LRB · John Lanchester · Once Greece goes… The economic crisis in Greece is the most important thing to have happened in Europe since the Balkan wars. That isn’t because Greece is economically central to the European order: at barely 3 per cent of Eurozone GDP, the Greek economy could vanish without trace and scarcely be missed by anyone else. The dangers posed by the imminent Greek default are all to do with how it happens. I speak of the Greek default as a sure thing because it is: the markets are pricing Greek government debt as if it has already defaulted. This in itself is a huge deal, because the euro was built on the assumption that no country in it would ever default, and as a result there is no precedent and, more important still, no mechanism for what is about to happen. This is, at the moment, the best-case scenario and the current plan A.
There is a good moment in one of the otherwise terrible Star Trek movies, in which Spock quotes an ancient Vulcan proverb: ‘Only Nixon could go to China.’ 30 June. A Bluffing Game: European Politicians in Denial as Greece Unravels - SPIEGEL ONLINE - News - International. The euro will face bigger tests than Greece. George Soros | Financial Times | February 21, 2010 Otmar Issing, one of the fathers of the euro, correctly states the principle on which the single currency was founded. As he wrote in the FT last week, the euro was meant to be a monetary union but not a political one. Participating states established a common central bank but refused to surrender the right to tax their citizens to a common authority.
This principle was enshrined in the Maastricht treaty and has since been rigorously interpreted by the German constitutional court. The construction is patently flawed. The European Union was brought into existence by putting the cart before the horse: setting limited but politically attainable targets and timetables, knowing full well that they would not be sufficient and require further steps in due course. The same applies to the euro. The original construction of the euro postulated that members would abide by the limits set by Maastricht. Copyright The Financial Times Limited 2010. Vested interests in Greek debt: German banks and US bond insurers « O M-N O M-N O M I C A. Greece needs to default. The debt is unpayable: the longer they continue to service the debt, the more the Greek economy becomes too impoverished to ever repay. However, expect certain vested interests to fight any debt default every step of the way.
Firstly, the banks in Germany and elsewhere that hold Greek government debt. Currently these banks are making speculative profits by valuing the Greek bonds at above their current market value (the current market value is much lower due to the widely perceived possibility of default). The European Central Bank currently accepts Greek debt at the nominal, higher value, as if Greece was a solvent economy. So the value of Greek debt is completely up in the air–entirely dependent upon how long can the IMF and Greek riot police contain the popular uprising against austerity and unsustainable debt service.
As long as they do, the banks in Germany and elsewhere continue to reap speculative profits. Like this: Like Loading... Greece default 2012. Understanding the Real Implications of a Greek Default. Papandreou to Merkel: “The keys are in the mailbox.” Just like an “underwater” homeowner, the Greeks are simply walking away from their obligations and telling their creditors, “It’s yours.” While it’s true that the Greeks haven’t actually walked away yet, Prime Minister George Papandreou walked away today…and that’s the first step. “Wait a minute!” You may be saying. “Didn’t the Greeks strike a bailout-salvaging political deal over the weekend?
Didn’t Papandreou agree to step down in order to enable an interim, power-sharing government to secure the EU’s 130 billion euro rescue package?” Absolutely, if you believe American or Northern European press reports. Papandreou did not step down to “make way for the rescue package.” No one wants to be the “austerity candidate.”
“It is no coincidence,” Ekathimerini continues, “that both times that Papandreou tried to throw away the burden of government were during widespread demonstrations and violence. But don’t pity the Greeks. Eric Fry. Greece's Choice -- and Ours: Democracy or Finance?) Which do you trust more: democracy or financial markets? Greek Prime Minister George Papandreou decided in favor of democracy yesterday when he announced a national referendum on the draconian budget cuts Europe and the IMF are demanding from Greece in return for bailing it out. (Or, more accurately, the cuts Europe and the IMF are demanding for bailing out big European banks that have lent Greece lots of money and stand to lose big if Greece defaults on those loans – not to mention Wall Street banks that will also suffer because of their intertwined financial connections with European banks.)
If Greek voters accept the bailout terms, unemployment will rise even further in Greece, public services will be cut more than they have already, the Greek economy will contract, and the standard of living of most Greeks will deteriorate further. If Greek voters reject the terms and the nation defaults, it will face far higher borrowing costs in the future. We’ve been here before, remember? The Math Behind The Greek Myth. The Greek January – September budget deficit was EUR 19.16bn versus 16.65bn same period last year (+15%).
This only includes the central government. The initial deficit target for 2011 was EUR 17bn. We blew past that after only 8 months. The revised target (July) is now 22bn (9.5% of GDP). Latest estimate from the Greek government: 8.5% deficit (19.5bn) for 2011 (instead of 7.6% or 17bn). Here’s a chart of the budget deficit (cumulative): You can see that 2011 pans out to be worse than 2010 (dashed line). Revenues are negatively impacted by the severe recession. While 2011 revenues are trending below 2010, expenses are trending higher. Despite all the austerity measures, Greece is still spending 150% of its revenues: Of course, the Ministry of Finance sees a reduction of the deficit to a miniscule 2.6% of GDP by 2014 as revenues rise and expenses come down: How is that possible?
I leave it up to you to decide if this is credible. As of June 30, Greek government debt stood at EUR 353.7bn. Models for a Greek Sovereign Default. I am on a plane - long-haul over the Pacific - and someone asked me to spell out what I thought would happen with a Greek sovereign default. As this is drafted on a plane it is designed to outline extreme views (you know the ones after two glasses of wine). If people want to explore more modest views that is for the comments. Still all options look bad. I see two broad variants - both of course stick most of the losses on Germany and France. Variant 1 - the Argentine option: Default and de-peg the currency. When Argentina defaulted not only did the government default but they forced a private default.
Likewise if you had a US dollar asset you got back Peso. The forced private sector default was necessary for Argentina. The same applies in Greece. The Argentine economy was doing quite nicely after the devaluation. If you were Greece you would take this option without hesitation. However this option has explosive implications for Europe. But now suppose Greece does pull this trick. John.