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PIIGS to the Slaughter

by Richard Lyon Tue Feb 23rd, 2010 at 12:26:13 PM EST

I found an interesting article in Spiegel Online International. I have found this to be a good German news source for someone who doesn't read German. My impression is that Der Spiegel is a reasonably well respected source of news and opinion. If anyone on ET thinks that this impression is seriously flawed, I'd be very interested in hearing about it.

Can the Euro Zone Cope with a National Bankruptcy?

Here are a few excerpts that I found particularly interesting from what is a fairly long article. They are probably a bit out of context presented alone.

There has never been this much uncertainty. No one knows whether the Greeks will manage to solve their problems, whether and how other countries will come to their aid, whether the crisis can be confined to Greece or whether it will spread like wildfire among the PIIGS -- and end up tearing apart the European currency union.

All of this translates into excellent opportunities for foreign currency traders and speculators. They can either bet on a decline of the euro or a bailout for the Greeks in the form of a rescue effort by other euro zone countries. In the first case, the price of Greek government bonds will hit rock bottom, and in the second case it will rise.

These are the kinds of conditions that make it possible to make a lot of money quickly -- but with devastating consequences, because speculators amplify trends and increase risks. If they bet on a Greek bankruptcy, it will become even more difficult, and expensive, to attract fresh capital. This could lead to a national bankruptcy or the feared conflagration -- or even the collapse of the euro

It is no coincidence, however, that the speculators have not zeroed in on the dollar, the British pound or the yen. Although the United States, Britain and Japan are also groaning under the burden of their debt, the euro is much more vulnerable, for both historic and political reasons.

The weak southern countries, members of the so-called Club Med, have always been seen as problem cases. They have lived beyond their means and neglected the need to be competitive, they have built up -- partly in full view, partly cleverly hidden -- enormous mountains of debt, and they have avoided hard-hitting reforms. These conditions existed before they became members of the euro zone, and they did not improve afterwards.

The other euro countries looked the other way. Initially, before the establishment of monetary union, they looked away because they didn't want to jeopardize their political goal of a European common currency. Later, it was because they themselves were benefiting from the euro. The German export economy, in particular, was able to expand continuously, unhampered by troublesome revaluation and appreciation that would have made its exports more expensive.

At the time, politicians ignored the concerns of many economists. Now they realize that this may have been a mistake. The European agreements that define the legal framework of the currency union do not include any provisions to account for the kind of crisis the euro is currently experiencing. For that reason, there are no instruments available to combat such a crisis.

The article goes on to provide a detailed discussion of the mechanics of currency trading and esoteric instruments such as credit default swaps. What seems significant to me is that this is a German publication, not an American or British publication, that seems to view these problems as serious and significant. I understand them to be saying that they think that absent major structural changes, the future of the EMU is seriously threatened.

Certainly the role of financial speculators is magnifying the problem. It could well be a replay of the way they used the US housing market as a roulette table. However, in the absence of real international financial regulation, that problem is not going to go away. All nations must have dealings in international financial markets. As such they are swimming in shark infested waters. As long as there serious questions about the future of the euro the sharks will taste the blood.  


Display:
Have you been tracking the ideological trajectory of Spiegel Online International? It's been reliably reflecting the Anglo consensus for quite a while.
by Colman (colman at eurotrib.com) on Tue Feb 23rd, 2010 at 01:01:55 PM EST
That's why I was asking for people's views on where it fits into the political spectrum.

So what would be the reason for a large German publication adopting such a political position? Does the German "establishment" see its economic interest as more aligned with those of the UK and US?

by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 01:06:32 PM EST
[ Parent ]
It's become neoliberal. It is unclear whether the FT or the WSJ (even pre-Murdoch) advocate the economic interest of the UK or US respectively. What is clear is that the three publications advocate the interests of Western™ financial elites.

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 Tue Feb 23rd, 2010 at 01:12:01 PM EST
[ Parent ]
I am certainly not naive enough to think that fat corporate media anywhere are really putting the interest of the working class front and center. The question I raise is whether there has been a convergence of the interest of German financial elites with their counterparts in the US and UK. In the past it seemed as though there was some divergence in the agendas.
 
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 01:18:27 PM EST
[ Parent ]
The question I raise is whether there has been a convergence of the interest of German financial elites with their counterparts in the US and UK.

Depends whom you mean by "financial elites". Starting in the 90s, German banks, led by Deutsche and Dresdner, greatly expanded their presences and trading activities in London and NY.

If you mean the Bundesbank establishment, they've always been concentrated on keeping money as hard as possible.

And of course, Spiegel itself has converged with the neoliberal MSM consensus.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Tue Feb 23rd, 2010 at 02:52:09 PM EST
[ Parent ]
The German Liberals believe the Social Market Economy is obsolete, if they ever thought it deserved credit for the German Economic Miracle.

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 Tue Feb 23rd, 2010 at 06:07:16 PM EST
[ Parent ]
So, is it primarily the Socialist who still back the Social Market Economy?
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 06:12:55 PM EST
[ Parent ]
You mean the Social Democrats or the Left Party?

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 Tue Feb 23rd, 2010 at 06:18:01 PM EST
[ Parent ]
The Social Democrats. They are the major left of center party, correct?
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 06:24:47 PM EST
[ Parent ]
Yes. See Why Social Democrats are just unfit for power by DoDo on October 10th, 2009.

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 Tue Feb 23rd, 2010 at 06:27:30 PM EST
[ Parent ]
Interesting. It sounds a little bit like the US Democrats.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 06:32:54 PM EST
[ Parent ]
You don't say!

The third way was a common disease of the hegemonic parties of the left in all of The West™ in the 1990's. it is responsible for the left not being able to capitalize on the current neoliberal-caused global crisis, since they not only had no alternative economic narrative but were partly responsible for the crisis to the extent that they held power in the past 15 years.

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 Tue Feb 23rd, 2010 at 06:38:10 PM EST
[ Parent ]
I really need to make a diary on the third way in Sweden, which has been implemented overwhelmingly by social democratic governments, and in some ways made Sweden the most neoliberal country in the world. On the other hand, due to the selective implementation of the policies (like taxation still being strongly progressive) they have in my opinion been mostly positive, in spite of fiascos like the deregulation of the power market. One must remember that not that long ago Sweden was something of a DDR light, minus the torture chambers. I'd say the third way reforms have ended up net positive around here.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Feb 24th, 2010 at 10:44:55 PM EST
[ Parent ]
Oh and, the SPD being one of the major drivers of third way politics, I don't think they actually believe they still adhere to the Social Market Economy either. They're responsible for Hartz IV for example.

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 Tue Feb 23rd, 2010 at 06:30:11 PM EST
[ Parent ]
So has the social market idea become a "far left" platform? I had the impression that at some point that had been a fairly centrist position in Germany which made it a fundamentally different place from the US and UK.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 06:35:15 PM EST
[ Parent ]
Centrist and mainstream, to the point that the German Economic Miracle happened under the CDU (center-right) governments of Adenauer and Erhard.

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 Tue Feb 23rd, 2010 at 06:43:16 PM EST
[ Parent ]
The post-elections makeover of the SPD with new leadership was a more or less open break with that heritage, though.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Thu Feb 25th, 2010 at 08:56:34 AM EST
[ Parent ]
which militates for strengthening the Social model. There are also elements in the CDU and esp. CSU on the right (the old, Catholic right in particular), as well as what remains of the left-wing of the CDU (most of whom have moved, at least on the federal level, to Die Linke).

Die Linke polls in the low teens and got 12% of the federal vote in last year's elections, with the CDU getting 23%.  

It's hard to dismantle a successful model; people tend to like its results and their positive impact on their lives which, once removed, are nearly immediately noticeable, so the first things they go after are the less noticeable things like pensions. But wages, benefits, et c...that's a hard thing to change overnight, in Germany as here in France. They're trying of course...

But the irony in Germany is that the Liberal party, known in Germany as the Free Democrats, junior partner in the present Government coalition, are upset at the senior partner, the CDU/CSU, which in their view isn't moving at all on "reform" ("reform" when uttered by a politician of our day means social regression) and needs to go after the workers more fervently.

The CDU/CSU's most logical partner in the event of a collapse in the coalition? The CDU, who are supposed to be representing workers but whose Third Way-ism is every bit as toxic as Tony Bliar's, at a federal level these clowns are even worse than the Democrats in the US. The outgoing Finance Minister in the last government, the CDU Steinbrueck, was a complete and utter failure in representing his constituents (both natural and global) on par with a Joe Lieberman or a Jack Straw.  

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Feb 24th, 2010 at 02:23:01 AM EST
[ Parent ]
_what remains of the left-wing of the CDUSPD (most of whom have moved, at least on the federal level, to Die Linke)

See also DoDo's Successors for Red Oskar and Concrete-head Bisky by DoDo on January 27th, 2010.

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 Wed Feb 24th, 2010 at 03:02:57 AM EST
[ Parent ]
No mention of the Greens at all?

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 Wed Feb 24th, 2010 at 03:08:43 AM EST
[ Parent ]
I see them, in Germany and France at least, as more representative of the professional classes, a natural centre. In France they tend to play the economic middle as a trade-off with whomever is in power in order to advance their environmental agenda. I'm sure there are economically progressive elements in both but they do not stand out, at least to me, but I m willing to be corrected if this analysis is wrong.  

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Wed Feb 24th, 2010 at 03:25:49 AM EST
[ Parent ]
Interestingly, the Greens in Germany's most populous state, NRW, are considering a coalition with the CDU for the next election in May.  What this portends is complex, perhaps with positives and negatives.

"Life shrinks or expands in proportion to one's courage." - Anaïs Nin
by Crazy Horse on Thu Feb 25th, 2010 at 02:59:08 AM EST
[ Parent ]
Bild Zeitung is rousing the rabble against the Greeks, too. Spiegel takes care of the elite, Bild of the regular people.

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 Tue Feb 23rd, 2010 at 01:15:23 PM EST
[ Parent ]
I thought the FAZ and Die Zeit takes care of the elite, and Spiegel is more for people who like to think of themselves as hip.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Tue Feb 23rd, 2010 at 07:06:48 PM EST
[ Parent ]
Spiegel is a serious weekly, like TIME or Newsweek. Die Zeit and FAZ are dailies, like the NYT or WaPo.

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 Wed Feb 24th, 2010 at 03:04:11 AM EST
[ Parent ]
Die Zeit and FAZ are dailies

???

by gk (gk (gk quattro due due sette @gmail.com)) on Wed Feb 24th, 2010 at 03:08:27 AM EST
[ Parent ]
LOL, I need coffee.

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 Wed Feb 24th, 2010 at 03:09:31 AM EST
[ Parent ]
in http://www.neues-deutschland.de/index.asp Neues Deutschland].

Unfortunately, no English language version.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Feb 23rd, 2010 at 04:24:50 PM EST
[ Parent ]
There's also the dailies Berliner Zeitung, taz, and the weekly der Freitag. The Süddeutsche Zeitung is seen as centre left, and is the largest and most important daily. The German-language version of the SPIEGEL is notably more diverse (even online) than the English-language online version and still indispensible as a weekly.
by nanne (zwaerdenmaecker@gmail.com) on Wed Feb 24th, 2010 at 06:07:24 PM EST
[ Parent ]
I have a hard time connecting a relevant international monetary theory to the idea that if one, smallish country defaults on its sovereign debt that the international currency it uses domestically must also suffer.

For comparison, consider that there also exists a "dollar-zone" outside of the traditional US states and territories -- countries that have given up their own currency voluntarily and adopted the US dollar as their national currency.  

In addition to other small countries, East Timor, Ecuador, El Salvador, and Panama all use the US dollar as their national currency. Non of them are particularly noteworthy for their solvency either, yet wall street (nor the chinese) does not pin them blame on them for dollar value problems.

by santiago on Tue Feb 23rd, 2010 at 01:12:32 PM EST
I have a hard time connecting a relevant international monetary theory to the idea that if one, smallish country defaults on its sovereign debt that the international currency it uses domestically must also suffer.

Sure, because the whole thing is media noise to try to cause a political failure of the Eurozone. Any connection to (correct or neoclassical) monetary theory is pure coincidence.

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 Tue Feb 23rd, 2010 at 01:16:33 PM EST
[ Parent ]
I honestly don't think that this situation is entirely a media created fantasy any more that the crash of 2008 was. Much of the reporting is poor and distorted, but I think that there are economic realities that have to be dealt with seriously.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 01:21:12 PM EST
[ Parent ]
Possibly, but the real problems are buried under a deluge of bullshit. And may in fact be partly a creation of the manure flood.

Obviously there are problems, but they're not the ones the neoliberals want us to look at. The Eurozone needs an industrial policy, a fiscal policy, social supports to increase domestic demand all those sorts of things. More government, not less.

by Colman (colman at eurotrib.com) on Tue Feb 23rd, 2010 at 01:43:02 PM EST
[ Parent ]
That would seem to be more a difference of opinion about solutions than about the nature of the problems. It looks to me like while there is support for demand stimulating solutions in the more prosperous countries of the EMU, much of public opinion in those prosperous countries strongly favors imposing IMF type austerity programs on the less prosperous members. I am inclined to think that such a disparity among people who are eating out of a common currency pot is a problem in and of itself.

People who oppose what they term neoliberalism at home seem entirely willing to impose it on their neighbors.

 

by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 01:51:27 PM EST
[ Parent ]
Richard Lyon:
People who oppose what they term neoliberalism at home seem entirely willing to impose it on their neighbors.

hmm, reminds me of that old saw: 'everyone loves to see justice done.... to someone else.'

not that neoliberal policies remotely promote justice, ansi...

anything but.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Feb 23rd, 2010 at 04:42:25 PM EST
[ Parent ]
Then there's the reality version of the golden rule.

Do unto others before they can do unto you.

by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 04:56:22 PM EST
[ Parent ]
people think what they are being told to think - when you get non stop propaganda about how deficits are really bad, and how the Greeks have been cheating and want "our" money, it's hard not to be against bailouts and against Greek mal-discipline - especially as people suffer themselves and do NOT get bailouts themselves.

And thus the financiers deflect the blame away from their share of responsibility (and deflect their risk, ie default - to be covered by a bailout, which will be unpopular and allow for further speculation against new fat targets like Spain, Italy, and maybe next France or Germany...)

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

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:02:05 PM EST
[ Parent ]
solutions for the putatively "profligate," standard fare mercantilism for the "serious" (in the EU this means France, Germany and Benelux for the most part)

It's not a problem which can't be solved by giving Brussels more fiscal powers to equalize things in countries, like Spain and Portugal, who have burst bubbles caused in no small part by a credit boom which the ECB itself, via one-size fits all monetary policy (unavoidably so unfortunately), helped cause.

The PIIGS moniker itself is one-size-fits-all and inappropriately so. Of the PIIGS, Italy can at least for now be set aside - no major crisis, spreads are lower against the Bund than the UK's spread. I don't see too many of these idiots in the city saying Britain should be in with the "PIIGS."

Same for Spain, an even lower spread than Italy's, and Spain also has a relatively strong debt to GDP ratio and room for further stimulus. So, one of the I's and the S shouldn't be in there in my view.

Two of the countries are in there due to scandal - Ireland, whose right-wing government gave the Irish a banking scandal on the level of Iceland's or the US, and Greece, whose right wing government spent the better part of a decade lying about its public accounts. Of course the neo-liberals won't say right-wing governments ran up these debts or caused and allowed these scandals to happen - it's all "austerity" talk now. Ireland seems to have done their austerity, not fairly (it never is!) and of course the city is rewarding it with lower spreads. Greece, so far, another story altogether. Sometimes I wonder how Greece got into the Eurozone ahead of Turkey but this is another issue...

Portugal does have a high spread and issues, though to my mind they are, similar to Spain, victim of a real estate bubble, just not as strong on the economic fundamentals as Spain. They definitely merit being supported, in my book.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Feb 23rd, 2010 at 04:48:43 PM EST
[ Parent ]
let's not conflate the German traditional seriousness (no deficits) with the neoliberal "seriousness" (cut taxes, and then say social spending is unsustainable).

Not gorging on debt is still a sound principle, in my mind. Blaming the public sector for the debt it incurred in bailing out the private (financial) sphere requires quite some chutzpah, but then we know it's not in short supply. But the transfer has been done, and we do need to deal with German worries - and they have some legitimacy: there was no bubble and no debt runup in Germany.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:05:04 PM EST
[ Parent ]
Richard Lyon:
much of public opinion in those prosperous countries strongly favors imposing IMF type austerity programs on the less prosperous members.

I have yet to see any LTEs about sending the IMF after the poorer countries, but maybe I read the wrong papers. The few I have seen about Iceland said essentially that you do not abandon your neighbor when their house is on fire (as it is both wrong and stupid). My impression is that there is no strong public opinion on these matters at all, and so the politician are free to do whatever fits them, which appears to be to impose IMF austerity programs.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Tue Feb 23rd, 2010 at 04:51:35 PM EST
[ Parent ]
... of the problem. In the neoliberal fantasy, and incapacity to pursue a fiscal policy at the monetary authority level in response to a cyclical downturn is a feature, not a bug, since "the" fictitious "market" will push the economy automatically toward a full employment equilibrium if left to its own devices.

In the real world, a monetary production economy can not only stagnate below full employment but, in some circumstances, can go into a downard spiral where the consequences of the damage to balance sheets as well as economic structures and institutions is to deepen the downturn.

And so in the real world, an incapacity to be able to pursue fiscal policy at the same level as the monetary authority in response to a downturn is a bug, not a feature.

Now, Lisbon seems to allow the EU to guarantee Greek debt, which would short-circuit the speculative attack. Whether it would fix more problems than it solves long term would likely depend on the terms of the guarantee, and if the terms have a heavily punitive neoliberal tilt, it could indeed be just delaying rather than resolving the crisis.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed Feb 24th, 2010 at 05:49:16 PM EST
[ Parent ]
Without knowing (much) about the inner workings ...

The Eurozone, to an outsider, has the flaw of local operators - the various nation-states - being able to use the system without being constrained to and by various burdens, restrictions, and limitations necessary for long term existence of the system.

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

by ATinNM on Tue Feb 23rd, 2010 at 01:51:35 PM EST
[ Parent ]
That is not to say that the member nations are entirely unconstrained:

Stability and Growth Pact - Wikipedia, the free encyclopedia

The Stability and Growth Pact (SGP) is an agreement by European Union member states related to their conduct of fiscal policy, to facilitate and maintain Economic and Monetary Union of the European Union.

It is based on Articles 99[1] and 104[2] of the Treaty Establishing the European Community (with the amendments adopted in 1993 in Maastricht), and related decisions. It consists of fiscal monitoring of members by the European Commission and the Council and, after multiples warnings, sanctions[3] against offending members.

The pact was adopted in 1997,[4] so that fiscal discipline would be maintained and enforced in the EMU. Member states adopting the euro have to meet the Maastricht convergence criteria, and the SGP ensures that they continue to observe them.
The actual criteria that member states must respect:

  • an annual budget deficit no higher than 3% of GDP (this includes the sum of all public budgets, including municipalities, regions, etc)
  • a national debt lower than 60% of GDP or approaching that value.

It was to get around these constraints that Greece got into bed with Goldman Sachs.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Tue Feb 23rd, 2010 at 02:39:09 PM EST
[ Parent ]
Then there are those, including Bill Mitchell, who claim that the Stability and Growth Pact has provided neither stability nor growth, certainly not for the Club Med countries and especially not for Greece. Most of those who have any real grip on Keynes are appalled at the present prospects for Greece under the proposed neo-lib austerity programs.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Feb 23rd, 2010 at 08:02:02 PM EST
[ Parent ]
They wouldn't be any worse off dealing with the IMF.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 08:04:32 PM EST
[ Parent ]
I read in a US blog a suggestion that Greece should start negotiations with the IMF, if nothing else, as a tactic to put pressure on Germany and others. The IMF is claiming to have a kinder, gentler approach these days. Wouldn't take much to top Germany's approach.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Feb 23rd, 2010 at 11:55:28 PM EST
[ Parent ]
I wonder what would be Dominique Strauss-Kahn's attitude to a Greek approach for IMF rather than Euro Group aid? (He who would like to be French president in 2012).
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 02:29:44 AM EST
[ Parent ]
Dominique Strauss-Kahn might advocate a less kind and gentle approach to Greece on account of mere political ambitions?!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 01:30:23 PM EST
[ Parent ]
I mean I doubt he'd be in any hurry to lead the IMF into what might well be perceived (and hyped) as in unfriendly to, or in spite of, or even humiliating for, the EU.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 03:00:22 PM EST
[ Parent ]
I'm sure he's in background talks with the ECB and the Ecofin.

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 Wed Feb 24th, 2010 at 04:22:12 PM EST
[ Parent ]
It's already too late.

They would have devalued long ago if it weren't for the eurozone. But now they're stuck because they will surely default if left to their own means. But they wouldn't have needed the IMF either if they could have turned it around say 2 or 3 years ago. People keep mentioning that Greece was always this way, but it isn't true. The debt was 4 or 5%, and may have grown incrementally prior to the recession, but with the recession, it has pushed them over the top. At some point, they could have devalued and found a way, but now the irony is that they are screwed precisely because they couldn't devalue and the extent of the deficit wasn't caught in time. It's not like Greece hasn't been in a negative growth period before, but they haven't defaulted on debt since WW2 when the country was under occupation. So, obviously, in prior years, they came out from under debt problems by taking measures. What changed?

by Upstate NY on Wed Feb 24th, 2010 at 12:13:45 AM EST
[ Parent ]
what's the big deal with default, other than pissed off financial investors?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:11:09 PM EST
[ Parent ]
They can't default if other euro nations start buying up their bonds to create a price floor to keep down Greek financing costs. That would be a very unfriendly action.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Feb 24th, 2010 at 10:45:15 PM EST
[ Parent ]
Well, for Greece, they'd be out of the eurozone, which would be a problem. But for others, there would be no problem unless they are exposed in a variety of other ways, either through investments guaranteed by their home country (as say, Germany with gov't owned banks) or CDS's which are both off the books and far exceed Greek debt. Right now, the CDS index accounts for over 80+ billion Euros in derivative contracts, but since these are done in a private market, is this index accurate or does it simply track what has been reported? It would seem to me that, were I in the business of selling insurance, I would want to keep my exposure a secret to stave off any speculative attack.
by Upstate NY on Fri Feb 26th, 2010 at 10:43:17 AM EST
[ Parent ]
Again: I'm assuming that countries will backstop their banks and not allow them to fail. if they took Stieglitz's advice and totally changed their current course, then they could allow both Greece and a number of their banks to fail (covering only the losses that are insured by the gov't).
by Upstate NY on Fri Feb 26th, 2010 at 10:44:36 AM EST
[ Parent ]
I wrote a diary at Daily Kos dispelling this myth about Greece and Goldman Sachs.

http://www.dailykos.com/story/2010/2/20/839058/-Clearing-the-Air:-Goldman-Sachs-and-Greece

The main thing I would point out is that the deal was done in 2002 after Greece was in the Eurozone.

The second thing I'd point out is that such deals were done by many countries including Germany which just did a $50 billion deal 3 years ago.

Look at this: http://www.reuters.com/article/idUSTRE61L3EB20100222

by Upstate NY on Wed Feb 24th, 2010 at 12:08:15 AM EST
[ Parent ]
is constrained by a number of things:
  • the interest rates are set by the ECB;
  • there are specific rules preventing funding of governments by the ECB (ie no government can run the printing presses to fund its spending);
  • there is the somewhat binding Maastricht treaty rules on deficits and debt;

So the current worries about the euro, beyond the concern trolling, are about Germany accepting to relax its standards to bailout the weaker countries by either (i) lending them money (big deal, that means a slight increase in German debt, smaller than what the US is doing and smaller than what it can handle, even if it includes Spain) or (ii) doing quasi money-printing (again, big deal, it's what the Fed is doing on a larger scale).

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:10:13 PM EST
[ Parent ]
Germany accepting to relax its standards to bailout the weaker countries

Because Germany

  1. didn't force a relaxation of the GSP criteria in 2005 to suit its own needs
  2. was not in violation of the 60% debt-to-GDP ratio for several years without penalty
  3. didn't have the rest of the EU share the financial burden of reunification in the 1990s


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 Wed Feb 24th, 2010 at 04:15:52 PM EST
[ Parent ]
1&2. we're not talking going beyond the GSP lines, but providing actual debt guarantees and the like!
3. yes - although they paid that to some extent by refusing to devaluate the DM in the late 90s when they should have, and suffering through the early years of the euro with higher interest rates than they would have liked (of course, it was only German workers who ended up paying)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:28:31 PM EST
[ Parent ]
To put this on the simplest level (which is how I tend to understand these things) while being more or less correct, I think there are three main things involved here:

  1. Since the dollar is the international reserve currency, it is considered to be the "safe haven" currency. Thus, when there's a great deal of uncertainty, such as during a crisis, people will flock to dollars.

  2. As Keynes observed, financial markets are like beauty contests: the more successful traders value a given asset not in terms of what they think it is worth, but in terms of what they think other traders think it is worth. Thus, if the press is reporting a lot of stories about how the euro is in trouble, it is rational for traders to think that other traders will trade as if the euro is in trouble, even if everyone knows that the Eurozone economy is more sound than the American economy. (But the latter belief is not all that significant because of (1): unlike other currencies, the value of the dollar derives not only from the soundness of the economy of the nation which issues it, but also from its role as a reserve currency, as the currency in which the prices of commodities are set, etc. If you buy a lot of oil for example, the way to avoid risk is to hold dollars, since the price of oil is set in dollars.)

  3. Anyone who's observed how currency values change over time knows that currencies go through periods of upswings that typically go on for months, periods of relative stability, and periods of downswings. The euro soared last summer; now the dollar is soaring. Everyone knows that the dollar will resume its decline eventually (that will be good for the US, since it will reduce its debt), but most traders believe that most traders believe that that is unlikely to happen until the current crisis is resolved.

And as Peter Gowan has argued, crises are an essential part of the post-Bretton-Woods system. They are in large part what makes the dollar a safe haven.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Tue Feb 23rd, 2010 at 02:43:02 PM EST
[ Parent ]
At times I entertain the notion that we may be seeing the Breton Woods Armageddon. The international financial system that was established in 1944 was designed and imposed by the US. They were able to do that because they were the only people who hadn't gone broke in the war. The exchange system established the dollar as the reserve currency with the US assuming the obligation to make the dollar convertible to gold. Nixon pulled the plug on that obligation, but the US has been able to continue to enjoy all of the benefits of being the reserve currency without any inconvenient obligations. I think the present mess demonstrates the need for a new and more stable international currency system.

We also still have the IMF and World Bank which were Bretton Woods creations designed to serve US interest and those of Europe to a lesser extent.

by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 03:01:29 PM EST
[ Parent ]
the present mess demonstrates the need for a new and more stable international currency system.

I think the 1997 Asian financial crisis demonstrated that at least as much.

The need for a new and more stable international currency system has been clear for some time, but the present system benefits the US—how could the US finance its empire without being able to print the international reserve currency?—so nothing's going to change until there is a crisis of confidence in the dollar.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Tue Feb 23rd, 2010 at 03:23:10 PM EST
[ Parent ]
It looks like the Chinese are close to having the power to challenge the dollar. I think they are probably still undecided as to whether or not it's worth the risk involved in doing that.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 04:06:14 PM EST
[ Parent ]
A recent article in the NLR suggests that Chinese elites are committed to the dollar.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Tue Feb 23rd, 2010 at 05:19:48 PM EST
[ Parent ]
I think it might be better stated this way, however:

1) Because the dollar is considered the "safe haven" currency, it is the international reserve currency.

Everything else follows from that. Nothing makes the US dollar the reserve currency today except millions of daily decisions by central bankers and international merchants, travelers, and traders of all kinds, to hold US dollars instead of something else.  

by santiago on Tue Feb 23rd, 2010 at 03:46:11 PM EST
[ Parent ]
As much as present perceptions of "safe haven" it is the results of the consequences inherent from past decisions. Nations such as China who hold large reserves in dollar denominated US securities face the risk of a substantial decline in the value of those assets if by selling them off they were to trigger a declined in the dollar.

It is always easier to collect debts from the poor than from the rich.

by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 04:09:22 PM EST
[ Parent ]
The problem with being the global reserve currency is that in a deficit-based economy - where most of the money is created as interest-bearing debt by private banks - a global reserve currency issued by a nation is unsustainable because it means that the one whose currency becomes the reserve currency becomes indebted to the world.

It's known as the Triffin Dilemma

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Feb 23rd, 2010 at 04:22:08 PM EST
[ Parent ]
Well the US has certainly passionately embraced that destiny.

 

by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 04:25:38 PM EST
[ Parent ]
But it is important to note that since Nixon let the dollar float freely with respect to gold or anything else, there really is no such thing as a "global reserve currency" in the sense that central bankers or Treasury ministers get around a table and agree on a policy to have an international currency. Instead, open, liquid markets for money and commodities have determined which thing is the reserve currency by themselves. That means that it is unlikely that any policy decisions through international governance institutions, such as the proposals to establish an international trade currency based on an index of commodities or currencies, will be able to easily change from the US dollar. Instead, it looks like there is something inherent in the dollar by its nature that makes it more desirable to hold than anything else.  Unless that trait or traits is correctly identified and reproduced in another currency (or the dollar ceases to have such traits), markets are likely to stick with dollars as reserves no matter policymakers do.
by santiago on Tue Feb 23rd, 2010 at 05:17:59 PM EST
[ Parent ]
Instead, it looks like there is something inherent in the dollar by its nature that makes it more desirable to hold than anything else.

Most commodities are priced in dollars, which means that if you know you're going to be buying a lot of oil, for example, you'll want to hold dollars to avoid foreign exchange risk. Nixon got Saudi Arabia to agree to recycle their oil earnings into US Treasury bonds. The financial capitol of the world is Wall St,, and Wall St. works with dollars, not euros.

There are a lot of deliberate policies of the US government that have made the dollar the international reserve currency.

in the sense that central bankers or Treasury ministers get around a table and agree on a policy to have an international currency.

That's right. Central bankers and treasury ministers didn't get together and agree to make the dollar the international reserve currency. The dollar already had that role under Bretton Woods, and when the US took the dollar of the gold standard, it presented the rest of the world with a fait accompli: you continue to use dollars as you did before, or face a major economic crisis.

As far as I know, the best account of this is Peter Gowan's The Global Gamble.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Tue Feb 23rd, 2010 at 07:33:50 PM EST
[ Parent ]
The only 'inherently attractive' thing about the dollar is tradition, backed by a pretence of hard power and a clearly-signalled willingness to indulge in ruthless international machismo for the sake of realpolitik.

As a strategy, this works for exactly as long as investors believe in it. If the machismo starts to falter, the dollar will crash.

It may crash anyway. Even though Wall St is a global institution and not an American one, and the traders there are more than happy to throw the rest of the US population under a steam roller if it means a better monthly return, Wall St's shameless criminality has left it teetering on the edge of a cliff. Thieves need at least some trust, even between each other.

It should be obvious to everyone that deliberate devaluation of at least 30% is coming within the next year or two. The Fed wonks believe they're going to be able to manage a limited and controlled implosion.

Considering their predictive record, skepticism isn't unreasonable.

Mythology aside, the only thing holding the dollar now up is public spending and debt - which is peculiarly neo-liberal solution, and can't possibly be a permanent one.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Feb 23rd, 2010 at 10:03:43 PM EST
[ Parent ]
It should be obvious to everyone that deliberate devaluation of at least 30% is coming within the next year or two.

A devaluation, deliberate or otherwise, won't solve the basic problem of the US economy: lack of jobs.  The lack of jobs has resulted from labor rate arbitrage by the trans-nationals who can purchase labor in a low wage rate country and sell in a high wage rate country, where the wage rate is determined by the over-all cost of living.  

Usually, as I understand it, devaluing the currency allows idle factory capacity to be brought back on line with a necessary extension of having to hire people to work in the factory.  Well, there isn't any idle factory capacity - sufficient to the need thereof - in the US.  Coupled with this is the fact either building new factory capacity or utilizing spare factory capacity runs smack into the problem of unmet demand for products which requires consumer money in excess of necessary purchases which requires jobs which requires deployment of new or excess factory capacity ...

And round and round we go.

This is a classic positive feedback loop in the negative direction and a pure monetary policy -- as evidenced by the Great Depression -- is not an answer.  In the US, at least, the Depression was effectively ended by World War II which substantially changed the global economic environment (Fitness Landscape.)  

A devaluation of the US dollar, deliberate or otherwise, by itself will only mean the devaluation of the purchasing power of the US dollar or, more accurately, an increase in the purchasing power of non-dollar currencies of products and services NOT having the dollar as their currency-of-account.  Looked at in that way it becomes clear the US dollar will 'firm' only to the extent economic entities are willing to accept a lower profit or rate of return in their currency-of-account(s) or as measured by the US dollar.

A corollary is the elite economic entities will find their economic value, measured objectively, being re-calculated to the extent of their US dollar holdings - writ large.  Intimating their economic "power" - again, writ large - will also follow the objective value of the US dollar.  Here "objective value" is the purchasing power of the US dollar for goods and services in all currencies or currency-like, e.g., gold, commodities.  An "accounting" valuation ... as it were... is thus included in the Feedback Loop.  Thus, it starts to become clear, US dollar devaluation will only be affective to the extent economic Agents are willing to accept a lower Rate of Return from their economic activities as measured in their currency-of-account, US dollar denominated or otherwise.  If they are willing to accept a lower rate of return then a US dollar devaluation will accomplish nothing.

Except raising the potential to have the domestic economic problems of the US 'exported' to the rest of the world.

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

by ATinNM on Wed Feb 24th, 2010 at 02:25:07 PM EST
[ Parent ]
This is a classic positive feedback loop in the negative direction and a pure monetary policy -- as evidenced by the Great Depression -- is not an answer.

The term "Death Spiral" springs to mind, though the proper academic reference might be Irving Fisher's Debt-Deflation Theory of Great Depressions. Interesting recent discussions of this are found here, here and here.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 03:18:03 PM EST
[ Parent ]
From one of the links:

Since August of 2007 we have been seeing a steady constriction of credit markets, starting with subprime mortgage back securities, spreading to commercial paper and then to interbank credit and then to bond markets and then to securities generally. While the problem is usually expressed as one of confidence, a more honest conclusion is that credit extended in the past has been employed unproductively and so will not be repaid according to the original terms. In other words, capital has been betrayed into unproductive works.

I love it.  "Capital has been betrayed."  There is a whole book in how inane, ill-educated, superficial, and down-right silly a person has to be in order to write something like that and then think - using the term loosely - it means anything.

I have been both a central banker and a market regulator.

Now we know why the global financial system is facing ruin: it was governed by idiots.

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

by ATinNM on Wed Feb 24th, 2010 at 03:50:00 PM EST
[ Parent ]
The quote was from John Stuart Mill back in the 19th century. They talked like that then. But the meaning is clear. When people do stupid, feckless things with their and other people's money, bad things don't always happen immediately. But come a crisis and an occasion to give a close look at "investments" the true situation will be revealed. The crisis didn't cause the shortage, it just revealed it.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 05:26:03 PM EST
[ Parent ]
I knew there was a reason I was suspicious of Mill!

;-)

Okay.  Point taken.

 

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

by ATinNM on Wed Feb 24th, 2010 at 05:33:25 PM EST
[ Parent ]
The quote:
"Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works."

- Mr John Mills, Article read before the Manchester Statistical Society, December 11, 1867, on Credit Cycles and the Origin of Commercial Panics as quoted in Financial crises and periods of industrial and commercial depression, Burton, T. E. (1931, first published 1902). New York and London: D. Appleton & Co


I am reasonably confident that much, if not all of the underwater mortgage debt being foisted onto the public via Fanny and Freddy will be the equivalent of having been assumed by the public for "hopelessly unproductive works."  It will be a long time, if ever, before the house I sold in Northridge, CA in Jan. 2006 is again worth over half a million dollars. For the buyer, the appraisals and the entire real estate market of early 2006 constituted a hopeless betrayal of the capital involved in any loan sold at that time in that market as grotesquely overvalued. They will never get >70% of their money back, if that.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 05:37:44 PM EST
[ Parent ]
Crisis happen when the present values of future cash flows fail to validate past debt commitments. They used to talk like this at the end of the 20th century.

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 Wed Feb 24th, 2010 at 06:26:15 PM EST
[ Parent ]
Did you read
Stabilizing and Unstabele Economy
?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 08:57:07 PM EST
[ Parent ]
Err, Stabilizing an Unstable Economy?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 09:00:37 PM EST
[ Parent ]
Yes, and I liked it.

If I can be so bold, I think Krugman didn't understand it, nor did Brad DeLong.

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 Thu Feb 25th, 2010 at 04:10:56 AM EST
[ Parent ]
Another one I guess I need to buy and read.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 25th, 2010 at 12:13:14 PM EST
[ Parent ]
The trait of traits.

Sounds positively Derridean.

And, as in Derrida, the remarking trait may very well be category itself (i.e. the America dollar is the world's base currency). When hat changes, then it changes.

by Upstate NY on Fri Feb 26th, 2010 at 10:48:59 AM EST
[ Parent ]
In one way, the strength of the dollar and the reserve currency status is a bet on the US superpower status. This follows from people thinking that if the US goes down, we'll have far greater problems than playing around with sovereign bonds. Witness the weakness of the dollar when the US international stature weakened during the 70's  with Carter and the false détente and strengthened when Reagan took over. I think I read about these thoughts in an article by the Spengler fellow at Asia Times.

Ah, it seems TBG already touched on this: The only 'inherently attractive' thing about the dollar is tradition, backed by a pretence of hard power and a clearly-signalled willingness to indulge in ruthless international machismo for the sake of realpolitik.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Feb 24th, 2010 at 10:46:09 PM EST
[ Parent ]
This assumes though that superpower status is linked with the government somehow. The USA could go isolationist at any moment and declaim its superpower status. But the USA elites that have their hooks into the Fed will still own an inordinate amount of the world's wealth, and the dollar might have a lot more to do with them than it does with our government and its projection of power.
by Upstate NY on Fri Feb 26th, 2010 at 10:52:04 AM EST
[ Parent ]
Superpower status is not only the ability but also the will to project power.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Sat Feb 27th, 2010 at 03:06:37 AM EST
[ Parent ]
...and the more mayhem and chaos certain actors can create worldwide, the greater the 'flight to safety', strengthening the dollar...

got it.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Feb 23rd, 2010 at 04:38:19 PM EST
[ Parent ]
It might seem true, and there definitely would seem to be a moral hazard for people who have an interest in strengthening the value of the US dollar, but since it is always somewhat ambiguous what class of people, even among bankers, might benefit and whom might be penalized by sudden shifts in the US dollars value, it seems pretty hard to make a case that enough people in such a class could conspire to make it happen solely for the purpose of enriching themselves.
by santiago on Tue Feb 23rd, 2010 at 05:42:05 PM EST
[ Parent ]
Currency speculators do make bets on what will happen to particular currencies. When they win on those bets they stand to make a lot of money, See George Soros.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 05:48:26 PM EST
[ Parent ]
Yes they do, and they also engage in manipulations. But manipulating the value of the dollar is a much bigger and more complicated conspiracy than manipulating the value of smaller currencies because of the other unintended consequences to the largely dollar-relative portfolios of all of the actors that might be needed to execute such a conspiracy. But, yes, on a day-trading basis like George Soros, I agree.
by santiago on Tue Feb 23rd, 2010 at 05:57:00 PM EST
[ Parent ]
However, I very much doubt that most of those speculators have any grand plan or conspiracy in mind. They are just out to make a pile of bucks.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 06:11:44 PM EST
[ Parent ]
santiago:
it is always somewhat ambiguous what class of people, even among bankers, might benefit and whom might be penalized by sudden shifts in the US dollars value,

who profits if the usa goes further into deficits? from whom do they borrow money if not banks too?

i think it's a prestige thing too, the dollar can't fall too far, or it looks like a pussy currency.

besides, 'sudden' to the general public might be 'well planned and thought through' to insiders, n'est-ce pas?

i'm sure 'they' make money as it goes up or down, just as long as it moves, and if it looks to descend to embarassing levels, they shake up the rug somewhere, and watch nervous investors flock back where they want them to be.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Tue Feb 23rd, 2010 at 06:56:55 PM EST
[ Parent ]
The Chinese government. The US government lends money to the banks to bail them out.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 07:01:27 PM EST
[ Parent ]
are the banks fully state=owned in china?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Fri Feb 26th, 2010 at 06:58:45 AM EST
[ Parent ]
I would say predominately yes. State ownership in China is rather a fuzzy thing. Something may be present ed as a "private" company, but when you start digging around, you find that the majority owner is a state controlled development corporation. Lenovo is an example of this.
by Richard Lyon (rllyon@gmail.com) on Fri Feb 26th, 2010 at 09:03:43 AM EST
[ Parent ]
who profits if the usa goes further into deficits?

The TBTFs, provided they don't generate a TBTBO event, (too big to bail out). They profit on fees and on the flow, provided their prop desks don't shoot them in the ass.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 09:05:40 PM EST
[ Parent ]
Interesting idea. I'm no expert, but from what I remember reading, the dollar was already in effect the international reserve currency under Bretton Woods. That the phenomenon of Eurodollars appeared while Bretton Woods was still effect (i.e., before Nixon took the dollar off the gold standard) supports that.

Before Bretton Woods was done away with, I don't think the concept of a "safe haven" currency even existed: currencies were either hard (convertible at fixed exchange rates) or not. No one worried about holding hard currencies other than the dollar, since in the event of serious balance of payment deficits, the IMF would step in to preserve the official value of the currency. (Values of currencies could be renegotiated in the face of persistent imbalances, but I don't think that was ever done out of the blue; also, the revaluations were modest compared to the wild swings one sees today, I expect.)

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Tue Feb 23rd, 2010 at 05:11:08 PM EST
[ Parent ]
As I understand it, it was the US pledge to guarantee that the dollar would be convertible to gold that was the underpinning of the origional Breton Woods system. The idea was to keep all currencies within a narrow band in relation to the dollar. This was a change from the gold standard where all currencies had a fixed convertible rate.

The big debate at Bretton Woods was between Keynes and Henry Dexter White representing the US treasury. Keynes argued for for a system that would do more to promote economic stability and reduce income disparities. However, at that point the UK was in no position to argue with its benefactor.  

by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 05:21:02 PM EST
[ Parent ]
Yes, that was what people thought at the time of Bretton Woods, and it was the policy they tried, unsuccessfully, to implement.  What is more interesting, however, is the fact that the dollar was already the de facto reserve currency without any such agreement before Bretton Woods, and it still remains the de facto reserve currency long after any attempts to fix it's value to anything have died out.  This experience settled, or should have settled, the big gold debate that had raged since the earliest economic thinkers.  Currency has value in and of itself, without any need to reference a consumable commodity such as gold.
by santiago on Tue Feb 23rd, 2010 at 05:37:57 PM EST
[ Parent ]
It does, but that value is entirely faith based, and has no objective foundation.

If I have bread and you have raw wheat, we can probably arrange a trade.

If I have bread tokens and you have wheat tokens, we can arrange a trade so long as at least one of us believes that the tokens are exchangeable for real items.

After two bubble economies and a debt economy, faith in tokens is diminishing rapidly.

As faith and confidence vanish, so does perceived value, and so does the future.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Feb 23rd, 2010 at 10:10:29 PM EST
[ Parent ]
If I have a gun, and you need some cash, we can probably arrange a trade of some sort.
by santiago on Wed Feb 24th, 2010 at 12:27:40 PM EST
[ Parent ]
What I mean is that there is no reason to believe anything like an "objective foundation" even exists when we're talking about wealth.  Wealth is founded not actual things, but on our relationships with one another, and power is a fundamental part of human relationships.
by santiago on Wed Feb 24th, 2010 at 02:07:18 PM EST
[ Parent ]
The dollar was the de facto reserve currency already by the time of Bretton Woods, having recently overtaken the British sterling in the previous decades (both were fixed to gold, but only weakly so, devaluing against gold almost constantly), and the dollar has remained the de facto reserve currency now for almost four decades after the demise of Bretton Woods.  That says something about the inherent value of the dollar as well as something about the inherent ineffectiveness of international agreements that might try to impose substitutes for it.

What makes currency valuable -- the inherent traits that make successful currencies and unsuccessful ones -- is a notably unstudied area in economic research. The models implied in current macro theory regarding what makes money valuable are crude and very old relative to advances in thinking in the rest of economics and social science.  I think one area that might produce better understanding of money and value is to apply new thinking and discoveries regarding the concepts of power and  institutions in determining monetary value.

by santiago on Tue Feb 23rd, 2010 at 05:32:36 PM EST
[ Parent ]
It's a rather simplistic statement to say that currencies of nations or blocs with powerful economies will always play a more important role that those of smaller nations with weaker economies. However, within the major players the present theories don't seem to do a good job of explaining the dynamics. I've done some academic reading on the subject and none of it left me with any feeling of enlightenment.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 05:46:03 PM EST
[ Parent ]
You're right.  It is an academic topic that was left largely abandoned at the turn of the last century.  And I don't mean to imply that the size of an economy determines the reserve currency.  After all, the eurozone is a larger economy than the dollar zone.  Rather, I think it might be a function of political power, what German sociologist Carl Schmitt called sovereign power. When a currency is perceived to be backed by a very credible political group with a track record for delivering the goods to its constituents, whomever they might be (meaning not necessarily citizens), I think it is likely to have more value as a storage unit of wealth than currencies (or even commodities) that don't enjoy the same political backing.  When the world to investors and central bankers appeared to be falling apart recently, a good bet was that the country with the world's biggest army and navy and a 200+ year record of institutional consistency would still be around when the dust, settled whatever happened to everyone else.
by santiago on Tue Feb 23rd, 2010 at 06:10:16 PM EST
[ Parent ]
I think one area that might produce better understanding of money and value is to apply new thinking and discoveries regarding the concepts of power and  institutions in determining monetary value.

Two things spring to mind:
 1. Mary Douglass, in How Intitutions Think IIRCC, noted that the ill-defined things that no one really wanted to talk about and that caused people to be uneasy were often the real core of a belief system, regardless of, or especially when they did not really make too much sense or well withstand scrutiny.

2. Nitzan and Bichler explore many aspects of the relationship between capital and power in Capital as Power but "money" does not even appear in the index--see item 1.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Feb 23rd, 2010 at 09:23:32 PM EST
[ Parent ]
Exactly. Abortion and homosexuality are very important determinants in how people group themselves in belief systems, for example, with real implications that constrain policy options for a polity.

Power, however, is a more difficult thing to pin down because embedded within the definition of power is that some actors can use such ill-defined uneasiness to group people in support of other ends, even if that actor doesn't share the larger groups' core beliefs about such uneasy things. Dissimulation is as much an exercise of power (power is usually defined as coercion of individual interests to favor the interests of others or the group) as using brute force.

There is a lot to the Euro, for example, that favors some people more than others in Europe, which means that the euro is an exercise of political power, first and foremost -- it coerces resources from some people and gives it to others. German workers as a class appear to be the biggest beneficiaries of the euro thus far, which would make it easy, if not necessarily true, for a cynic to complain that the EU itself is merely the belated realization of Bismark's imperial project for a greater Germany. (Again, channeling Carl Schmitt regarding what he believed was Germany's Nomos, or natural area of sovereignty.  

by santiago on Wed Feb 24th, 2010 at 02:25:26 PM EST
[ Parent ]
Why German workers as opposed to owners?
by generic on Wed Feb 24th, 2010 at 02:45:59 PM EST
[ Parent ]
Because in capitalism-speak, owners by their nature are are largely transnational being, more so today than ever, and therefore it makes more sense, when creating categories of people for the purposes of determining welfare effects, to think of three classes of people here: owners, workers in country X, and workers in other countries.  (A single person can belong to more than one category, too. A German worker can be an owner of a business in Greece. The categorization helps to organize how effects of policy can be different to individuals based on belonging to one or more categories.)

I'm just relying on what Marxists have always said about the nature of ownership versus workers here, but it's a good question.  If they are right and owners really are more transnational than workers, we should be able to observe that real returns to investments should be more or less the same, after accounting for risk, all over the world.  But real wages for labor should be vastly different in various countries. My guess without looking at any evidence is that this is probably true.

by santiago on Wed Feb 24th, 2010 at 06:23:27 PM EST
[ Parent ]
They are the only ones to have had stagnating wages in Europe over the past 20 years. It used to be that the strong DM was good for them, but it's not really the case today.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:14:40 PM EST
[ Parent ]
But they still have a sort of nationalistic attachment to hawkish monetary policy.

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 Wed Feb 24th, 2010 at 04:17:57 PM EST
[ Parent ]
which is why they have tolerated this social stagnation for so long.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:29:18 PM EST
[ Parent ]
"nationalistic attachment"? I'd rather call it an "obsessive characteristic".

   

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Feb 24th, 2010 at 10:46:24 PM EST
[ Parent ]
Interesting. Real wages?  And worker benefits also include welfare transfers.  Have they gone down in real terms in the last 20 years too?

But then again, maybe I've got the political economy of Germany all wrong, and it's the Marxists who are right. Maybe the old German imperial interests of Bismarckian flavour really favor European capitalists, German and foreign, against workers, German and foreign.

by santiago on Wed Feb 24th, 2010 at 06:31:12 PM EST
[ Parent ]
Maybe the old German imperial interests of Bismarckian flavour really favor European capitalists, German and foreign, against workers, German and foreign.

I would be amazed were this not true and believe that the benefits that accrued to workers in the post-was years were a by-product, not the goal of policy, and something that could be accepted when times were good, but when competition and rising resource costs cut into profits, it was the workers' interests that were sacrificed.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 09:20:21 PM EST
[ Parent ]
That's what happened in the US. After WWII militant unions were castrated by McCarthyism and obedient unions were given high enough wages that they could be cannon fodder for the consumer economy. That all began to come unraveled in the 70s. Since western Europe didn't really get a full head of economic steam until the 60s the process began to take place later.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 09:30:40 PM EST
[ Parent ]
For real wages, see my comment below.

For social benefits, see Germany: Hartz IV Unconstitutional, and follow the link to Wikipedia offered there to Hartz Concept.

Schröder and the SPD took a momentous Third Way decision in 2002 to increase German competitiveness by compressing wages and social budgets, in a programme called Agenda 2010.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 25th, 2010 at 02:27:34 AM EST
[ Parent ]
Is that German "Agenda 2010" independent of the EU's "Lisbon Agenda for Growth and Jobs" adopted in 2000 for the 2000-2010 period? Neoliberalism all around. And now the Lisbon Agenda is to be updated and, like the GSP, its neoliberal ideological basis won't be reexamined.

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 Thu Feb 25th, 2010 at 04:16:46 AM EST
[ Parent ]
It makes specific reference to the Lisbon Agenda.
by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 25th, 2010 at 04:22:02 AM EST
[ Parent ]
Real wages in Germany have declined in the '00s, but not over 20 years.

From DIW (German Economic Institute) Weekly Report, October 2009 (pdf), "Real Wages in Germany: Numerous Years of Decline".

The drop 20 years ago was due to East German wages coming into the average. Wages still continued to rise, however, until the early '00s, and have since declined.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 25th, 2010 at 02:13:44 AM EST
[ Parent ]
santiago:
I think one area that might produce better understanding of money and value is to apply new thinking and discoveries regarding the concepts of power and  institutions in determining monetary value.

After several comments re open markets and "inherent" value of a currency, I think you're getting warmer with this...

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 03:04:25 AM EST
[ Parent ]
What open markets are particularly useful for is pointing out where our untested beliefs about things, and governmental policies resulting from them, are simply wrong.  In currency, the continued strength of the US dollar as the preferred currency for international trade and investment arrangements despite having no backing in anything more fundamental than some unstated, implied trait connecting dollars to the United States polity, shows that people who thought value and wealth needed to be backed, eventually, by real commodities like gold or energy, were simply wrong.  Instead wealth appears to be primarily a social relationship function, supported or constrained by our relationships to one another in society and not based in anything more tangible at all.  Relatively free markets in money since 1972 demonstrate how this may be true.
by santiago on Wed Feb 24th, 2010 at 01:58:13 PM EST
[ Parent ]
santiago:
no backing in anything more fundamental than some unstated, implied trait connecting dollars to the United States polity

But that polity has in itself been fundamental, in terms of both hard and soft (economic and cultural) power, from roughly speaking the end of WWI till now. The dollar as world reserve currency is one of the institutions that project and preserve that power, whether the connection is unstated, implied, or not (and whether the US deliberately uses and manipulates it as such, or not).

santiago:

our relationships to one another in society and not based in anything more tangible at all

I take it that by "tangible", you are thinking of gold or other commodities. Power and institutions are, however, potent shapers of social relationships.

santiago:

open markets are particularly useful for ... pointing out where our untested beliefs about things... are simply wrong

Open markets, particularly under the influence of massive adjuncts of derivatives and liquidity, and the media amplification of their slightest mood or movement, may also "test" beliefs with the precision of a sledgehammer cracking a nut. The control of information, in particular, is a very considerable form of power. The markets make things happen that institutions with power find profitable. How often does this serve the useful revelation of truth?

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 03:59:05 PM EST
[ Parent ]
santiago:
despite having no backing in anything more fundamental than some unstated, implied trait connecting dollars to the United States polity, shows that people who thought value and wealth needed to be backed, eventually, by real commodities like gold or energy, were simply wrong.

In fact, what backs - more or less directly - the great majority of dollars in existence - particularly those created in the last ten years - is the rental value of US land, and the value of the materials and labour embedded in that land.

I have long thought that John Law's concept in 1705 of land-backing for currency is a guide to the sort of national currencies which may emerge in the 21st century. For international currencies, it seems to me that the use value of energy makes it the natural candidate.

It is possible to monetise both, either through conventional intermediation by the government and banking system, or directly by creating - within a suitable framework - Units redeemable in payment for the land rentals aned energy respectively.

The framework of trust - which is necessary for the circulation of currency on credit terms - will be backed by the use value of knowledge, I think. By this I mean both the subjective knowledge (experience, expertise, contacts, common sense, ingenuity) which resides between our ears, and the objective knowledge which may be the subject of intellectual property.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Feb 24th, 2010 at 04:58:30 PM EST
[ Parent ]
What open markets are particularly useful for is pointing out where our untested beliefs about things, and governmental policies resulting from them, are simply wrong.

History would seem to validate this thesis, sometimes at spectacular expense and damage to society. Unfortuantely open markedts don't seem to be as effective at seeing that we respond appropriately to beliefs that are shown to be wrong.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 25th, 2010 at 12:39:01 PM EST
[ Parent ]

 but most traders believe that most traders believe that that is unlikely to happen until the current crisis is resolved.

Yes, this is largely about self-reinforcing perceptions and narratives amongst groups of people with similar mindsets, sources of information and backgrounds.

And many of them are aware of it, which only reinforces that reality - and increases the importance of the few "narrative-driving" sources like the FT, WSJ or Economist.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:13:16 PM EST
[ Parent ]
There is a variety of different types of exposure to Greece. In other words, many countries will lose billions, many, from the default.
by Upstate NY on Tue Feb 23rd, 2010 at 11:59:59 PM EST
[ Parent ]
But here's the question: could it even conceivably matter so much that the value of the euro in relation to the currency of EU countries trading partners would be significantly affected in any way?  And precisely how, if it can?

After all, there is zero difference in macro-economic effects between, say, Germans losing the billions it has invested in Greek debt (and I don't even know if it has such investments) and Germans losing billions by simply gifting that money to Greece to help Greece overcome its economic problems.  

by santiago on Wed Feb 24th, 2010 at 02:35:55 PM EST
[ Parent ]
In one report, Hypostate Bank, owned by the German gov't, loaned $4 billion to Greece, but it also somehow has $100 billion exposure to a Greece default (in derivatives? I don't know). Now, you tell me how this could happen. Greece is $350 billion in debt, so how could anyone have that much exposure in terms of direct investment? It's nearly impossible.

And that's not the tip of things. Spanish and Swiss banks are said to be in even deeper, and then there's the threat of a speculative attack that would come after a Greek default, and there you see what they are up against.

by Upstate NY on Wed Feb 24th, 2010 at 02:40:44 PM EST
[ Parent ]
Last year I spent some time trying to make some sense out of the CDS numbers game. I reached the impression that large amounts of shadow/phony money is being created by these shenanigans. Probably the only way to ever get a realistic count of what is involved would be to let Humpty Dumpty fall off the wall and then count the pieces of egg shell.  
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 02:47:28 PM EST
[ Parent ]
There would be a whole new world order, if that were to happen. One based on the idea that you don't have to honor contracts. I'm not necessarily saying this is an immoral stance or that it shouldn't be done. I spend very little time considering it, actually, as I worry more about distribution of food and mass starvation.
by Upstate NY on Wed Feb 24th, 2010 at 03:05:12 PM EST
[ Parent ]
I'd like to see the specifics of that case, because even with lots of derivatives and other forms of insurance, you just can't turn a $4 billion debt into a $350 billion loss, or anything close to that. (I serve on the loan committee in a bank that makes these kinds of lending decisions, so I have some experience in this.) The only way something like that can occur that I can think of, as it did with the failure of Lehman Bros, for example, is if the insurers and counter parties to derivatives can't come up with the $4 billion to pay the lending bank and so they go insolvent too.  But if that's the case, it isn't Greece's problem at all.  It's the poor financial condition and regulation of the banks and insurers that lent to Greece when they couldn't possibly pay out the insurance they promised and were paid to provide. (And I don't think that this is actually the case here.)
by santiago on Wed Feb 24th, 2010 at 03:11:04 PM EST
[ Parent ]
Well, first off, it's $100 billion exposure.

And I do realize that the selling of derivatives would not be the fault of Greece. But it has been reported that Goldman was selling these instruments not only to the Bank of Greece but to German Banks as well. Obviously, in the USA and UK, the derivatives were sold and sold and sold again many times over, enough to create potentially hundreds of TRILLIONS in debt. I'm not a banking guy and my mind can't comprehend, but the true exposure to credit default swap in the USA has never been revealed.

I also didn't say that Hypostate has risk from its $4 billion investment in Greece. I said that it has exposure of $100 billion, and this might very well have absolutely nothing to do with any deal it struck with a concern in Greece.

by Upstate NY on Wed Feb 24th, 2010 at 03:19:35 PM EST
[ Parent ]
The derivatives in question are standard practice.  In fact, it is usually illegal for banks to lend to such borrowers without some form of derivative or insurance contract that pays out when something goes wrong with the loan.  That's a major line of business for investment banks and insurance companies, and it a very legitimate and necessary one for society at large. There is a big difference, however, between exposure and what one could conceivably lose, and it's not always very easy to add up when banks lend and insure each other in seemingly incestuous ways.  

Debt is not the same thing as exposure.  Debt is what the lender has actually put up to lose, while exposure refers to varying degrees of potential loss. And if the latest mother of all financial crises can be taken as a guide, only a small sliver of total contracted, multi-trillion dollar exposure was actually lost in the whole affair, so the Greece-EU situation is unlikely to be any worse.

by santiago on Wed Feb 24th, 2010 at 03:56:32 PM EST
[ Parent ]
In fact, it is usually illegal for banks to lend to such borrowers without some form of derivative or insurance contract that pays out when something goes wrong with the loan.

It is not a legal requirement to purchase CDS cover of debt assets, it is just a convenient device for saving on regulatory capital. This may lead to complacency and so be counterproductive.

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 Wed Feb 24th, 2010 at 07:00:37 PM EST
[ Parent ]
The question is, were these contracts abused?

Put it this way, if Hypostate invested in Greece a certain amount, how much insurance does it actually need?

The practice of Goldman and other banks has been not only to sell these insurance contracts, but to sell them on the same debt over and over and over and over. Surely this isn't news to you?

Indeed, Goldman goes out of its way to make risky loan because it knows then that the market for the derivatives will invite more speculation.

The Michael Lewis article in Portfolio last year outlined the ways in which these deals were done.

We would not be where we are today were it not for these deals (and I'm referring here to the fallout from the Lehman collapse).

by Upstate NY on Wed Feb 24th, 2010 at 11:11:11 PM EST
[ Parent ]
A potential problem is that there is no limit on the number of derivatives, such as CDSs, that can be written around a loan or a bond. Nor is there any way to know just how many are in existence. The US financial accounting standards organization ruled that one does not have to present a bond or loan on which one has lost money in order to collect on the CDS.  In other words, there is no requirement for "insurable interest."

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 03:24:22 PM EST
[ Parent ]
True, but since there is always a winner for every loser in derivatives -- a zero sum game -- it doesn't really matter at all, unless it turns out that one party was lying to the other and really didn't have the money to pay out if it lost.  Which gets us back to my point above -- that it doesn't provide evidence for a narrative that this is a Greek fiscal irresponsibility problem at all, or even a problem with Greece and Goldman skirting the arbitrary EU rules on debt and deficits.

Whether a country has breached the EU rules or not doesn't indicate anything regarding the ability of underlying insurers of that debt to make good on their promises to pay out in case of default.  The insurers should have had the means to make good on their insurance or derivatives contracts irregardless of what actually happened in Greece.

by santiago on Wed Feb 24th, 2010 at 04:12:51 PM EST
[ Parent ]
since there is always a winner for every loser in derivatives -- a zero sum game -- it doesn't really matter at all, unless it turns out that one party was lying to the other and really didn't have the money to pay out if it lost.

Such as AIG? Goldman knew they were in trouble. It had sold them the toxic assets. And almost certainly Goldmans bets were all on the downside. Were things to go the other direction in one of these plays, the guys that set it up could get blown up. But the US taxpayer would be there for them.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 05:18:50 PM EST
[ Parent ]
Yes, exactly. But that's my point. If there is a problem with the whole Greek-EU thing, it isn't that Greece is fiscally irresponsible or even that Goldman helped them skirt EU rules on deficits or debt sizes.  It's that banks are lying about their own capacity to pay their own bills if and when they come due.  

If the problem is anywhere as big as it's being hyped to be (and I have a doubts about that whole story), it could only have gotten so bad because there were actors who never had the means to pay out insurance claims or derivatives losses if and when they came due.  It has nothing to do with Greece's or the EU's underlying fiscal or political problems or lack thereof.

by santiago on Wed Feb 24th, 2010 at 05:36:11 PM EST
[ Parent ]
Well, depending on how many of the credit default swaps GS convinced Greek banks to buy, the banks that made the loans guaranteed by those CDSs could be sweating bullets about now. If Greece defaults on the loans, Greek banks are not a real good bet to pay off on the CDSs. GS seems to have a malicious sense of humor.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 06:07:23 PM EST
[ Parent ]
Banks don't convince each other to buy more CDSs.  It's just a mechanical, book-keeping thing to hedge risks of rate changes or defaults and is pretty much set in bank regulations.  What they do try to convince each other is to buy their CDSs instead of someone else's, and that pitch is based on price and credibility that they actually have the means to pay if required to do so. If anyone else wants to also place bets on debt risk, that can't affect the economics of Greece or the EU any more than placing stupid bets on sporting events in Las Vegas can.

If Greek banks were gullible enough to actually speculate on Greek debt instead of just hedge it (buying more CDSs than one should), it still has nothing to do with the underlying fundamentals of Greek debt. Those same banks would have also been sold on other dumb speculative positions even if the Greek debt opportunity wasn't there for them.  If what you say about the banking and hedging situation in Greece is true, it just means that banking regulation of loan insurers needs to be fixed, not that Greeks or the EU needs to do anything differently regarding fiscal policy or even bookkeeping.

by santiago on Wed Feb 24th, 2010 at 06:41:42 PM EST
[ Parent ]
Banks don't convince each other to buy more CDSs.  It's just a mechanical, book-keeping thing to hedge risks of rate changes or defaults and is pretty much set in bank regulations.

Banks would do this in an automatic way only if they slavishly follow regulatory capital requirements without a proper model of economic capital.

The concept of economic capital differs from regulatory capital in the sense that regulatory capital is the mandatory capital the regulators require to be maintained while economic capital is the best estimate of required capital that financial institutions use internally to manage their own risk and to allocate the cost of maintaining regulatory capital among different units within the organization.
Limiting yourself to regulatory capital pretty much guarantees insolvency. This is why Basel II actually has a "second pillar" in which regulators are supposed to demand bank "capital self-evaluations". I suspect many regulators haven't taken this too seriously in the past years.

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 Wed Feb 24th, 2010 at 06:51:24 PM EST
[ Parent ]
Yes, you're right, except that in many, if not most, cases, covering risk of loss with a derivative or insurance contract provided by a AAA rated counter-party would classify such lending as low risk and therefore not deplete lenders economic capital allowances in any way, allowing them to continue to lend to higher risk borrowers.  Is that what happened in the Greek case? I don't know.
by santiago on Thu Feb 25th, 2010 at 12:21:47 PM EST
[ Parent ]
covering risk of loss with a derivative or insurance contract provided by a AAA rated counter-party would classify such lending as low risk and therefore not deplete lenders economic capital allowances in any way

Not so. If you look at the consolidated version of Basel II, Pillar I [PDF] you'll see that the only category with a risk weighting of 0% is sovereign debt with a rating of AA- or better. Since sovereigns are not in the business of selling CDSs and the best risk weighting of any other entity is 20% it is impossible to use CDS cover to reduce the risk weighting of assets below 20%. Given that minimum capital requirements for credit risk are 8% of risk-weighted assets, any lending covered by a CDS requires you to set aside capital in the amount of 1.6% of the exposure.

Assuming the original risk weighting before CDS cover was 150%, you could multiply your lending to that same counterparty by about 7 times (ignoring CDS premiums and capital to cover market risk), but not indefinitely.

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 Thu Feb 25th, 2010 at 04:18:29 PM EST
[ Parent ]
In addition, the seller of CDS protection now has credit exposure to Greek debt and must set aside capital with the Greek risk weighting. So the buyer of CDS protection saves an amount of capital no larger than to the amount of extra capital that the seller of CDS protection must set aside.

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 Thu Feb 25th, 2010 at 04:24:16 PM EST
[ Parent ]
Yes, but that's only if the seller of CDS protection is constrained by either Basel II-induced regulations or self-imposed economic capital policies, which many, perhaps most, sellers of CDS protection are not, coming from the risk-taking stratosphere of the world's super-wealthy.  (For example, before agreeing to be re-incorporated as a US National Bank last year, Goldman Sachs had few regulatory requirements or market incentives other than reputation among its clients and investors/customers to have to think in terms of economic capital.  They could attain high risk ratings without it based on their past success.)

But that speaks to your point about how anyone in the business of lending and insuring such debt should be using an economic capital model.

by santiago on Fri Feb 26th, 2010 at 11:29:46 AM EST
[ Parent ]
And also to the fact that after what has happened in the last 30 months, nobody who gets burnt with Greek debts or CDS in the next weeks or months should be bailed out. The "nobody could have foreseen" defence is no longer valid.

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 26th, 2010 at 11:35:22 AM EST
[ Parent ]
Good point.
by santiago on Fri Feb 26th, 2010 at 11:09:37 AM EST
[ Parent ]
There was that famous uncovering of the mathematical formula that more or less was the guardrail for determining risk for such insurance contracts on Wall Street. The formula was flawed (and frequently critiqued as such prior to the crisis) because it assumed at its base that the CDS market was an objective measure for risk. The CDS phenomenon in the USA didn't take off until an egghead came up with the formula and that formula was made part of every risk management practice on Wall Street.

And yet the picture painted of the actual sellers and buyers of CDS's is of wolves and rubes (according to Michael Lewis's piece in Portfolio) so the formula's base could not have been substantive or objective at all.

In other words, Wall Street had fooled itself into assuming that it was managing risk correctly. There was no zero-sum game.

by Upstate NY on Fri Feb 26th, 2010 at 11:00:33 AM EST
[ Parent ]
There was that famous uncovering of the mathematical formula that more or less was the guardrail for determining risk for such insurance contracts on Wall Street. The formula was flawed (and frequently critiqued as such prior to the crisis) because it assumed at its base that the CDS market was an objective measure for risk. The CDS phenomenon in the USA didn't take off until an egghead came up with the formula and that formula was made part of every risk management practice on Wall Street.
You're confusing CDOs and CDSs, I think, as well as price and risk.

CDS (default insurance) are very simple instruments. Their price was used as a parameter in "Li's Gaussian Copula" to, in turn, price CDOs (collateralised debt obligation, a kind of asset-backed security, not a kind of insurance). Without Li's formula you could not price CDOs and so there could not be a ballooning market for them.

See here.

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 26th, 2010 at 11:12:40 AM EST
[ Parent ]
Right, I do confuse these. The slicing and dicing into classes just hurts my brain, and they are all derivative plays to me.

I will say however that they hurt a great many brains other than mine and that's why in many articles, people make the same mistake that I did, or they use CDS as shorthand.

by Upstate NY on Fri Feb 26th, 2010 at 11:20:29 AM EST
[ Parent ]
The CDO market imploded in 2007. Now we are talking about CDS.

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 26th, 2010 at 11:36:54 AM EST
[ Parent ]
My comment about GS and a malicious sense of humor was based on my sense that it should be very bad policy for banks that would be adversely affected by a default on a to loan their government to be selling a CDS on that loan, and thereby partly guaranteeing it, which is what I had gathered had happened from my reading this last few weeks. I had read that GS structured the CDS and Greek banks sold some of them. I may have been misleading in my statement above. Buying and selling CDSs is obviously not something I do.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 07:17:57 PM EST
[ Parent ]
What if the banks in question were actually owned by the German gov't?
by Upstate NY on Wed Feb 24th, 2010 at 11:29:14 PM EST
[ Parent ]
I'm not sure it would make a difference, but one could come up with story about a conflict of interest problem if it was argued that German political authorities used such ownership to try to manipulate the situation to benefit German political authorities at the expense of Greek citizens.
by santiago on Thu Feb 25th, 2010 at 02:22:11 PM EST
[ Parent ]
Again, I agree with you that this problem with CDS's does not mean that Goldman and Greece engaged in deceptive practices (especially since the deal was well publicized and it came AFTER Greece entered the Eurozone) but Goldman has been reported to have pulled the same CDS game it pulled in the USA.
by Upstate NY on Wed Feb 24th, 2010 at 11:13:20 PM EST
[ Parent ]
Yes, and focusing on Goldman's role in this whole thing is good place for policymakers to be.
by santiago on Thu Feb 25th, 2010 at 12:23:03 PM EST
[ Parent ]
That report is still unsubstantiated as far as we can tell.

The word "exposure" is used in such ambiguous ways that it is not possible to tell whether people mean what they say

Hypo Real Estate, the German mortgage bank that had to be bailed out by the federal government, and which is now state-owned, has an exposure of €4bn to Greek debt. If this exposure had to be written off, the bank, and thus the government, would need to strengthen the bank's capital base by €100bn.
Either the exposure is 100 billion or there's no way the loss can be 100 billion. But you originally quoted the exposure at 4 billion.

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 Wed Feb 24th, 2010 at 04:26:49 PM EST
[ Parent ]
This is the nature of Hypo's exposure:

So the fee associated with the deal isn't a fee for arranging the transaction, as the NYT would have it: instead, it has to cover all of the credit and market risk that Goldman Sachs is taking on in lending the money to Greece. What's more, a very large chunk of the fee was immediately paid to Depfa, which sold Goldman a $1 billion 20-year credit default swap on Greece to hedge its credit risk. And for what it's worth, Dunbar's article puts Goldman's total charge for the transaction at $200 million, not $300 million: I have no idea which figure is more reliable.

Depfa is part of Hypo.

by Upstate NY on Wed Feb 24th, 2010 at 11:23:28 PM EST
[ Parent ]
Where are the €100 billion?

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 Thu Feb 25th, 2010 at 04:18:47 AM EST
[ Parent ]
Again, I don't know.

But I also don't know the exposure that American banks had to Lehman. This has never been revealed. What if these banks adopted American and British practices of selling the same insurance to a variety of buyers that had absolutely no exposure to Greece?

I have read a ton of articles in the last couple of weeks on exposure elsewhere in Europe, and unfortunately, I can't remember the source for one claim that one other German bank (not Hypostate) is in trouble.

by Upstate NY on Thu Feb 25th, 2010 at 09:47:06 AM EST
[ Parent ]
The biggest problem with Lehman was not that so many banks had exposures with them (lots did), and that therefore they were going to lose money too. (Banks being exposed to Lehman didn't mean they lost money.  It meant that they had to recategorize lots of loans from low-risk status to high risk status, pushing their capital reserve requirements far outside of bboth regulatory parameters and their comfort zones, effectively curtailing lots of forms of lending.)

Once banks were forced by the Lehman collapse to stop lying to themselves about the solvency of their insurance counterparties, the only rational thing to do was stop trusting anyone anymore, which meant, under post Basel II and other frameworks for risk management, that capital markets had to largely disappear for everyone except for governments and the privately wealthy, such as Saudi princes and Warren Buffet, thus bringing on the collapse of the market-based financial system, at least for a while.

I just don't see anything like this occurring due to the Greek situation because everyone is ALREADY so risk averse now that it can't have a major effect on lending and insuring behavior anymore.

by santiago on Thu Feb 25th, 2010 at 12:35:25 PM EST
[ Parent ]
The reports however show that CDS contracts on Greek debt went from $38 billion to $80 billion in the last month or so. That's just what has been reported by an index tracking this, and since the market is really a private one, we don't know really what's out there.

The main point, though, is that even now banks are taking on this risk without knowing how well capitalized their counterparties are. Has anything really changed in this market?

by Upstate NY on Thu Feb 25th, 2010 at 12:55:03 PM EST
[ Parent ]
Without looking at the reports, it would seem that CDS contracts are increasing, not that debt at risk of default is increasing. This could be due to two reasons, at least. One is that with Greece in the news, lenders are now looking for more protection for the loans to Greece, so they're over-insuring. Another is that speculators want to cash in on the volatility that the news has created so they are taking positions against one another using CDSs.  Neither of these scenarios at least is particularly worrisome to anyone who doesn't own a speculative bet on one side or the other.  Lenders shouldn't be worried, because they own two sides -- the loan and their CDS hedge, so their only risk is that their CDS counterparty can't follow through with their commitment in the event of a default. Insurers and people who own the other side of the hedge might be dissappointed in the event of a Greek default, but they also shouldn't be too concerned provided they had the means to pay out what they said they would if a default occurs.  Either way, Greece's fiscal problems are irrelevant here. The only issue appears to be whether people making CDS commitments to Greece's lenders ever had the means of making good on those commitments in the first place. If they did, then the macro-economic result has to be zero -- someone placed a bet on Greek debt and lost.  So what?
by santiago on Thu Feb 25th, 2010 at 02:14:43 PM EST
[ Parent ]
I think I said this once above: if multiple contracts were sold on the same debt to parties that had no actual investment, then the party selling the insurance may be on the hook for many multiples of the original debt in the event of a default.
by Upstate NY on Fri Feb 26th, 2010 at 10:37:25 AM EST
[ Parent ]
But who is selling this insurance?

And how can they be selling insurance without setting aside capital?

Anyway, this 2004 piece may provide some entertainment, with the benefit of hindsight.

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 26th, 2010 at 10:43:09 AM EST
[ Parent ]
I don't know.

But, the Michael Lewis piece (which I'm often quoting) showed that some of the capital used to leverage these insurance contracts was actually capital that was placed with a bank to SHORT insurance contracts not yet sold!

Imagine that. Naked shorts providing the capital through which the banks could sell multiples of these derivative contracts. According to Lewis, one of the shorts revealed to him that the banks had run out of bad bets (i.e. they had no takers for the loans, takers with good or bad credit) so instead they reversed the process, began introducing their dupes (i.e. CDS contract buyers) to hedge fund managers, who were shorting the buyers willy nilly, only the hedge funds themselves had little idea that their money was providing the basis for the contract in the first place.

by Upstate NY on Fri Feb 26th, 2010 at 11:05:23 AM EST
[ Parent ]
Yes, I understand that point.  But from the point of view of the party selling insurance, it doesn't matter in any way whether the buyers of said insurance are truly hedging or whether they are speculating and have no other investment at stake. And insurers need to have the capacity to pay out on all of their policies before they sell them, irregardless of whether their portfolio is made up of a thousand contracts on the same bad event, or on a thousand contracts on different unrelated bad events.  The issue of selling multiple contracts on the same event is no different, therefore, than the issue of having an un-diversified investment portfolio. I.e., it has nothing whatsoever to do with the underlying investment that is being insured.
by santiago on Fri Feb 26th, 2010 at 11:02:09 AM EST
[ Parent ]
Well, I'm looking at it from the perspective of a taxpayer whose national government backstopped all the counterparties that couldn't pay on the deals they made.

So, yes, as you've said, these deals only go wrong when a counterparty does not manage its risk correctly. Unfortunately, this is is what happened last year in the USA.

I would also say that the parties selling these contracts in the USA also used a variety of other schemes to generate business in CDS contracts. I am not savvy enough to understand them, but the Lewis article in Portfolio unravels a scheme through which the capital set-aside for contracts was derived from hedge funds that were shorting contracts not yet sold or signed.

by Upstate NY on Fri Feb 26th, 2010 at 11:10:15 AM EST
[ Parent ]
This seems to me to be the essence of the problem. The agricultural futures market provides a useful risk management tool for farmers and other people engaged in the business of food production. As a person who has no direct connection to that business, I can go and speculate in those futures markets. However, since I am most definitely not too big to fail, nobody is going to bail me out when I fall on my face. That is as it should be.
by Richard Lyon (rllyon@gmail.com) on Fri Feb 26th, 2010 at 11:47:57 AM EST
[ Parent ]
But in the case of Greece, I don't think anyone is seriously contemplating that the public will be asked to offer its credit to help bail out anyone's CDS losses, as they were with AIG.  At worst, EU citizens will be asked to help Greece by giving Greece some of their wealth, but they should be doing that anyway, so that has nothing at all to do with the CDS issue. At worst, a lot of CDS sellers might lose some money because of their unfortunate bets on Greek debt.  Big deal. It's a separate issue entirely, and for every loser of a CDS loss, there's another gainer somewhere else in the economy, so it's wash.  

The AIG situation was a little bit different, however.  And that's because what happened there was the impossible, never-before contemplated situation that the huge multi-trillion dollar market for MBS securities simply disappeared one day, even though the vast majority of loans underlying the securities in that market were still, and still are even during and after the Great Recession, making their payments. Because it was deemed an exogenous event that neither regulators or market participants had ever assumed possible, there is some (perhaps not very strong) justification for a policy intervention on grounds of both fairness as well as preventing the situation from getting much worse.

Since we all know now that such things as the evaporation overnight of a multi-trillion dollar market can occur, the risk of that eventuality is already built into financial assumptions of investors (probably too much), so anyone who invested in Greek debt or insured that debt cannot possibly do any serious harm to the economy if they go bankrupt because of their bad investments (their loss is just someone else's gain), and neither do they have a justifiable claim on society's resources anymore.

by santiago on Fri Feb 26th, 2010 at 12:11:49 PM EST
[ Parent ]
Since we now know that, it would seem to be a good argument for some regulation which doesn't seem to be happening.
by Richard Lyon (rllyon@gmail.com) on Fri Feb 26th, 2010 at 12:16:37 PM EST
[ Parent ]
It's an argument for more regulation AND for not bailing anyone else out.
by santiago on Fri Feb 26th, 2010 at 12:25:21 PM EST
[ Parent ]
A couple of the links I posted were to Depfa Bank, Irish-based but owned by Hypostate, itself owned by the German Gov't, having sold CDSs to Goldman. So, whether they are capitalized to pay out on a default or not, there would be a gov't calculation involved. At the end of the day, someone must be crunching numbers to figure out the cost of a Greek default not only in terms of lost investment and knock-on effects of Greek banks going down (in the Balkans for instance) but also in terms of exposure to credit default swaps. Now, I think we're pretty aware that in the USA, the gov't was not aware as to what was out there on Lehman Brothers. The question is, do gov'ts know what's out there on Greece?
by Upstate NY on Fri Feb 26th, 2010 at 12:54:27 PM EST
[ Parent ]
I strongly suspect that nobody really understands this octopus and its dimensions. What we are getting in a lot of empror's new clothes speak.
by Richard Lyon (rllyon@gmail.com) on Fri Feb 26th, 2010 at 12:59:02 PM EST
[ Parent ]
This is where the business press really fails in its ability to illuminate something for the public.  We have to think about this in basic macro-economic terms first, and then see if anything in the Byzantine details of CDSs really can change matters. To summarize, however, there are too issues in most economic questions: productivity, and welfare. Welfare refers to who benefits or is burdened by economic events. Productivity refers to issues of economic growth or decline. I argue here that the Greek mess is almost entirely just a welfare issue, not a productivity issue at all, so unless you live in Greece or have an investment stake yourself in the matter, there's just nothing to see here. Move along folks, as the police say.

Normally, if a borrower defaults on a loan, nothing happens to the economy at large. There is nothing more problematic in economic terms about a borrower defaulting on a loan than someone winning a large lottery ticket.  In both cases there are just large, one-time transfers of wealth from one agent to another. Only two actors are affected -- the lender and the borrower. The borrower gets richer and the lender gets poorer.  Nothing to write home about unless you happen to be a stakeholder in either or both agents, in which case you are either richer or poorer too.

So, is there anything in the complex details of the case at hand that might change the fundamental economics of this? Two things, at least, have been offered up so far: 1) There are lots and lots of stakeholders involved in such very large things as big banks and national governments as well as ambiguities of agency and ownership.  And 2) there appears to be a lot more wealth changing hands in this affair than just the amount being defaulted on by the Greek government: third party insurers and speculators of the Greek debt also stand to lose billions, perhaps even more than what the entire debt in question was ever worth.

Start with 2 first: Does it matter that more people have also placed bets on Greek credit risk and now stand to lose even more than the debt was ever worth?  Answer: If you're not one of the losers (or winners) then no, it just cannot matter in any significant, material way.  Unless you have a large enough personal stake as either a beneficiary of a Greek default or someone who stands to lose a lot of your personal savings because of an unlucky investment, this event can have no more of an impact on you, or on economic productivity at large, than the millions of cases every day where people win and lose large sums of money in stock markets, currency exchanges, or Las Vegas.

On to 1: But doesn't it matter if it is a really big default, like a few hundred billion dollars?  Answer: maybe, but just because it increases the chance that you will be affected by it materially -- that you'll be one of the losers or winners, either directly or indirectly. But remember, in a national debt default there are lots of winners too, and it's usually the poor in such cases who benefit more. If Greece defaults on its debt, it's the same thing as if Goldman Sachs and other investors had been forced to pay for more of Greece's welfare and other governmental expenses -- exactly what many argue that other EU members should be providing them now anyway.  So it is not at all clear why anyone except the lenders involved should be concerned about this. If I were Greek, I would be throwing a party.  (In fact, when I'm in NYC next, maybe I'll go Astoria and do just that in one of the Greek cafes or bars, and leave a big tip for the obligatory Polish and Romanian waitresses.)

However, there is also a third possibility regarding productivity fallout, and that is the externality of increased uncertainty that might occur in the event of lenders taking big losses, perhaps increasing investors' aversion to risk at a time when we need to be decreasing that aversion.  

But this was only a really big issue before the Great Recession began, not so much anymore, because so much of economic activity in the last decade was dependent upon people's continued (and probably unsustainable) high trust in each others' ability to deliver on our promises.  But that's no longer true.  That trust is now virtually non-existent because of the events of 2007.  And that means that a Greek default, as bad as it might be for the lenders and insurers involved, just isn't going to make people any more averse to investment risk than they already are today, so the effects on economic productivity can only be minimal.

So, there just is no fundamental issue to worry about here unless you've lent a lot of money to Greece or insured that debt yourself. And for the poor in Greece, if not the well-to-do, there appears to be more upside in this whole affair than down.

by santiago on Fri Feb 26th, 2010 at 04:02:26 PM EST
[ Parent ]
These are the economic calculations, of course, and I appreciate your post. I do.

There are political considerations as well.

Does a Greek default mean they are out of the Eurozone?
Does a Eurozone member leaving/getting kicked out also mean they are out of the EU?

Given the Iceland membership squabbles with the UK and the Netherlands, where both the UK and Netherlands are demanding that Iceland cover the costs of funds that the UK and Netherlands had to make do on, one wonders if Greece would similarly be held responsible for losses incurred by foreign banks. If so, then how would EU partners punish Greece for rejecting such demands?

The political fallout of Greece being ejected from the EU has a great many variables. I assume that would never happen.

by Upstate NY on Fri Feb 26th, 2010 at 04:44:47 PM EST
[ Parent ]
Those are all good questions. It seems that expelling Greece from the EU is out of the question, according to this document.  But with regards to eurozone membership, there is really nothing that the European Central Bank can do to prevent a country from using the euro as its national currency, even if there were treaty articles that allowed expulsion from euro usage.  

For example, when Ecuador and El Salvador decided to adopt the US dollar as their national currency, the US Federal Reserve indicated that it was not at all supportive and that it would not be implementing anything to accommodate the use of US dollars as national currencies in other countries.

by santiago on Sun Feb 28th, 2010 at 11:46:10 AM EST
[ Parent ]
At worst, a lot of CDS sellers might lose some money because of their unfortunate bets on Greek debt.  Big deal. It's a separate issue entirely, and for every loser of a CDS loss, there's another gainer somewhere else in the economy, so it's wash.

But if the loss seriously affects a TBTF, then does it not becomes a problem for the government and, ultimately, the tax payers of the country(ies) in which the TBTF(s) is/are domiciled.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 26th, 2010 at 08:39:05 PM EST
[ Parent ]
The reports however show that CDS contracts on Greek debt went from $38 billion to $80 billion in the last month or so

Is 80 billion more than the outstanding Greek debt?

This could just mean that $42 billion worth of previously uninsured Greek debt has now become covered by CDS, due to increased risk awareness on the part of the debt holders.

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 Thu Feb 25th, 2010 at 04:20:12 PM EST
[ Parent ]
Right. And I know that this amount is not the total of Greek debt.

All I'm saying here is that people are not shy about insuring Greek debt, and investors are not totally skeptical about a counterparties' ability to pay.

I would highlight again, however, that these contracts are private, and whatever the index I'm quoting from is portraying may be only half the picture.

by Upstate NY on Fri Feb 26th, 2010 at 10:35:33 AM EST
[ Parent ]
All I'm saying here is that people are not shy about insuring Greek debt, and investors are not totally skeptical about a counterparties' ability to pay.

Considering all that has happened in the last 30 months regarding credit risk, anyone who would go bankrupt as a result of their involvement with Greek debt and credit derivatives should be allowed to go bankrupt. They can no longer claim "nobody could have foreseen" a default, or that a CDS seller was insufficiently capitalised.

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 26th, 2010 at 10:49:46 AM EST
[ Parent ]
Indeed, assuming of course the contracts are recent and as of the last 6 months.
by Upstate NY on Fri Feb 26th, 2010 at 11:11:36 AM EST
[ Parent ]
I would say 18 months. Post-Lehman and especially post-AIG.

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 26th, 2010 at 11:59:14 AM EST
[ Parent ]
Mig:
Considering all that has happened in the last 30 months regarding credit risk, anyone who would go bankrupt as a result of their involvement with Greek debt and credit derivatives should be allowed to go bankrupt. They can no longer claim "nobody could have foreseen" a default, or that a CDS seller was insufficiently capitalized.

I certainly agree that they SHOULD be allowed to go bankrupt. But, in the USA, given the gall that TBTFs have just shown with regard to paying executive compensation that is a significant portion of the amount of the TARP funds they received, and given that they received those funds over vitriolic protests from citizens and that the Fed chairman has been fairly described as the exemplar of moral hazard, it is doubtful that they WILL be allowed to go bankrupt in such circumstances. This makes it doubtful that they will, in fact, refrain from taking such risks.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 26th, 2010 at 08:50:30 PM EST
[ Parent ]
by Upstate NY on Wed Feb 24th, 2010 at 11:23:56 PM EST
[ Parent ]
The cross-currency swaps transacted by Goldman for Greece's public debt division were `off-market' - the spot exchange rate was not used for re-denominating the notional of the foreign currency debt. Instead, a weaker level of euro versus dollar or yen was used in the contracts, resulting in a mismatch between the domestic and foreign currency swap notionals. The effect of this was to create an upfront payment by Goldman to Greece at inception, and an increased stream of interest payments to Greece during the lifetime of the swap. Goldman would recoup these non-standard cashflows at maturity, receiving a large `balloon' cash payment from Greece...

It seems the total credit risk incurred by Goldman Sachs was roughly $1 billion. Effectively, Goldman Sachs was extending a long-dated illiquid loan to its client.

This doesn't seem fraudulent to me at all, actually. And the $100 billion are still nowhere in sight.

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 Thu Feb 25th, 2010 at 04:22:23 AM EST
[ Parent ]
Right, I think a few journalists and people in the trade have argued that there is nothing really untoward about the currency swap deals.

On Greece's part, this is a form of creative accounting which eurostat did not account for at the time.

by Upstate NY on Thu Feb 25th, 2010 at 02:10:24 PM EST
[ Parent ]
I still fail to see any objective reason for the euro to be touched in any way by a Greek default. I see an impact on the price/cost of debt for other countries perceived as risky and depending on foering buyers of such debt, but not more.

In fact, the euro could arguably be more impacted by a bailout, as it would mean a weakening of German discipline and of that country's commitment to a strong currency.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:17:30 PM EST
[ Parent ]
Not about "objective reasons," near as I can tell.  It's all about Mr. Market going into fear and panic mode, selling off, price drops due to the sell offs, feeding and increasing the levels of fear and panic.  It's a classic market bubble - don't know what else to call it - in the negative direction.

I do note people who account in US dollars - like me - stand to make a killing on this over the next year or two.  There's been a net drop of the euro-to-dollar of around 11% plus the price drop for the instruments themselves.  When this Goes Away we'll get two bangs for the buck:  increase in the bond prices plus riding the upward re-valuation of the dollar/euro.

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

by ATinNM on Wed Feb 24th, 2010 at 05:53:06 PM EST
[ Parent ]
I have a theory about currency exchange rate value as index of penis length. Any particular currency can have only onr value on the international markets at any given time. However, among the people using that currency a rise or decline in its value has very different impacts on people with different economic interests. A fall in value benefits exporters while a rise benefits people who purchase imported goods. It seems like the reaction should be mixed. Yet, for all the hue and cry that goes up when there is a rise or fall you get the feeling that strong currency is equated with national potency.
by Richard Lyon (rllyon@gmail.com) on Tue Feb 23rd, 2010 at 04:52:08 PM EST
I think that's close to the truth. It's not quite as crude, but a need for financial potency is closely tied to a need to feel secure within a herd.

I have diaries planned explaining what I think is happening. But it's not too wild an exaggeration to suggest that economics isn't just psychological - certainly far more than it's financial - but that it's a true and honest picture of some of the less attractive parts of the collective unconscious.

Neo-liberal economists aren't very serious people with moral authority - they're monsters from the Id.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Feb 23rd, 2010 at 10:16:34 PM EST
[ Parent ]
ThatBritGuy:
Neo-liberal economists aren't very serious people with moral authority - they're monsters from the Id.

hehe, you sure nailed it there. steven king territory...

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Wed Feb 24th, 2010 at 03:01:13 AM EST
[ Parent ]
Richard Lyon:I found an interesting article in Spiegel Online International. I have found this to be a good German news source for someone who doesn't read German. My impression is that Der Spiegel is a reasonably well respected source of news and opinion. If anyone on ET thinks that this impression is seriously flawed, I'd be very interested in hearing about it.

When I read this I had to smile. I did have the impression you would be hearing a lot about it. A lot of interesting discussion in the comments.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Feb 24th, 2010 at 12:02:48 AM EST
I truly wanted to know more about the dynamics of political opinion in Germany. I am very pleased that the responses here have given me an opportunity to do that. I think it probably is accurate to say that Der Speigel is not a trashy rag. Somebody compared it to Time and Newsweek. I wouldn't automatically disregard everything I found in those publications, but I would definitely consider that any opinion and analysis was coming from right of center.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 09:09:56 AM EST
[ Parent ]
If you're ever at a newsagent's that sells foreign newspapers, take a look at a copy of Der Spiegel sometime. I'd say that on average, issues are three times thicker than Time or Newsweek; the same proportion goes for the amount of copy. I think people are right when they say that it's gone neoliberal on economics, but otherwise it is definitely left of center.

To be honest, it's an insult to Der Spiegel to compare it to Time and Newsweek. The main annoying thing about Der Spiegel is that the writing uses a pseudo-hip, informal style.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Wed Feb 24th, 2010 at 09:35:36 AM EST
[ Parent ]
It's not only neolib in economics, it's Atlanticist wrt foreign policy. Where are the left of centre bits?
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 09:48:37 AM EST
[ Parent ]
At the same time that I read the article that's posted here, I read one about China that sounded like it might have been written by the ghost of John Foster Dulles.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 09:56:43 AM EST
[ Parent ]
wooh! <runs and hides, gets caught by Allen Dulles>

If you mean

Masters of the World: The Arrogance of China's Leadership - SPIEGEL ONLINE - News - International

Beijing's leaders are behaving like the masters of the world, as aloof as if they could walk on water.

it's fair to point out it's billed as "commentary".

But it does indeed give me the feeling I'm reading the Reader's Digest from 1958.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 10:07:15 AM EST
[ Parent ]
That's the one.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 10:10:39 AM EST
[ Parent ]
I stand corrected. To me however, Atlanticism and neoliberalism are two sides of the same coin, since both are aspects or manifestations of US empire. Since you in contrast don't seem to accept US empire as a category that helps us explain current phenomena, you apparently see Atlanticism and neoliberalism as two separate (unrelated?) things.

OK, I looked through a recent issue of Der Spiegel, and I couldn't find anything left of center.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Wed Feb 24th, 2010 at 10:51:38 AM EST
[ Parent ]
I certainly do accept the notion of US empire! I was simply pointing out that (as we have seen again and again in the Salon here wrt to Spiegel International articles), Atlanticism is a powerful influence there.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 03:17:47 PM EST
[ Parent ]
Alexander:
a pseudo-hip, informal style

Add American, in idiom and spelling.

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 10:01:44 AM EST
[ Parent ]
In the online English version. Alexander presumably picks it up at a newsstand in the German print version.

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 Wed Feb 24th, 2010 at 10:06:25 AM EST
[ Parent ]
I don't think the German and English versions should be considered as identical, for sure. I thought we were talking about the English-language version here.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 10:08:51 AM EST
[ Parent ]
I think we should do more to compare them side-by-side... Though even the choice of topics to cover must be different - and that points to an interesting question, what does it do to our own coverage of the European public sphere that we only excerpt Spiegel online (http://www.spiegel.de/international/) and very little of Spiegel (http://www.spiegel.de/) in the Salon as well as in diaries? Similarly for other English-language publications from non-english-speaking countries.

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 Wed Feb 24th, 2010 at 10:18:50 AM EST
[ Parent ]
I'm really interested in what English language publications there are from non-English countries. I've looked for them and haven't found much available. What there is usually consist of rudimentary snippets.

I sometimes use Google Translate on non-English publications but the results of that aren't very satisfactory.

by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 10:24:19 AM EST
[ Parent ]
Make this a diary asking for links by country.

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 Wed Feb 24th, 2010 at 10:28:35 AM EST
[ Parent ]
I think that any online publications that are done in English are probably making a conscious effort to attract American readers, e.g The Guardian Unlimited.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 10:12:31 AM EST
[ Parent ]
Not to the point where their editorial style is openly American.
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 10:15:50 AM EST
[ Parent ]
Can you give me some examples of online publications in English that present an editorial POV that is distinctly counter to mainstream American views? I certainly would not describe The Guardian that way.  
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 10:20:21 AM EST
[ Parent ]
I can think of a few candidates...



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 Wed Feb 24th, 2010 at 10:27:28 AM EST
[ Parent ]
I didn't know about France24. That looks interesting. I had looked at the others on occasion. They are the type of thing that I was describing as being pretty rudimentary.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 10:37:00 AM EST
[ Parent ]
There is more:

And so on... Most large newspapers have an online English edition.

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 Wed Feb 24th, 2010 at 10:43:22 AM EST
[ Parent ]
Do you really think that the Jerusalem Post is counter to the American mainstream?
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Feb 24th, 2010 at 11:39:36 AM EST
[ Parent ]
LOL!
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 11:43:34 AM EST
[ Parent ]
No. That comment was properly a reply to this.

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 Wed Feb 24th, 2010 at 11:57:01 AM EST
[ Parent ]
France24 is available, a component of US cable TV programming mix. Where a firm has identified a substantial segment of its market is ESL, the delayed, time-limited feed may be bundled with other foreign language programming (e.g. Nigerian TV, RA, RI, BBC America, etc) in "basic" or "essential" SLAs. Where a firm has identified a substantial profit margin by discriminatory pricing of foreign language programming, subscribers pay a premium (20%-150%) per channel.

This observation apart from MSM content versioning by geographical market of print and web content.

Diversity is the key to economic and political evolution.

by Cat on Wed Feb 24th, 2010 at 12:33:24 PM EST
[ Parent ]
I was startled a few years ago to find what The Guardian had turned into. Mainstream American POV, indeed.

I don't usually read editorials (as opposed to opinion pieces) in any newspaper, but as far as opinion and reporting go, I'd say that The Independent goes significantly more out of the US orbit than The Guardian does. The fact alone that they have Patrick Cocburn (who reports about the Middle East keeping true to his family's left-wing tradition) and Robert Fisk writing for them leads to that result. I'm not aware of The Independent distancing itself from neoliberal orthodoxy however, although I haven't really investigated.

From what I know, the best "examples of online publications in English that present an editorial POV that is distinctly counter to mainstream American views" are actually American.

For US foreign policy TomDispatch (invaluable, has a left-liberal point of view with an emphasis with what the military is up to) and Antiwar.com (American libertarian POV, i.e., both the warfare AND the welfare states are bad, for the same reasons; unlike TomDispatch, has daily news coverage).

The premier American leftist Web site with daily (except for Sunday) commentary is CounterPunch, which the mainstream (e.g., DailyKos) makes great efforts to marginalize. Up until about five years ago, it had the occasional "far out" radical piece, but now just about everything that appears in it strikes me as fairly reasonable.

There are a multitude of other left-leaning sites, but they tend to be more doctrinaire and "idealistic" than CounterPunch, so I never visit them anymore, and won't mention them.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Wed Feb 24th, 2010 at 11:48:54 AM EST
[ Parent ]
The limitation I find in almost US publications, whatever their position on the political spectrum, is basic myopia that begins on the beeches of California and New Jersey. 30 years ago it was rude for the US to think that it was the only place on the globe that mattered. Today that is a seriously delusional outlook.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 11:55:00 AM EST
[ Parent ]
Have you tried the Nation? Pacifica Radio? Counterpunch? Mother Jones?

It's not true of a lot of left leaning journals and radio journalism.

by Upstate NY on Wed Feb 24th, 2010 at 02:44:08 PM EST
[ Parent ]
I agree about Antiwar and Counterpunch which are my main English-language sources (with Guardian/Independent for daily news, and talkingpointsmemo.com for more detailed US info). Otherwise my main sources are non-English: these days Süddeutsche, Repubblica, and Ha'aretz (alternating between the Hebrew and English version).

Does anybody get the printed version of Counterpunch? I wondered a while back whether the additional material would be worth paying for, but then they went into their global-warning denial phase (fortunately over) and I stopped thinking about it at the time.

by gk (gk (gk quattro due due sette @gmail.com)) on Wed Feb 24th, 2010 at 12:09:30 PM EST
[ Parent ]
I'll have to start visiting Süddeutsche. I stopped keeping abreast of German news sources, largely for the reason Richard raises in this sub-thread.

I unintentionally let my subscription to the CP newsletter lapse, and haven't brought myself around to renewing it. (I must say I've got out of the habit of reading printed magazines, as opposed to books, even for those to which I still have subscription.)

I'm intrigued by Paul Craig Roberts' new book "How the Economy Was Lost", advertised on the CP Web site. He's a supply-sider and worked in Reagan's Treasury Department, but in resent years he's been a good critic of outsourcing.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns

by Alexander on Wed Feb 24th, 2010 at 12:47:15 PM EST
[ Parent ]
(I must say I've got out of the habit of reading printed magazines, as opposed to books, even for those to which I still have subscription.)

Same here. I have subscriptions to, and read, the TLS and NYRB. When in Germany, I sometimes pick up the SZ, and when in France, I always get Le Canard enchaîné. I sometime get Repubblica or Manifesto in Italy, but that's about it,

by gk (gk (gk quattro due due sette @gmail.com)) on Wed Feb 24th, 2010 at 01:16:09 PM EST
[ Parent ]
Ha'aretz (alternating between the Hebrew and English version)

How do they differ in topical coverage, editorial line, etc?

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 Wed Feb 24th, 2010 at 01:25:38 PM EST
[ Parent ]
The Hebrew has more general world news, of course.

I've posted a few examples of differences in the past, but it's sometimes hard to tell whether the differences are simply due to the Hebrew having been updated, while the English was not. The only really blatant example I can recall is when Marek Edelman died, and the English version cut out all reference to his anti-Zionist views and the fact that Israel generally ignored him as a result. But the next day Moshe Arens wrote a very warm appreciation of him (including all the controversial issues), and this got translated.

The one exception is Beni Ziffer, a literary editor for Ha'aretz. He mostly writes for his blog, that, like all the other blogs are not translated. If you want to see wholesale slaughter of sacred cows, this is the place. Usually one can characterize him as being on the far left, but he sometimes takes on the left as well. I always read his columns, which are highly entertaining, even when I don't agree with him.

by gk (gk (gk quattro due due sette @gmail.com)) on Wed Feb 24th, 2010 at 01:35:31 PM EST
[ Parent ]
Greek instability now spreading to the private sector
Greece's financial instability is spreading to private-sector banks. The Wall street Journal reports that  Fitch Ratings downgraded Greece's four major banks to triple-B, or two notches above "junk" status and  characterized its outlook for Greek banks as "negative." The main worry is that public austerity measures spread quickly into the Greek economy, lowering demands for loans and cutting into bank profits and that banks will find it more difficult in the current climate to raise money.

Good to see the American ratings agencies doing a serious job of work. Where were they on American mortgage-backed securities?

by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 03:01:56 AM EST
These banks along with Austrian banks are exposed hugely to the same exact countries in the Balkans. Something like 50% of all Greek and Austrian loan are in the Baklans.

If the Greek banks pull out of there, the Austrian Banks will be left with a severely weakened Balkan economy.

In some of those countries, I read that 15% of the economy--the very jobs--are due to investments from Greek banks. You'll have additional exposure.

So, it's not only the Spanish, Swiss and German banks that are exposed because of their investments in Greece, but now you have knock-on effects of Greek banks exposed due to Greek austerity measures, and this exposure creates a new reality in the Balkans, where countries such as Austria are heavily invested.

by Upstate NY on Wed Feb 24th, 2010 at 02:47:51 PM EST
[ Parent ]
This is the kind of global interlocking that means that you can't separate the euro crisis from the global crisis.
by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 02:52:52 PM EST
[ Parent ]
is French-owned (not that it behaves much differently from the others)...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:21:23 PM EST
[ Parent ]
Fitchtre!
by afew (afew(a in a circle)eurotrib_dot_com) on Wed Feb 24th, 2010 at 04:32:12 PM EST
[ Parent ]
Axel Weber hits out at Blanchard
Kathimerini writes that Standard & Poor's might downgrade Greece yet again next month from the current BBB+ rating, on the basis of risks to growth that could jeopardise the country's stability. The rating agency said it would downgrade depending on the public reactions to the government's austerity programme. S&P is quoted as saying that the downside risks to growth would increase the necessity for further fiscal adjustment, which in turn would raise doubt about the feasibility of the country's ambitious deficit reduction efforts.

Meaning: neolib doctrine states that cutting wages and social redistribution provides growth and stability. If workers complain, ratings agencies will make matters worse.

Again, these are the agencies that rated triple A piles of stinking crap American MBSs, and are now threatening to break a country unless the government clamps down on protest.

Next stop, bring back the colonels?

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 25th, 2010 at 04:09:19 AM EST
[ Parent ]
It is my strongly held opinion that the rating agencies were criminally corrupt in their contributions to the great US financial debacle. It appears that they are going to get off scott free.
by Richard Lyon (rllyon@gmail.com) on Thu Feb 25th, 2010 at 09:05:45 AM EST
[ Parent ]
This paper by Bernard Lietaer - one of the architects of the Euro - plus collaborators, is quite interesting

Is our monetary structure a systemic cause for financial instability

Lietaer's proposed solutions all involve central issuers for alternative or complementary currencies because he envisages that money is a credit object rather than a credit relationship. He is demonstrably wrong IMHO, since wherever a barter system incorporates credit then the result IS a monetary system. The Swiss WIR credit clearing union has demonstrated this empirically since 1934.

Centralisation of issuance brings us to TBG's power relationship point, and is the reason why I see the evolution of decentralised Peer to Peer Finance as not only a change in financial architecture but also in the architecture of power relationships.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Feb 24th, 2010 at 06:58:57 AM EST
The magnitude of which is truly massive. Source: El País (in Spanish):
  • Spain's GDP was €1.05bn (down more than 4% from the previous year)
  • Government revenue was 10.1% of GDP
  • Government deficit was 9.5% of GDP (3.86% in 2008, superavit of 2.2% in 2007)
  • Tax revenue was down 17.1% from 2008 (in turn 18.2% lower than in 2007), and is 24% lower than budgeted (!)
(all 2009 figures, 2008 figures from the lin in El País' piece)
This is brutal.

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 Wed Feb 24th, 2010 at 08:31:23 AM EST
GDP was €1.05tn, sorry.

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 Wed Feb 24th, 2010 at 08:43:49 AM EST
[ Parent ]
Here's an interesting perspective from Reuters.

Germany quietly gains from euro zone crisis

The crisis, triggered by market concerns about Greece's ability to fund its fiscal largesse, gives Berlin more leverage to press for public finance discipline across the euro zone.

Greece's problems with a budget deficit that was four times the European Union limit in 2009, have also bolstered demand for German bonds and thereby lowered Berlin's borrowing costs, while weighing on the euro to the profit of German exporters.

Such benefits, easily lost sight of amid German complaints at Greek behavior, may stiffen some Germans' reluctance to help Greece, though if Athens' debt woes start to threaten the euro zone's future Berlin will likely act to save the currency club.

Mass-selling daily Bild led a recent round of complaining, saying this month the "cheating, profligate Greeks" should be kicked out of the euro zone. German ministers have, in public, stuck firmly to the line that Athens must sort out its own mess.

"The Germans have been very clever over the last 20 years to pretend that monetary union was a huge problem for them," said David Marsh, author of 'The Euro: The Politics of the New Global Currency'.

by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 12:30:31 PM EST
like typical British "divide and rule" by making claims that one continental European country has tried to shaft its neighbors.

Germany actually suffered from the euro in the early days, as it entered the eurozone at an overvalued rate of the DM (but devaluation was unthinkable, of course) following the reunification. Of course, it was Germany workers who paid for that through stagnating wages, the DM mystique allowing the authorities to impose severe neoliberal "reforms" to cut costs and regain competitivity. Except that this time the fruits were not shared.

And still aren't, as wages are still being constrained today.

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

by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 04:25:55 PM EST
[ Parent ]
Deutsche Bank hasn't distinguished itself for being particularly beneficial to the Eastern European countries it has invested in.

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 Wed Feb 24th, 2010 at 04:28:50 PM EST
[ Parent ]
How is this related to my comment? And where did Deutsche Bank invest in any meaningful fashion?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 05:22:27 PM EST
[ Parent ]
It sounds a bit more complicated than that to me. There are some basic ways that Germany's economic situation seems to be balanced in an opposite direction from the Mediterranean members of the EMU.  Trying to claim that everybody is just one big happy family that are being picked on by those nasty old Anglosaxons seems a bit simplistic to me.

Germany's export economy has definitely benefited from having its largest markets protected from exchange rate risk.

by Richard Lyon (rllyon@gmail.com) on Wed Feb 24th, 2010 at 04:54:27 PM EST
[ Parent ]
were largely protected from exchange risk since the 80s or earlier as these countries slavishly followed Bundesbank policies.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Feb 24th, 2010 at 05:21:27 PM EST
[ Parent ]
They actually went down almost 10 percent in real terms.

Here in France we had stagnating wages...in Germany they went down.

This is the thing the countries in line for a bailout need to understand...German workers paid for currency union, not so much the bosses, so unsurprisingly it will be easy, especially in the case of the Greeks who've spent a decade with a lying government they re-elected,  to turn German workers against any bailout of folks in other parts of Europe where, as in Greece let's face it, the weather isn't so bad even if the women are a little hairy, and where wages have gone up quite a lot in a short period of time.

Certain parts of Europe need to get realistic about wages if we are going to have proper convergence. That's for the local elites to manage. But we also need to make sure there is a service minimum assured by each Eurozone member state as regards social services and, if need be, both provide subsidies and also (in the case of the Greeks I am thinking) competent administrators.

And, in the case of member states who have done no wrong, whose debt to pib is still below target and who are still having a hard time resecting the GSP, we need to plow money from Brussels into those economies. It is unacceptable that Spain, which from a macro perspective, has been a paragon of virtue, suffer 20% unemployment. Period.

And, since I know some here are a fan of DSK, they should listen to his chief economist and accept that, as the left has been saying for a decade, it is time to increase the inflation target, in the case of the Eurozone, double it, from 2% to 4%.

 

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Wed Feb 24th, 2010 at 05:47:22 PM EST
[ Parent ]
Axel Weber hits out at Blanchard
Olivier Blanchard's discussion paper on the macroeconomic consequences of the crisis has hit the ire of Germany's monetary establishment. Axel Weber writes in Financial Times Deutschland that the IMF was playing with fire, and that it was not only wrong, but also careless to propose an increase in the inflation target from 2 to 4 per cent. Considering that this proposal comes from the IMF, it might endanger the public trust's in price stability. He also said Blanchard, while considering the risks, played down the costs of the increase in the target. Weber makes the point that it not only matters what a proposal contains, but when and how it is made.

Axel Weber is hot-tipped to follow Trichet at the ECB.

by afew (afew(a in a circle)eurotrib_dot_com) on Thu Feb 25th, 2010 at 03:52:51 AM EST
[ Parent ]
Just what we need.

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 Thu Feb 25th, 2010 at 04:18:09 AM EST
[ Parent ]
Axel Weber is hot-tipped to follow Trichet at the ECB.

Heaven help us all.

The last thing we need is another German or Dutch central banker.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu Feb 25th, 2010 at 04:21:18 AM EST
[ Parent ]
They skillfully lined up all their ducks...

EurActiv: Portugal wins coveted ECB seat (16 February 2010)

Portugal puts Germany at ECB helm

...

The two candidates known to be interested in succeeding Trichet are Weber, president of the German Bundesbank, and Mario Draghi, governor of Banca d'Italia, who are both members of the ECB's governing council (see 'Background').

For the sake of geographical balance, if the vice-president comes from southern Europe, the ECB president cannot be a southerner too. Though this is not an official procedure, it is an unwritten convention, say sources close to the Council.  

This would automatically exclude the popular Italian candidate Mario Draghi from the race for the presidency and clear the way for Weber's appointment. Officials close to the negotiations also say that Italy was not in favour of Constancio's appointment for this very reason.



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 Thu Feb 25th, 2010 at 04:31:30 AM EST
[ Parent ]
interested.

We could do worse than Finland's central bank chief Liikanen, who is also well connected in Brussels.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu Feb 25th, 2010 at 04:50:39 AM EST
[ Parent ]
A Liikanen speech for directors of EU affairs in Finland 2006

A competitive and growing economy makes it easier to build social cohesion. When Europe grows faster, we all benefit. Competetiveness is a precondition for a cohesive society. But also, a society that guarantees equal opportunities for education, and along with that, for active participation in the labour market is more highly competetive.

When there is high-level EU competence within the single market, there is broad national competence in the social dimension. Policies should be articulated so that citizens know who is competent and accountable in each of the different areas.

Competetiveness requires vast efforts in R&D. But it is not simply a question of more spending. It is about creating platforms and consortia where European companies and research centres work together and create common, open standards, whether formal or de facto. And so they create markets. This is the basis for innovation and growth. If we are not strong in Europe, we cannot be strong globally.

The EU has had lengthy discussions on better regulation. And with good reason. We must not overregulate and create excessive costs for enterpreneurs.

At the same time we must remember that 25 different national regulations with 25 different national implementations may be the most excessive form of over-regulation. The bottlenecks must be removed. Sometimes you can do this through competition measures, sometimes you need a simple legislative act.

People are concerned about security. We need to respect fundamental rights, to be strong on anti-terrorism, have a more common solution to asylum and migration policies - and so on.

The Commission has promised an initiative that improves decision taking and accountability in these vital areas. I am sure that the existing Treaties include some possibilities. The initiative will be very welcome.

In today's world, the need is great for an effective and efficient Europe in the global arena. The Commission has also promised a new approach to external competetiveness. We must work for free trade, and parallely insist on open access to all markets. We must be open to research cooperation and parallely to protection of intellectual property. We have a right to defend our legitimate interests. But we must remember that to reject protectionism is also in our vital interest.

Jean Monnet was often criticized, often said to be overly optimistic.
His reply was. " I am not optimistic. I am determined"

This is a good guideline for our actions as we more forward.



You can't be me, I'm taken
by Sven Triloqvist on Thu Feb 25th, 2010 at 05:14:25 AM EST
[ Parent ]
What is competitiveness?

For Germans, it's the worlds finest engineering and technology.

For Saudis, it's natural resources.

For Greeks, it's tourism and shipping.

Since we're ostensibly been talking about Greek competitiveness, there's no doubt that Greeks can improve at what they do best, that is, make a better tourism product.

When I hear the word competitiveness coming from a person in a country with high-technology, I imagine people building the best machines that will make computer chips smaller. But surely that can't be the only gauge of competitiveness. People will go on vacation, people will need someone to ship food and iron ore, people will be in need of the most agragrian age-old services we can think of, and people will still want to smoke dope. If everyone bought their cannabis from the same place, that country would be filthy rich.

by Upstate NY on Thu Feb 25th, 2010 at 02:16:33 PM EST
[ Parent ]
Mmmm, gyros...!

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 Thu Feb 25th, 2010 at 04:21:59 PM EST
[ Parent ]
in European cup play.

Leave the retsina at the border though, thank you.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu Feb 25th, 2010 at 05:02:33 PM EST
[ Parent ]
Except for the national team in the 2004 Eurocup...

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 Thu Feb 25th, 2010 at 05:08:51 PM EST
[ Parent ]
They must've cheated in some way like their government did with the national accounts...maybe played some women...Greek women are damn tough...probably that's it.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Thu Feb 25th, 2010 at 05:31:15 PM EST
[ Parent ]
And Kalamata olives...

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 Thu Feb 25th, 2010 at 05:09:22 PM EST
[ Parent ]
Actually, retsina has been replaced by grape wine in Greece.

It's now the equivalent of West Virginia moonshine, except for the kids on holiday who slam it with tequila and lemonade.

by Upstate NY on Thu Feb 25th, 2010 at 06:01:21 PM EST
[ Parent ]
I'm sleeping easier already.

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Fri Feb 26th, 2010 at 02:18:27 AM EST
[ Parent ]
Considering that this proposal comes from the IMF, it might endanger the public trust's in price stability.

The public right now wants jobs, not price stability.

Too bad the ECB, unlike the Fed with its dual mandate, has only a price stability mandate. Too bad, then, that the EU doesn't have a fiscal and employment policy worth its name.

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 Thu Feb 25th, 2010 at 04:35:38 AM EST
[ Parent ]
But our public is not his public. His public is the investor class.

Of course there is a reason for this bias to price stability over all else, and it comes straight from the Buba. He's simply another in a long line of German central bankers who've made the rest of Europe suffer for 20 years.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu Feb 25th, 2010 at 04:53:15 AM EST
[ Parent ]
OTOH the ECB is ostensibly independent (by treaty) and thus should not  be under the influence of national governments nor other EU institutions. It is the central bank for the Eurozone, not the EU.

You can't be me, I'm taken
by Sven Triloqvist on Thu Feb 25th, 2010 at 04:55:07 AM EST
[ Parent ]
Hovever,
As long as the financial stability role of central banks remained in the background, the notion of central bank independence appeared to have something to recommend it.

...

Once central banks get involved in lender-of-last resort operations, recapitalisor-of-last-resort operations and other rescue operations of banks and other financial institutions deemed to big, too complex, to international, too interconnected or too politically well-connected to fail, centrals banks and central bankers become normal political actors, indeed partisan political actors.  They should not be surprised to be treated as such.

...

It is unavoidable, indeed desirable, that this shambolic mess has become a major political issue.  We are no longer talking about technocratic interventions by disinterested guardians of the public interest.  We are talking interest group politics, capture and partisan behaviour.  When the cake is made smaller and its distribution made more unfair by the actions of regulators, central bankers and unelected government officials, accountability is required.

(Willem Buiter's Maverecon: Central banking as partisan politics, June 27, 2009)

Also What's left of central bank independence? (May 5, 2009)

There can be little doubt that the ECB is the central bank with the highest degree of formal or legal operational independence. Since it also sets its own operational objectives (medium term HICP inflation below but close to two percent per annum ), it can also be characterized as the most independent central bank, when operational independence and target/goal independence are taken together.  The ECB's operational independence and its mandate are enshrined in the Treaty establishing the European Community and the associated Protocol. These can only be amended through a Treaty revision requiring the unanimous consent of the EU member states (currently 27 in number).

...

Every time a central bank makes a loan at the discount window or engages in a reverse repo secured against private collateral, it takes credit risk (default risk).  In the Euro Area, the ECB even takes credit risk when in accepts the Treasury debt of some of the Euro Area member states as collateral in its lending operations.  There is no guarantee that cross-border fiscal solidarity in the Euro Area will ensure that sovereign debt issued by fiscally incontinent member states will be made good by Germany and other member states with deep pockets.

...

It is a mistake for central bankers to express, in their official capacities, views on what they consider to be necessary or desirable fiscal and structural reforms. Examples are social security reform and the minimum wage, subjects on which Alan Greenspan liked to pontificate when he was Chairman of the Board of Governors of the Federal Reserve System, and Ben Bernanke's tendency to lecture on everything, from equality and opportunity to teenage pregnancy. It is not the job of any central banker to lecture, in an official capacity, the minister of finance on fiscal sustainability and budgetary restraint, or to hector the minister of the economy on the need for structural reform of factor markets, product markets and financial markets. This is not part of the mandate of central banks and it is not part of their areas of professional competence.

Central Bank independence and inflation targeting are ideological and, at present, counterproductive.

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 Thu Feb 25th, 2010 at 05:08:04 AM EST
[ Parent ]
Perhaps ideological, but, like an independent judiciary, when does principle become ideology? I'd rather have fully independent central banks than a system like the Fed - even if they are temporarily 'counterproductive'. Politics and business are both, as we often discuss, expediences.

Besides there are other financing institutions within the EU such as the EIB and the EIF that can operate in a different way than the ECB.

You can't be me, I'm taken

by Sven Triloqvist on Thu Feb 25th, 2010 at 05:26:53 AM EST
[ Parent ]
BTW the ECB is 'accountable' to the European Parliament (and the Commission, the Council and the Council of Europe). The EP can question the annual report and submit opinions to the ECB executive board.

You can't be me, I'm taken
by Sven Triloqvist on Thu Feb 25th, 2010 at 05:31:31 AM EST
[ Parent ]
yes.

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 Thu Feb 25th, 2010 at 05:46:15 AM EST
[ Parent ]
Over on this side of the Atlantic an "Independent Central Bank" means in practice "Support the Major Money Market Financial corporations and to hell with everyone else."

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Thu Feb 25th, 2010 at 03:15:48 PM EST
[ Parent ]
Well, a significant portion of Club Med seems to share these feelings. Almunia has been rather open about what he feels is a systemic loss of competitiveness as a result of Spain entering the eurozone, so at the highest levels of the EU, this is not a foreign idea.
by Upstate NY on Fri Feb 26th, 2010 at 11:14:53 AM EST
[ Parent ]
I was going to cross post my diary here also from: PIIGS and a Spurious Correlation. But it looks like the HTML is going to be too much hassle to correct like can't use  target="_blank".

Rutherfordian ------------------------------ RDRutherford
by Ronald Rutherford (rdrradio1 -at- msn -dot- com) on Thu Feb 25th, 2010 at 03:05:26 PM EST
That is an interesting diary. It does a nice job of pulling together several issues that are tied to the more general matter of EU financial problems. Might I suggest that you do a simple diary here with a link to that diary. I think it deserves more attention and discussion than it might get by being buried at the end of what has developed into a complicated brier patch of multiple topics.

 

by Richard Lyon (rllyon@gmail.com) on Thu Feb 25th, 2010 at 04:41:53 PM EST
[ Parent ]


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