Euro Area

[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.

[phonicsmonkey]

There is an excellent article in the Sep 17th Economist called "How to save the Euro". I can't post a link here because it's behind a paywall but I strongly recommend it to anyone interested in this topic.

In essence it argues that:
- the Euro must be saved because the alternative is too terrible (along the lines of what I have outlined above)
- insolvent nations (eg. Greece, maybe Portugal and Ireland) must be allowed to default but only after
- governments use the funds they had earmarked for the Greece bailout to shore up the banks instead and make the strongest possible commitments to stand behind solvent nations which are facing liquidity issues (eg. Italy and Spain)

The thesis being this would stop the horrible chain of events that I believe would follow a Greek default.

PVC with respect to the Greek taxes where is the cash coming from to pay them?

Furunculus that may well be the case but it must be explained to the people of Europe that simply getting fed up with the whole thing and chucking the towel in is not going to help anyone. Maybe no-one wanted the Euro but now we (by which I mean the whole world!) have it and the cost of letting it go to the dogs would be global recession and maybe even depression. Political leadership and not populism is what is required!

[Furunculus]

"sorry, it is too late for you to get het-up about 'freedom', you have a responsibility to everybody else to put up with a system of governance that is neither legitimate nor representative because being the cause of another recession would be EVIL!"

Great message, wonder how well that will go down?

[phonicsmonkey]

"sorry, it is too late for you to get het-up about 'freedom', you have a responsibility to everybody else to put up with a system of governance that is neither legitimate nor representative because being the cause of another recession would be EVIL!"

Great message, wonder how well that will go down?

I'm not suggesting anyone should be railroaded into anything and a recapitalisation of German banks by the German government hardly counts as illegitimate if it's enacted by their democratically elected government. My point is that government should act responsibly in putting the real facts of the matter to their people so that everyone can make an informed decision. As opposed to the current situation where policymakers are basically talking nonsense. Isn't the official position still that Greece is solvent?

[Furunculus]

I'm not suggesting anyone should be railroaded into anything and a recapitalisation of German banks by the German government hardly counts as illegitimate if it's enacted by their democratically elected government. My point is that government should act responsibly in putting the real facts of the matter to their people so that everyone can make an informed decision. As opposed to the current situation where policymakers are basically talking nonsense. Isn't the official position still that Greece is solvent?

if 'saving' the euro is limited to nations recapitalising their banks then fine.......... but it isn't.

[phonicsmonkey]

if 'saving' the euro is limited to nations recapitalising their banks then fine.......... but it isn't.

in the short term it is (at least according to the Economist).

In the longer term it means something else and I agree with you that there is little to no public support for further integration at this point.

Still, better to ride out the short term dangers and make longer-term decisions when things are more stable, in my view.