Euro Area

[Furunculus]

one thing is clear to me: the banks are in too much of a mess to be simply cut loose. This was true in '08 and it remains true now because substantially the same problem exists and has simply been moved from one place to another.

only problem is that western governments no longer have any spare money, or any good credit, with which to launch into round 2.0 of the bailout circus.

[phonicsmonkey]

only problem is that western governments no longer have any spare money, or any good credit, with which to launch into round 2.0 of the bailout circus.

I think Germany and France are creditors of sufficiently good standing to sit behind the eurozone debtors, if the political will were there. Which of course it is not.

[Furunculus]

I think Germany and France are creditors of sufficiently good standing to sit behind the eurozone debtors, if the political will were there. Which of course it is not.

france isn't.

and as you note there is no political will to subsidise non-family massively in perpetuity.

[phonicsmonkey]

france isn't.

and as you note there is no political will to subsidise non-family massively in perpetuity.

Germany and France in combination. Even better for them if others get involved to share the load.

As I've outlined here before there is no realistic alternative to their continuing to stump up the cash required to keep Greece afloat for the foreseable future (aka kick the can down the road and hope for something to happen to help them out).

Either they do so, or they let Greece default which will cause european banks to have to recognise huge losses and hold larger capital reserves against the bad loans, which in turn will kill off trade finance, world trade and impact global growth. Cue market panic!

Or they allow their precious Euro to break apart, Greece devalues and effectively defaults causing the same issues.

Or they create a political and fiscal union and issue Eurobonds to replace the entirety of eurozone sovereign debt. Goodbye Germany and France as sovereign countries!

[InsaneApache]

The will be war if they do that.

[phonicsmonkey]

The will be war if they do that.

Do you mean revolution? Because in order for them to create political union they would need (of course) the consent of governments which would be included. It would be practically impossible otherwise.

Of course that consent will not be forthcoming even if Germany and France were interested in doing so (which I do not believe they are). There is no desire among the public of Eurozone countries for closer political and fiscal union. The draft consitution was rejected en masse in 2005 and I don't believe events since then would have made people more welcoming of it!

Interestingly though, as respected and sensible an economist as Ken Rogoff believes this is what will be the outcome. Perhaps it goes to show why he is an economic and not a political commentator...or perhaps I am missing something important in my inexpert analysis.

[Furunculus]

Germany and France in combination. Even better for them if others get involved to share the load.

As I've outlined here before there is no realistic alternative to their continuing to stump up the cash required to keep Greece afloat for the foreseable future (aka kick the can down the road and hope for something to happen to help them out).

Either they do so, or they let Greece default which will cause european banks to have to recognise huge losses and hold larger capital reserves against the bad loans, which in turn will kill off trade finance, world trade and impact global growth. Cue market panic!

Or they allow their precious Euro to break apart, Greece devalues and effectively defaults causing the same issues.

Or they create a political and fiscal union and issue Eurobonds to replace the entirety of eurozone sovereign debt. Goodbye Germany and France as sovereign countries!

france does not have the leeway, if it commits to to much more liability on behalf of the eurozone it risks its own credit rating being downgraded.

Italy has just been downgraded, that however was expected, but the eurozone cannot afford to have the 'other' supporting pillar beside germany dissolve.

[InsaneApache]

There is no appetite for political union. If one is forced onto people, well look at Jugoslavia as a template for what happens when different cultures are forced together. Ironically the very thing that Monet and the rest of those idiots wanted to avoid.

[phonicsmonkey]

Interesting viewpoint in the Guardian, I think the comparison to Argentina is apt even if I do not agree with his conclusions.

http://www.guardian.co.uk/commentisf...-and-quit-euro

[Philippus Flavius Homovallumus]

Germany and France in combination. Even better for them if others get involved to share the load.

As I've outlined here before there is no realistic alternative to their continuing to stump up the cash required to keep Greece afloat for the foreseable future (aka kick the can down the road and hope for something to happen to help them out).

Either they do so, or they let Greece default which will cause european banks to have to recognise huge losses and hold larger capital reserves against the bad loans, which in turn will kill off trade finance, world trade and impact global growth. Cue market panic!

Or they allow their precious Euro to break apart, Greece devalues and effectively defaults causing the same issues.

Or they create a political and fiscal union and issue Eurobonds to replace the entirety of eurozone sovereign debt. Goodbye Germany and France as sovereign countries!

Default is what is going to happen saying, "there is no realistic alternative to their continuing to stump up the cash" misses the crucial point, neither the populace nor the national Parliaments will wear it. Nor should they.

What EVERYONE needs to consider is how to get on after Greece defaults and exits the Euro. once they have done that a loan to help rebuld their economy might be an idea worth considering, but it is a lot less atractive than it was in 2010. If we had allowed Greece to default in reality and then required them to actually collect their own taxes, after which providing money for recovery, we would be in a much better place than we are now.

Time to get real, the crisis is entering the Second Act and, like all good Tragedies, this is where it gets ugly.

[Louis VI the Fat]

Europe needs strong leaders who accept the consequence of the crisis. The electorate is restless, and is not willing to foot the bill any longer. Therefore, the EU needs to abolish neo-capitalism forthwith. It was always a recipe for disaster.

~~o~~o~~<<oOo>>~~o~~o~~

Switzerland last week pegged the Franc to the Euro. Currency fluctuations have been wreaking havoc on the Swiss economy. The Swiss crave the economic stability of an absense of currency fluctuations with your major trading partners.
To help them out, I vote we fasttrack Swiss EU and Euro membership.

The Swiss National Bank said Thursday it will
continue to keep short-term interest rates as low as possible and defend
the peg of the Swiss franc to the euro in order to counter the
currency’s appreciation resulting from inflowing capital in search of a
safe haven amid the Eurozone debt crisis.

http://www.forexlive.com/blog/2011/0...close-to-zero/

[Papewaio]

So Greece doesn't have the marbles to think their way out or The Marbles leftover to pay their way out.

[phonicsmonkey]

neither the populace nor the national Parliaments will wear it.

You may be right about that - if so it will constitute a failure of political leadership at least as bad as the one which has gotten us here in the first place.

What EVERYONE needs to consider is how to get on after Greece defaults and exits the Euro

Move all your investments to cash and prepare for a severe and prolonged global recession. It really is going to be that bad.

once they have done that a loan to help rebuld their economy might be an idea worth considering

Versus lending money to Greece now to prevent global economic armageddon? I fail to see why that is a preferable option.

If we had allowed Greece to default in reality and then required them to actually collect their own taxes, after which providing money for recovery, we would be in a much better place than we are now.

I agree that Greece should be required to fundamentally restructure its tax system in order to ensure government revenues are on a firm footing in future. One suggestion for how to do this is in the Guardian article I posted. But I think allowing Greece to default on its debts rather than stumping up the first set of bailout funds would have been as disastrous as letting it happen now, for all the reasons I have outlined above.

(EDIT: I should add that suddenly and sharply raising (or starting to collect) taxes while at the same time cutting government spending is not exactly the recipe for growth! And it's growth that Greece needs in order to service its debts.)

I don't think you fully appreciate the integral part the European banking system plays in international trade. Literally the only thing keeping the world economy in positive growth at the moment is trade between the developing and developed countries. This is largely financed by the lending of European banks.

These banks are currently holding a vast amount of European sovereign debt. Greek, Portuguese, Irish etc. Capital reserve requirements only require the banks to hold a certain amount of equity (read: cash) against these loans at present. Call it 25%, I'm not sure of the exact figure since Basel 2. This means they have to reserve 25% of the value of the loan as un-used capital. the other 75% can be used to capitalise other loans, for example trade finance and loans to businesses in Europe.

If the Euro sovereign loans go into default they are required to hold closer to 90% of capital against them. This will significantly impact their ability to make further loans. And the sovereign debt that was not Greek will drop dramatically in value, further impairing their balance sheets (or it would do if they were required to mark those loans to market). The short-term shock of all this will drive several banks into bankruptcy. Banks will be unwilling to lend to one another again for fear of counterparty risk and therefore unable to lend to non-banks.

Kiss goodbye to global growth in that scenario.

I can't imagine how anyone except the most extreme anarchist would welcome that chain of events or deliberately choose them.

[Furunculus]

You may be right about that - if so it will constitute a failure of political leadership at least as bad as the one which has gotten us here in the first place.

No, it is a failure of representative democracy, in that their political leaders ceased being interested in representing the will of the people.

Now they've got themselves in a pickle, have been recognised as such by their peoples, who now demand an end to foolishness they never sanctioned in the first place.

[Philippus Flavius Homovallumus]

You may be right about that - if so it will constitute a failure of political leadership at least as bad as the one which has gotten us here in the first place.

That horse has bolted, which is EXACTLY why we are in this mess.

Move all your investments to cash and prepare for a severe and prolonged global recession. It really is going to be that bad.

So... like now where the banks are just recapitalising and won't lend?

Versus lending money to Greece now to prevent global economic armageddon? I fail to see why that is a preferable option.

Hasn't worked, it's just good money after bad at this point. If they had defaulted first we wouldn't have even more bad loans to deal with and Ireland and Portugal might be better off.

I agree that Greece should be required to fundamentally restructure its tax system in order to ensure government revenues are on a firm footing in future. One suggestion for how to do this is in the Guardian article I posted. But I think allowing Greece to default on its debts rather than stumping up the first set of bailout funds would have been as disastrous as letting it happen now, for all the reasons I have outlined above.

(EDIT: I should add that suddenly and sharply raising (or starting to collect) taxes while at the same time cutting government spending is not exactly the recipe for growth! And it's growth that Greece needs in order to service its debts.)

A large proportion of Greeks don't pay taxes, something stupid like 2/3 was a figure I heard once, but no one really knows. If all Greeks payed existing taxes then the deficit would dissapear.

I don't think you fully appreciate the integral part the European banking system plays in international trade. Literally the only thing keeping the world economy in positive growth at the moment is trade between the developing and developed countries. This is largely financed by the lending of European banks.

These banks are currently holding a vast amount of European sovereign debt. Greek, Portuguese, Irish etc. Capital reserve requirements only require the banks to hold a certain amount of equity (read: cash) against these loans at present. Call it 25%, I'm not sure of the exact figure since Basel 2. This means they have to reserve 25% of the value of the loan as un-used capital. the other 75% can be used to capitalise other loans, for example trade finance and loans to businesses in Europe.

If the Euro sovereign loans go into default they are required to hold closer to 90% of capital against them. This will significantly impact their ability to make further loans. And the sovereign debt that was not Greek will drop dramatically in value, further impairing their balance sheets (or it would do if they were required to mark those loans to market). The short-term shock of all this will drive several banks into bankruptcy. Banks will be unwilling to lend to one another again for fear of counterparty risk and therefore unable to lend to non-banks.

Kiss goodbye to global growth in that scenario.

I can't imagine how anyone except the most extreme anarchist would welcome that chain of events or deliberately choose them.

IIRC it's a 5% reserve, or was before the crash. You are thinking like the EU Comissioners, and ignoring the basic facts - high debt and low confidence. Continuing defaults are GOING to happen, if national governments continue to indebt themselves to banks (by borrowing money for bailouts) or banks take on more bad debts theselves you cannot stop the necessary rebalancing, only put it off and make the eventual shock potentially even bigger.