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but the result of the euro has, in fact, been a great boon for the poorer countries, who suddenly benefited from German-like interest rates because the markets, for some reason, suddenly decided to treat all eurozon government debt as identical now that it was the same currency, instead of differentiating per country. They are now suddenly reconsidering, thus the massive movements in CDS spreads (instruments which make such change easier, btw).

Why should Greek debt suddenly have become more trustworthy because it was in euros? Is Californian debt more reliable because it's in dollars than in local IOUs?

The markets made a mistake, which meant a massive windfall for Spain, Portugal, Ireland and Greece for 10 years, now coming to an end. it's back to normal evaluations, and more realistic debt prices for these countries, but it's not the end of the world.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Fri Feb 5th, 2010 at 12:48:27 PM EST
[ Parent ]
Question.

In theory, as I understand it, interest rates in the in the PIIGS countries should rise to meet investor's default risk assessment.  Meaning, eventually, a flow of funds to those countries from lower interest rate countries within the euro.  This intimates macroeconomic 'convergence' within the euro countries and, possibly, the EU as a whole.  And this was one of the arguments presented for the introduction of the euro.

Or am I full of it?


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Feb 5th, 2010 at 01:16:18 PM EST
[ Parent ]
interest rates in the in the PIIGS countries should rise to meet investor's default risk assessment
What interest rates?

The European Central Bank sets a single base rate for all of the EU.

However, you are right that there are credit spreads between the different Eurozone sovereign debt issues, as well as between firms in different sectors and countries.

It is possible that, because of monetarism, too much importance is attached to the single base rate set by the ECB where it is the other market-set interest rates that matter.

Meaning, eventually, a flow of funds to those countries from lower interest rate countries within the euro
Here I prefer to think of higher interest rates as penaties that borrowers have to pay, not as something that makes lending more attractive to them because they are offering to pay a higher interest rate. A higher interest rate spread doesn't help.
This intimates macroeconomic 'convergence' within the euro countries and, possibly, the EU as a whole.
I think the outcome of interest rate differentials is that, say, German firms, will be able to take over, say, Spanish films, because of their loewr credit spreads. I don't think that has much to do with macroeconomic convergence.

I think the macroeconomic convergence must come from local inflation differentials which cannot be compensated by the various Eurosystem central banks by means of different local "base rates".

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Fri Feb 5th, 2010 at 02:41:50 PM EST
[ Parent ]
On a macro level, that's indeed true, but on a personal level, every Greek saw the price of things double relative to income a decade ago, and they were not able to scale back lifestyles as quickly. Whoever imagined they could does not know much about human nature. Greeks by tradition were not keen on debt, and their high home ownership %s made even mortgages a rarity. I hate to demean my own people but the scenario was a little like giving your child a credit card before going off to college. No Greek government could have withstood the immense pressure of a public workforce concerned with losing tons of buying power so quickly. That was not going to happen.

The problem is that a country with a good social welfare system that also has a first class education and training system may pass by training workers to compete in this highly competitive atmosphere. Greece is not that country. It's lack of diversification is it's problem.

I know this is not going to happen, but if it devalued, Greece would also find that the lack of diversification would be a big boon to the welfare of average citizens. Tourism and Int'l Shipping still make up more than 50% of GDP, and then there's trade in agriculture etc. With the flight of capital from the country, the fourth pillar of the economy (Banking) is about to be brought to its knees) but nonetheless, Greece's three main industries are still competitive and they bring in lots of outside dollars. Unless the shipping owners re-register their ships elsewhere--in an incredible show of cowardice--Greece has the easy means of improving the situation of its citizens. A cheaper tourist destination would help people internally. Transferring shipping dollars into a devalued currency would also help. The problem of course is that you'd totally scare away foreign investment (but if you look at the statistics, foreign investment is abysmally low in Greece) and that you'd lock Greeks inside the country, just as they used to be when Greeks used to go on vacation to Bulgaria.

I'd say that Greece is more like Argentina than it is like Haiti.

by Upstate NY on Sun Feb 7th, 2010 at 11:02:10 AM EST
[ Parent ]

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