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Stephanie, good to see you're only one day behind me on the Greek saga. My take is that there is a selective haircut in the offing:



and I look forward to your thoughts on similar possibilities for Ireland and Portugal!

'of delaying the day of market reckoning a little longer. '

The story of the last three years.
Put off the day of judgement.
Rather than facing the music now with extreme pain, instead leave it for a later date when the pain will be significantly worse, but on someone else's patch (our youngsters).

I wish, I wish we could be responsible, and not injure our children !!

Stephanie,

Surely a lot of this rescheduling will be on the ECB loans made in the last year?
So problem solved as EU taxpayers & contributors (including UK) take the hit!
No one seems to have thought of an exit strategy yet to take the PIGs off financial life support.

OK, the solution is as follows. The Eurozone 'wise virgins' need to swallow hard and pay off enough of the Greek debt to stabilise the Greek economy (OK, call it a long term structural loan, to save everybody's face). That solves today's crisis. For the future the ECB must adopt a system to limit the Euro sovereign debt that any member country can issue to a predetermined figure which is within its means. That much is underwritten by the whole Eurozone. Member countries can issue debt in excess of that if they wish, but it must be in currencies other than Euro & will explicitly not be underwritten.

Greece should stay in the Euro for long enough to get the best restructuring deal available, then leave the Euro and default on the rest.

The only solution that can happen which involves them remaining in the Euro, is for the ECB or some other body to purchase their debt and donate the interest payments back to the Greek government for investing in improvements to their economy. There can be condtions attached, but not silly conditions involving austerity or irrational labour market reforms.

These conditions should be long term - things like:

-Investment in diversifying their economy (which will also improve their external balance in the long run)

-Improved tax collection and regulation

-reducing corruption within business, the government and trade unions (not labour market reforms though)

-better investment in education and infrastructure.

-reforms to attract businesses from outside Greece (e.g. in their property markets)

It's a good analysis but I don't think that your #2 option, with all its difficulties, would by itself be enough.

Greece will not be able to return to growth, just by having more bailouts from the EFSF. Even if the interest rate on the debt is lower Greece desperately needs policies that will promote growth.

The main problem is that all the EU conditionality attached to more refinancing inflicts policies that sink Greece deeper into recession. For all their talk, all they demand is more austerity, and that is not only a policy that won't work but it is pushing Greece to the edge of the cliff politically. If it falls, the rest of the dominoes might soon follow.

The German press may offer drastic solutions to push matters forward - last Friday's rumours about Greece exiting the euro being a prime example - but a more radical answer that is much more likely to work is re-introducing their beloved Deutsch Mark. I suggested this last summer, but it is an even more attractive solution today, see:

and links there in.

There are many falsehoods in finance and one of the most gross is that you get your money back. Inflation generally steals the capital little by little so little inflation and a haircut may be OK and better than huge inflation and no haircut.

The essence of the problem with economic is that economists only ever look at less than half the story - the revenue account and very very seldom at the asset side (hence the false perception that asset price inflation is 'good' and flogging off of your forests/gold reserves boost the country.) This is also why rampant short-termism prevails and generates false costs and benefits.

In the end we are all dead and can't take it with us, but as every farming dynasty knows your farm fro the future long after you are dead - the idiots who teach economics and produce the fools who advise the ECB get many things wrong because they do not understand assets and they will get it wrong again and again until the teaching of economics is fundamentally restructured - by the way this kind of reappraisal of economics they cathartic economic reappraisal happens every time we enter on a depression!

In Greece's case 'solutions' are presented that included flogging off assets to foreigners or even Greeks, and the alternative is said to be default. What default is, is the realisation that the historic monetary price paid for these same assets was far too high and the money lenders want their money back. Really these options are the same. The real question is the responsibility of the lenders for loaning too much - and should they be allowed to get away with it! The is just like the crash and PPI - idiot, clueless, ignorant and highly protected bankers stealing money from the mouth's of widows and orphans.

Greece and the rest of us have to de-leverage/deflate our entire loan base before normal economics can resume - I argue that the best way to do this is the make the banks bankrupt and those foolish borrowers who borrowed too much and gave a security get repossessed (or alternatively lots and lost of inflation!). The key to recovery is get the pain started and over quickly, both here and in Greece. Haircuts all round!

The Northern Europeans are an unpleasant lot. Who lent Greece all this money in the first place while knowing how poor its tax collection policy was? That's right, North European banks. And besides, Northern Rock has more capital then all the German banks combined. Any Greek default and the German banks are down the swanny, and they'll take all the other EU banks down with them! I don't think the PIGS realise how much power they have.

Now we are getting to the nitty gritty of the problem.
And the bond holders wont like it one little bit.
Just how powerful are the bondholders?
How much clout do they command?
If they get their hair cut then by how much?
Do they think they will be able to get the taxpayers of - precisely which - country to save them?
They are stuffed since other bondholders down the line see the shears being sharpened and they want to avoid them at all costs.
If it means sacrificing Greek bondholders then so be it.
But it wont be. Not this time. Next perhaps... Meanwhile one big fix coming up.

Stephanie,

You give the Greek government too much credibility, there are Greek ultra left wing politics developing here, eventually the real politics of the situation will come to the surface and the economics may possibly become a secondary issue.

The Greeks want their debt being written off, there is the 'deliverable' in their eyes.

Will Chancellor Merkel stick her neck our a second time for the failed Greeks against the rising impatience of the German taxpayers and the German Banks?

Did you ever debate;- 'I am a Greek and all Greeks are liars' at St Pauls School or was it a natural assumption that all God's mankind are usually honest and reliable?

It is now quite apparent that the Euro zone officials who denied that there was a meeting on Friday were not telling the truth. Or as a good blog post pointed out they were following the maxim of Sir Humphrey Appleby from Yes Minister.

"Never believe anything until it is officially denied!"

Also the same blog explains why things are going to go wrong for the Eurozone taxpayer.

"As to debt restructuring the Euro zone has by a combination of incompetence and dithering got itself into a position where a lot of the restructuring would take place on the books of the European Central Bank! They are fortunate that the vast majority of their taxpayers and voters do not understand what has taken place here. In fact it is worse than that as the accountancy used is that of the madhouse which declares the interest-rate profits but assumes that capital losses cannot happen! Yes a position which can only have large losses as we stand is declaring a profit…"



In other words there are losses and taxpayers in the Euro zone will have to stump up for them whilst the banks get away with again.

A far simpler approach is who gives what points to which country in a song for Europe franchise or in English here is your bum note.

New to the Boards and have some questions about this article as I don't quite understand:
1. If the EU and the Germas are going to continue to fund Greece through the EFSF or any other funding tool surely buying Greek 3 year paper at a yield of circa 25% must be a bargain and everyone should be buying??? Surely they have to default as there debt is already priced for a default.
2. Stephanie says in the article that a restructure of the debt by lengthening the maturity will not cause disrupruption because "In theory, investors agree to the exchange because the net present value stays the same". I do not understand this surely if you lengthen the term the repayment of principal will be delayed this will surely erode the value of the principal being returned due to discounting???

Anyway any explanations would be welocome

When McDonalds the burger providers have a lower loan interest rate available to them than the good burghers of a country then you get the idea that they have a bit of a problem. As for the coalition of 17 in the Eurozone - This is the key weakness of the whole European set up. The USA has one central administration. As has been commented before - if somebody at the top in the USA wants a one-to-one with a European representative who are they going to call.

Beware Greeks baring debts.

15. At 20:54pm 9th May 2011, Arthur Daley wrote:
Beware Greeks baring debts.

==============================================

Groan.

Though things could get a lot wurst.

An interesting set of comments, but might I suggest there is an aspect not covered.
That is the stability of each country that is in financial difficulties. It is possible that Greece [and others] can only take so much pain before there is catastrophic civil unrest. It won't be spoken about publically, but I bet its considered as a factor privately. Civil unrest introduces the type of uncertainty that markets hate and react adversely to. Predicating the outcome is very difficult. From the point of view of the population the government is in power to improve their lot, not destroy/degrade it. From the point of view of the average citizen, default represents a viable option and perhaps leaving the euro. After all, its a man-made system, and other men can change it. To the man in the street, it possibly represents the best option.

#13. snarf wrote:

""In theory, investors agree to the exchange because the net present value stays the same". I do not understand this surely if you lengthen the term the repayment of principal will be delayed this will surely erode the value of the principal being returned due to discounting???"

Quite right, but economists only understand revenue accounting and anything long term is beyond their understanding whereas banks and real people understand the time/price relationship only too well!

The more you look into the rationality of economics as it is taught the bigger and more obvious their chasms in understanding! The subject, as it is taught in the major institutions is defective and rotten to the core! You will find more and more glaring omissions the longer you look at it.

I know print a large euronote with enough zeros after the 1 to cover the greek debt then sneak it into the greek pm's office so he can hand it over to the european central bank as payment of his countries debt.. Come to think of it why dont we just do that here !! Its only paper after all you cannot EAT it!

Then start a new type of money that is created as debt free money ie the BANKERS dont get to create wealth using fractional reserve banking the nation does but NOT the banks...

Austerity makes the Greek deficit worse not better. They need long term funding at sensible rates of interest to produce growth and modernisation.

They do not need a visit from the apocalypse school of economics represented by JfH.

16. At 21:43pm 9th May 2011, TheComingStorm wrote:
15. At 20:54pm 9th May 2011, Arthur Daley wrote:
Beware Greeks baring debts.
Groan. Though things could get a lot wurst."

I agree this just spells trouble!

On a heavier note - Greece has dug itself into a humungous hole. Better to cut their losses, default and leave the Euro. Same for Portugal and possibly Ireland.

The Eurozone needs to be established properly with a Central Reserve bank, Central Fiscal control and proper reserves.

As many said at the beginning of this disastrous episode, only the core countries in the non Med areas could live with this currency area. Let the Eurozone shrink and then start again properly - but frankly cows will fly first!

"Re-profiling would mean the principal (the initial amount that was borrowed) would remain the same, but the maturity is extended by, say, 5 years. In theory, investors agree to the exchange because the net present value stays the same.

This simply is not true and if you think about it logically could never be true unless the interest-rate was zero and even then you might prefer to have your money back earlier...

#18. John_from_Hendon:

Thanks John only problem is it is not the econosmists who hold Greek debt it is the Banks (most notably German ones) and they maybe do understand NPV but then again judging on some of their recent investment decisions may be not....

#13 #18 #23

You cannot know if the statement is true or not, unless you have some information about the (implicit or otherwise) interest rate before and after, and making assumptions about the discount rate. It only mentions the principal, not anything else.

Firstly, it is usually possible to restructure so that you can discount both cash flows back to the same NPV, using the same discount rate in each case, but of course you have to adjust the total nominal value of the cash flow so you pay back more when the term is longer.

However, in this case you may even be able to make the argument that the NPV stays the same *even* without adjusting the total nominal value of payments, because a different discount rate should apply to the longer repayment term, due to lower risk.

Comparing say, a 2 year term and a 50% chance you will get nothing, or a 5 year term with much better odds, the latter deserves a lower risk-adjusted discount rate. You may of course argue whether the risk is lower or not, which is why it says "in theory".

The following statement as only happened twice in living memory:-

I agree with John from Hendon (sorry John)

Sooner or later the fabric will be so insecure that no amount of props will keep it afloat. Wouldn’t it be nice to hear established (with a small e) not only say ‘WE’ got it A about T but to say ‘WE’ have to go back to the drawing board.

I am whispering this so nobody hears and you can save face….it aint working!

7**
John you are wrong , in that if you tried to do above , no one would buy a house again and the banks would have to make such massive write downs , we would end up with a full set of banks.

The issue is GOVERNMENT DEBT , borrowing money even when times are good , rather than paying down debt . Its all down to good governance, something Gordon Brown was to WEAK to do , because he could not contemplate cutting back on welfare support.

The biggest twist of all is , there is nothing worse for the human soul than being added to the welfare scrapheap, in essence he helped no one .

First of all, good blog today. I
happen to be quite busy with work and what have you for the next couple of
days, so I decided to write my comment on my trusted PDA while commuting back
home. Yes, a QWERTY keyboard helps there!

Now, first of all - I do not know the Greek
government's strategy, assuming they have one other than "Play nice with
EU, hope for the best". It is a fact that several of the reforms promised
thus far have stalled. Perhaps the government is afraid... Perhaps it's
incapable of completely alienating their "party clientele". Still,
many things that should have taken place more aggressively have not. A notable
example of that is the restructuring of the tax & revenue collection
management:

The corporate tax & book-keeping law is
supposed to be totally scrapped and replaced by a friendlier legislation.
Individual tax offices are also supposed to be scrapped in their majority, with
the burden of collection falling to the Ministry of Finance at a central level.

These two reforms have been postponed for Q2-Q3
2011. The introduction of a "tax card" that will track one's
purchases and associate them with a business VAT number is delayed until June
at the earliest, onwards from January. And so on, and so forth.

Meanwhile, unemployment continues to
sky-rocket. In effect, official figures would be probably doubled if they
included employers owing money to their own employees (suppliers are already
used to not being paid...until bankruptcies occur eventually). My employer has
withheld for 6-7 months one monthly salary to us, until "they are able to
pay it", and this is a "good" situation. Thousands of others
remain unpaid for larger time periods, and of course, totally ineligible for
social care support - They are all "employed normally" you see.

Hospitals and universities, all entirely
public, tend to shut down for temporary time periods, in order to save on
operational funds and / or supplies. Not all of them, of course, but there is a
worrying trend here. Even the National Technical University of Athens, one of
the largest in the country, publically admitted that it is considering
temporarily suspending its operation as whole - certain Depts. such as
Architecture have already done that.

And of course, several thousands of small shops
and businesses have been shut down permanently. You know, I do blame bad
business decisions for a good portion of these, and their entrepreneur owners
"living the dream" in the Greek bubble of the last...decades, but
now, even good businessmen can't escape - Banks have shut down credit, and they
only refinance corporate loans, when they do even that, because they hope that
some of these may be repaid...

All in all, the situation seems to have
deteriorated by quite much. Allow me a little example that illustrates the
state mentality:

During the most recent Troika
"check-up", supposedly the Troika employees visited certain central
tax offices. The situation they found there was pathetic - not only revenue
targets were missed by considerable margins, but also, the State refused to
refund / pay VAT returns to businesses - for many, many, months. When the
Troika employees asked "Why are you not returning VAT to businesses?"
they got the response "Aren't you glad? More funds are recorded as being
available in the state coffers!"

Need I say more? The Greek state is already
bankrupt - the fact that the deficit is being revised boils down to servicing
past debt of the wider public sector, and that's about it... Hospital suppliers
alone are owed several hundred million Euros, and they're still only partially
paid, not "to-date".

How much of the day-to-day situation is
reflected "on the record" to Troika? Not much, of course... I suspect
their employees visiting Greece will have lots to say "off the
record" though, with their reports boiling down to: "They're both
bankrupt and cannot miraculously fix the situation in mere months. Handle with
care".

But when I read that, for instance, Mr. Trichet
does not want to end his term with "radical departures" from usual
ECB policy, or Ms. Merkel opposes easing of the "austerity packages"
to mitigate her political cost, I can't help but wonder if I'll be ordinarily
resident overseas in the next 5 years - The way things stand right now, Greece
will be a wasteland by then.

The above assume that the Mayas are wrong, and
in the end of 2012 the world will not end. Of course, such a development would save EU the hassle of having to deal with its own EFM in 2013, but who knows...?

At risk of repeating myself, it is not debtors who lose money on default - it is creditors. The Eurozone bailouts, the propping up of the UK housing market, QE in the States, are all designed to maintain the volume of debt in our economies.

The fear is that once the defaults start the whole thing would unravel in a chain reaction of failures and bailouts: leaving us God knows where. The fact remains that our economies are not generating enough money to pay off our debts.

#27 Sovjohn
Reality - Grisly to read, excellent to know.
Thank you very much.

This comment was removed because the moderators found it broke the house rules. Explain.

The Euro was always a political gamble. Those people are not stupid. They knew that the disparity between fiscal and monetary policy was a problem. They hoped that 'ever closer union' would be the answer in everyone's mind - citizens and politicians alike.

Unfortunately, the politicians - who generally seem to have plenty of money - seem to think that way but the citizenry does as it always does. It glares at the politicians and says 'what have you done with my extremely important money you silly people' (words in bold replaced at moderator request).

Of course the EU has the answer to that as well. The citizenry cannot get rid of these politicians.

The Greeks can get rid of their politicians, though.

The Greek debt should be decalred 'Odious' and Greece should be allowed to default.

The contracts should be declared invalid due to the corrupt and coercive activities of Goldman Sachs and the current Greek Govt. Just why should the Greek state's assets be plundered due to the fraudulant activities of a private bank and succesive reprobate governments.

'In the beginning of 2010, it was discovered that Greece had paid Goldman Sachs and other banks hundreds of millions of dollars in fees since 2001 for arranging transactions that hid the actual level of borrowing.'

Greek president George Papandreou should be put in jail, but then he IS currently the President of the Socialist International, a known neo-liberal anarchistic (i.e. deregulating) world-wide organisation. That under the banner of 'socialism', actually seeks to deceive nation states by subverting them through the privatisation of national states' assets all for the free marketeers.

The Greek Govt pretends to be left wing but is in fact right wing by pandering to the free markets and big business. Here's one Euro politician with the guts to say it how it really is...(it's a must read btw)

Well who would've thought it ?
The Greeks trying to get their second bailout in before the Portuguese have a chance of getting their first in first :)

Next up will be the Spanish denying there may be a small problem on the horizon and of course they are too sensible and financially astute to get themselves into a position where a bailout for them would become a necessity.

As a Spanish bailout will be too much for the current support packages, will Italy jump the gun and try to get in there first ?

No EZ country can be allowed to default, it is one out all out so the only solution will be for each of the EZ nations Central Banks to become an arm of the ECB and the ECB will become the sole buyer of EZ countries debt.
There may be an EZ wide haircut for existing bondholders (which would be a bit of a downer if you hold German bonds as the current yield does not price in a default scenario), the ECB will become the sole seller of EZ Bonds

The end result will be proper fiscal union.

#27SovJohn - thanks.

Due to the proximity of Greece to the Middle East and North Africa I wonder if you think this may be the next natural spreading of the workers taking back control?

The bailouts will continue to happen because the terms set for the defaulting countries guarantee it!
The Germans control the Eurozone, if not the EU itself! The problem can be solved quickly, not by the defaulters leaving the Euro but by Germany leaving it! The Eurozone will rapidly become history, The EU experiment will be shown to be the failure it is and the chains of interest slavery will be broken.
Yes, it will be painful and yes, it will take time. If it doesn't happen however, the continuation of this madness will destroy every European sovereign nation and drag the whole world into a second dark age!

Have I missed something ? What nobody has done in all this discussion is to place it in the context of a world increasingly dominated by China, who are buying up resources like there's no tomorrow and consequently making it more likely there won't be for the rest of us , and India et. al. Asia is set to dominate the world's commerce and the West , with all its debt and determination to maintain an unsustainable grip on its share , is in decline and at their mercy.
Greece ( and Portugal , for that matter ) can only balance their economy by achieving the impossible and that is by selling more internationally than they are spending . What can they offer the world - tourism, wine, cheese..... ? They need to put their business minds ( not economic ) in gear. Instead of the EU pouring in good money after bad why not offer businesses financial incentives to set up in Greece ? Why ? Because they would move from the already rich countries who want to keep them. Ultimately, Greece must crash and burn unless the economists are sacked and the entrepreneurs take over. Otherwise the Greeks must bite the bullet and accept 3rd world status.

The one thing you don't mention, Stephanie, is any link between helping Greece overcome its current financing problems, and correcting the fundamental issues which caused them. This can probably be taken as automatic for Portugal and Ireland, but Greece's cultural aversion to paying tax is endemic, and until this is corrected, it is difficult to see how can the country can remain a full member of the EU.

They have paid lip-service to EU rules and regulations while acting like a 3rd world country (if this isn't an insult to many 3rd World countries) and have now been caught out. So, Stephanie, will the Germans and French insist on a credible commitment to deep structural reform (as opposed to the usual nod and wink which Greece will feel it can ignore) and if so, what will Greece's response to that be?