Greece about to default

[Charmonium]

It wouldn't increase the money supply beyond what bankers tried to make it by assuming that Greek bonds were solid & fungible, would it?

The only reason this is a big problem is because default actually decreases the money supply. Investment banks routinely use an enormous % of assets as collateral for short term loans in the repo market, for example. In the US, bank holding companies must maintain as certain ratio of assets to loanable funds to satisfy fractional reserve requirements, as well. The Eurozone is similar, I'm sure.

When Greece defaults, then those "assets" disappear which translates into less liquidity for banks, which is what "the money supply" is all about, anyway. They can't profit on the spread between borrowing costs & lending earnings w/o offering collateral to their creditors. Lending in general contracts unless more assets or more "money" are introduced to the system, the latter being part of the role of any central bank.

For Germany, excess lending fueled exports to the periphery, keeping their factories humming to meet demand that otherwise wouldn't have existed. Now that the money supply has been cut off, the demand is gone, too, so there's no profit. OTOH, wealth has been accumulated in the process so the objective becomes holding onto that hoard of value. One way to accomplish that is through hard money, even to the point of deflation. If you can't profit from investment, from risk, then find a way to come out on top from the fact that you simply have money. Don't want inflation eroding that at all.

I might be missing something here but there are only 2 situations where you get an increase in the money supply - an increase in borrowing through the money multiplier and purchases by central banks. In the case of the ECB, let's say they buy back €200B in Greek debt at stated rather than market value. So they have to print €200B in order to do that. That money goes directly into the money supply.

On the flip side, you can have a decrease in the money supply if banks start to deleverage, or IOW start to loan less, in which case the money multiplier runs in reverse. With a central bank, you get a decrease when the bank starts to sell assets for cash. That takes cash out of circulation and puts negotiable paper in. But debt instruments aren't generally considered cash in terms of gauging the money supply.

 

[senseamp]

Krugman did some analysis in his blog about what the fiscal multiplier has been in the European austerity experiment.
http://krugman.blogs.nytimes.com/2015/07/10/austerity-and-the-greek-depression/

It looks like a 1.5 multiplier, so for every $1 of reduced deficit/increased surplus, the economy shrunk by $1.50.
Note that this means that economy will likely shrink additional 5% of GDP if surplus of 3.5% is mandated, as per the austerity agreement, this is aside from any GDP shocks due to ECB cutting off Greece's banks for 2 weeks. This is on top of the 25% GDP drop (greater than depth of the Great Depression in the US and far longer) that Greece has already gone through.
This is while debt grows 25%+ from the latest bailout. So if it was unsustainable before as percent of GDP, it's pretty hopeless now.

 

[senseamp]

Reading Yanis V's article in TheGuardian.

Makes me think they don't want to be in the Euro anymore, but it's the transition that is scaring them.
http://www.theguardian.com/commentisfree/2015/jul/10/germany-greek-pain-debt-relief-grexit

Greeks, rightly, shiver at the thought of amputation from monetary union. Exiting a common currency is nothing like severing a peg, as Britain did in 1992, when Norman Lamont famously sang in the shower the morning sterling quit the European exchange rate mechanism (ERM). Alas, Greece does not have a currency whose peg with the euro can be cut. It has the euro – a foreign currency fully administered by a creditor inimical to restructuring our nation’s unsustainable debt.

To exit, we would have to create a new currency from scratch. In occupied Iraq, the introduction of new paper money took almost a year, 20 or so Boeing 747s, the mobilisation of the US military’s might, three printing firms and hundreds of trucks. In the absence of such support, Grexit would be the equivalent of announcing a large devaluation more than 18 months in advance: a recipe for liquidating all Greek capital stock and transferring it abroad by any means available.

Everyone wants to go to heaven, but no one wants to die.

 

[mrmt]

Reading Yanis V's article in TheGuardian.

Makes me think they don't want to be in the Euro anymore, but it's the transition that is scaring them.

This guy is a professional gambler. Really. So he basically spent 5 months at the office without building a coherent strategy for a Grexit and without moving negotiations further, on the hope that the creditors would blink first and throw money at Greece on their conditions? With this political leadership, no wonder this country is well on its way to become an third world country.

Btw, I think the Germans would happily provide such support for Greece to exit the Eurozone. I think even the US would.

 

[Charmonium]

Leaving the Euro would have been suicide for Greece and they knew it. The should have known that they would have to impose capital controls and those are infamous for being relatively easy to get around.

The problem was that the Greek leadership thought it would also be suicide for the Eurozone, except they miscalculated, grossly miscalculated. It was nothing short of criminal incompetence that they didn't have a Plan B. Now they've had to fold because they were completely out of options.

 

[Jhhnn]

I might be missing something here but there are only 2 situations where you get an increase in the money supply - an increase in borrowing through the money multiplier and purchases by central banks. In the case of the ECB, let's say they buy back €200B in Greek debt at stated rather than market value. So they have to print €200B in order to do that. That money goes directly into the money supply.

On the flip side, you can have a decrease in the money supply if banks start to deleverage, or IOW start to loan less, in which case the money multiplier runs in reverse. With a central bank, you get a decrease when the bank starts to sell assets for cash. That takes cash out of circulation and puts negotiable paper in. But debt instruments aren't generally considered cash in terms of gauging the money supply.

Banks are forced to deleverage if Greece defaults because they won't have as many "assets" to offer as collateral or as many in terms of fractional reserve lending requirements.

Business won't borrow as much money, either, depending on how much they rely on Greek markets.

One way or another, the ECB won't allow the banks to fail or the Germans' hoard o' cash to diminish in value, either, certainly not when they can just blame the Greeks for their own failures while imposing austerity by proxy on the whole population of the Eurozone. It won't matter as much to the more affluent Germans nor would the inflationary effect of actually creating the money supply necessary to service the debt they created. As top down class warfare looting sprees go, it's as much a tour de force as the Ownership Society.

 

[senseamp]

I think debt restructuring is coming. But not right away because that would be seen as giving in to Greek demands and encourage other countries to demand it too. It will come in "completely unrelated news" a few months down the line.
All the talk of Greeks not accomplishing anything ignores the fact that no one would discuss debt relief with them before the referendum. Now IMF said Greece needs debt relief. President of EU said Greece needs debt relief. France is saying Greece needs debt relief. Even Germany now says that Greece needs debt relief.
http://www.reuters.com/article/2015/07/09/us-eurozone-greece-idUSKBN0P40EO20150709

So they successfully shifted the consensus on the need for debt relief. Which was the major sticking point for them, because they already agreed to the fiscal targets even before the referendum. Are they going to get actual debt relief? I think it's 80% probability, and they can always default and Grexit later when they are better prepared, so in any case, it's worth it for them to take the bailout and wait and see.

 

[mrmt]

I think debt restructuring is coming. But not right away because that would be seen as giving in to Greek demands and encourage other countries to demand it too. It will come in "completely unrelated news" a few months down the line.

I don't think the full brunt of what happened in Greece has already surfaced. The banks are basically bankrupt because people will bleed them dry of whatever deposits they can even if a deal is struck in the next few weeks and they won't pay the loans they got, and with them a lot of companies will go down because either lack of credit or because of the combination of low economic climate and tax hikes. Add to that Greece structural deficiencies such as the byzantine justice system and the lack of skilled labor force and we can see that Greece is poised to become an economic wasteland.

In this context debt relief is just a minor issue. Greece could have its debt written down to 0 but because of the structural problems and propensity to live beyond their means they would end up on the same place in less than one generation. With Asia competitiveness improving and Europe competitiveness shrinking, Greece is to become an everlasting problem for the EU.

 

[senseamp]

Greece has been running a surplus excluding interest payments. Europe competitiveness is shrinking because Euro is pegged to where Germany is competitive, not where Europe as a whole is competitive.
BTW, the bailout number is 74 Billion Euro now. They were negotiating 7.4 Billion Euro program extension before the referendum, so a little adjustment.

 

[mrmt]

Greece has been running a surplus excluding interest payments.

Did you check the arrears of the Greek state? This is where this fake primary surplus comes from.

 

[werepossum]

I don't think the full brunt of what happened in Greece has already surfaced. The banks are basically bankrupt because people will bleed them dry of whatever deposits they can even if a deal is struck in the next few weeks and they won't pay the loans they got, and with them a lot of companies will go down because either lack of credit or because of the combination of low economic climate and tax hikes. Add to that Greece structural deficiencies such as the byzantine justice system and the lack of skilled labor force and we can see that Greece is poised to become an economic wasteland.

In this context debt relief is just a minor issue. Greece could have its debt written down to 0 but because of the structural problems and propensity to live beyond their means they would end up on the same place in less than one generation. With Asia competitiveness improving and Europe competitiveness shrinking, Greece is to become an everlasting problem for the EU.

Exactly. This is why even though everyone knows Greece is never paying its debts, there is no point in discussing debt relief until Greece figures out how to live within it's means. And it isn't just Greece in this predicament, Greece is just first and worst. All Western nations are either going to eventually drop down to the Chinese standard of living, or do without cheap Chinese manufactures.

 

[CPA]

Greece has been running a surplus excluding interest payments.

This "primary surplus" argument is nothing more than a convenient statistic to push a narrative. Please tell me another situation where it was as heavily used to defend more loans?

In previous threads, the argument for the US to borrow more/load up on more debt was our GDP could handle it, or, in other words, our debt to GDP percentage was low enough to handle more debt. There was NEVER any discussion on "primary surplus". So, why is the argument different for Greece? Well, because their debt to GDP ratio is 200%! That won't fly in the "austerity doesn't work, we need to loan them more money" argument. So, out trots the convenient statistic to spin the argument.

It's like telling your credit card company to up your borrowing limit because if I exclude the interest portion of my credit card payments, I actually make 5% more than I pay out! Hey, I have a primary surplus! Doesn't matter that I still have to make the interest payments. smh.

 

[senseamp]

Greece is at 2x debt to GDP because austerity shrank their GDP. Primary surplus determines how much the debt is sustainable, because that's where interest payments come from. But a primary surplus that crashes the GDP is itself not sustainable. Ultimately the easy to maximize what the creditors can recover is to let the Greek economy recover, and for that, Greece needs fiscal stimulus, not austerity.

 

[DucatiMonster696]

This pretty much sums up the huge fuck up by Tsipra's and the gang in attempting to bluff the EU.

Even the French realize that Greece has lost all its ability to demonstrate it is a honest actor in these negotiations and thus it has greatly weakened its initial position from where it started at from the beginning of this Greek/Syriza induced debt-tragedy in regards to these debt bailout negotiations. Of which past failures of sticking to agreements also are aggravating its failures even further.

But even French Finance Minister Michel Sapin, Greece's most powerful ally in the euro zone, said: "Confidence has been ruined by every Greek government over many years which have sometimes made promises without making good on them at all.

http://finance.yahoo.com/news/greek-pm-seeks-backing-concessions-001513836.html

 

[Greenman]

Greece is at 2x debt to GDP because austerity shrank their GDP. Primary surplus determines how much the debt is sustainable, because that's where interest payments come from. But a primary surplus that crashes the GDP is itself not sustainable. Ultimately the easy to maximize what the creditors can recover is to let the Greek economy recover, and for that, Greece needs fiscal stimulus, not austerity.

The problem is the Greeks don't want to try it and no one would give them the money if they did. They've spent 30 years digging a hole and very very few people think the answer is making it deeper.

I don't know why you continue to argue a moot point. The Greek government has failed. Their future now depends entirely on help from others. It's a done deal.

 

[DucatiMonster696]

The problem is the Greeks don't want to try it and no one would give them the money if they did. They've spent 30 years digging a hole and very very few people think the answer is making it deeper.

I don't know why you continue to argue a moot point. The Greek government has failed. Their future now depends entirely on help from others. It's a done deal.

LOL - Probably because he/she is the type of person who believes that they can walk into any negotiation where they have ZERO leverage or where he/she has blown all of their leverage and still cling to the false belief that they have the ability to dictate the terms of said negotiations to the opposing party.

 

[mrmt]

Greece is at 2x debt to GDP because austerity shrank their GDP. Primary surplus determines how much the debt is sustainable, because that's where interest payments come from. But a primary surplus that crashes the GDP is itself not sustainable. Ultimately the easy to maximize what the creditors can recover is to let the Greek economy recover, and for that, Greece needs fiscal stimulus, not austerity.

Who would want to invest in Greece? What sectors are globally competitive? Fiscal stimulus doesn't make a structurally inefficient economy more efficient.

What would happen if Greece didn't have any debt tomorrow, what sectors would generate growth? My bet is that they wouldn't reform and would be drowning in debt again in 10 years or less.

 

[Greenman]

Who would want to invest in Greece? What sectors are globally competitive? Fiscal stimulus doesn't make a structurally inefficient economy more efficient.

What would happen if Greece didn't have any debt tomorrow, what sectors would generate growth? My bet is that they wouldn't reform and would be drowning in debt again in 10 years or less.

And that is the problem with democracy and an entitled population. Sooner or later everyone figures out that you can vote yourself anything they want.

Robert A. Heinlein had it right when he said "you can't increase a sum by adding zeros".

 

[Jhhnn]

Exactly. This is why even though everyone knows Greece is never paying its debts, there is no point in discussing debt relief until Greece figures out how to live within it's means. And it isn't just Greece in this predicament, Greece is just first and worst. All Western nations are either going to eventually drop down to the Chinese standard of living, or do without cheap Chinese manufactures.

There's no point to any of it until we figure out how to prevent bankers from creating more debt than can be serviced. That's the story of every financial crisis in history.

They knowingly do so, particularly in this era of too big to fail. In times past, the bank itself was just a disposable ride to greater riches under the worst case scenario.

We need to redefine their fiduciary duties, impose structural rules that carry less risk for everybody, less than their gambler's nature would create on its own.

Greece couldn't borrow their way into this hole w/o willing bankers, nor could any Eurozone country. Put a much shorter leash on the bankers & other high finance types & there won't be nearly as many crises nor will they be as severe. That was the whole point of New Deal style financial regulations which actually worked reasonably well for over 40 years. Bankers didn't like it, but it's not like their kids went hungry, either.

 

[werepossum]

There's no point to any of it until we figure out how to prevent bankers from creating more debt than can be serviced. That's the story of every financial crisis in history.

They knowingly do so, particularly in this era of too big to fail. In times past, the bank itself was just a disposable ride to greater riches under the worst case scenario.

We need to redefine their fiduciary duties, impose structural rules that carry less risk for everybody, less than their gambler's nature would create on its own.

Greece couldn't borrow their way into this hole w/o willing bankers, nor could any Eurozone country. Put a much shorter leash on the bankers & other high finance types & there won't be nearly as many crises nor will they be as severe. That was the whole point of New Deal style financial regulations which actually worked reasonably well for over 40 years. Bankers didn't like it, but it's not like their kids went hungry, either.

And yet the far left is still insisting the only solution is for bankers to loan Greece even more money. It's only when it is time to repay the loans that the banker hate pops back up.

 

[Charmonium]

Here is a summary of the current issues between Greece and the EU. They haven't even started negotiations yet. They negotiating whether to negotiate. So this is going to get a lot worse before it gets better.

1. Greece will need to accept even tougher reforms and fiscal targets to take account of the rapid deterioration in its finances and economic outlook caused by the closure of its banks and the introduction of capital controls.
2. Trust in the Greek government's commitment to reforms, and its ability to implement them, has been shattered by the series of U-turns seen in the past couple of weeks.
3. Opinion in some other countries that use the euro, including Germany and Finland, is running very high against another rescue for Greece. Taxpayers don't want to put more public money at risk. A new bailout would need to be ratified by parliament in Germany, and a handful of other countries.
4. Greece wants creditors to restructure its debt. Europe could give it even more time to pay back loans, and cut already very low rates of interest, but that may not be enough. Some eurozone countries insist they can't go further and cancel Greek debt outright.
5. That in turn could kill a deal. Some eurozone countries say they'll only back a third bailout if the IMF takes part. The IMF has made clear that it will only participate if the Europeans agree to restructure Greece's debt.

Meanwhile, healthcare in Greece is starting to sound like a plot from a mafia movie.

Fakelaki means "little envelope" in Greek. As in a little envelope full of cash, given to a doctor in exchange for good care.
Sadly, it's a staple of the country's health care system.
"There are some doctors, even public health care doctors, who directly ask for money," Maro Kouri said. "They ask before running tests, they ask when you are supposed to get your results back," she said.

 

[werepossum]

Here is a summary of the current issues between Greece and the EU. They haven't even started negotiations yet. They negotiating whether to negotiate. So this is going to get a lot worse before it gets better.

Meanwhile, healthcare in Greece is starting to sound like a plot from a mafia movie.

I will be very surprised if Merkel can politically survive simultaneously writing off Greece's loans to Greece and making new loans. Roughly half of the EU nations have similar feelings. Assuming France can take over the heavy lifting, will they? As we have seen with our own proggies it's one thing to assert that people should loan Greece money that never gets repaid, quite another to be those people.

 

[senseamp]

I think they should go to a non-cash full electronic currency when they drop out of Euro. That will help with tax collection and tracking fraud, also the logistics may be simpler than introducing a new paper currency.

 

[Charmonium]

I think they should go to a non-cash full electronic currency when they drop out of Euro. That will help with tax collection and tracking fraud, also the logistics may be simpler than introducing a new paper currency.

If you mean a cryptocurrency, most people aren't ready for that. You normally have to pick a password to access your wallet and the vast majority really suck at that sort of thing. Plus, depending on which system you use, once your money is gone, it's really gone. Getting it back can be virtually impossible.

There are systems like Vodafone's m-pesa that could work though. But that requires infrastructure and a base currency. So you still need something to stand in for cash.

The easiest and fastest route is start printing IOUs. Even then though there is the question of how they will be denominated. If in Euros, then there will need to be some sort of agreement with the EU for them to have any value. If in Drachma, then how are you going to establish an exchange rate? All salaries, contracts, etc are currently denominated in euros so it would be an unholy mess to say the least.

 

[Zorkorist]

Gaurds at the borders, similar to North Korea.

Make deals with Turkey.

At least they are done with the fucking Euro Lords.

-John