On Greece and Contagion

It’s Not About Greece Anymore

The Greek “rescue” package announced last weekend is dramatic, unprecedented and far from enough to stabilize the euro zone.

The Greek government and the European Union leadership...have abandoned previous rounds of optimistic forecasts and have now admitted to a profoundly worse situation.

This new program calls for “fiscal adjustments” — cuts to the fiscal deficit, mostly through spending cuts...

This new program is honest enough to show why it is unlikely to succeed.

Daniel Gros, an eminent economist on euro zone issues who is based in Brussels, has argued that for each 1 percent of G.D.P. decline in Greek government spending, total demand in the country falls by 2.5 percent of G.D.P. 

If the government reduces spending by 15 percent of G.D.P. — the initial shock to demand could be well over 30 percent of G.D.P.

...Greece is likely to experience a very sharp recession — and there is substantial uncertainty around how bad the economy will get. 

...Since most Greek debt is held abroad, roughly 80 percent of the budget savings the Greek government makes go straight to Germans, the French and other foreign debt holders...

If growth turns out poorly, will the Greeks be prepared for ever-tougher austerity to pay the Germans?

...If the euro zone proves unwilling to protect a member like Greece from default, then bond investors will run from Portugal and Spain also...  Higher yields on government debt would have caused concerns about potential bank runs in these nations, and then spread to more nations in Europe.

When there is such a “run,” it is not clear where it stops.  In the hazy distance, Belgium, France, Austria and many others were potentially at risk. Even the Germans cannot afford to bail out those nations.

...The program as announced has only a small chance of preventing eventual Greek bankruptcy, but it may still slow or avert a dangerous spiral downward — and enormous collateral damage — in the rest of Europe.

...Someone has to decide who should be defended and at what cost, and the European structures are completely unsuited to this kind of tough decision-making under pressure.

In the extreme downside scenario, Germany is the only obvious safe haven within the euro zone, so its government bond yields would collapse while other governments face sharply rising yields.

The euro zone would likely not hold together.

PETER BOONE AND SIMON JOHNSON
New York Times, May 6, 2010

Market Watch: S&P cuts Greece ratings to junk status

Standard & Poor's said Tuesday it cut Greece's ratings to junk status.

The ratings agency lowered the long-term sovereign credit rating on Greece to BB+ from BBB+.

The outlook is negative.

"The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory," said Marko Mrsnik, an S&P credit analyst, in a statement.

Market Watch

John Taylor on Greece

Greece Is Out, We Just Have To Sort Out the Details

...Although there do not seem to be more than 100 people in all of New York City that have any interest or concept of what is going on in Greece and within the euro, the events of the next few months will have a tremendous impact on the world. If the political actors in this tragedy-comedy play their roles well – staving off collapse – our suffering will be worse.

There is no way to win.

The powerful elite political forces, and their co-opted market allies, involved in this fanciful decision-making can not control the economic reality that will eventually destroy Greece and Europe.

Hopefully, they will be forced to give up before the damage is too severe.

The quicker the crisis comes, the better for the world, but almost everyone is working in the other direction, stretching it out to inflict maximum pain. At this point, the best way out for Greece is very clear. Greece should pull out of the euro this weekend, issue new drachma notes as soon as possible, and let the lawyers clean up the mess. If I were running Portugal, Italy, or Spain I would do the same thing – the first one out is the winner.

...the breakdown of politics is war.

Usually the war implied in this famous aphorism would be between states, but in this case it would be between the people and the government that has failed them. The Greek government can’t follow the current course.

On the issue of ‘internal devaluation,’ the European political elites are way out of touch with their people: almost no one will stand for it. The political maze we are entering might have many twists and turns with distorting mirrors, but money is money and its powerful logic will win in the end.

No matter how many speeches and new regulations are made, the Greek economy will continue to deteriorate, dragging down the rest of Europe far more powerfully than its 3% implies...

John R. Taylor, Jr.
Via Tyler, April 8, 2010

Is Greece California? (Deflation Edition)

If sovereign and municipal credit markets tighten,
how could unemployment and business profitability be affected
if Greece, some other relatively weak European countries
and some US states implement severe budget cutbacks and tax increases
to balance budget deficits?

If the EU/US doesn’t bailout Greece/California
could the Euro and the US dollar retain credibility as commodity prices fall?

Could deleveraging in developed countries cause some over-indebted customers
to import less from lower wage paying emerging markets?

If cut off from credit markets and in danger of default,
could some emerging countries inflate currencies to maintain debt and spending?

We should consider ourselves unauthorized
to saddle posterity with our debts and morally bound to pay them ourselves.

Each generation has the right by will of its majority to bind themselves,
but none to bind the succeeding generation.

Thomas Jefferson

Is a Keynesian or Austrian path the most economically ethical?

Historical Rhyme: If Hungary, Bolivia, Brazil, Chile, The Dominican Republic, Ecuador, El Salvador, and Peru defaulted or had to restructure sovereign debt in 1931, and Austria, Bulgaria, Germany, Colombia, Nicaragua, Panama, and Paraguay did in 1932, before Romania, Serbia/Yugoslavia, Cuba, Guatemala, and Uruguay did the same in 1933…?

What could happen if a generation of underemployed, underpaid, educated and indebted young adults become disillusioned by their elders’ financial mismanagement and seek to identify and punish those responsible?

What may most likely happen after what happens after what happens next?

On Greece, Portugal, Spain, Italy etc…: Have the educated underemployed instigated most rebellions?

Is Greece California? (Inflation Edition)

Under a shared common currency, can a Eurozone member like Greece,
or an American state like California, inflate out of excessive spending and debt?

What could some unintended consequences be
if the European Union and/or the US federal government
intentionally inflate money supplies
to subsidize EU member and/or American state spending, debt and deficits?

Why would some oil exporters become reluctant to accept relatively lower prices
if the US federal government continues to amass unsustainable budget deficits?

We can guarantee cash benefits as far out and at whatever size you like,
 but we cannot guarantee their purchasing power.

Alan Greenspan

Ron Paul: Are US Taxpayers Bailing Out Greece?

On Greece, Portugal, Spain, Italy etc...: Have the educated underemployed instigated most rebellions?

Those who would give up essential liberty
to purchase a little temporary security,
deserve neither liberty nor security.

Benjamin Franklin

Greece faces strike barrage over austerity cuts

Greek tax collectors and customs officers walked off the job on Thursday, kicking off a spate of strikes against government austerity cuts designed to halt a financial crisis caused by massive debt.

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Both groups embarked on a two-day walkout ahead of industrial action called by civil servants, doctors and Communist-backed workers on February 10 and a general strike called by Greece's main umbrella union on February 24.

…The unions are on the warpath over a government austerity programme that they say has progressively become harsher under pressure from the European Union and market speculation that has hurt Greek finances and rattled the euro.

…GSEE has also walked out of the official debate on how to reform the country's cash-strapped pensions system that is a key part of the government's economy rescue agenda.

The country's recession-hit economy has already been disrupted by a protest by farmers, who have blocked key highways and shut down border crossings on a near-daily basis for three straight weeks.

Greek Prime Minister George Papandreou on Tuesday ordered a public salary freeze, a higher retirement age and a hike in petrol prices, supplementing a crisis plan unveiled last month to reassure the international financial community.

Greece's debt stands at more than $412 billion…and it suffered a triple downgrade of its sovereign debt in December.

AFP