European debt deal

[Altherion]

I might have missed it, but I have not seen a thread dedicated to last week's deal on Greece's debt. In a nutshell, they got private holders of Greek debt to "voluntarily" take a 50% loss on that debt, buffed up the bailout fund to around a trillion euro (not sure where that money is coming from, but that's for later) and increased the reserve requirements on banks. The most puzzling part is the 50% loss of the private sector. How did the governments manage that? Are there really so few holders of significant parts of this debt that they could just come into a room and negotiate?

Also, can the representatives of the banks agree to such a thing without being sued? It looks an awful lot like simply giving money away and the losses are not trivial. For example, one large company (MF Global) has already filed for bankruptcy.

[Former Lord of Winterfell]

That's what I thought too... If you can get the bondholders to agree on something, it means that very few bondholders hold bonds.

Being in the 1% must be really difficult.

Well, following up on those points, here's a POV saying that the whole thing is smoke and mirrors, in part because they can't force bondholders to agree to anything, and will simply make the problem worse rather than better.

http://www.telegraph.co.uk/finance/comment/liamhalligan/8857518/Why-the-latest-eurozone-bail-out-is-destined-to-fail-within-weeks.html

[Hereward]

Now this can't help.

http://www.bbc.co.uk/news/world-europe-15526719

Do the Greeks think they're going to get a better deal? :eek:

[Shryke]

The average greek citizen doesn't know shit about what's going on anyway. But they know they are mad.

Thus, the political leaders are trying to appease them to stay in power.

[Hereward]

Oh absolutely, but if they think that defaulting will lead to something better than the current austerity package they've got another think coming. Instead of a relatively orderly retreat from their massive deficit, they'll have to do it it in one fell swoop.

[Shryke]

Oh absolutely, but if they think that defaulting will lead to something better than the current austerity package they've got another think coming. Instead of a relatively orderly retreat from their massive deficit, they'll have to do it it in one fell swoop.

I don't think the average greek makes the connection between "fuck this deal" and "default".

Or, frankly, even knows what "default" would mean.

[Floria]

The most puzzling part is the 50% loss of the private sector. How did the governments manage that? Are there really so few holders of significant parts of this debt that they could just come into a room and negotiate?

The main holders are banks and pension fonds. A bunch of them is hold by Greece itself, by national banks or Greek pension fonds.

Also, can the representatives of the banks agree to such a thing without being sued? It looks an awful lot like simply giving money away and the losses are not trivial. For example, one large company (MF Global) has already filed for bankruptcy.

Either they agree and get a part of the cake or are considered last and maybe, there's no money left in the public debt fonds by then. And who would sue them? They made bad investments and are on the verge of loosing billions Euro, so they can't be very picky when it comes to negitiations on cutting down their interests.

Concerning the Greek banks and pension fonds holding Greek debts, it's only fair that they agree to forgo parts of the credits they gave themselves.

[Hereward]

No, nor do I, but the prime minister should.

[Hereward]

Hereward said:

What would default mean for Greece? We know what would happen to Greece if they defaulted.

The problem isn't what would happen to Greece. The problem is what that default would do the Eurozone. And if I'm Greek, I gotta ask myself: where are my priorities, again?

Yes, the problem is also what would happen to Greece, as the article makes clear. They wouldn't be able to borrow, so they would have to cut wages and social security at a level far in advance of that which is causing such rage now.

[Former Lord of Winterfell]

The problem isn't what would happen to Greece.

That's what the problem is for the Greeks, else they'd have no reason not to default.

The problem in Greece is that they consume more than they produce, which they have been able to do so far by borrowing -- selling debt. If they repudiate the debt, they'll still be left with a system that doesn't produce what its citizens have grown use to consuming. And they'll no longer have anyone willing to sell them debt to finance that. I suppose they could just print up tons of drachmas to satisfy all those pension obligations, etc., but I don't imagine they'll quite buy what those retirees expected.

The problem is what that default would do the Eurozone. And if I'm Greek, I gotta ask myself: where are my priorities, again?

Look, I happen to agree with you. The Greeks should repudiate all that debt, and have nothing more to do with banks, lenders, or the Euro zone has a whole. That way, they'll be sure that the financiers aren't screwing them.

[Shryke]

Hereward said:

What would default mean for Greece? We know what would happen to Greece if they defaulted.

The problem isn't what would happen to Greece. The problem is what that default would do the Eurozone. And if I'm Greek, I gotta ask myself: where are my priorities, again?

The Greeks don't control their own currency. That's the big issue. Argentina did.

Indeed, it would be pretty tough, but it wouldn't be catastrophic. In the end, they have the same workforce and the same resources as they did before.

Yes, it would be catastrophic and no, they would not have the same resources as before. They would be losing ALOT of money coming in for investment and such.

[Former Lord of Winterfell]

Yes, it would be catastrophic and no, they would not have the same resources as before. They would be losing ALOT of money coming in for investment and such.

But there won't be bankers and financiers stealing all their money! Repudiate the debt, and prove to the world how badly they were screwing you over.

I really think they've got it all figured out.

[generic]

The Greeks don't control their own currency. That's the big issue. Argentina did.

Yes, it would be catastrophic and no, they would not have the same resources as before. They would be losing ALOT of money coming in for investment and such.

I don't see any of this as the big issue with default. What kind of investment is taking place at the moment? They could always decide to run a nation sized Wörgl experiment if they need money for internal expenses.

That leaves the trade deficit and the financial system. And those really bite. You can't pay for imports with scrip. And the ECB will surely crater the banking system by not accepting new Greek state debt.

So calling a default a catastrophe is entirely appropriate.

On the other hand there is no way the current course can ever lead to improvements. No amount of spending cuts will lead to substantial improvements in the debt to GDP ratio. No voluntary non CDS triggering haircut will change that. So why not blow it all up now instead of in two years?

[Shryke]

I don't see any of this as the big issue with default. What kind of investment is taking place at the moment? They could always decide to run a nation sized Wörgl experiment if they need money for internal expenses.

With what money? And investment takes place all the time. Drop off the Euro and the Greek banking sector like ... disappears overnight.

That leaves the trade deficit and the financial system. And those really bite. You can't pay for imports with scrip. And the ECB will surely crater the banking system by not accepting new Greek state debt.

So calling a default a catastrophe is entirely appropriate.

On the other hand there is no way the current course can ever lead to improvements. No amount of spending cuts will lead to substantial improvements in the debt to GDP ratio. No voluntary non CDS triggering haircut will change that. So why not blow it all up now instead of in two years?

Well, there's plenty that could change the course, but the ECB seems determined not to. That could change though.

The other option has literally no upsides.

[WrathOfTinyKittens]

Regarding the markdown of privately-held debt, the IIF, a banking consortium of some kind, had representatives at the summit who negotiated directly with Sarkozy and Merkel, and these are the ones who seem to have accepted the deal.

Personally, I'm cautiously optimistic. The bail-out fund was always large enough to save Greece, but that wasn't the issue; Spain and Italy are the issue. However, their problems can be contained largely by the ECB alone if it continues to intervene in the bond markets, and the stability fund can aid them in rolling over their long-term debt obligations, large portions of which are coming due soon.

There have also been reports that China and some other countries have expressed interest in backing a more flexible fund - I forget what it's called, but it will be the successor the to bailout fund in 2013.

Honestly I think that the US and China - and probably others - will intervene via direct or indirect investment before they allow a disorderly default. The economic effects would cause another 2008 meltdown at the least.

I don't like kicking the can financially, but if the problem of Italy and Spain and Greece (and Ireland, and Belgium...) can be pushed off for a few years, long enough to growth to recover in the Eurozone, I think that they have a pretty good chance of actually succeeding in chaining this monster.

[Inigima]

welp

Jubilation about the German deal to save the euro could prove short-lived if fresh news of Greek tax evasion gains wider currency. There are more Porsche Cayennes registered in Greece than taxpayers declaring an income of 50,000 euros (£43,800) or more, according to research by Professor Herakles Polemarchakis, former head of the Greek prime minister’s economic department.

http://blogs.telegraph.co.uk/finance/ianmcowie/100012894/fast-cars-and-loose-fiscal-morals-there-are-more-porsches-in-greece-than-taxpayers-declaring-50000-euro-incomes/

[White Walker Texas Ranger]

I have a question that is...I'm sorry to admit...coming from a place of ignorance. The question requires a little bit of a preface about what I do believe that my monkey brain is aware of.

It seems that there are myriad advantages to nations having their own currencies, and that the US, Japan, Argentina, and the UK are all examples of this not to mention China. My silly question is this: What was the primary rationale for the Euro in the first place?

When this was going into effect, I was a junior at the Uni, and I was primarily concerned with traveling the continent and drinking cheap alcoholic beverages. Roughly a decade later I have some regrets about this, but the point is that I was 21 and while certainly aware that Europe was about to undertake a potentially dramatic policy change, I was not overly concerned about the devil within the details.

Was the rationale that the Eurozone could effectively turn itself into a proverbial superpower if it became more united?

I don't claim to be an expert (or even more informed about this issue than average) but Europe had been through a series of the worst conflicts in human history, in large part due to excessive nationalism and disunity. I imagine that had something to do with it

[Horza]

Had more to do with smaller countries wanting to borrow money at low rates and the bigger ones wanting to sell them more products. There may be some problems with this.

[ThinkerX]

Personally, I'm cautiously optimistic. The bail-out fund was always large enough to save Greece, but that wasn't the issue; Spain and Italy are the issue. However, their problems can be contained largely by the ECB alone if it continues to intervene in the bond markets, and the stability fund can aid them in rolling over their long-term debt obligations, large portions of which are coming due soon

Not so much for me (not that big a surprise to most folks here). With me it is -

1) this is like attempt six? seven? to deal with this mess in just the past year. The 'solutions' either fail immediately or create even bigger problems or ignore serious underlying issues.

2) there seems to be a 'bailout mentality' here on the part of the big financial players - they take these downright moronic risks because they *know* they have to be 'rescued' one way or another, less the entire system go under.

I find myself wondering what the *real* exposure of the big US banks is in this mess - keeping in mind they all lied about their exposures in the mortgage mess.

Way past time for a sort of 'international RTC'

[Shryke]

Greater trading integration means more profit overall as barriers between economies get lower and less money is lost in moving from one economy to the next. In specific regions, it depends. Smaller economies want to buy shit and get invested in by larger players and also borrow at a lower rate by being on the Euro. Larger economies want to invest in smaller economies and sell them shit.

The killer here is a lack of fiscal intergration and the ECB's refusal to be a normal central bank and instead just focus on price stabilization.