Greece

Post by Shine »

ghariton wrote:
StuBee wrote:A few interesting articles at the Financial Post. Are they serious :shock: ?
http://business.financialpost.com/2011/ ... kest-hour/
http://fullcomment.nationalpost.com/201 ... nce-again/

This appears quite dramatic to say the least!!!
Any opinions (from anyone with more knowledge than me---i.e. more or less anybody who condescends to respond :) )?
That first article covers a lot of ground. What part of it do you want feedback on?

Ah well, lawyers are trained to speak whether or not they have something to say, so here goes.

Europe's southern fringe has been living beyond its means for over a decade. In the old days, they would get in debt, and then de facto reduce that debt by devaluing their currency. Financial markets, knowing that, would not lend them much, or only at high interest rates. That limited the amount of debt they could accumulate. Once they started using the Euro, they could no longer devaluate their currency. Loans to them seemed safer, and foreign lenders (especially German and French banks) were willing to lend them as much as they wanted, at very low interest rates. After all, it was thought, all members of the Eurozone more or less guaranteed each other's solvency. (That was a big mistake. Even in a tight federation such as the U.S., individual states and municipalities can default on their bonds.) Plus a number of countries, the most egregious being Greece, systematically lied about their financial situation.

Fast forward to two years ago. Newly elected Prime Minister George Papandreou declares to the world that Greece's financial situation is abysmal. (It's not clear to me why he did this then. Perhaps he was just more honest than his predecessors.) If you held Greek bonds, what would your reaction be? Right.

Because Greece's bonds were denominated in Euros, the customary solution of devaluation was not available. Indeed, the only way Greece could improve its financial situation was through "internal devaluation", i.e. reduce nominal salaries and wages, etc, etc. (Under devaluation scenarios, real wages fall, but because nominal wages stay constant or even increase, everyone is fooled into thinking that there is no austerity -- or at least not as much.)

Normally, Greece would then default on its sovereign (i.e. government-issued) debt. Normally that would not be a big deal, but this time it was, for two reasons.

(1) If Greece has been lying about its finances and defaults, who else? Suddenly investors question lending to Ireland and Portugal, then Spain, then Italy. Soon it might be France and Germany itself. (I note that even the Germans have experienced difficulty selling bonds recently.) Contagion might imperil every member of the Euro Zone.

(2) German banks (and Fench banks) hold a mittful of bonds issued by the countries in question. It would be politically very difficult to let them take the losses. (There are many further complications. E.g. many sovereign bonds have been insured against default. Will the insurers survive?)

So Germany has a very strong interest in no defaults (voluntary "haircuts" are another, and more acceptable, matter). But Greece et al are broke,. and likely can't pay interest or indeed refund principal much longer. What to do?

The European Central Bank can guarantee Greece's loans, either directly or as a lender of last resort to Greece. But the ECB's money is mainly German money. So we are talking of Germany basically taking on Greece's debt. You can imagine how politically popular that is with ordinary Germans. In addition, essentially the ECB would be increasing tjhe supply of Euros very significantly. The Germans firmly believe that would lead to inflation, and possibly hyper-inflation. (For those on this forum who doubt that, I'm just reporting on German beliefs, not commenting on their validity :wink:).

And not only would Germany have to take on the present Greek debt. They would be taking on an open-ended commitment to take on (or guarantee) all future Greek debt as well. Essentially, they would be creating huge "moral hazard", i.e. the Greeks would spend and the Germans would pay. (Sounds like my household :wink:).

So the least of the conditions that the Germans would attach would be a veto over future Greek budgets. Depending on how concerned they were, they might want more detailed control over government spending, taxes (and their collection) and so on. Of course, they could not expect to do this directly -- that would be imperialism. So they would do it through the European Commission or another such body, with strong German control. This is the German imperialism, and take-over of Europe, that some fear.

I prefer to call it federalism, somewhat as in Canada. A central body has a rather weak control over provincial finances, but full control ove the financial system.

Of course, there would be ongoing problems. In particular, it is not clear how long ordinary Germans are willing to transfer money to Greeks. On the other hand, Alberta has been transferring money to Quebec and the Atlantic provinces for decades now, so perhaps "transfer federalism" can work for long periods of time. But it does take some central fiscal authority, which Europe doesn't have.

The alternaitve is to let Greece default. Very unpleasant for ordinary Greeks, but who cares apart from them and their relatives? The real concern is instability in the other Eurozone members, and the losses to German and French banks.

Difficult choice for Angela Merkel and Nicolas Sarkozy. At least the two are getting along on a personal basis. There was a photo in the weekend paper of the two hugging and having a merry old time. Good thing Dominique Strauss-Kahn isn't the French President.

George

George, an excellent summary. You may have missed two words only - Goldman Sachs.
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Re: Greece

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Don't forget where one article said something like Germany gets benefits from the union. It said the citizens are starting to realize that there will also be costs.

Compare the situation with China who pegs their currency to countries who need to be able to devalue. It's identical to Germany who's essentially pegged to the Mediterranean countries and is using that advantage to export goods. It's still mercantilism when non-asians do it. Germany lends money to the fringe so they can buy German goods. China lends money to the US for the exact same reason. This lending to customers who can't pay was a big factor in the tech crash as well.

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Re: Greece

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x
Last edited by Shine on 05 Dec 2011 09:05, edited 1 time in total.
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Re: Greece

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Shine wrote:
Compare the situation with China who pegs their currency to countries who need to be able to devalue. It's identical to Germany who's essentially pegged to the Mediterranean countries and is using that advantage to export goods
Germany lives within the Euro while China restricts market value on the Renmimi/Yuan.
It's the same thing. China keeps their currency low compared to their customers in order to export more. The euro does the exact same thing for Germany.

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Re: Greece

Post by squid »

If Germany is going to be in de facto control, what was the point of WWII?
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Re: Greece

Post by Wallace »

Shine wrote:George, an excellent summary. You may have missed two words only - Goldman Sachs.
Deja vu all over again - :wink:

An old argument coming full circle......
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Re: Greece

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newguy wrote:Don't forget where one article said something like Germany gets benefits from the union. It said the citizens are starting to realize that there will also be costs.

Compare the situation with China who pegs their currency to countries who need to be able to devalue. It's identical to Germany who's essentially pegged to the Mediterranean countries and is using that advantage to export goods. It's still mercantilism when non-asians do it.
Yes. I necessarily simplified a lot.

Other members of the EU can't devalue against currency. If they could, that would lower their relative unit costs and increase their competitiveness as against Germany (all on the backs of their workers, etc, but who cares about them?)
Germany lends money to the fringe so they can buy German goods. China lends money to the US for the exact same reason. This lending to customers who can't pay was a big factor in the tech crash as well.
A different point, but also valid. Of course, Germany doesn't need survival of the Eurozone for this one. merely denominate loans, etc, in new marks.

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Re: Greece

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Wallace wrote:
Shine wrote:George, an excellent summary. You may have missed two words only - Goldman Sachs.
Deja vu all over again - :wink:

An old argument coming full circle......
Indeed. Stick around this forum long enough and you get to marvel at how smart we all were five or ten years ago. :wink:

Try a thought experiment (as the philosophers say). Imagine that Goldman Sachs had never existed. Instead, Lloyd Blankfein and his merry men were all engaged as plumbers or electricians or something. Would the financial crisis not have occurred? Or, if it would have occurred anyway, would its scope have been less?

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Re: Greece

Post by Shine »

ghariton wrote:
Wallace wrote:
Shine wrote:George, an excellent summary. You may have missed two words only - Goldman Sachs.
Deja vu all over again - :wink:

An old argument coming full circle......
Indeed. Stick around this forum long enough and you get to marvel at how smart we all were five or ten years ago. :wink:

Try a thought experiment (as the philosophers say). Imagine that Goldman Sachs had never existed. Instead, Lloyd Blankfein and his merry men were all engaged as plumbers or electricians or something. Would the financial crisis not have occurred? Or, if it would have occurred anyway, would its scope have been less?

George
All too true George. My reference to "two words" may well have been glib.

This afternoon, however, I was driving home along Marine Drive half listening to the radio and it suddenly hit me that most every country,state, province, and municipality,is bankrupt. I had to pull over to the shoulder for some time.

I am overtaken by the thought that the real financial crisis has not yet arrived. Maybe 2008 was only a tremor.
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Re: Greece

Post by tedster »

> Greek
> Bailout
>
>
>
> It is a slow day in a little Greek Village. The
> rain is beating down and the streets are deserted. Times are
> tough, everybody is in debt, and everybody lives on
> credit.
>
>
> On this particular day a rich German tourist is
> driving through the village, stops at the local hotel and
> lays a €100 note on the desk, telling the hotel owner he
> wants to inspect the rooms upstairs in order to pick one to
> spend the night.
>
>
> The owner gives him some keys and, as soon as
> the visitor has walked upstairs, the hotelier grabs the
> €100 note and runs next door to pay his debt to the
> butcher.
>
>
> The butcher takes the €100 note and runs down
> the street to repay his debt to the pig
> farmer.
>
>
> The pig farmer takes the €100 note and heads
> off to pay his bill at the supplier of feed and
> fuel.
>
>
> The guy at the Farmers' Co-op takes the
> €100 note and runs to pay his drinks bill at the
> taverna.
>
>
> The publican slips the money along to the local
> prostitute drinking at the bar, who has also been facing
> hard times and has had to offer him "services" on
> credit.
>
>
> The hooker then rushes to the hotel and pays
> off her room bill to the hotel owner with the €100
> note.
>
>
> The hotel proprietor then places the €100
> note back on the counter so the rich traveller will not
> suspect anything.
>
>
> At that moment the traveller comes down the
> stairs, picks up the €100 note, states that the rooms are
> not satisfactory, pockets the money, and leaves
> town.
>
>
> No one produced anything. No one earned
> anything. However, the whole village is now out of debt and
> looking to the future with a lot more optimism. And that,
> Ladies and Gentlemen, is how the bailout package
> works.
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Re: Greece

Post by ghariton »

Notice the fallacy in the anecdote in tedster's post.

Before the chain of events, everyone in the villages owes EUR 100. But for the story to work, everyone in the village is also owed EUR 100. Therefore, everyone in the village has a net worth of zero (ignoring other assets).

After the tourist comes and all the shenanigans take place, everyone in the village still has a net worth of zero. Nothing has changed except for a few accounting entries.

But we can keep the punchline: And that is how bailouts work!!

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Re: Greece

Post by Dennis »

Yabbut the tourist gave the hotel owner a loan without interest :twisted:
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Re: Greece

Post by tedster »

George, it was just a joke. Came to me as an email and I was trying to decide if I would post it in December Humour.. but chose this thread instead. :)
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Re: Greece

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tedster wrote:George, it was just a joke. Came to me as an email and I was trying to decide if I would post it in December Humour.. but chose this thread instead. :)
Yes, I knew. But I thought I would use it as a `teaching moment`. After all, FWR is supposed to be an educational site. :wibk: Thank you for providing the occasion.

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Re: Greece

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More bailout math.

Three guests check into a hotel room. The clerk says the bill is $30, so each guest pays $10. Later the clerk realizes the bill should only be $25. To rectify this, he gives the bellhop $5 to return to the guests. On the way to the room, the bellhop realizes that he cannot divide the money equally. As the guests didn't know the total of the revised bill, the bellhop decides to just give each guest $1 and keep $2 for himself.

Now that each of the guests has been given $1 back, each has paid $9, bringing the total paid to $27. The bellhop has $2. If the guests originally handed over $30, what happened to the remaining $1?


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Re: Greece

Post by AltaRed »

The bellhop's initials must be GS.
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Re: Greece

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newguy wrote:More bailout math.

Three guests check into a hotel room. The clerk says the bill is $30, so each guest pays $10. Later the clerk realizes the bill should only be $25. To rectify this, he gives the bellhop $5 to return to the guests. On the way to the room, the bellhop realizes that he cannot divide the money equally. As the guests didn't know the total of the revised bill, the bellhop decides to just give each guest $1 and keep $2 for himself.

Now that each of the guests has been given $1 back, each has paid $9, bringing the total paid to $27. The bellhop has $2. If the guests originally handed over $30, what happened to the remaining $1?
Like tedster`s, this should be in the Humour`section, or perhaps a `puzzles`thread.

The room cost $25 (i.e. $30 less $5), the guests paid $27 (i.e. 3 times $9), and the bellboy got the difference, $2. So $27 equals $27. Where is the puzzle. (I guess that the puzzle is why anyone would think that the original $30 is relevant to anything, once it had been reduced to $25.)

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Re: Greece

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Who's Responsible For the Euromess?
Europe's fundamental problem wasn't budget deficits, it was capital flows within the eurozone ...
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Not Greece. Germany.

Post by apater »

Executive summary: (German) exports are cheaper than they have any right to be because their currency is cheaper than it is has any right to be.

http://www.bloomberg.com/news/2011-12-0 ... klein.html
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