Greek Bailout XXIII

So an umpteenth Greek bailout (maybe not literally #23) has been "agreed". Does anyone really think there's a snowballs chance in hell this will end the crisis once and for all? Not me.

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The Greek debt deal

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AFTER another all-night summit, a deal between Greece and the troika (the EU, ECB and the IMF) has finally been reached. It involves the expected combination of measures - a private sector write-down, more loans from the EU in return for austerity measures and enhanced monitoring of Greek compliance. After all that effort, Greece will still have a debt-to-GDP ratio of 120%, which looks more than it can afford.

Markets have duly been unimpressed today, although of course a deal may have been priced in. But the FT story about a confidential paper on Greek finances only illustrates that this is a short-term fix and that further bailouts will be necessary.
It is hard to find an analyst who is impressed with the deal. First, there is the issue of overoptimistic forecasts. Lombard Street Research writes that

The troika assumes that the new austerity policies will improve the Greek public finances but have only a modest impact on economic growth. In their baseline scenario, GDP is expected to contract by just over 4% in 2012 and then stabilise in 2013 before growing robustly (at over 2% pa) thereafter. This, of course, is ludicrous and runs counter to all the evidence accumulated over the past couple of years.
This is probably the last Greek bailout we will see, but not for the reasons the authorities are claiming. Neither the Greeks nor the EU will have the patience for another round of negotiations once this latest package unravels.

David Owen at Jefferies points to the alternative forecast in the leaked report which sees the debt/GDP ratio in 2020 at 159% and comments that

the assumptions which feed into this are not particularly onerous - marginally weaker growth, slightly slower fiscal adjustment and less rapid pace of asset sales. And so from this leaked document comes a damning sentence which really sums up what the markets should take away from today: "With debt ratios so high in the next decade, smaller shocks would produce unsustainable dynamics, leaving the programme highly accident-prone."

And what kind of precedent does this set for other European bailouts? At M&G, fund manager Richard Woolnough notes bitterly that

The (deal) ensures that the private sector will suffer a real loss while the public sector (national European central banks and the ECB) will not suffer any losses. Central banks have this privileged position as they are prepared to provide further finance to Greece (akin to a rescue rights issue diluting existing shareholders). Of course, it is not in the politicians' interests for the central banks to bear any losses as a result of lending to Greece and of course it is the politicians that set the legal and regulatory framework. Not only can politicians change the goal posts, they can change the ball you are playing with. Politicians, and the authorities, are exercising their embedded power.

This deal will cause the private sector to suffer a disproportionate level of losses both in absolute and relative terms to the public sector. This punishes the private sector investor in Greek debt relative to the private speculator who was short Greek debt

Finally, there is the issue of whether Greek politicians can really impose this deal on their electorate. At Capital Economics, Jennifer McKeown predicts that

with the recession thwarting debt reduction efforts and public outrage growing, we still see Greece leaving the euro-zone before the year is out.

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If I was a private investor I'd also be reconsidering whether its too wise to invest in Portugal, Italy etc.

http://www.presseurop.eu/en/content/...plus-ca-change I think this is a good summary of the situation. Ignore the dates.

Whether or not this is a good deal will not be decided by the beancounters. What will make or break this deal is whether or not it gives us a tool to destroy the last soviet style economy in Europe. If we manage to do that, then Greece may have a fighting chance. Otherwise we'll see the country drop into the abyss at some time, which will in the end result in the same wiping out of the present system there, but with a lot more hardship than through internal devaluation.

Just to point out one thing; the 'austerity' condition about heath care costs should actually make drugs more accessible to Greeks; appearantly the Greeks health care providers didn't like the idea of generic drugs. Leading to brand drugs being out of reach of people having to deal with pay cuts.

Another 'austerity' measure is the liberalization of professions and business regulations.

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Originally Posted by Loki

Ignore the dates.

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Why?

The fact that things are largely the same over 150 years later is a good indication of the snowball's chance in hell any meaningful change in Greece has. I say the creditors should seize the assets and sell them off at auction, like a bank foreclosure. I myself, am in the market for a private island that isn't some hellishly hot climate, and Greece ought to have one or two I could get for a good price at auction. :downcast:

I suppose the privatization effort is going to get a boost of sorts if it's no longer unwilling Greek bureaucrats being in charge of that program.

Well well well, the Irish are going to vote again. Too bad for them this time it doesn't really matter to anybody if they vote no. And If they happen to do that the first time round their state will be cut off from the money it desperately needs.

The actual question on the ballot should be which percentage would you like the Irish Republic to pay on its debts? 13% (no to the treaty) or 3% (yes to the treaty). That's not scaremongering, that's the present day gap between what borrowing on the markets or borrowing from EFSF/ESM costs. The latter source not being available to countries that do not ratify.

Funny how Iceland can get their loans at a small fraction of the 13%

My number was a bit outdated. 8,5% is the going rate for the Irish Republic. That is probably a side effect of the ECB flooding the market with cheap money. It is still double what they pay under the present deal.

So if they manage to keep it at just 8,5% all they need to do is cut another €5bn our so out of their budget to not make their situation worse than it is today. That would mean the state would have to increase austerity by a mere 8%.

But you see Randblade; the message the markets will pick up if Ireland votes no, is that it is willing to risk a default without a safety net and in the worst case a euro-exit. I am interested in seeing how much money will leave Irish banks in the run up to the vote.

Iceland: The rating agencies consider it to be "investment grade"; real wages are rising; exports and manufacturing are growing by 20%; tourism is back near all-time highs; unemployment is declining sharply; interest have fallen to 5.5% and the stock market has rebounded 50% from its lows.
Ireland: Still has 20cents in every euro of taxes going directly to interest payments, yet you reckon they couldn't afford to stand on their own.

Hmm, which do you think is in a better situation?

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Originally Posted by RandBlade

Iceland: The rating agencies consider it to be "investment grade"; real wages are rising; exports and manufacturing are growing by 20%; tourism is back near all-time highs; unemployment is declining sharply; interest have fallen to 5.5% and the stock market has rebounded 50% from its lows.
Ireland: Still has 20cents in every euro of taxes going directly to interest payments, yet you reckon they couldn't afford to stand on their own.

Hmm, which do you think is in a better situation?

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Rand, why do you keep doing those color changes? And in particular why are you doing color changes that are difficult to read on some of the more popular themes we use on here?

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Originally Posted by RandBlade

Iceland: The rating agencies consider it to be "investment grade"; real wages are rising; exports and manufacturing are growing by 20%; tourism is back near all-time highs; unemployment is declining sharply; interest have fallen to 5.5% and the stock market has rebounded 50% from its lows.
Ireland: Still has 20cents in every euro of taxes going directly to interest payments, yet you reckon they couldn't afford to stand on their own.

Hmm, which do you think is in a better situation?

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They are not in a better situation, they are heavily dependent on IMF support. On the other hand, Iceland is in the unique situation that the liquidation of the assets of its banks turned out to be enough to cover the shortfall.

Irish banks on the other hand have got underwater mortgages on their books. They can't save themselves (and the Irish state who owns them) by selling those. They as a matter of fact are too cash strapped to be able to actually foreclose on any of their mortgages.

Iceland hit a bump and got away relatively lucky, Ireland is in a deep hole in the ground.

P.S. another thing Iceland could impose and which was conductive to sorting things out was capital controls and suspension of trade in the Icelandic Krona. So even from that angle you're not going to get the answer you so desperately desire. For the simple reason that it is not the case.

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Originally Posted by LittleFuzzy

Rand, why do you keep doing those color changes? And in particular why are you doing color changes that are difficult to read on some of the more popular themes we use on here?

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I didn't do any colour change deliberately. :confused:

I googled to get some facts, copied-and-pasted then rephrased. I'm guessing that's copied the font over without me noticing.

Stocks are rallying on the Greek debt deal, so it must be solved!

Actually the Greek problem has been solved as a potential cause for a world wide crisis now that Greece hardly has any private creditors left. It's just a question if the Greek deficit and debt problem has been resolved as well. The answer to that would probably be no. But that's no longer our problem; the Greeks will have to deal with that themselves while the rest of the Eurozone will at some point have to write down Greek debt (without that being a really big deal other than politically arkward).

Hazir, I think the issue with Greece has never been a default leading to insolvent private creditors (mostly banks). Rather, the issue has been that if the ECB and EU allowed a Greek default after virtually guaranteeing all eurozone debt against default, yields on other stressed sovereign debt will skyrocket as people try to flee the sinking ship of eurozone debt. Contagion is the name of the game.

I will, however, concede that things look far better now than they did only a few months ago. Don't get me wrong - Greece looks as bad as ever. But two things have changed my mind about the likelihood of widespread contagion in the eurozone. The first is that the eurozone's two largest economies with unsustainable debt (Italy and Spain) have both gotten their act together. It appears that Mario Monti is really going to change some structural issues in Italy and try to get their debt under control, and markets have rewarded them with an easing of yields. While not as clear-cut, it appears that the Rajoy government in Spain is making a credible effort as well, but we'll have to see what their actual deficit cutting measures will be after the local elections there. If both Italy and Spain make credible progress towards long term fiscal improvements in the next year or so, and if the eurozone economy doesn't completely tank, there's a chance that debt contagion will be limited to a handful of small peripheral economies, which can be easily handled by rescue funds and the ECB. Big ifs there, of course, but I'm more optimistic than I was a few months ago. Hell, a few months ago even French sovereign debt was starting to look frothy.

The second ray of sunshine is that the ECB finally got their act together and effectively commenced back door QE to bring down rates. There's still a lot of dysfunction in monetary policy in the eurozone - not least because they have failed to effectively prod banks into increasing the money supply, despite cheap money - but I'm marginally more hopeful that things will loosen up now. This will help keep yields low while governments sort out their finances, and it will also help keep the eurozone's faltering economy from completely collapsing.

Only time will tell if these positive trends bear fruit. A lot of things could screw this up - an oil price shock being a likely candidate right now - but they might dodge a bullet, despite all of their terrible attempts at monetary and fiscal policy.

Given the high European taxes on petroleum, the Europeans can just reduce those taxes to offset higher market prices.

Europeans reduce taxes? :haha:

That's almost as likely as Greece nipping this debt thing in the bud before it becomes a proper crisis. :o

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Originally Posted by wiggin

Hazir, I think the issue with Greece has never been a default leading to insolvent private creditors (mostly banks). Rather, the issue has been that if the ECB and EU allowed a Greek default after virtually guaranteeing all eurozone debt against default, yields on other stressed sovereign debt will skyrocket as people try to flee the sinking ship of eurozone debt. Contagion is the name of the game.

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Funny how you keep insisting there was a virtual guarantee of all eurozone sovereign debt where such a guarantee was not only explicitly denied legally, but also were something the creditor nations only reluctantly and partially accept now after years of trying to avoid getting to that point.

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I will, however, concede that things look far better now than they did only a few months ago. Don't get me wrong - Greece looks as bad as ever. But two things have changed my mind about the likelihood of widespread contagion in the eurozone. The first is that the eurozone's two largest economies with unsustainable debt (Italy and Spain) have both gotten their act together. It appears that Mario Monti is really going to change some structural issues in Italy and try to get their debt under control, and markets have rewarded them with an easing of yields. While not as clear-cut, it appears that the Rajoy government in Spain is making a credible effort as well, but we'll have to see what their actual deficit cutting measures will be after the local elections there. If both Italy and Spain make credible progress towards long term fiscal improvements in the next year or so, and if the eurozone economy doesn't completely tank, there's a chance that debt contagion will be limited to a handful of small peripheral economies, which can be easily handled by rescue funds and the ECB. Big ifs there, of course, but I'm more optimistic than I was a few months ago. Hell, a few months ago even French sovereign debt was starting to look frothy.

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Spain's debt situation unsustainable? The average government would sign up to the level of Spanish debt. Which is not to say that Spain will benefit a lot from modernizing its economy as the present government is doing.

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The second ray of sunshine is that the ECB finally got their act together and effectively commenced back door QE to bring down rates. There's still a lot of dysfunction in monetary policy in the eurozone - not least because they have failed to effectively prod banks into increasing the money supply, despite cheap money - but I'm marginally more hopeful that things will loosen up now. This will help keep yields low while governments sort out their finances, and it will also help keep the eurozone's faltering economy from completely collapsing.

Only time will tell if these positive trends bear fruit. A lot of things could screw this up - an oil price shock being a likely candidate right now - but they might dodge a bullet, despite all of their terrible attempts at monetary and fiscal policy.

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I am still not convinced LTRO is a solution, as I don't really think QE is a solution. It's a kicking down the can the road by central banks, but it's bound to come back to bite us all in the ass.

But, as you point out, contagion seems rather less of a problem today than it did a year ago. I think that was as much or maybe even more the object of the EMU's leaders as saving Greece.

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Originally Posted by Loki

Given the high European taxes on petroleum, the Europeans can just reduce those taxes to offset higher market prices.

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Actually, it's high European taxes on fuel that normally softens the effect of oil price spikes on economic growth. The issue is that the economy in much of Europe is pretty soft right now and very susceptible to demand shocks. And, oddly enough, I'm in the position of agreeing with CC - gas taxes aren't going to be decreased in the EU. In fact, it's only in the US that such populism often happens (same with opening up the SPR for small jumps in gas prices). It should be the opposite, of course - since in the EU taxes are such a big chunk of fuel prices, they have some room for temporary cuts, but in the US it would be a better idea to raise fuel taxes in the medium term in order to reduce the impact of future oil price shocks.

Not going to happen, of course, but it's a nice idea. A carbon tax would be a nice way to do this, but the chances of that passing are even lower than the chances of a straight up increase in the gas tax in the US.

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Originally Posted by Hazir

Funny how you keep insisting there was a virtual guarantee of all eurozone sovereign debt where such a guarantee was not only explicitly denied legally, but also were something the creditor nations only reluctantly and partially accept now after years of trying to avoid getting to that point.

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Markets certainly thought so - the legal reality is irrelevant. If market expectations are changed, that results in market turmoil and often adverse consequences. We've been over this a lot and you bring up this irrelevance every time.

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Spain's debt situation unsustainable? The average government would sign up to the level of Spanish debt. Which is not to say that Spain will benefit a lot from modernizing its economy as the present government is doing.

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I actually agree that Spain's debt to GDP isn't too bad at the moment - officially, somewhere around 70% of GDP. The issue is that their economy is still shrinking, their deficits are still way above target, and the headline number ignores the debt of local and regional governments that have been quite spendthrift and have little in the way of fiscal discipline. More broadly, they have huge structural problems - awful long term unemployment, very uncompetitive policies, etc. I have hopes for the Rajoy government fixing this, but the concern about Spain was not unwarranted in the past. I'm cautiously optimistic, though.

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I am still not convinced LTRO is a solution, as I don't really think QE is a solution. It's a kicking down the can the road by central banks, but it's bound to come back to bite us all in the ass.

But, as you point out, contagion seems rather less of a problem today than it did a year ago. I think that was as much or maybe even more the object of the EMU's leaders as saving Greece.

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We've had our conversations about this before, but for once I actually have faint praise for the ECB. Don't look a gift horse in the mouth, eh?

Oh noes there was a technical default! But but but...I thought that was the worst possible outcome!

I wonder what borrowing costs would be if bond insurance was outlawed like some seem to want.

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Originally Posted by Dreadnaught

Oh noes there was a technical default! But but but...I thought that was the worst possible outcome!

I wonder what borrowing costs would be if bond insurance was outlawed like some seem to want.

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I wonder what bond insurance would cost if OTC credit default swaps were outlawed, or at least regulated.

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Originally Posted by Dreadnaught

Oh noes there was a technical default! But but but...I thought that was the worst possible outcome!

I wonder what borrowing costs would be if bond insurance was outlawed like some seem to want.

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The worst possible outcome was a disorderly default, which is what didn't happen. Also, the way things were done seem to have pretty much cancelled out those CDS's that were still hanging over the market. Seems to me that the policy was quite effective; irresponsable lending and borrowing got punished. And the risks of contagion were strongly reduced.

Given that in the end the tax-payer is asked to foot the bill for those CDS's I see very little against prohibiting them, or at least severely curtailing them. I wouldn't have had a problem with them if they hadn't taken on the shape of private profits, socalized losses. That as far as I am concerned is not the ideal shape of the free market.

Now all we need is central banks stop printing money as if there is no tomorrow and we might get somewhere.

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Originally Posted by Hazir

Given that in the end the tax-payer is asked to foot the bill for those CDS's I see very little against prohibiting them, or at least severely curtailing them. I wouldn't have had a problem with them if they hadn't taken on the shape of private profits, socalized losses. That as far as I am concerned is not the ideal shape of the free market.

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The tax-payer is only footing the bills because governments chose to act.

Some of us were quite happy with the notion of a disorderly default. In which case those behind CDS's would have footed the bill - and so they should have.

If 'some of us are happy with the notion of a disorderly default', those 'some of us', should have their head checked. There is nothing pretty about a disorderly default of a sovereign debtor.

Those who had written CDS's could not have taken a €300bn body blow and as it happens, the tax-payer also could not afford them going belly-up as they included many systemic banks. And FYI, €300bn is a figure that is on the optimistic side, because it doesn't take into account the contagion risk of such a disorderly default on other debtor nations.

Disorderly default now, or spend another century paying for Greece's debts.

No "pretty" options in play, Hazir.

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Originally Posted by CitizenCain

Disorderly default now, or spend another century paying for Greece's debts.

No "pretty" options in play, Hazir.

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Well, for that to happen the Greeks should first try to re-affirm their fiscal authonomy. I don't see them pull that off for the rest of this decade. After they've gone through the grinder I actually have some hope for them. Greeks in general are hard workers, it's just they have too many bureaucrats who don't work at all and actively frustrate those who want to work. If you reduce their numbers by 50% Greece will be doing much better already.

I could buy that... Then again, I'll almost always agree that killing half the bureaucrats is a good plan.

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Originally Posted by Hazir

If 'some of us are happy with the notion of a disorderly default', those 'some of us', should have their head checked. There is nothing pretty about a disorderly default of a sovereign debtor.

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I never said that a disorderly default would be "pretty", but none of this is. Its also ethically the right thing to do.

I'd have been happy with the Greeks going to the wall, and bailouts being redirected at the banks rather than a foreign nation that still has no chance of actually repaying these "loans".

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Originally Posted by RandBlade

I never said that a disorderly default would be "pretty", but none of this is. Its also ethically the right thing to do.

I'd have been happy with the Greeks going to the wall, and bailouts being redirected at the banks rather than a foreign nation that still has no chance of actually repaying these "loans".

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Actually we are doing the Greek citizens a favour; we are denying their state the ability to hire unlimited bureaucrats. And while doing that we saved ourselves a bunch of euro's.