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Help me with this: If Greece has currently (2010) a primary deficit of 4,5% than why would "a default at this time would lead to the cessation of pension and other social payments" and not a net cut of ~5% in all public expenses?
And how worse can this "market sentiment" be? Spreads are at over 1000 bps for 10 year bonds, the day the PM announced an extension of the auterity program complete with a sell out of most of the public sectors assets.

On another note "Greeks would transfer all their deposit to foreign banks, a process that is already partially under way" implies that when the process is completed, there won't be much of a problem. I note that the Greek taxpayer has offered the Greek banks from the start of the crisis until now, somewhere close to 110 billion euros in direct funding and (mostly) guarantees - 30 billion Euros a few days ago

The road of excess leads to the palace of wisdom - William Blake

by talos (mihalis at gmail dot com) on Sat Apr 16th, 2011 at 06:13:02 AM EST
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On another note "Greeks would transfer all their deposit to foreign banks, a process that is already partially under way" implies that when the process is completed, there won't be much of a problem.

What is implies is that the Greek banks have for all intents and purposes already failed and the drain of cash out of Greece is impacting the current account balance. That is a process that should be stopped.

The charitable interpretation is that Bini Smaghi seems to be implying that the only eligible collateral the Greek banks have at this time is Greek debt, and were that to become worthless the Greek banks would lose access to ECB liquidity for that reason.

If either of these interpretations let alone both are correct, I think desperate corrective measures are needed, including a derogation of free movement of capital in and out of Greece. More than an outright ban, possibly a tax on outflows. This might allow Greece to restructure its banking sector without defaulting on the public debt. The situation might be hopeless, though, and then a default would follow after a complete collapse, whereas Bini Smaghi claims a collapse would follow a default.

On capital controls, see this post by Krugman and links therein.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Sat Apr 16th, 2011 at 06:47:22 AM EST
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If Greece has currently (2010) a primary deficit of 4,5% than why would "a default at this time would lead to the cessation of pension and other social payments" and not a net cut of ~5% in all public expenses?

Because the 5% is 5% of GDP, not 5% of government expenses (which are something closer to 35% of GDP - so spending would need to be slashed by 15% across the board.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sat Apr 16th, 2011 at 11:43:04 AM EST
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My bad, I was repeating a previous calculation with the wrong numbers. The primary deficit this year is predicted according to the Greek ministry of finance's 2011 budget (a work of speculative fiction in many respects, but anyway) to be around 2 billion Euros (actually 1,7 but that has been already corrected. That is less than 5% of current expenditures, something like 3,5%.

The road of excess leads to the palace of wisdom - William Blake
by talos (mihalis at gmail dot com) on Sat Apr 16th, 2011 at 01:31:34 PM EST
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For the Greek gov't to rebalance its primary deficit from negative five percent of GDP, then the Greek gov't would need to withdraw spending to the tune of five percentage points of GDP times the tax rate and divided by the money savings rate of the people from whom it is withdrawn. So more like 15 % of Greek GDP, or around half of the government's budget.

Keynesian multipliers are just as dramatic in reverse as they are when you're doing it right...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 16th, 2011 at 06:24:18 PM EST
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