The Tailgate's Very Own European Debt Crisis Thread

[Hubbs]

(Hooray, I've already ensured that 80% of our members won't even bother to click on my thread by giving it a horrendously boring/nerdy/wonky title. I'm a marketing genius, I tells ya.)

So the Greek government survived a vote of confidence yesterday, a necessary step in moving towards a second bailout, which Greece desperately needs given that it essentially can't access the normal bond markets anymore. Two-year bonds are flirting with 30%, which they already breached once last week.

Some have pointed out that Greece is a tiny nation in the grand scheme of things, with an economy about the size of Washington state's. This is true. However, thanks to the ridiculous capital ratios maintained by European banks, and their exposure to Greece, a default could ignite a chain reaction across the continent, which in turn would create a global crisis. Greece has been compared to Lehman Brothers, in that a bankruptcy could have far-reaching effects. Perhaps the most direct effect would be pushing Portugal, Ireland, and eventually Spain and Italy closer to their own default scenarios, as they all have structural problems with repaying their debt, and Greece is seen as the example of how crises around the entire European periphery could play out.

My humble opinion is that the Greek situation is both a vision of the future and almost completely irrelevant. It will certainly show what will likely happen for all of Europe's PIIGS (Portugal, Ireland, Italy, Greece, Spain), but it also won't change the mathematical future for any of them. If Greece gets another bailout, Ireland and Portugal will still eventually be denying their own needs for a second bailout, which is, of course, one of the biggest signs that they will need a second bailout. (See their denials about needing a first bailout.) Similarly, if Greece doesn't get another bailout and is forced to leave the euro so it can issue and subsequently devalue the drachma, Ireland and Portugal will still eventually be denying their own needs for a second bailout. The big questions ultimately lie in Spain and Italy. Greece, Ireland, and Portugal are all small enough for the larger European economies to prop up. But Spain and Italy are, in all likelihood, "too big to bail." So far, they've been able to avoid the near-lockout from bond markets that the smaller nations have faced. But ultimately, the math is quite troublesome for them as well. If they start to run into hurdles when it comes to issuing debt... well, look out is all I can say.

Discuss.

[FanboyOf91]

Alex, what is German banks and politicians demand a bailout before they are hoisted on their own petard?

[RichmondRedskin88]

So did Greece run out of money yet? I was reading in the WSJ they were close.

[SnyderShrugged]

Greece has so stuck it to the other EU nations. The deal today, where Germany bent over, means that the Greek creditors will likely not be the bearers of the losses, the EU taxpayers will shoulder that burden now. They should force Greece to restructure their debt on their own and not further create an EU moral hazard that keeps growing with each bailout.

[Larry]

I feel like I'm watching soccer. Yeah, a bunch of people running back and forth, and I have no idea why.

I'm just wondering if maybe this will convince people like Japan, China, and the Saudis to Buy American (debt). Especially now that we've ramped up production on it.

[Predicto]

To be fair, Greece is worse than the other PIIGS. Greece clearly lied like crazy to get into the Euro in the first place, and has made no effort to make any of the structural changes that are necessary to remain solvent. It doesn't even enforce its own tax laws.

Ireland and Spain, at least, are different. They got caught up in the boom-bust cycle and hit very hard, but they are not completely disfunctional, and there is every reason to think that they can get back on the right track, though it won't be easy.

I don't know spit about Portugal, and Italy's situation is so unique and complicated that I don't even know where to begin.

[Hubbs]

I'm just wondering if maybe this will convince people like Japan, China, and the Saudis to Buy American (debt). Especially now that we've ramped up production on it.

Japan is going to have a lot of problems buying our debt if it keeps posting trade deficits like it has for the past couple months, which is almost as unthinkable as the US actually running trade surpluses.

China and Saudi Arabia/other major buyers will probably continue their recent pattern of reducing their purchases and complaining loudly about our monetary policy, but not really geting serious about exiting the dollar. (At least not yet.)

and there is every reason to think that they can get back on the right track

I have to quibble with that statement. "Every reason"? Really? I can think of a few reasons that should make you think they won't get back on the right track:

- Ireland faces a debt crisis because it backstopped its financial system, which is huge relative to its GDP and has forced the government to make promises that, mathematically, it's quite unlikely to keep

- Spain's main debt problem lies within its "cajas," which hold billions upon billions of bad real estate assets which will never be made whole (sound familiar?), and which Madrid has determined must be propped up at all costs, pushing Spain's true debt/GDP much higher than the "official" statistic

- Structural unemployment in Spain is simply too high to spark the level of economic growth needed for the country to grow its way out of its debt hangover. However, given my tendency to question any given single statistic, I'll also point out that "underemployment" and age-specific youth unemployment are both sky-high.

- Taken a gander at Ireland's bond yields lately? They seem to keep breaking records. I get the feeling that this may pose a problem for the Irish government.

[Predicto]

Oh, I agree that in the short run, Ireland and Spain are both in deep water. I was thinking more in the long run. Both of those countries' governments are relatively responsible, and decisions that were hastily made in the depths of the financial crisis will be quietly modified over time (IMO).

Greece, on the other hand, is like a petulant child. It has pensions and social services that it can't possibly sustain, it has ridiculous debt all out of proportion to its GDP, it doesn't collect taxes, it repeatedly lies to the EU about its finances, and any effort to cut back any spending is met with huge riots in the streets and the likely collapse of the government. They aren't even operating in reality over there.

[Hubbs]

Oh, I agree that in the short run, Ireland and Spain are both in deep water. I was thinking more in the long run. Both of those countries' governments are relatively responsible, and decisions that were hastily made in the depths of the financial crisis will be quietly modified over time (IMO).

Greece, on the other hand, is like a petulant child. It has pensions and social services that it can't possibly sustain, it has ridiculous debt all out of proportion to its GDP, it doesn't collect taxes, it repeatedly lies to the EU about its finances, and any effort to cut back any spending is met with huge riots in the streets and the likely collapse of the government. They aren't even operating in reality over there.

Ah, I gotcha. You're right, Greece is definitely worse than anyone else.

[PeterMP]

So what's the solution that doesn't include the EU's economy going into the tank?

I heard somebody proposing the other day that Greece leave the EU which would allow them to manipulate their currency, but then the other person said that would be a disaster for them.

[Hubbs]

So what's the solution that doesn't include the EU's economy going into the tank?

I heard somebody proposing the other day that Greece leave the EU which would allow them to manipulate their currency, but then the other person said that would be a disaster for them.

They're both right. Sort of.

Greece doesn't need to leave the EU. It just needs to leave the eurozone. With or without a second bailout, there's no way that Greece is going to avoid a default. There just isn't. Ultimately, there will be a disaster for both Greece and the EU. This disaster can take a number of forms, however. The best form would probably be the Iceland solution, in which Greece leaves the euro, goes back to the drachma, and does what Iceland did a couple years ago, essentially telling international banks to go screw while devaluing its currency and liquidating as much debt as possible in order to gain an economic clean slate. Did it suck in the near term? Yes. Did it put Iceland in a much better current position than Ireland? Also yes.

In other words, leaving the euro will be a disaster for Greece in the same way that choosing a financial collapse was a disaster for Iceland. It's more short-term pain in exchange for less long-term pain. The same is true for the rest of the eurozone—to reject another Greek bailout would be to choose more short-term pain and less long-term pain. It would be better to amputate Greece like a gangrenous finger than to give it another bailout, one that will be just as successful as the first. Instead, Europe is trying very hard to keep the finger attached. I bet they'll all act very surprised when the infection spreads to the rest of the arm, as if nobody could possibly have seen it coming.

[Gibbs Hog Heaven]

Yet another reason to praise the God Lord above that England never caved to monetary union and kept it's own currency.

Thank heaven for the pound.

Hail.

[Stillers6SB]

So what's the solution that doesn't include the EU's economy going into the tank?

I heard somebody proposing the other day that Greece leave the EU which would allow them to manipulate their currency, but then the other person said that would be a disaster for them.

The solution is that the European debtholders will end up taking a haircut. Banks will fail. (As they should have failed after Lehman.)

Life will go on.

[FanboyOf91]

Yet another reason to praise the God Lord above that England never caved to monetary union and kept it's own currency.

Thank heaven for the pound.

Hail.

Indeed. Now if her Majesty could only send some of the Barclays chaps to the Tower pour encourager les autres...

[Hubbs]

Yet another reason to praise the God Lord above that England never caved to monetary union and kept it's own currency.

Thank heaven for the pound.

Hail.

Unfortunately, that didn't prevent British banks from acquiring all sorts of exposure to the PIIGS, and also to the possibility of general contagion within the European banking system.

I've heard that recently, British financial institutions have been ditching European exposure as fast as they can. I hope they're successful.

[deejaydana]

thoughtful thread Hubbs and, in your typical style, it's both well worded and thought out. I look to Greece and more broadly the EU and wonder when this will visit this side of the Atlantic. I think above all what I take away from Greece is how much of a narcotic social programs can be and how difficult it's going to be to pare them back without just titanic public revolt. Why will that be any different here? On another, larger front I wonder if this simply spells the end of Greece's inclusion in the EU and an end to them using the Euro. Ultimately I take the same stance that I take here in that we need to pull that band aid off sooner rather than later, sorry to generalize with that statement, but we just can't delay this any further and taking lumps now will make the longer term more agreeable...however far off that may be.

[Prosperity]

does this have anything to do with the finance sector layoffs?

[MartinC]

Unfortunately, that didn't prevent British banks from acquiring all sorts of exposure to the PIIGS, and also to the possibility of general contagion within the European banking system.

I've heard that recently, British financial institutions have been ditching European exposure as fast as they can. I hope they're successful.

Its not just UK banks which are exposed to the EU debt. Most of the debt of the PIIGS is held by US banks. Thats the elephant in the room here - the first credit crunch was caused by toxic debt based on sub prime debt mainly mortgages. If Greece defaults, which looks likley in one form or another it will be US and UK banks left holding worthless debt and taking a bath. Even more importantly if Greece goes under it will put the spotlight on Portugal and Spain with Italy and Ireland not far behind - their debt ratings will be under severe pressure, the cost of servicing their debt will go up and because they are in the Euro they will be unable to adjust domestic interest rates to cope. The whole Euro will be under threat.

The implications of this are that US and UK banks have huge exposure to all this debt and have reinsurance policies runing into Billions and Billions against the collapse of the Euro. Soverign debt makes sub prime mortagages look like pocket money and if it starts to go bad the Credit Crunch will look like a positive economic boom.

we have huge public spending cuts here in the UK - and not before time - and people are starting to squeak about them though not seriously like in Greece. What most people dont realise - or want to understand - is that the cuts that we are making in the UK are not reducing our defecit just slowing the rate at which it is growing. Serious economic and spending reform is needed globally to get finances back in balance and meanwhile we are all peering into the abyss.

[PeterMP]

They're both right. Sort of.

Greece doesn't need to leave the EU. It just needs to leave the eurozone. With or without a second bailout, there's no way that Greece is going to avoid a default. There just isn't. Ultimately, there will be a disaster for both Greece and the EU. This disaster can take a number of forms, however. The best form would probably be the Iceland solution, in which Greece leaves the euro, goes back to the drachma, and does what Iceland did a couple years ago, essentially telling international banks to go screw while devaluing its currency and liquidating as much debt as possible in order to gain an economic clean slate. Did it suck in the near term? Yes. Did it put Iceland in a much better current position than Ireland? Also yes.

In other words, leaving the euro will be a disaster for Greece in the same way that choosing a financial collapse was a disaster for Iceland. It's more short-term pain in exchange for less long-term pain. The same is true for the rest of the eurozone—to reject another Greek bailout would be to choose more short-term pain and less long-term pain. It would be better to amputate Greece like a gangrenous finger than to give it another bailout, one that will be just as successful as the first. Instead, Europe is trying very hard to keep the finger attached. I bet they'll all act very surprised when the infection spreads to the rest of the arm, as if nobody could possibly have seen it coming.

My understanding is the Iceland situation was different because the problem was their banks debt. The government of Iceland didn't default. Essentially, all of the banks did, but those banks also had credibile and significant international assets and that covered much of the deposits, which made people relatively happy.

Here, the Greek government itself will have to default, and it doesn't hold a ton of assets.

I'm also curious as to see what you think about the latest change in the Icelandic krona (going from ~120/USD to ~180/USD). At one point it 60/USD (http://www.google.com/finance?q=USDISK). Isn't that a concern? I'd assume the costs of imports have gone through the roof in Iceland and that Iceland requires some very basic things (e.g. food) to be imported.

---------- Post added June-23rd-2011 at 10:13 AM ----------

we have huge public spending cuts here in the UK - and not before time - and people are starting to squeak about them though not seriously like in Greece. What most people dont realise - or want to understand - is that the cuts that we are making in the UK are not reducing our defecit just slowing the rate at which it is growing. Serious economic and spending reform is needed globally to get finances back in balance and meanwhile we are all peering over the abyss.

I've become convinced that the global economic and environmental problems are one in the same.

We are simply not effecient enough. We consume to much based on the utility and amount that we produce.

[deejaydana]

We all need to follow Germany's lead and follow how they're running their country, even the socialist elements of it. The money being given to Greece would be used just as wisely if we threw it on a massive bonfire.

[Prosperity]

We all need to follow Germany's lead and follow how they're running their country, even the socialist elements of it. The money being given to Greece would be used just as wisely if we threw it on a massive bonfire.

pretty much Greece = codependent *******

[Hubbs]

Its not just UK banks which are exposed to the EU debt. Most of the debt of the PIIGS is held by US banks. Thats the elephant in the room here - the first credit crunch was caused by toxic debt based on sub prime debt mainly mortgages. If Greece defaults, which looks likley in one form or another it will be US and UK banks left holding worthless debt and taking a bath. Even more importantly if Greece goes under it will put the spotlight on Portugal and Spain with Italy and Ireland not far behind - their debt ratings will be under severe pressure, the cost of servicing their debt will go up and because they are in the Euro they will be unable to adjust domestic interest rates to cope. The whole Euro will be under threat.

Yup.

Nobody in Europe wants to say it, but the euro's very existence is at risk here. (Not necessarily with Greece by itself, but the cascading effect of Greece, then Ireland, then Portugal, and then maybe Spain or Italy all tearing the European banking system to shreds, and ours along with it.)

My understanding is the Iceland situation was different because the problem was their banks debt. The government of Iceland didn't default. Essentially, all of the banks did, but those banks also had credibile and significant international assets and that covered much of the deposits, which made people relatively happy.

Here, the Greek government itself will have to default, and it doesn't hold a ton of assets.

Yes and no. Ireland is most easily compared to Iceland, which is convenient because it allows all sorts of lines to be written about the difference between the countries being "one letter and one trillion euros." Iceland didn't choose to backstop its banks, and Ireland did. Irish banks are the biggest reason that Ireland is in a debt crisis right now. The government decided to guarantee debts that were huge relative to GDP, but doing so has only put Ireland between an even larger rock and an even harder hard place. Now, if the banking system isn't still propped up, the pain will be even greater, because a lot of economic decisions have been made on the basis that the Irish government won't let its banks fail. But if the system is propped up, Ireland is only kicking the can further down the road, because it simply can't make all of these payments, and when the whole house of cards collapses, the pain will be worse still, because even more economic decisions will have been made on the basis that Ireland is capable of saving its banks.

Greece, on the other hand, is more like your typical sovereign default scenario, although as with virtually all countries since 2008, the banking system is quite a big anchor. But even without its banks, Greece has simply over-promised while lying about all of its under-delivering in the form of hidden off-balance-sheet debt that it can't hope to pay off. Greece is ****ed. Period. And a second bailout will only make the eventual carnage even worse. But since any level of carnage is politically inconvenient, Europe is desperately trying to once again kick the can a few more yards down the road.

I'm also curious as to see what you think about the latest change in the Icelandic krona (going from ~120/USD to ~180/USD). At one point it 60/USD (http://www.google.com/finance?q=USDISK). Isn't that a concern? I'd assume the costs of imports have gone through the roof in Iceland and that Iceland requires some very basic things (e.g. food) to be imported.

I'm not particularly familiar with Iceland's foreign trade, but when it comes to food, I would guess that Icelanders eat a lot of fish, which they can catch themselves.

[Hubbs]

thoughtful thread Hubbs and, in your typical style, it's both well worded and thought out.

That's my typical style? I thought my typical style was more along the lines of being economically unorthodox and not even showing signs of coming to fruition for years.

By the way, here's a quick analysis of Greek math versus American math:

http://www.thedailyshow.com/watch/wed-june-22-2011/grecian-burn

I'm sure this won't bite us in the ass anytime soon....

[Hubbs]

Oh look! It's already happening, and this is such a ridiculous move that it's practically sarcastic:

[Prosperity]

Hubb's what do you think of Greece's "austerity package" seems like folks think it'll pass, and if it does, that the bigger European states will bail them out.