So Greece is once again closer to exiting the Euro. This could come suddenly, and messily. My working assumption is that the trigger for a messy Greek exit would be a run on the local banks. The government is in no position to nationalise the local banks and independently support their liabilities. So in the event of a local, Greek bank run, Athens may simply decide the game's up for their Euro membership.What I especially wonder, is how likely this is to happen. It's a decent working assumption that Greek banks are only being kept liquid by loans from the ECB. Surely, at some point Greek banks will run out of collateral. But when? As a follow on observation, the ECB must be on the hook for bucket loads of Greek based collateral. If Greece redenominates Greek state and other debt into new-drachma, that's a great big loss to the ECB. The threat of doing this must give Greece some negotiating power, even now in it's seemingly forlorn aim of negotiating yet another concession on its latest bail-out package.
Mark,I would guess that the clever Corporate and Private money has long since left the Greek Banks and is safely nestling in New York, London, Hong Kong and so on. (Mine would be!)It would be interesting to know how much Greek private individuals still have on deposit in their own banking systemG12
The deposits are one side of the problem but don't forget the loans made by Greek banks will be against Greek assets which can't be moved. A Greek mortgage on a Greek property for example or a loan to a Greek business. Sure these loans have to be funded but this is where the EU funding comes in so even if all the deposits were removed from the Greek banks as long as they can fund the loans via repos with the EU things can continue.Obviously, if the assets prices crash (e.g. Greek house prices) and/or due to unemployment businesses go bust and loan repayments fail then banks get a hit on capital and require recapitalisation via debt restructuring or new equity. A deposit run in itself would not be fatal as long as the EU backstop with funding. If that failed though then I guess most of the banks would be in big trouble. Log
The deposits are one side of the problem but don't forget the loans made by Greek banks will be against Greek assets which can't be moved. A Greek mortgage on a Greek property for example or a loan to a Greek business. Sure these loans have to be funded but this is where the EU funding comes in so even if all the deposits were removed from the Greek banks as long as they can fund the loans via repos with the EU things can continue. Indeed, but I suspect now that the indirect owner of much of the Greek property mortgages (for example) is now the ECB. If Greece denominates into new-drachma, instead of the ECB holding €100 collateral per €X of LRTO loan, it will hold 100 new drachma. And the new drachma collateral is certain to below par. So the Greek bank is bust, but the ECB also takes a gigantic hit. Maybe it would just be simpler for the EU to start issuing common-bonds, and get it over with. More and more residual liabilities of southern European states look to be indirectly communal anyway, because the ECB is a common institution.
<<<"I would guess that the clever Corporate and Private money has long since left the Greek Banks and is safely nestling in New York, London, Hong Kong and so on. (Mine would be!)">>>>-------------------------------------------Or maybe on top of the wardrobe. ;0).http://www.dailymail.co.uk/debate/article-2008068/WILLIAM-RE...
Yes for sure a big hit to the ECB but probably worse since there is a lot of Greek sovs repo'd there as well. It won't be a 100% hit though as they'll have to provide over 100% collateral to get back 100% in funding but substantial nonetheless. This is the stick the Greeks have to beat the ECB with though without which I'm sure the Eurozones would have cut Greece loose a long time ago.Log
deposit flighthttp://blog.titocosta.com/post/6555268929/greece-bank-run-de...http://soberlook.com/2012/04/continuing-flow-of-capital-out-...or just look at the bloomberg 'greece domestic deposits'they dont all reconcile very well excepting, of course, they are all well down.Zero hedge (dare I mention) did a good review in Jan or Feb, showing seasonality and flsh points.r
My views here, if anyone is interested:http://boards.fool.co.uk/this-gives-a-good-idea-of-how-the-g...WShak
I very much agree with your post WShakThe leader of Greece's left-wing Syriza bloc is continuing attempts to form a government after elections on Sunday produced an inconclusive result.Alexis Tsipras has said he will try to form a coalition based on tearing up the terms of the EU/IMF bailout deal, which he describes as "barbaric".On Wednesday, he will meet the two mainstream pro-bailout parties, Pasok and New Democracy (ND).If the two sides fail to agree, Greece could face fresh elections in weeks.http://www.bbc.co.uk/news/world-europe-18001715Not good for short term sentiment but it looks pretty likely that we'll now have new elections ASAP and it now appears that the Troika have cancelled their May mission to Greece which will bring the choice at that election very starkly into focus. My guess is that after showing their disapproval of politicians at this election that more sensible heads will prevail at the next. Without bailout money Greece is going to face either being unable to pay public sector workers or to actually leave the Euro with the horror that would bring them.B
Without bailout money Greece is going to face either being unable to pay public sector workers or to actually leave the Euro with the horror that would bring them. Any idea the present size of Greece's primary deficit i.e. is there a hypothetical option of defaulting on bonds in June, but continuing to pay public sector workers partial wages?
MarkLucasapparently greece runs a primary surplus as of January http://blogs.telegraph.co.uk/news/danielknowles/100136919/gr... quoted from the ecbother sources say small primary deficit (ekathemerini and forbes) but dont quote exact sourceDefault friendlyr
RobbinsboxThanks, and interesting Greece has a primary surplus. So as things stand Greece could default (or threaten to do so), potentially cling on to Euro membership, and renegotiate its sovereign debts right down. I wonder if defaulting on sovereign debt (whilst respecting its obligations to the IMF tier of debt), would put Greece in breech of and treaties governing its membership of the Eurozone and EU. Maybe not.Mark
Thanks, and interesting Greece has a primary surplus. So as things stand Greece could default (or threaten to do so), potentially cling on to Euro membership, and renegotiate its sovereign debts right down. I don't think so to be honest. I think they're being firmly given the choice - keep to the deal and stay, change the deal and leave.The German foreign minister has just come out and said that 'Greece's destiny in the Euro Zone lies in Greece's hands, Greece will decide on it's own which path it takes. We have made an offer, we are showing solidarity, but there is an agreement.'Everyone's pushing for a re-election now.B
The German foreign minister has just come out and said that 'Greece's destiny in the Euro Zone lies in Greece's hands, Greece will decide on it's own which path it takes. We have made an offer, we are showing solidarity, but there is an agreement.'Everyone's pushing for a re-election now.Worth remembering just how the population feel about the Euro as well - the majority want to keep it. Ask the people whether they want austerity, obviously the answer is "no". Unfortunately, other countries don't want to give Greek people money without something in return in the form of European stability.As the German FM days, Greeks can decide what Greeks should do and fresh elections will give them another opportunity to say what they want, having registered a protest vote on Sunday. I would be astonished if extreme parties didn't lose some votes next time around.WShak
'if that would put greece in breach of treaties'I would love to know thisI doubt there was any provision put in placeAccession and formative treatieshttp://europa.eu/legislation_summaries/institutional_affairs... but no detail as to penaltieshttp://en.wikipedia.org/wiki/Withdrawal_from_the_European_Un...clearly states that there is no mechanism for ejection but this concerns the eu, not the euro.That is all I could find. Maybe others know more.Separately, imo default is valid. Exiting the euro without default it inconceivable as, is widely commented, euro denominated debt burden is very large.No idea why some propose leaving the eu. (i honestly think there is still some confusion in the press about EU and eurozone)r
Separately, imo default is valid. Exiting the euro without default it inconceivable as, is widely commented, euro denominated debt burden is very large.If they leave the Euro they'd have to default but also many firms and individuals would also have to default. Would be an absolute nightmare for them which is why I personally don't think that they will.
Well, I’m not as sanguine about this as WShak and Bertee. It seems to me that the momentum towards Greek rejection of the bailout terms, and exit from the Eurozone, is still building both internally and externally, and may now have reached a tipping point after which it becomes inevitable.I’ve had a house in Greece for many years and have a number of Greek contacts, and right now momentum towards SYRIZA still seems to be building. With 70% of the vote last Sunday in favor of rejecting the bail out terms, it wouldn’t take too many of the other minority parties’ anti-bailout voters to switch their vote to Syriza to make Syriza the largest party in the next election, at which point they’d collect the 50 seat winner’s bonus. The situation is very unstable and fluid, and anything's possible, but I don't think one can assume that "normal service" will necessariiy be resumed in a second election.Over here, we think it doesn’t make sense for the Greeks to reject the bail out terms because “where will they get the money to pay public sector salaries”, but that’s not how it seems in Greece. There is 50%+ youth unemployment, huge social pain, limited social; security cover, and if they accept the bail out terms they face yet further economic collapse, with no perceived prospect of economic recovery. It was announced this morning that Greek budget revenues fell over 10% in April YoY. It’s basic human psychology that if you’re faced with the certainty of near term economic pain, then you’ll become risk seeking to avoid the pain. Looked at this way, maybe Greeks can see no way out, so many of them are prepared to throw the dice for change, any change reallyI agree that the majority of Greeks want to stay in the Euro, but not at any cost and the bottom line is that, whichever party is in, I think it will now prove impossible for the bail out austerity terms to be implemented - neither Greek society nor its institutions will accept it (for instance they’ve now cancelled the civil service review program). I doubt most Greek voters have fully thought it through in these terms, but I’d guess that if ultimately the choice is between accepting further austerity along the bail out lines, and returning to the Drachma, they may well choose the Drachma.And in truth, I’m not sure that would be a bad thing. Greece just can’t recover within the Eurozone without further massive internal devaluation, whereas if it defaults on its external debt and returns to the Drachma then at least it has the prospect of recovery. The primary budget is near balance now, and further austerity would really be about is paying off external creditors. If Greece can get that weight off its back, then at least it has a chance. Sure, it would be traumatic in the short term - the Greek banking system would immediately have to be nationalized, and resolving private sector EU debt and contracts would be hugely problematic. But countries (not least Greece, many times!) have defaulted and devalued before, survived and even prospered. And once a devalued Drachma was back, the massive recent flight exodus of capital from Greece might start to return to pick up bargains.Personally, I think it would probably be best for everyone to get this over and done with soon - it seems inevitable long term anyway, so best to get it over with now and resolve the uncertainty. The key to me is how an exit is handled - and in this respect I found this morning’s German comments about possibly helping Greece to achieve a Eurozone exit whilst remaining within the EU encouraging. That’s really what is needed, not only for Greece but also potentially for Spain and Portugal. These countries need to be able to leave the Eurozone, at least temporarily, and devalue so that they can regain competitiveness. EU and ECB funds should be used to help them do that and promote growth agendas, rather than funding budget deficits exacerbated by a hopeless feedback loop of austerity and internal devaluation.Personally, I’d find it pretty encouraging for the long term prospects for risk assets if a way is found to let Greek out of the Eurozone as painlessly as possible, and if that becomes a blue print for other peripheral nations in trouble. Yes, it might be very unsettling for markets in the near term, but we’d soon find a bottom. The Euro would then presumably rise in due course (no longer having the dead weight of the peripherals behind it), so if there are signs that this is the way things are headed and the Euro drops much further short term, then I might be tempted to buy it (and European corporates) quite aggressively.I suppose what we want to avoid at virtually any cost is a disorderly Eurozone break up - far better a controlled and managed break up. If the Greek situation brings key EU thinkers closer to real thought about how to achieve this, then so much the better. But in truth, for the time being I don’t think any of us can know how this is all going to develop, and I doubt any of the key players know either. I have a difficult enough time trying to work out what equities are worth in normal economic conditions, without trying to second guess inherently unpredictable political developments! Anyway, as an investor, you don’t have to swing the bat at every ball. So for the time being I’m still largely in cash, waiting to see how things develop. But equities are starting to get less expensive, and if events start to develop the right way there could be buying opportunities. Fascinating times.......A
Euro Zone debates delay of €5.2B May 10th payment to Greece - DJTempting though it may be to do so, I don't think that this payment should be delayed if conditions have been met for its distribution. WShak
If they leave the Euro they'd have to default but also many firms and individuals would also have to default. Would be an absolute nightmare for them which is why I personally don't think that they will. Are we getting a bit too Greek focused here.The change as I see it is that all the recent elections (UK, France, Greece) have hurt incumbants who are following austerity policies and boosted everyone who says they would do something different.This political momentum looks to be the biggest threat to the status quo and one the markets are not happy about.If you are a long term investor, like many here, there is nothing to do but keep collecting ones dividends and ignore the capitial declines on the premise that voters won't do anything that could hurt their pockets and the status quo will muddle through. This has been quite a successful tactic and it has the benefit that one doesn't need to do anything.But if your trying to generate alpha then this all looks like a potentially good opportunity, although deciding when the markets have been trashed enough and are due for a rally makes one feel that any profits which come have been well earned.Regards,
It will be interesting to see how the new president of France enjoys the poisoned chalice .
Ody asks if we're getting a bit too Greek. Fair point, but logic says Greece stands head and shoulders above the other weak Euro-zone members as at risk of default or Euro exit.Last year, I posted along the lines of whether it is really unthinkable that Greece should leave the Euro. Have to say, I felt a bit shouted down by the consensus response that exit would be a EU wide disaster. A year on, and now my hunch is that Greece could default and possibly exit the Euro, and contagion be contained. Reading between the lines,it sounds like Germany wouldn't be sorry to loose Greece from the Eurozone. So, as A. says, it may be willing to pay up to help ease Greece's transition. As mentioned at the start of the thread, the EU communally is already on the hook for a lot of Greece's debts, indirectly through the LRTO operation to its banks. Here's a pertinent extract from Martin Wolf's blog in today's FT, concerning exiting fixed exchange rates For many countries no plausible exit exists from depression, deflation and despair. If the currency union were a normal fixed exchange rate arrangement, it would collapse, as did the gold standard in the 1930s and the Bretton Woods system in the 1970s. The question is whether the fact that it is a monetary union will do more than delay that outcome. http://www.ft.com/cms/s/0/51bf429c-98f8-11e1-948a-00144feabd...
Euro Zone debates delay of €5.2B May 10th payment to Greece - DJTempting though it may be to do so, I don't think that this payment should be delayed if conditions have been met for its distribution. As it's now more likely that there will be a default, or at the very least lots of renegotiation/haggling, what advantage is there to the Eurozone in making a payment to Greece until the terms have been properly accepted?At best, this would encourage yet more haggling over the terms.At worst, it's just losing a lot of money.
As it's now more likely that there will be a default, or at the very least lots of renegotiation/haggling, what advantage is there to the Eurozone in making a payment to Greece until the terms have been properly accepted?At best, this would encourage yet more haggling over the terms.At worst, it's just losing a lot of money.Folk want Greece to honour its agreements and for them to do that it would be helpful if Europe honours its agreement so that if the Greeks do go they don't have a genuine excuse. As things now stand holding off this money could bring about exactly what all the months of negotiation and earlier payments were designed to stop. It would pull the rug from underneath all the moderate politicians.Regards,
avidya wrote:Sure, it would be traumatic in the short term - the Greek banking system would immediately have to be nationalizedYou see this is a very interesting point. I can't really see how this helps. How does a nationalized bank fund its loans and how does the sovereign backstop it's deposits when that sovereign has no funds?The only way to do this seems to be to convert all loans overnight into the new currency and print money to fund the loan book since no money from Europe will be forthcoming to do so. All equity and subordinated debts wiped clean within the banks. Although pretty radical how does this work in practice. What happens when banks have made loans to companies overseas or to international entities? How do all the contracts written in Euros for Greek companies work do they all get torn up and re-negotiated?I'm not that convinced this is at all possible in any practical way and when the alternative is pretty forgiving anyway and a lot less painful why go down that route? Having said that desperate people do desperate things and understanding the complexities of it all might not be achievable for enough people with a vote.Log
It will be interesting to see how the new president of France enjoys the poisoned chalice . At least the UK coalition only had the 50% tax rate to either swallow or spit out.
Breaking news is that part of this weeks transfer to Greece will be withheld. Talk is of 20%http://www.guardian.co.uk/business/2012/may/09/eurozone-cris...
Absolutely superb, myth busting article on Greece -everything you need to know in simple terms.http://www.huffingtonpost.com/alexander-mizan/greek-election...WShak
Absolutely superb, myth busting article on Greece -everything you need to know in simple terms.http://www.huffingtonpost.com/alexander-mizan/greek-election......If you follow the link to "Unfortunate Text Placement", the picture is probably appropriate to Greece too.
A Greece exit is no longer an issue for the Eurozone IMO, purely an issue for the Greeks themselves.Greece just can’t recover within the Eurozone without further massive internal devaluation, whereas if it defaults on its external debt and returns to the Drachma then at least it has the prospect of recovery.That is the crux of it. Many people, including me, would totally disagree. We'll never actually know because Greece can only take one option.But we are only interested from on investment perspective right. And in that sense I believe ody is on the money.GO
Hi avidya,I wouldn't say I'm sanguine about the possibility of a far left government taking charge in Greece but I am fairly relaxed about the impact that it would have on the rest of the Eurozone. Greece may well just prove itself to be the perfect example of why electorates shouldn't vote for parties that simply promise them the rosiest scenario without any ability to actually deliver it. I'd imagine that the Greeks are quite cynical about electoral promises but, if they can be convinced that they can get bailout money without any of the conditions attached so painfully over the last year, then they must still believe in the Tooth Fairy.All rational analysis has suggested that the least worst option for the Greeks is for them to stay with the Euro but that it will be extremely painful - I don't see why that now changes because extreme ends of the political spectrum are attracting protest votes. Of course, what is sensible economic policy and what is more attractive to vote for are two separate issues.If momentum is building towards the hard left, then I've obviously misread the situation but common sense tells me that people have a more emotional response when they get the first opportunity to react in a stressful situation. Only after a cooling off period, and an opportunity to see what the reality actually is, do people think with their heads rather than their hearts. The EC will realise that Greece will be the first of many if it shows any weakness whatsoever and, even in the worst case, it stands a chance of successfully demonstrating just how awful things can get for any country that takes the Tooth Fairy approach too seriously. I don't expect to see any softening in stance from the EC since it has everything to lose and not much to gain.So it really comes down to Greek voters and what they want to do and that's as it should be. If they want the support of Europe/IMF, they can't have money that doesn't need to be paid back. From what I've read in the Greek press, their journalists don't believe in the Tooth Fairy so the population should know what to expect if they go down that route. I've taken a decent sized position in NBG-A prefs which will obviously take a bath if that's the case but it's nothing that will affect me too much and I'd much rather see that happen than see the EC risk contagion by caving to the hard left in Greece. WShak
A Greece exit is no longer an issue for the Eurozone IMO, purely an issue for the Greeks themselves.There is a diversity of opinion here. Some commentators do take a contrary view.Andrew Roberts from RBS said brinkmanship between Athens and Berlin over Greece's euro membership risks full-fledged conflagration, with Spain in the frontline. "The contagion risks are woefully under-estimated. If Greece is forced out of the euro, it will set off deposit flight across southern Europe. This is becoming very dangerous. They seem to think that Greece is a one-off case but once you create a blueprint for exit, everything changes," he said. http://www.telegraph.co.uk/finance/financialcrisis/9255621/S...Arnaud Mares, of Morgan Stanley, said a Greek exit would set off "massive deposit flight" from all the vulnerable EMU states: "It could unravel the single currency altogether."http://www.dnaindia.com/analysis/comment_crisis-escalates-as...
On Newsnight they said that the even though anti EU bail out parties attracted 70% of the vote, they still couldn't get a coalition together and so its looking like another vote next month..
Hi Avidya, great post as ever!Personally speaking, although Europe is in a far stronger position now to deal with a Greek Euro exit I still don't think that they are ready. So we would still have a significant problem in that once one country actually leaves it sets a precident and a process for others to do the same rather than just being a talking point as it is now. We still don't have Eurobonds guaranteed by all member states and it looks to me like that's around 4-5 years away yet before they'll be in a position to finally agree on a system and issue them. So as soon as Greece actually left markets would immediately start to anticipate further exits and you'd expect a sharp rise in Italian and Spanish bond yields as markets built in the risk of currency devaluation to bond yields. Now everyone's focusing on the 10yr but shorted dated bond yields in both currencies still have a 3 handle and both countries still have access to bond markets. With a Greek exit I'd say there is a high risk that they would both be cut off and even short yields would go to potentially double digits.If anything polls in Greece suggest that the desire to stay in the Euro has grown rather than diminished. Something like 80% now want to stay in, it was only around 60% a year ago. The banking system would have to be nationalised but you would also have significant corporate and personal bankruptcies. Any defaults that I can think off have been in emerging markets where there is little consumer debt, so the focus has been entirely on the sovereign. Greece is very different. The closest in terms of having a lot of foreign currency denominated debt would appear to be Argentina, but even there you didn't have the amount of personal and corporate debt that Greece has. Argentina is still a total basket case now, they make up their inflation and GDP data.So for me the risks remain too high both for Europe and the Greeks for Greece to exit the Euro. We'll see a lot of bluff with European politicians waving goodbye and pretending that they're not going to be upset if Greece leaves but it's all just bluff. B
One very interesting thing by the way is that JP Morgan now believe that Greece will formally default on the bond due on the 15th of May which is now just a small rump held by those people who didn't take part in the voluntary debt swap. If they default on this bond they would then default on all their other hold out bonds - but they wouldn't default on the new bonds issued for the debt swap. B
Hi BertEEE, Is this all playing out as you thought it would or would you say now that Greek default and leaving the Euro look a little more likely than your previous forecasts? It seems that a majority of investors now believe that Greece will leave the Euro within the year. I thought that this might be a 50/50 probability a few months ago while you thought it was an extremely unlikely event (I can't remember exactly what probability you you put on it). If you now think it might happen, what events have changed your mind?John
Hi JohnNo I still think it's extremely unlikely and a tiny probability that Greece will leave the Euro. It wouldn't surprise me if Greece now defaulted though - the hold out bonds are now very small and if they are sufficiently confident that a formal default won't trigger government contracts etc (they've now had time to potentially make changes anyway) then it's common sense at this stage. The critical thing is that the vast majority of the debt has been swapped and this won't be affected so the market risk from it is now very low. B
IMO,Up to now, Germany has held all the cards on the direction of Euroland. The joker in the pack France has now emerged following the election of Hollande. To this point the the controlling of austerity and debt reduction has given the space to deal with the issues of Greece, Ireland etc. The space had been gained to either allow for Greece to tow the line or for a controlled exit.Hollande has made a lot of promises to the French, who have an expectation of seing them delivered. If he tries to renegotiate austerity with Germany that is likely to give the platform for further unrest in Spain and Portugal, with a requirement for further bail-outs. If he doesn't deliver then we might see more elections in France. The German public were not keen on the bail-out for Greece so any further signs of proping up other countries is likely to put pressure on Merkel and her party. Greece going may well be seen as a positive consequence by the German public.The current climate could well see a split of the Euro. We will see how well during the next 3 months when Hollande declares his true intentions to both the Germans and the French electorate. RegardsJeff
So for me the risks remain too high both for Europe and the Greeks for Greece to exit the Euro. We'll see a lot of bluff with European politicians waving goodbye and pretending that they're not going to be upset if Greece leaves but it's all just bluff.It may be bluff, but if there is a chance that all of this could escalate and get out of control, it looks to me, based on your earlier comments that Europe isn't prepared, that equities are way over priced.Sure we have had huge falls in Spain, but the rest of Europe isn't pricing in this possibility. It would be nice if folk could come out and say a Greek default is not going to happen, but no one can until at least new Greek elections have been held.In the period before the elections it is going to be difficult for equities not to sell off significantly so as to price in a potential Greek default with plenty of volatility as opinion polls swing about.Difficult time to hold equities although potentially a huge buying opportunity later if Greece returns a Euro stay in party or earlier if the opinion polls make it very likely. But with such a big risk if they do leave it is not something I want to rush at.Regards,
WShak'Tooth Fairy' you sayto renegotiate terms to remain in the eurozoneto not defaultnot particularly unrealistic expectations. Not what I would wish from the tooth fairy.Greeks dont expect 'no strings attached' for bailout, they want looser strings attached.'All rational analysis' I disagree. Ultimately euro exit may well be healthier for Greece and the eurozone, though in the shorter term may be extremely disruptive.Expecting austerity (which I agree to be necessary) to fully compensate for the burden of an overvalued currency is tantamount to believing in the tooth fairy imo and ignores the more fundamental imbalance.r
robbinsbox,Tooth Fairy' you sayto renegotiate terms to remain in the eurozoneto not defaultnot particularly unrealistic expectations. Not what I would wish from the tooth fairy.This is the "Fairytale Scenario" outlined in the excellent Huffington Post article I linked to:http://www.huffingtonpost.com/alexander-mizan/greek-election...The Fairytale Scenario:Mr. Tsipras is correct about all of his predecessors being traitors or incompetent and Greece having unused leverage vis-à-vis the EU/ECB/IMF Troika. The EU is so afraid of setting a precedent of a country leaving the euro that it will write yet another blank check to Greece to keep it on life support. Mr. Tsipras becomes a national hero. He flies back to Athens a winner.German politicians have an electorate to answer to as well - the Greek people aren't the only ones who get to vote.The terms that were agreed were tortuous and carried out over many months, putting politicians in the stronger economies directly in the line of fire. To renegotiate terms now, simply because a potential new government demands it, would be political suicide.Whatever the rights or wrongs of the austerity program demanded by the EC (and the IMF, by the way), Greece will not get what it wants (money without conditions) with the use of threats.The money is there to see Greece through until they can afford to tell everyone to get stuffed and reclaim sovereignty. If they don't want it, they don't have to take it but the result won't be the Tooth Fairy scenario.WShak
Hello WShak<<<“The EC will realise that Greece will be the first of many if it shows any weakness whatsoever and, even in the worst case, it stands a chance of successfully demonstrating just how awful things can get for any country that takes the Tooth Fairy approach too seriously. I don't expect to see any softening in stance from the EC since it has everything to lose and not much to gain.”>>>-----------------------------------------------Indeed this may all be true and the exit of Greece could see a procession of exits over the years which is all the more reason why the EC would wish to keep all countries locked into the Euro zone.Its also true that many people in Greece, perhaps the majority would like to keep the Euro as Michael Portillo's TV programme shown last night illustrated. I watched it was very good.Portillo is a Euro sceptic and even he was surprised by the populations general favour of the Euro to the Drachma.But then of course they have had a whale of time with the Euro over the last few years which must have flowed like water and at present the reality hasn't yet really bitten perhaps for long enough. http://www.telegraph.co.uk/culture/tvandradio/tv-and-radio-r...Speaking of tooth fairies reminds me of the magic wands that politicians claim never to have at their disposal.The problem is that they do have them and occasionally wave them in a way which sets the tone for a future disaster.It has been revealed to day in The Times via der Spiegel that Italy and Greece should never have been accepted into the common currency zone.The decision to invite them to join was based exclusively on political considerationsby Helmut Kohl at the expense of economic criteria.A good example of the waving of magic wands.The documents reveal today what was only assumed until now.I don’t know how Europe will turn out but it doesn’t look like there has been much of an attempt to rectify the yawning disconnect between the countries of Europe in the good times so it is going to be really interesting to see how they achieve it in the bad times.I suspect tooth fairies and magic wands will be required in great numbers. together with the kind of belief that leaves democracy wanting.“ Kohl ignored warnings that Italy posed a serious risk to the Euro “..........Behind The Times paywall.Regards
Rights and wrongs aside.Without a fiscal transfer compact and some significant loss of sovereignty, those countries unable to compete will ultimately seek currency sovereignty, if that happens sooner then it will be chaos, if it happens later then it will be 'managed' from a position of greater strength. European stability is the concern, not Greece per se. Politicians (the ones we get to vote for) have invested, at great polling cost, in supporting Greece, largely without the consent of the electorate, but I would not feel too sorry for them. The eurozone is every inch the artificial construct and has been built with pragmatism a secondary concern. The bailout too, defies the market, and perpetuates imbalances. Greece is undergoing a rebalancing or trying to. The EU is not softening this a la keynsian, but paying to delay, for the good of the ideal. The idea that Greece will manage to support its current level of debt is outlandish so too is a neutral current account deficit at current euro strength. Politicians and bureaucrats are surely aware of this, or, I hope they are, and are either betting on fiscal transfers by default or letting Greece slide when it is 'safe' to do so. Neither are honourable methods nor necessarily in the best interests of the eurozone member states. From an very simple investors pov, I would like an earlier resolution than a drawn out affair even if it were to be a painful process (who is to say which may be worse). I wish you profitable trading with the bank issue though.r
It may be bluff, but if there is a chance that all of this could escalate and get out of control, it looks to me, based on your earlier comments that Europe isn't prepared, that equities are way over priced.I guess it depends on what probability you assign to it getting out of control but European markets do look pretty cheap - all on current year P/E forecasts with a 8 or 9 handle and many on next year forecasts with a 7 handle. The Spanish market now yields 4.7% and the Italian one a pretty decent 5.5%.Difficult time to hold equities although potentially a huge buying opportunity later if Greece returns a Euro stay in party or earlier if the opinion polls make it very likely. But with such a big risk if they do leave it is not something I want to rush at.I remain very happily long myself although obviously I have a longer term view.B
ECB installs GLTB (Giant Long-Term Boot) at HQ as Eurozone crisis worsens. Will kick cans up to €500bn down road.http://twitpic.com/9jet5nMrC
It's interesting to note from the telegraph's live debt crisis blog that both William Hill and Ladbrokes have suspended betting on Greece leaving the euro.http://www.telegraph.co.uk/finance/debt-crisis-live/9255890/...Seems to me it's hardly unrealistic to think Greece will leave. Rather than debating whether or not Greece will leave the euro might it not be useful to consider how to play a Greek exit in investment terms? It would be good if even those who do not think Greece will leave could contribute.If Greece exits I would like to hold:- cash (good currencies would be the dollar, sterling and possibly the swissie or the yen depending on what the respective central banks of those countries do).- t bills and gilts, although I wonder if the yields on the latter can get much lower? Might a Greek exit create a general fear of government debt? Bunds are interesting they could do well, but there are certainly risks to the German fiscal situation of a euro break-up, a big state bank bailout is not out of the question.- prime London property, although another financial market collapse could cause problems here you'd have to bet that a great deal of scared southern european money would come to London. Clearly this is a hard one to act on quickly and you must have deep pockets!- Gold is an obvious one in a panic, although there could be a sell-off to cover losses elsewhere.If Greece exits I would really not like to hold:- most equities but particularly financials- pretty much any eurozone government bonds- an apartment in Malaga (lol)If Greece exits I would be unsure about holding:- commodities, on the one hand real assets could be attractive, on the other, a big financial dislocation could spell a general lack of global economic activity and falling demand for raw materials.Anyone got any thoughts on this?
Looks like changes are happening in Greece for you to know guys - looks like the 'Democratic Left' may be moving towards PASOK and the New Democracy party after a statement by their leader. Faced with stark reality some moderation in positions seems to be occuring and talk is that the renegotiation of the EU deal may come down to just a single year extension of the program to bring the EU program in line with the IMF program (they might just get away with that!).B
I guess it depends on what probability you assign to it getting out of control but European markets do look pretty cheap - all on current year P/E forecasts with a 8 or 9 handle and many on next year forecasts with a 7 handle. The Spanish market now yields 4.7% and the Italian one a pretty decent 5.5%.The problem as I see it is that all this political stuff is putting folk off buying anything. Cisco (Chambers) gave negative guidance last night, talking of slowing in most markets. Recently they have been a pretty good barometer of global financial health.So sure forward p/e look cheap but the message from Chambers is that sales are drying up and so forward p/e can soon move up.The other problem is the length of time getting some clarity is likely to take, so that we have at best weeks, more likely months of talks and uncertainty and in this environment purchasing managers are likely to hold back anything not essential.Wish it was better and that things were moving slowly positive, but alas not currently good.Regards,
The other problem is the length of time getting some clarity is likely to take, so that we have at best weeks, more likely months of talks and uncertainty and in this environment purchasing managers are likely to hold back anything not essential.That is definitely a problem and will weigh on the economy as it will see investment and employment decisions being postponed etc as well.Lets hope for a significant moderation in the Greek political situation - if they formed a credible government with only very moderate demands then I think Hollande will get the benefit of the doubt short term. Would be very good news - sadly still unlikely, but the probability has risen.B
As an aside, I think Southern Eurozone electorates will take their cue at general election time, from the outcome for Greece. For example if Greece doesn't default or exit the Euro, it's almost certain to wring further concessions from the EZ north. Ii that case, for example, Portugal's electorate will see the benefit of supporting anti austerity parties.On the other hand, if Greece plays hardball and is propelled into national disaster, electoral support for austerity-compliant parties in the other troubled EZ members should be higher.
By Marcus Bensasson and Maria Petrakis May 10 (Bloomberg) -- Greek Pasok party leader EvangelosVenizelos said there were “good omens” from his meeting withDemocratic Left leader Fotis Kouvelis in talks on forming acoalition government. Venizelos said his views were very close with those ofKouvelis, according to statements carried live on state-run NETTV. Venizelos is holding talks with party leaders after he gota three-day mandate to form a government from President KarolosPapoulias earlier today.If the Decocratic Left come aboard a pro-Euro ship, then a coalition may get formed after all.NBG-A currently $3.94, up 13%.WShak
PASOK party leader Venizelos says Kouvelis proposal 'responsible and concrete' May 10 (ANA-MPA) -- PASOK party leader Evangelos Venizelos spoke of a coincidence of views with Democratic Left party leader Fotis Kouvelis after their meeting in the framework of the exploratory mandate he has received from the President of the Republic. Venizelos termed the proposal by Kouvelis "responsible and concrete".
But that's just the original pro-European coalition?Wot about the hooligans on the left !!
Bertee and WShak,You both make some very valid comments about the difficulties and costs of Eurozone exit for Greece. I completely agree with you that a unilateral repudiation of all external debt and immediate return to the Drachma would impose huge short term costs on Greece - in the short term certainly far greater than continuing with the EU/IMF austerity program. It would also be a disaster for markets and for the wider Eurozone. So I hope it doesn’t happen.But what I do believe needs to happen is that the Greek austerity program needs to be relaxed, and in due course (maybe later this year) Greece needs to leave the Eurozone in a planned manner whilst remaining in the EU, and be assisted in the transition by the EU. If this transition is handled in the right way then, as i wrote yesterday, it could eventually be very positive for markets. But if they drop the ball and Greece has a disorderly near term exit than that would be dire. This is a hugely important issue which we will need to watch very closely in the coming weeks, so I make no apologies for returning to it again as I think this is a very useful discussion to have.So.....whilst the costs to Greece of a near term disorderly exit would be huge, It’s clear that the costs to the EU would be very great also. I think there are several points to bear in mind here:i) some 70%, or €140bn, of Greece’s external debt is now owed to official creditors. The ECB owns €40bn of Greek sovereign bonds, and is currently also providing €140bn of repo finance to the Greek banks. As FT Alphaville wrote yesterday, a Greek debt moratorium would therefore impose huge losses on official creditors. They could absorb the losses, but the political impact of such losses having crystalized would be seismic and would severely impact future EU bail out and ECB bank financing programs;ii) as Bertee wrote earlier today, there would be unknowable contagion risk with regard to Portugal and Spain; andiii) equally as important as the pure economic costs, the disorderly exit of one of its members from the Eurozone would be a massive political setback to the whole Euro project. Not to mention the perceived strategic geo-political importance of Greece.So it’s a game of bluff on both sides and the reality is that the costs to the EU of a disorderly Greek exit would be far greater than the direct financial cost of loosening the purse strings for fiscal transfers to Greece. Presumably, cannier Greek politicians must think this too. Greece is only 1% of EU GPD, so the EU could (if it wanted to) support it via fiscal transfers ad infinitum. But the reason the EU won’t openly do this is, of course, because the core would then find the other peripheral countries knocking on their door for similar concessions. As we’ve discussed here many times, how the Greek crisis is dealt with therefore has a significance which goes way beyond Greece.But the fact remains that in this game of chicken the EU has a great deal to lose, possibly as much as Greece itself. I checked the figures this morning, and Greece is still running a primary deficit of around €6bn p.a., but that’s down from a deficit of €18bn 3 years ago. €6bn is about 3% of Greek GDP, so loss of access to external funding would force Greece into further immediate spending cutbacks, but the gap is not unbridgeable.Greece’s real problem at the moment is not that it cannot, in time, return to primary budget balance, but rather that the EU/IMF program is seeking to impose massive internal devaluation in the forlorn hope that Greece can move into large primary budget surplus. I don’t think anyone thinks the EU elite really believes this, but it seems politically essential to them to preserve the fiction that Greece can service and eventually repay its official debt. However, it’s important to understand the scale of what is proposed in order to be able to maintain this fiction: the EU/IMF plan envisages a 13.0% fall in nominal per capita Greek employee compensation this year, with further falls of 3.8% in 2013 and 2.2% in 2014. That is unprecedented in a Western democracy.The problem is that it’s all too obvious to everyone now that that this prescription isn’t possible to administer without killing the patient. The latest IMF forecast (February) was for Greek GDP to decline by 4.7% this year, before returning to 0% growth/decline (i.e static GDP) next year. Whereas in fact industrial output was down 8.8% in March, and unemployment rose to 21.7%. And this is before the really harsh cutbacks kick in.....And it’s not as if the EU/IMF money is actually being channeled to help the Greek economy. Yesterday the EU withheld €1bn of the €5.2bn it was due to advance to Greece. The €4.2bn it did advance went straight into a segregated “debt service account”, €3.3bn of which will be handed back to the ECB later this month in order to repay the ECB at par (!!) for Greek bonds which the bought at a discount in the market. These are the same bonds on which private investors were forced to take a 75% haircut! The balance of the €4,2bn will be used to pay €0.7bn of interest due in May on ECB loans and €0.2bn of interest due on EU/IMF loans.The average Greek voter doesn’t fully understand these figures or this “round tripping”, but he/she knows something “smells” wrong about all of this. If EU money were being mainly used to rebuild the economy, to fund capital investment, to tide ex-employees over a period of retraining, etc,, then it might feel fairer. But it’s not. It’s being used to maintain the fiction that the EU and ECB haven’t lost money on the bond support operations which they entered into to protect their own banking systems from losses. It barely touches the actual Greek economy.Excuse anecdotal comment, but it might help if I give some flavor of just how difficult the day to day position in Greece looks to me right now. Tourism is Greece’s biggest industry, and summer bookings are currently down 40% or more from last year’s levels on the island where I have a home. On the islands, the hotels, restaurants and bars typically borrow for the banks at the start of the tourist season to fund the opening costs and stock, and repay at the end of the season. This year, it’s proving very difficult to get such loans and consequently many on our island won’t open this year. And think about it - if you’re a tourist, are you really going to choose to go to Greece this June at election time when for all you know if there’s the “wrong” result the banks might close, planes might be grounded and they might not be able to pay for water supplies and transport? On the mainland, unemployment is now at horrific levels. Unemployment benefit in Greece is only available to people who have made national insurance contributions, and since many of the 50%+ youth unemployed have never had a job, they are not eligible for benefits. Even those who do receive the monthly payments of €360 see them stop after a year - after that if you are unemployed in Greece you are on your own, without access to financial support or free health care. There is no job creation going on, because all the capital that can flee the country has already done so. Multi-nationals operating in Greece now routinely sweep their accounts to clear surplus cash out of the country on a daily basis. Government bills are going unpaid for a year or more. Would anyone, right now, bring hard Euros into Greece to establish a factory or other business when in a few months’ time the Drachma could be re-introduced? That’s the problem, and little hope is being offered.Personally I have huge affection and concern for the Greek people and for the Greek country, but I’m writing this not as a sob story (this is an investment board, after all), but to try and understand why Greek politics is as volatile as it is. In the recent election the younger people, in large majority, seem to have voted for the fringe parties. They felt they had nothing to lose. So too did a significant part of the older electorate, partly to “punish” the traditional parties. If WShaks’ hopes of a return to a pro-austerity vote at the next elections (if that is indeed what we get) are to come to pass, it’s certainly the older people who have the best chance of being won back. They are generally very pro-Europe, because they remember the time of the colonels and how hard life in Greece used to be. Importantly, many of them also have modest savings, and I’ve spoken to several who are afraid of immediate losses if these are redesignated into Drachmas. They’re also afraid of inflation following a re-introduced Drachma. So what seems very likely to happen in the forthcoming election campaign (assuming that the present last ditch coalition building attempts don’t work) is that New Democracy and Pasok will try to make it a straight referendum on staying in the Euro. They will say that if the bail-out terms are repudiated (as opposed to re-negotiated) then there will be no more EU money, the banks will close and there will have to be an immediate disorderly return to the Drachma. It’s possible, as WShak says, that this tactic will succeed, and that New Democracy will be able to cobble enough votes together to form an EU acceptable coalition. It would be shaky, but it’s possible. Unfortunately, it’s equally possible that the vote for the anti-bailout parties could hold up. The recent election was unprecedented in that 19% of the vote went to smaller parties who did not get enough votes to get any parliamentary seats, and 13% of this was anti bail-out. Yet Syriza was only 2% behind New Democracy, so it only takes a few of those “wasted” voted to switch to Syriza and they could form the largest party. What they would actually do if they were in power, God knows. But it wouldn’t be good.Frankly, the outcome is unknowable at this stage. But what seems blindingly clear is that the EU’s policy of imposing ever greater austerity measures on Greece to maintain the fiction that it has not lost money on its sunk loans, and that it will not make fiscal transfers to peripheral nations, seems doomed to failure. Even if a pro-austerity government gets back in, it will collapse again very quickly unless the EU is prepared to make some real, and substantive, concessions in relation to the austerity drive. The Greek people and institutions simply will not implement the austerity measures which the EU are currently demanding, and attempts to make them do so will inevitably drive them to vote in despair for extremists, with the spectre of disorderly default and Euro exit shortly thereafter.Personally, I’m praying that the wiser souls in the EU political elite know that, and that whatever their present rhetoric they’re preparing to make concessions to secure the formation of a pro-bailout government. If they’re lucky, and a new Democracy or other moderate led coalition can scrape back in, then if they’ve got any sense they’ll make concessions to help keep them in power, whilst in the background working with them to plan an orderly Eurozone exit later this year. In that sense, last week’s elections may have been perversely helpful if it gives EU core politicians some political “cover” for softening their hard line. Surely it should be blindingly obvious to them now, even if it wasn’t before the elections, that the scale of internal devaluation required to restore competitiveness to Greece simply isn’t possible without driving Greece into the hands of extremists. So unless they are prepared to fund very long term, and real, fiscal transfers to support Greece (there’s no sign of that), they must know that they will in due course have to let Greece leave the Eurozone, devalue and regain competitiveness that way. It must be very difficult for the EU political elite to accept this, of course, because as Bertee says once you let Greece out and in an orderly fashion, with the minimal possible pain, Spain and Portugal are next. But my view, as I wrote yesterday, is that it is inevitable that these countries too must at least temporarily exit the Eurozone whilst they devalue and restore competitiveness. IMO it’s only by recognizing this, and helping these countries achieve it in an orderly, planned, way that the EU will be preserved as a political entity longer term. Of course it’s an incredibly difficult “sell” to core electorates, because in an ideal world one would want the EU “core” to financially assist the reconstruction of peripheral economies outside the Eurozone, but within the EU. It must be a very, very hard thing for the EU political elite to accept, and the temptation must be to keep fudging and can kicking as long as possible. But if they can’t rise to this challenge then my view is that they risk a disorderly Eurozone break up, with catastrophic consequences. Sorry, it’s been a long post. But these are big issues, far more consequential than Greece per se. I don’t know what going to happen, and it’s in the nature of the problem that even if the politicians are planning for an “orderly” Greek exit they can’t tell us that. But which way this develops will have big implications for us all, so like most investors I’m watching events very closely and struggling to discern some pattern through the smoke!A
What a fascinating and useful board! I have just noticed this after being prompted by WShak that this is a more appropriate place to post about the little difficulties facing the eurozone. I have never bothered with these boards before, but on reading some of the previous postings, I am a convert.Anyway, I posted this item on the banking board about a mechanism by which Greece and other countries could exit the eurozone without the problems caused by capital flight.http://boards.fool.co.uk/there-was-an-interesting-proposal-p...This seems a fair way to spread the pain around and to provide an orderly exit. The mechanism seems to me to have a lot of merit and I would be interested to know what others think.
Sorry, forgot to post a link: http://www.policyexchange.org.uk/images/WolfsonPrize/wep%20s...The document is overly verbose, but contains a simple suggestion to convert the EUR into a basket of other currencies. e.g. one existing EUR would convert to 1 "new" EUR and 1 "new" GRD. The ECB would then print new EURs and Greece would print new GRDs.
Hi avidya,A superbly written post, as usual, but I think you are making two fatally flawed assumptions, which are linked to each other:1. A re-introduction of the Drachma, even if orderly and with everyone's blessing, would be a good thing.2. There will not be disastrous inflation consequences with every bit as horrific consequences as the austerity drive, if not much worse.I keep hearing that Greece needs to devalue as if that were the answer to all its problems but a depreciating currency will inevitably lead to hyper inflation. What's the difference between getting your pay cut or having to pay twice as much for goods? Even Jim Rogers, one of the most cynical investors out there, thinks that a return to the Drachma would be a disaster. A stable currency is a good thing, not something to be ditched to cope with everything else that is wrong with the economy.Greece has a major problem with crippling debt, even after the PSI, which was a great start to sorting things out. The next step that I think the ECB should be concentrating on in order to genuinely help Greece is to offer funds to buy in the newly issued Greek bonds that are trading at 20c/€ at say, 30c. Another $50b or so off the bill would be welcome wouldn't it? After that, they need to deal with the ECB held bonds in a politically acceptable manner.The Greek economy needs to get back on its feet but it needs austerity in order to become competitive and it needs further debt restructuring to make the figures work on a GDP level. It needs help, not just handouts, but the Greeks need to see it as being genuine rather than just self interest.WShak
Yiassou AvidyaWonderful post, very eloquently put. 'it’s in the nature of the problem that even if the politicians are planning for an “orderly” Greek exit they can’t tell us that'It does seem possible that this is planned. The German finance ministry has been equating renegotiation with Euro exit recently, when there is no provision and no need to draw such a parallel. It may be politically adroit but for whose sake, the markets or the voters? And, if I may: anankai d'outhe theoi makontai or 'even god can not prevent what is necessary' but the politicians seems to be able to delay it (avrio)r
wShakWhy would a one off depreciation lead to hyperinflation? Devaluation occurred in 1992 UK, France several times post 1945. Given the recessionary environment, plenty of spare capacity and low historical level of consumer spending, inflation would be a surprising result.I am sure 50bn euros haircut would be most welcome but it does nothing to alter Greece's competitive position.Granted, austerity will make the country more competitive but by marginal amounts over a long period of time. Devaluation makes large segments of the Greek economy competitive over a much shorter timespan and constantly self regulates.Within the eurozone, Greece is stuck with a permanently unmanageable current account deficit that only permanent fiscal transfer can compensate for. r
Hi Was,You wouldn’t by any chance be a holder of any of these Greek bonds you want bought back at 30c, would you?;-)But yeah, you’re right, a return to the Drachma in and of itself would be no panacea. Greece would still have to restructure its economy, implement real labour liberalization and avoid printing like drunken sailors to avoid hyper inflation. But plenty of countries have free floating currencies which they can in theory print, yet manage to avoid hyper inflation - including those within the EU like...err....us!Imagine if we here in the UK had to ask the EU to lend us money to fund our huge budget deficit rather than, as we have done, getting the good old Bank of England to print the money to buy the gilts which fund our deficit! We seem to be getting away with it...... But at least a return to the Drachma and devaluation would make Greece immediately more competitive and give them room to breath. If they chose to squander that then it’s up to them, but it would no longer matter so much to the wider Eurozone. And, in general, with some exceptions the historical growth record of countries following devaluation has been pretty good.Yeah, of course Greek inflation would rise following devaluation, not least because imports would immediately become more expensive. But that might prompt reduced imports and domestic production for import substitution. Interestingly, I was talking about just that with one of my more enterprising Greek friends last night - he was thinking about what might happen if the Drachma comes back, and was thinking of buying land on the Island where he lives to grow fruits that are currently imported. I said I might invest!A
Hi avidya,You wouldn’t by any chance be a holder of any of these Greek bonds you want bought back at 30c, would you?Ha! Ha! Yes, I have a tiny amount but most of my investment in Greek sovereign debt was returned via ESFS bonds so the rump I have is inconsequential. It's not part of my reasoning, apart from making me aware of what new debt trades at, honest. But yeah, you’re right, a return to the Drachma in and of itself would be no panacea. Greece would still have to restructure its economy, implement real labour liberalization and avoid printing like drunken sailors to avoid hyper inflation. This is the nub, though. They probably WOULD end up printing like drunken sailors and WOULDN'T do the hard stuff to restructure the economy - that's why those promising that the Tooth Fairy exists would have been voted in for. If the electorate have got them in to abandon the medicine, then that's exactly what they're going to do.I can understand why other Eurozone countries want Greece to suck it up, even if the medicine is going to kill the patient but why would the IMF want that? Why does everyone now assume that what Greece is currently having to endure is against its best interests when an independent body like the IMF thinks these things need to be done and done ASAP?But at least a return to the Drachma and devaluation would make Greece immediately more competitive and give them room to breath. If they chose to squander that then it’s up to them, but it would no longer matter so much to the wider Eurozone.This is my problem - it may make them immediately more competitive but it wouldn't make them more productive. It would be a short term fix and would cause more pain than there is currently in areas like inflation. The Greeks themselves don't want devaluation since the vast majority want to stick with the Euro so why do we think we know better?There aren't any good solutions for Greece, just less bad ones. In the same way that an injured footballer becomes a better player when he's not playing in a losing side, it strikes me that any solution that isn't currently being carried out at a time of pain is seen as the answer to the problems. Everyone starts saying the same thing and, before you know it, people start accepting it as true, which I don't believe it is at all.WShak
Great debate but I'm firmly in the BertEEE and WShak camp on the disaster going back to the Drachma would be.Indeed even the rhetoric coming out of Athens is in that camp:http://www.bloomberg.com/news/2012-05-05/samaras-says-return...Antonis Samaras, the head of Greece’s New Democracy party, said a return to the drachma would have “catastrophic consequences” for the Hellenic Republic and the euro-area as a whole, Bild Zeitung reported. I think the electorate aren't that stupid either.
The problem is that it’s all too obvious to everyone now that that this prescription isn’t possible to administer without killing the patient. The latest IMF forecast (February) was for Greek GDP to decline by 4.7% this year, before returning to 0% growth/decline (i.e static GDP) next year. Whereas in fact industrial output was down 8.8% in March, and unemployment rose to 21.7%. And this is before the really harsh cutbacks kick in.....But how can Greece turn the corner whilst in this political turmoil. If they got a Government together that said, we are going to stay in the Euro and sort this out whatever it takes, wouldn't that alone start to get them moving in the direction.But my view, as I wrote yesterday, is that it is inevitable that these countries too must at least temporarily exit the Eurozone whilst they devalue and restore competitiveness.That is a crazy idea IMO, and just never gonna happen.I'm with WShak, Nigel, BertEE and Antonis Samaras on this one... leaving the Euro would be a disaster for Greece.GO
Everyone starts saying the same thing and, before you know it, people start accepting it as true, which I don't believe it is at all.I believe this is now the issue with Greece. Ideas that folk like, irrespective of the logic of them, are feeding the emotional energy of the newly emerged politicians who see this as a great opportunity for power. If this collective attitude reaches enough power, it will run down the folk who are arguing for staying with the negotiated solution, irrespective as to what is really in everyones long term interest.It looks to me that Greek people are being encouraged to feel that they are being unfairly loaded down with misery. If this seige type of mentality isn't checked the clammer to be out and masters of their own destiny with the Dracma will become a potent national rallying point.Once populations get into these emotional states the folk who argue for logic and point to the troubles likely to come tend to get ignored. Foreign press and others who are not shoulder to shoulder with the pain can write all they want about historic parallels but they may never be heard.If this stuff starts getting seriously talked about and politicians start to run with it, the dangers for European equities go up substantially.Europe would then likely have to enter a debate between an uncontrolled move to the Dracma and an ordered one over a few years.Dunno, it all potentially chaotic now, in the sense that very small changes somewhere or other can have huge disproportionate consequences.Regards,
Reuters have carried out a poll among economists to see how they feel about the Greek situation. Selecting a meaningful sample is difficult but there is no indication that they haven’t tried their best. Anyhow the outcome is that.Greece is leaning on the euro zone's exit door but economists polled by Reuters around the world are split over whether it will fall through it.But they are in little doubt that Greece can still spread economic havoc. http://www.moneycontrol.com/news/world-news/greek-euro-exit-...
A lot of the discussion about Greece and possible solutions seems to ignore the option that Greece will increasingly export its problem. Greece is suffering from high levels of unemployment. This leads to reduced government income and high welfare costs. In the past when this has happened, countries have seen high levels of emigration. Greece itself has already in the past seen periods when 1 million+ of the population have emigrated. Ireland in the past has seen over 50% of the population emigrate. This has been in periods when there were much greater barriers to emigration. The world is now a much more global place, and certainly within the EU there is now complete freedom of movement. It is therefore quite likely that we could see emigration at levels never previously seen. The first people to move are likely to be those with least to lose - the unemployed, especially the young. They are most likely to move to countries with the best economic prospects - Germany has to stand out as one of the favoured options. How would Germany cope with 1 million+ Greeks emigrating to it? There would be a huge increase in welfare costs. Greater competition for jobs could increase social tensions. Greece would eventually sort itself out - with a much smaller population (and GDP), but able to balance income and costs. I am less convinced that countries like Germany would handle the issue in a seamless manner. Greece could also be only the first wave of emigration (with the other PIIGS close behind). The economic consequences of such mass migration of people are potentially very significant - much more so than whether Greece defaults on its debts.
JamesGood post regarding possible mass Greek emigration to Germany.I see parallels in the situation between China and North Korea.The larger economic power has a large vested interest in ensuring the impoverished neighbour does not starve.G12
>>>> Great debate but I'm firmly in the BertEEE and WShak camp on the disaster going back to the Drachma would be.I found it interesting that the greek people on the michael portillo program were universally against a return to the drachma. One saying, we don't want it because that gives the printing press to the government. however the question is how much pain will the greek people take in order to keep the euro ?and at some point will the grass look greener on a drachma future than on a staying in the euro future ? (regardless of the reality, potential pain, feels different to real pain here and now)
How would Germany cope with 1 million+ Greeks emigrating to it? There would be a huge increase in welfare costs. Greater competition for jobs could increase social tensions. Greece would eventually sort itself out - with a much smaller population (and GDP), but able to balance income and costs. I am less convinced that countries like Germany would handle the issue in a seamless manner. Greece could also be only the first wave of emigration (with the other PIIGS close behind). The economic consequences of such mass migration of people are potentially very significant - much more so than whether Greece defaults on its debts. I agree, that one of the effects of a common currency will be this kind of internal migration. But it won't be even handed. You'll see the younger, most employable, flexible and skilled workers tending to migrate. So far from being a drain on Germany, they're likely to be (a) an asset and (b) competition for the less talented and lazy component of the indiginous workforce.The things is, has Europe's nationalism reduced enough to tolerate all this? It's a question, which would still be there even if Greece's debt to GDP wasn't a problem. Will Greece and Portugal settle for permanent county-yokel status in the world? Because that's where the logic of common currency economics takes them. Consider this: there's a common currency between England and Scotland. The productivity gap between Britain's two countries is minor compared to Germany/Greece; and the cross-subsidy greater. Yet still, there's dissatisfaction in Scotland at their runner-up economic status, and this is leading to a credible threat of it ceceeding from the UK.
”this is leading to a credible threat of it ceceeding from the UK.”If only they’d just get on with it…Tony.
So lastest appears to be that the Democratic Left explicitly stated as an election pledge that they would not form a co-alition government unless Syriza (left wing) was involved. So they are interested in a coalition but it would need to be a 'grand coalition'. Looks like little chance of Syriza agreeing to this so basically it does appear that another election is going to be the only way this can be resolved.
I agree, that one of the effects of a common currency will be this kind of internal migration. But it won't be even handed. You'll see the younger, most employable, flexible and skilled workers tending to migrate. So far from being a drain on Germany, they're likely to be (a) an asset and (b) competition for the less talented and lazy component of the indiginous workforce.It is already happening, for example, talented Spanish workers migrating to Germany. A virtuous circle for Germany; the opposite for Spain. But the talent migration is not stopping at the EU border. A generation of talented Irish has already headed anywhere like Australia, Canada etc. This is the "real blow" for Ireland, the price for the wrong call, and likely to set their "human capital intensive" economy in reverse. If you like, the so called "Tiger economy" - remember that description - was down to human capital of the young variety. It was not so much EU support that mattered (can always be spent) but that the dispersed Irish talent decided to return home. That is now in reverse.P103
l it would appear that the young and better qualified are already leaving in droves. I can't pretend that the rest of Europe will be worse off because of this because people who have got the drive and energy to emigrate, rarely want to sit on their arses and do nothing with their lives. Greece will be the big loser in this because at a time when demographics are turning aginst old Europe, the proportion of those who are too old, sick or useless to contribute much to the economy will grow more rapidly than otherwise.I can't see Germany being that attractive to Greeks either, given what the Germans think about them. If you can't speak decent German the chances of getting work there aren't that good. The better qualified ones will go to the more open economies where English is the main business language. That's the UK and the Netherlands from my perspective in Belgium. The US, Canada and Australia are also likely to be much more attractive than Germany for the more able young Greeks.Anyone who knows anything about demographics would realise that Germany has the biggest problems because of the ageing population in Europe and is the most likely to suffer from a shortage of workers. Belgium has that problem too, but both economies are relatively closed to outsiders in comparison with the UK and NL. That won't last forever but the idea of one million Greeks moving to Germany to claim benefits is Daily Mail/Das Bild type of nonsense.These unfortunate young people are going to places like London, Melbourne, Amsterdam, New York and Toronto. They won't be going to places like Aachen in a hurry unless it is to clean dishes in their cousin's restaurant.repo
These unfortunate young people are going to places like London, Melbourne, Amsterdam, New York and Toronto. They won't be going to places like Aachen in a hurry unless it is to clean dishes in their cousin's restaurant.Funny you should say that Repo, we were in a Greek restaurant (actually serving excellent food; a sort of blend of greek and french cuisine) in Brussels last week. We had not been there for some years. All the staff seemed to be young greeks with little or very poor french - they prefered to speak english.In the end I negotiated a discount on the bill for the extremely poor service - although the food was as excellent as ever.However, I am not so sure that the young greeks are moving as you suggest outside the EU. Inside, to move is quite easy but outside much more difficult. I agree with the language points though.BL
Anyone who knows anything about demographics would realise that Germany has the biggest problems because of the ageing population in Europe and is the most likely to suffer from a shortage of workers. Belgium has that problem too, but both economies are relatively closed to outsiders in comparison with the UK and NL. That won't last forever but the idea of one million Greeks moving to Germany to claim benefits is Daily Mail/Das Bild type of nonsense.I'm sure that Germany won't be the only destination for economic migrants from Greece and many countries (including the UK) will need to be geared up on how best to handle the issue. It is worth noting, however, that in the last mass emigration from Greece in the 1960/1970's almost 80% went to Germany (probably over 500,000 people). Germany still has a sizeable Greek population (probably at least as large as the UK, and 10 times larger than countries such as Belgium or the Netherlands).You are right to highlight, however, that there will be significant barriers to employment for Greeks moving to Germany. It is probably not surprising that Germany is now looking to limit benefits for Greeks moving into the country (http://www.thelocal.de/money/20120309-41235.html)
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