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A debt swap to save Greece & the euro

Discussion in 'The Economy' started by Johny_come_lately, 20th May, 2010.

  1. Johny_come_lately

    Johny_come_lately Well-Known Member

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  2. Tropo

    Tropo Well-Known Member

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    Euro - Point of view.

    "According to the IMF World GDP in nominal terms expressed in dollars was $57 trillion in 2009. The European Union accounted for 29% of that; and lets say another 10% of the world implicitly or explicitly link their currencies to the Euro (for the sake of argument I’m assuming the Pound tracks the Euro and the Yen will track the dollar more or less).

    Regardless of what the Gold-Bugs say (and they may have their day in Court yet), the rest of the world effectively uses dollars.

    So…if the Euro in 2010 on average (or however the IMF works it out) is worth 75% in dollar terms, compared to what it was in 2009, and assuming anaemic growth, rough number that would mean World GDP in nominal terms denominated in dollars would go down by 39% x 0.2 = 8%.

    Rough Numbers!!

    Of course that’s not “Real”. And it does not account for PPP or any of those clever benchmarks that economists use to pontificate about this or that and justify their existence.

    But dollars are dollars, and nominal GDP is simply about dollars or their equivalent, passing from one pocket to another.

    And then the penny dropped that “someone else” would NOT be happy to lend money to profligate PIIGS and the like so that they could pay huge sums of money (that they don’t stand a chance in collecting in taxes), to pay for armies of public servants and union members to live a life a of luxury, at the expense of a diminishing pool of people who actually work for a living and pay the part of the wages and pensions of the “majority”.

    The trick there was that the majority always vote for an easy life of play-today pay-tomorrow, that’s what democracy as it is currently practiced is all about, that’s why UK joined with America to invade Iraq, it was the “will of the majority”. Just like the majority of Americans (the 70% who owned houses), voted for the housing bubble (and what they are really angry about is it burst).

    That’s the joy of democracy, when nations vote to commit collective suicide (and there is a lot of pork to grease the wheels (no pun intended)), well if they have a majority, that’s what they will do (witness the credit crunch).

    Put it another way, if the “profits” that banks reported in 2006 and 2007 were not “real”, then perhaps a lot of the GDP that the EU reported until recently, was simply a construct, built like the failed US model, on insanely foolish debt.

    So What about Oil?

    Regardless, money is money, and dollars are dollars, and so long as there are people prepared to accept dollars as payment for goods & services that’s the way it’s going to be (whether that was a good idea or not is not the issue).

    Regardless also, one thing that everyone will buy; is oil, because if they don’t have oil they can’t drive to work, tractors don’t run, and just-in-time logistics gets snarled up.

    When the market for oil is not in disequilibrium (and right now it’s not), short-term (I’m talking two or three years), the “fundamental” price of oil is a function of World GDP.

    That’s of course assuming that the essential principles of Parasite Economics apply (Stock Market News, Opinion & Analysis, Investing Ideas -- Seeking Alpha.. ).

    Oil was on a pretty steady path towards $90 until the latest “upset” with the Euro.

    If the Euro goes down and stays down relative to the dollar, then unless there is a spike up in the GDP of the rest of the world, the “fundamental” oil price (in dollars) is likely to drop from about $75 now to about $69. Until of course it becomes blindingly obvious it’s about to run out (and given the inability of the governments of Western Democracies to plan any further ahead than what dish of pork they will have for lunch, it’s likely that will be a BIG SURPRISE .

    Just like it was a BIG SURPRISE when a few weeks after Hank Paulson declared “The US Banking System is Safe and Sound”; all the banks in America started failing, like dominoes.

    So are those “nasty” markets that Angel Merkel is trying to defy, like King Canute ordering the tide to go down, anticipating Euro at $1.15 or less?

    Makes sense, the EU is full of pork and self serving “democracy” of the “I wanna-free-lunch” at the expense of the (ever-diminishing) productive part of the economy, variety. Perhaps now is the time for that to get washed out by a dose of reality, like neat cod-liver oil?

    The big question now is when will Germany decide to leave the Euro? "
     
  3. Tropo

    Tropo Well-Known Member

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  4. Johny_come_lately

    Johny_come_lately Well-Known Member

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    Greece has become the world's least credit-worthy country after Standard & Poor's has cut its rating from B to CCC, saying Greece will probably default on its debts at least once by 2013, the BBC reported on June 14 2011.

    The Greek government has been trying to push through fresh austerity measures as part of the conditions for the EU and IMF's 110 billion euro bail-out package, which have been met with staunch resistance from its already hard-hit population.

    The second austerity package will be discussed in parliament later this week, with Greek labour unions planning another general strike on June 15, while protesters are continuing their protest outside Syntagma square in the centre of Athens, having staged a camp or protest for days.

    People employed in the public sector are particularly concerned because the Greek government is formulating measures of having their jobs privatised as part of the reform process, which means that many will lose the stability and security that they have enjoyed to date.

    General discontent was evident as protesters spilled into the streets of Athens last week, with workers at state-run companies marching to save their jobs and the forecast for this week is more of the same as trade unions claim the proposed austerity measures will end in disaster.

    Although many "secure" jobs are likely to be scrapped, with more people becoming unemployed still, which in turn will deteriorate the state of the already battered local economy, Greek officials say something must be done as the economy continues to stagger. According to official statement from the Greek government, the unemployment levels in Greece at the moment stands at about 16 per cent in March, and to nearly 43 per cent for young people aged 15 to 24.

    Reports in Bulgaria media suggested that a more actual number for the overall unemployment in Greece might be as high as 24 per cent.

    Greece is already living on last year's $158 billion bailout from the European Union and International Monetary Fund, and Eurozone finance chief Jean-Claude Juncker said that "it is obvious" Greece will need a second bailout in order to survive.

    European banks are negotiating a deal under which they will buy new Greek bonds to replace the ones they have that are maturing, the VOA reported.

    Meanwhile, the S&P said it was likely that the EU would impose a restructuring of Greece's debt, which it would treat as a default because it would probably be on less favourable terms for the lenders.




    Johny.
     
  5. Billv

    Billv Getting there

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    They'll have to.
    I find it ridiculous how they have left Greece, Ireland, Portugal etc to pay market rates and haven't set their repayment rate to let's say 1% above the ECB rate or something like that.
    You don't kick someone who's already on the ground or he'll never be able to stand up. Unless they don't want them to stand up and pay back their debt....:confused:

    In comparison to the US,
    are any of the indebted US states paying market rates to the feds?
    I doubt it
     
  6. Johny_come_lately

    Johny_come_lately Well-Known Member

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    In a reaction that is causing frustration and anger abroad, the Greeks seem more inclined to blame others for their troubles than accepting that something is deeply wrong with their country and painful medicine is urgent.

    "The ordinary people don't understand the seriousness of the situation...not only for Greece, but for the whole world economy," said Jan Randolph, director of Sovereign Risk Analysis at IHS Global Insight.

    Violent protests against austerity measures demanded in return for an international rescue worth billions of dollars have combined with political infighting and euro zone dithering to severely spook international markets.

    No single element of society appears to have fully embraced the gravity of the situation, analysts say, and investors fear political wrangling and opposition to austerity measures could push the country into a messy default on its sovereign debt, which totals 340 billion euros.

    While countries like Latvia have taken IMF medicine, suffered quick but painful contractions, and are now on paths of recovery, analysts said Greece's case increasingly threatens to resemble Argentina, which defaulted in 2001 and is still shut out of financial markets.

    Greece's bailout lenders, the European Union and International Monetary Fund, have called for national consensus behind reforms to win a new financing package but in the country itself a great deal of time is spent pointing fingers rather than looking for solutions.

    Government and opposition paint each other as obstructing a solution, private company workers blame the bloated public sector, civil servants blame tax cheats and most Greeks say corrupt politicians are the main problem.

    "The big problem of Greek society is the tendency to consider somebody else is responsible for everything that goes wrong," said Theodore Couloumbis, of the ELIAMEP think-tank. "It's like someone who suffers from a severe disease and wants to know what caused it rather than taking precautions to cure it."

    Painful measures

    The government has reduced public sector wages by a fifth, raised the retirement age for women, cut pensions by more than 10 percent, and cut temporary public contract jobs.

    But the underlying budget problems remain. Tax evasion is still rampant -- the labor minister has estimated a quarter of the economy pays nothing -- and loss-making public firms cost the state 13 billion euros from 2004 to 2009, their workers virtually immune from being fired.

    "Ninety-nine percent of the Greeks' problems are of their own making," said Randolph. "If everyone had been paying their taxes, we wouldn't have a budget deficit this high."

    Greeks are upset with austerity and in a poll held last month, 80 percent of respondents said they refused to make any further sacrifices to get more EU/IMF aid.

    Workers at banks and state utilities heading for privatization, public sector contractors, and even doctors have taken to the street of Athens in almost daily protests to oppose deregulation, sell-offs and liberalization of a highly bureaucratic economy. Those demonstrations turned violent on Wednesday.

    Analysts say another problem is that Prime Minister George Papandreou's government appears to have failed to explain to the public how desperate the situation is -- that default will have a major impact not only in Greece but beyond its borders.

    French and German banks have the most exposure to Greek debt. If Greece went under, market pressure would increase on other indebted euro zone countries such as Ireland, Portugal and maybe Spain.

    A confusing internal political battle seems to have compounded the problems, with Greek politicians still eyeing a domestic audience rather than thinking of the broader picture.

    That may have played a role on Wednesday, when Papandreou initiated and then broke off talks with the conservative opposition on creating a unity government to push through new austerity measures. He later announced he would reshuffle his cabinet instead, adding to international jitters.

    Pundits said there was a small chance Papandreou thought a unity deal was possible, although the conservatives have for months demanded the renegotiation of Greece's 110 billion euro bailout from the EU and IMF last year.

    "I can't believe they are doing this with all the money they are being offered," one frustrated European Central banker said.

    Papandreou may also have wanted to scare wavering deputies into voting for the new five-year, 28 billion euro austerity package that is an IMF and EU condition for continued aid.

    "The real risk to the next package is coming from within Greece itself," J.P. Morgan wrote in a research note.

    "The prime minister is losing support within his own party, and there is huge conflict across the political spectrum and the population as a whole."

    Disappointment in Europe

    The confusion roiled markets globally and shocked European Union officials who have appealed for Greece's political elite to unite behind the reforms.

    Analysts said it looked as if Greece was drifting away from a Latvia-style situation. The Baltic state took an EU-IMF bailout in 2008 to avoid bankruptcy.

    It imposed spending cuts and tax hikes worth about 15 percent of gross domestic product over three years, including wage cuts for teachers and health workers of up to 50 percent.

    The measures triggered an 18 percent economic contraction in 2009 but Latvia's economy began growing again last year and it has returned to borrow on international markets.

    By comparison, Greece managed to cut its budget deficit to 10.5 percent of GDP last year, from 15.4 percent in 2009. But it has fallen behind on the targets it has agreed with the EU and the IMF, a result that led to the cabinet agreeing to the new belt-tightening campaign that sparked the protests.

    Markets are skeptical that Greece can be saved, not least after Wednesday's violence.

    Combined with resignations by several deputies from Papandreou's party and persistent differences between euro zone policymakers trying to arrange further aid for Athens, some analysts see the chances of a messy default rising.

    "The protests are not going to go away and the Greeks can't deliver ... it looks like you're seeing growing divisions between the IMF, EU and ECB," said David Lea, western Europe analyst at Control Risks.

    "I think we're moving inexorably to default."





    Johny.