Europe's Web of Debt - Graphic - NYTimes.com
$146bn rescue
What alternatives? Default?
The way things are going, it looks quite possible that Greece will spiral into domestic as well as debt crisis, and be forced to take emergency measures. And that makes me think of Argentina in 2001. At the time, Argentina had the convertibility law, supposedly permanently pegging the peso to the dollar — and that was supposed to be irreversible for the same reasons the euro is supposed to be irreversible now. Namely, to repeal the law would require extensive legislative discussion, and any such discussion would set off destructive bank runs, hence there was no way to undo the fixed exchange rate. But by late 2001 Argentina was a mess, with many emergency measures in place in an effort to contain the situation. These included the corralito , severe restrictions on bank withdrawals to contain bank runs — and one unintended consequence of all this was that the bank runs argument against suspending convertibility became moot.
As the debate over possible departures from the euro heats up, there seems to a lot of confusion over the possible uses of devaluation. The main argument I’m hearing goes like this: since Greece’s debt is in euros, devaluing won’t relieve the debt burden — so it won’t help. But that’s missing the point. True, devaluation wouldn’t reduce the debt burden. But it would reduce the macroeconomic costs of fiscal austerity. May 1, 2010, 8:47 am
Devaluation is good!
... but Greece couldn't
Households and firms anticipating that domestic deposits would be redenominated into the lira, which would then lose value against the euro, would shift their deposits to other euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments, leading to a bond-market crisis. If the precipitating factor was parliamentary debate over abandoning the lira, it would be unlikely that the ECB would provide extensive lender-of-last-resort support. And if the government was already in a weak fiscal position, it would not be able to borrow to bail out the banks and buy back its debt.
Capital controls ?
My colleague, Rebecca Wilder, recently concluded a "Tale of Two Recoveries: Malaysia vs Germany " which brought back memories of my own time in the Far East and some of the advisory work I did for the government of Malaysia during the financial crisis of 1997/98. Before the historical revisionists get hold of this period, it is important to note that Malaysia’s initial response to the crisis was a textbook illustration of how to exacerbate, not alleviate, a financial crisis. Of course, it was a consequence of taking stupid and economically ruinous advice from the International Monetary Fund, which is to economic development what John Meriwether is to asset management. If anybody had any doubts, those of us who observed the crisis first hand realized that the IMF and the so-called “Committee to Save the World” were more interested in saving the first-world banks who were exposed than caring about the local citizens who were scorched by harsh austerity programs.
At the time, the IMF prescription for Asian crisis countries was all about austerity to recover market confidence. I was relatively orthodox at first; but I eventually become convinced that we were witnessing self-fulfilling speculative attacks. And that made a strong case for a “curfew” — temporary capital controls to stop the panic.
... no help for Greece
Right now all the focus is on the budget, which is the action-forcing event. But Greece, like Spain , experienced a large real appreciation during the years of bubble finance — and now it faces a prolonged era of grinding deflation as it works its way back to competitive costs. IMF February 11, 2010, 6:41 pm
Deflation last solution
Same as Russia 98?
With Russia, the successive bailout proposals were quickly judged by the markets as too little, too late — as happened with the Greek crisis before the latest announcement. “You need speed to put out a forest fire,” , who was the lead Russian negotiator with the International Monetary Fund in the 1998 crisis, said in written responses to questions about the Greek bailout. In Greece, the fund and initially proposed a bailout of 110 billion euros, or $139 billion, last week. After markets reacted skeptically, European finance ministers met over the weekend and proposed a nearly $1 trillion financial support package for Greece and other weak euro zone economies. They proposed forming an investment fund guaranteed by the governments of richer European Union countries like Germany and France that would also draw on monetary fund money. Edmond S.
The Greek fiscal problem has been turning into a death spiral, in which fear of default is driving up borrowing costs, making default even more likely. The EU has now, in effect, given up on trying to restore market confidence; instead, it’s going to break the death spiral by main force, providing Greece with all or almost all the financing it needs directly, at an interest rate much lower than the market was demanding. The plan still requires savage austerity on Greece’s part, and ensures a terrible few years for the Greek economy. But it does rise to the scale of the problem, and it might work.
Greek plan might work...
Or not?
The drop in public spending, along with the psychological impact of the crisis, will provoke a profound recession that will deepen the deficit. This, along with the social and political impact of the crisis, will undoubtedly prevent the Greek government from delivering on its commitments. What will be done then? The IMF has the option of suspending its disbursements and forcing a default, as it did with Argentina.
Deflation awaiting Eurozone?
But look at the similar wage-cutting behavior occurring across the European Union, especially in the Eurozone hopefuls (Latvia, Lithuania, and Estonia are preparing to adopt the euro in coming years). The battle for exports has begun. Compared to the same period in 2008, Q1-Q3 2009 annual hourly labor costs growth are down 4.9% in Lithuania, 0.8% in the U.K., and 0.5% in Estonia.
Contagion risks
The Greek government, helped by the market threat of a near term collapse, appear to have strong armed the other eurozone countries into a generous package without making efforts to change seriously their (Greek) fiscal policy. This is good for near term calm, but it does not solve any of the inherent problems now manifest in the eurozone . Often assistance packages of this nature just help “smart money” to get out ahead of a default. This could be the case here; 40-45 billion euros total money could last roughly one year. Both Russia and Argentina got large packages in the late 1990s but never regained access to private markets, so eventually everything fell apart.
IT'S shaping up to be an ugly day for European markets, which is making for an ugly day for American markets . The big European indexes were off 2% to 3% on the day, and the euro fell to its lowest level against the dollar in over a year. The decline is likely related to renewed increases in yields on government debt across southern Europe. These had fallen from recent highs in the wake of the weekend announcement of a €110 billion package for Greece. But for the moment, it appears that European leaders and the IMF have not sufficiently ring-fenced the Greece crisis. Contagion looms .
Contain, contain, contain!
Integrate more with...
... a federal eco policy...
... or better off w/o Euro...
... or accept crisis now and then...
PED, do you have Roubini's paper in english? He's actually prediciting somber things going forward.... by wallen Jun 8
He's one of the very few economists (he teaches at NYU) that predicted the subprime crisis. And he's called "Dc Doom" in US newspapers. Here's an interview (in french, sry about that http://www.lemonde.fr/economie/article/2010/06/07/nouriel-roubini-nous-sommes-dans-une-zone-dangereuse_1368943_3234.html) by PED Jun 8
??? dunno know him but always interested to discover new perspectives ! any link ? by laetsgo Jun 8
Have you already checked Roubini's latest papers? The extracts I read were rather insightful on the situation :-) by PED Jun 8
talking about this, the latest Sapir I just sent you is quite illuminating...btw, i wrote about Spain being downgraded on May 5th...it happened rather quickly ! by laetsgo Jun 8
From a pure eco perspective, I simply mean integration whatever direction it takes. Once the integration is done, more or less social is then a political decision happening after a democratic debate. And even if you give that direction at the begining, it's not a guarantee that it will always be the case. by wallen May 5
depends on which integration you're talking about ! if it's only financial, people are definitely less and less favouring it (and it'll be even worse when the crisis jumps to portugal and spain !) - but if it's social (i mean aiming to increase social protection, and not downsizing/grading the standards), that'd be a chance to begin anew by laetsgo May 5
I really think that Europe will have very though choices to make on the euro in the coming years. Abandon euro or integrate economic politicies ? The Lisbon treaty referendum shows that the people are not really favoring more integration. by wallen May 5
There is an emerging consensus among economists of different school of thoughts on the topic. We're coming back to the debate of the 90's on the euro and its costs. by wallen May 5
merci ! bien sûr que ça m'interesse :-) by laetsgo May 5
