The Big Bailout of the Eurozone (Another crisis coming? - Seriously)

[Rossie11]

Latest piece from McWilliams.
Are the Greeks gonna save our skins by doing what our negotiators hadnt the balls to do??

Greeks turn tragedy into a drachma
May 9, 2011

By playing hardball with the French and Germans this weekend, Greece has bravely sparked a liberation which could topple the eurozone as we know it – and not a minute too soon

If you have ever tried to learn German, you will know that reading it is much more difficult than speaking it. The problem is the sentence construction, and the fact that the verb generally comes at the end of the sentence. So you spend ages trying to read practically backwards – or at least this particular grammatically-challenged student did.

Like all languages, after awhile there comes a time when your teacher gives you articles from a local paper to see if you can make out what is going on. I just about understood what the mass-market Bild was saying, but the real challenge was to figure out what was written in Der Spiegel.

In fact, German friends of mine used to joke that Der Spiegel was so highbrow and its readership so well-educated that even they had difficulty understanding the grammar it used. Der Spiegel uses the German of Schiller, Goethe and Heine. It is Germany's paper/magazine of record, not given to running stories without foundation.

Its credibility has been bolstered in recent weeks because it has clearly been getting accurate leaks from German government sources about the thinking both in Berlin and Frankfurt.

Therefore, the news published late last Friday afternoon in the online version of Der Spiegel, that Greece would leave the euro this weekend, caused the markets to react violently. The euro has plummeted against a feeble dollar. The German leak stated that certain eurozone finance ministers – the ones from the richer countries – were meeting this weekend in the exclusive surrounds of Château de Senningen in Luxembourg, with the Greeks indicating that, if they didn't get a deal on their debts, they would pull out of the euro. The usual denials followed the rumours, but it is clear that the Greeks are playing hardball – and good on them.

The Greeks know that, like us, their debt is unsustainable and that there is no way they can avoid default. They also know that their economy can't take more austerity. Greece has already missed some IMF targets, and will miss more. The markets decided months ago that the Greeks would default – the issue for investors is how and when, not if. The same goes for us.

The Greeks also know that the one thing the Germans and French – particularly the French – don't want is a 'conditional' euro, where commitment to the currency is conditional on whether it suits a country or not at a certain time in the economic cycle. The idea that a country could pull out is anathema to the French and German establishments, but this is exactly where their banks' reckless lending to the likes of Greece and Anglo Irish has led us.

Anyone who has any knowledge of economics realises that a strong currency makes a weak economy, like Greece's, weaker. We also know that, when debt can't be paid, it won't be paid. We also know that a balance sheet like Greece's, which is carrying too much debt, is never made stronger by yet more debt. It is made stronger by less debt.

There are only two ways you can lessen debt. The first is when the economy grows strongly, generating the tax revenue to pay off all the debt without much effort. This clearly will not happen in either Greece or Ireland. The other way is when you do a deal and default.

Obviously, this is what the Greeks will do this weekend and, just to focus the minds of the rest of Europe, they have indicated that, if they don't get a deal, they are off and will introduce a new drachma and leave the outstanding debt issues to the lawyers to sort out who gets what and when.

How would bringing the drachma back help them? First, they would announce that, from tonight, one new drachma is equal to one euro, and all former euro debts will be paid in drachmas at the prevailing exchange rate. At the moment of recalibration, all the old euro debts are to be paid in drachmas which, at that moment, have an exchange rate of one to one. So all the old euro debts are converted to drachma at an immediate exchange rate of one to one. So no default yet.

Then, they will announce that the drachma will be a free-floating currency. The currency's value will fall like a stone, possibly by as much as 70 per cent. This will wipe out much of Greece's debt problem at a stroke. But it's not that simple, because the people who are owed money by Greece will be livid – and will demand payment.

The Greeks will have figured out in advance how much is owed by foreigners and how much is owed by locals. They will clearly be keener to default on foreigners than locals. This is what the Russians did in 1998,whenRussia defaulted on rouble-denominated debt, knowing that foreigners – greedy for yield – had bought up the rouble-denominated debt. The Russians roasted the foreigners and gave the lawyers headaches.

The same would happen if Greece pulls out of the euro – a prolonged legal battle between creditors and Athens would ensue. The Greeks would then print the new currency and inflation would rise, resulting in a greater haircut being taken by the creditors because, the higher the Greek inflation, the more the drachma would fall and the more the creditors would lose.

Greek banks that hold Greek government debts would see the 'drachmasation' of their assets, which would undermine greatly the value of these banks in euro terms. However, in terms of the currency they lend in, the change would not be that huge.

Middle-class Greeks would take all their money out of the country and this money would wait offshore until the crisis settled down. The government would probably have to enforce capital controls for a time to make sure that it could have some control over where the currency went.

It would be chaotic but, like the Asian Tiger devaluations, it would pass and the country would recover. The economy adjusts. If you think the like of this is unusual, it is not. This is what Finland and Sweden did in 1993.They both sacrificed the interests of their creditors – both local and foreign – for the long-term interests of the economy. And it worked.

The competitive gains that both Finland and Sweden enjoyed from devaluing their currencies in 1992 lasted well into the 2000s.The British are regularly at the same game.

The difference in devaluing your currency and leaving a currency union is one of perception. The former is not likely until it happens and then life goes on; the latter is inconceivable until it happens, and then life goes on.

The country becomes more competitive, holidays in Greece are cheaper, exports from Greece are cheaper, the Greeks will price assets in euro for a while – this is a process which will be known as 'eurosation' and is already a reality in most Balkan countries anyway.

For example, if you want to buy an apartment in Croatia or Serbia, the price will always be given in euro, and never in kunas or dinars.

The crucial thing is the currency of the country is now appropriate to the country. A much weaker local currency reflects the weakened economy and we start again. Imports are expensive, which they should be, and exports are cheap, which they also should be. Like in Iceland, interest rates would fall rapidly, and off we go.

By threatening to leave the euro, the Greeks have called the Germans' bluff. The Germans were playing hardball with the Greeks, and now the Greeks have turned the tables and indicated that they are prepared to push the nuclear button, having decided that the fallout will be felt more abroad than at home. Nothing will focus the minds like this threat. The process of orderly default can now happen in the eurozone.

For Ireland, the one thing we can say with an element of certainty is that this weekend marks a liberation. Once the Greeks are given permission to default by the Germans, we will be next. The bondholders will not be paid, pure and simple.

This is obvious, no matter what language you speak. Some truisms are so clear that they never get lost in translation, even in Der Spiegel.

[Hardy]

Only one problem I can see with McWilliams's statement that when we default, "the bondholders will not be paid, pure and simple". Haven't the bondholders been almost completely paid off already? It probably makes little difference anyway - it's the ECB that will jot be paid, pure and simple.

And, in the immortal words of Christy Browne - "f**k them!".

[seafoid]

The (European) head of the IMF is involved in a sex scandal. A replacement might take a very different tack with the ECB.

[whiskeysteve]

http://www.zerohedge.com/article/treasury-confirms-debt-ceiling-be-breached-today-will-tap-pension-funds

This time 2 years ago I was a complete and utter ecomonic illiterate. Since then I took the time to read up and learn a bit. I followed the signifigance of the Irish 10 year as it raced up. I read McWilliams. I listened to Gurdgiev. Looking further afield, I followed Zero Hedge, listened to Kaiser, to Roubini, to Soros. I read Freefall by Stiglitz and watched Inside Job. I have read hundreds of opinion pieces and continue to do so.

I'm still pretty clueless but at least have a fairer sense of what way the winds blowing.

And this seems like a real Black Swan event to me. They are going to blow up the ultimate debt bubble. The kerfuffle after Lehmans went under will be a fart in the wind compared to the crash coming down the line this decade.

Any thoughts?

[muppet]

http://www.zerohedge.com/article/treasury-confirms-debt-ceiling-be-breached-today-will-tap-pension-funds

This time 2 years ago I was a complete and utter ecomonic illiterate. Since then I took the time to read up and learn a bit. I followed the signifigance of the Irish 10 year as it raced up. I read McWilliams. I listened to Gurdgiev. Looking further afield, I followed Zero Hedge, listened to Kaiser, to Roubini, to Soros. I read Freefall by Stiglitz and watched Inside Job. I have read hundreds of opinion pieces and continue to do so.

I'm still pretty clueless but at least have a fairer sense of what way the winds blowing.

And this seems like a real Black Swan event to me. They are going to blow up the ultimate debt bubble. The kerfuffle after Lehmans went under will be a fart in the wind compared to the crash coming down the line this decade.

Any thoughts?

I was banned from talking about this thread or the economy at the recent golf outing...............but that's over now.

We in Ireland are still stuck in the last crisis while other economies lurch towards the next one. Each solution always seems to create a bigger bubble and a bigger crash. Communism failed miserably and now Capitalism is consuming itself and everyone else.

We need some creative thinking and rebranding either Communism or Capitalism is not the answer. Both give long term power to small elites.

[seafoid]

http://www.zerohedge.com/article/treasury-confirms-debt-ceiling-be-breached-today-will-tap-pension-funds

This time 2 years ago I was a complete and utter ecomonic illiterate. Since then I took the time to read up and learn a bit. I followed the signifigance of the Irish 10 year as it raced up. I read McWilliams. I listened to Gurdgiev. Looking further afield, I followed Zero Hedge, listened to Kaiser, to Roubini, to Soros. I read Freefall by Stiglitz and watched Inside Job. I have read hundreds of opinion pieces and continue to do so.

I'm still pretty clueless but at least have a fairer sense of what way the winds blowing.

And this seems like a real Black Swan event to me. They are going to blow up the ultimate debt bubble. The kerfuffle after Lehmans went under will be a fart in the wind compared to the crash coming down the line this decade.

Any thoughts?

I was banned from talking about this thread or the economy at the recent golf outing...............but that's over now.

We in Ireland are still stuck in the last crisis while other economies lurch towards the next one. Each solution always seems to create a bigger bubble and a bigger crash. Communism failed miserably and now Capitalism is consuming itself and everyone else.

We need some creative thinking and rebranding either Communism or Capitalism is not the answer. Both give long term power to small elites.

Muppet- I came across this article recently and I thought it was very interesting. We are looking at running out of oil and runaway climate change the way things are going.  We need a new system. World War 1 came out of a structural crisis in capitalism and so did WW2 so the stakes are high. 

http://monthlyreview.org/2011/03/01/structural-crisis-in-the-world-system

Premise No. 1 is that all systems—from the astronomical universe to the smallest physical phenomena, and including of course historical social systems—have lives. They come into existence at some point, which needs to be explained. They have "normal" lives, the rules of which need to be explicated. The functioning of their normal lives tends, over time, to move them far from equilibrium, at which point they enter a structural crisis, and in due course cease to exist. The functioning of their normal lives has to be analyzed in terms of cyclical rhythms and secular trends. The cyclical rhythms are sets of systemic fluctuations (upturns and downturns), in which the system regularly returns to equilibrium. However, it is a moving equilibrium since, at the end of a downturn, the system never returns to exactly where it was at the beginning of the upturn. This is because secular trends (slow, long-term increases in some systemic characteristic) push the curve slowly upward, as measured by some percentage of that characteristic in the system. Eventually, the secular trends move the system too near its asymptotes, and the system is unable to continue  its normal, regular, slow upward push. Thereupon, it begins to fluctuate wildly and repeatedly, leading to a bifurcation—that is, to a chaotic situation in which a stable equilibrium cannot be maintained. In such a chaotic situation, there are two quite divergent possibilities of recreating order out of chaos, or a new stable system. This period we may call the structural crisis of the system, and there is a system-wide battle—for historical social systems, a political battle—over which of two alternative possible outcomes will be collectively "chosen."

[Declan]

We were trying to avoid reality at the Golf Classic so that's why we banned muppet from bringing the subject up!!!

But as has been said before the whole house of cards is falling down but people are just not addressing that issue - still trying to convince themselves that it's possible to work out of it -Look at these figures - http://online.wsj.com/article/SB10001424052748703421204576325583050561022.html?mod=WSJEurope_hpp_LEFTTopStories

Anyway here's whats ahead of us - http://www.nytimes.com/2011/05/16/business/global/16drachma.html?_r=2&ref=business

[thejuice]

http://www.independent.co.uk/news/world/americas/14294-trillion-in-the-red-so-us-treasury-must-stop-borrowing-2285025.html

A tranche of roughly $72bn in bonds and notes issued by the US Treasury yesterday left the national coffers exactly $14.294tr in the red, meaning that there is for the time being no capacity for additional public borrowing. The Treasury Secretary, Timothy Geithner, said he would pull an accounting trick, suspending investment in two large federal retirement funds and allowing the Government to meet its financial obligations until 2 August.

[armaghniac]

[Bogball XV]

Each of these actions has been taken in the past by my predecessors during previous debt limit impasses. By law, the CSRDF and G Funds will be made whole once the debt limit is increased. Federal retirees and employees will be unaffected by these actions.

This an excerpt from the letter sent to congress, does any of you know how many times and by whom has this been done in the past?  Is it really that big a deal?

[HiMucker]

http://www.independent.co.uk/news/world/americas/14294-trillion-in-the-red-so-us-treasury-must-stop-borrowing-2285025.html

A tranche of roughly $72bn in bonds and notes issued by the US Treasury yesterday left the national coffers exactly $14.294tr in the red, meaning that there is for the time being no capacity for additional public borrowing. The Treasury Secretary, Timothy Geithner, said he would pull an accounting trick, suspending investment in two large federal retirement funds and allowing the Government to meet its financial obligations until 2 August.

Aye but not to wory lads thats only 14.294 trillion short scale were a trillion is only a thousand billion as appose to long scale were a trillion would be a billion billion.  So we are not that bad off really!!  Hence how we can afford all these state visits.

[seafoid]

http://cachef.ft.com/cms/s/0/7f55fe18-6a8c-11df-b282-00144feab49a.html#ixzz1Jt0wFhDy

Bobby decided not to respond to this teasing. "So," he asked thoughtfully, "what's going to happen next?"
"If I knew that, I wouldn't be a mere economic journalist," his father said.
Bobby smiled: a familiar remark.
His father did not notice. "Maybe, the momentum gained by the US and the big emerging markets, especially China, will let the world ride through the shocks. The OECD calls the outlook 'moderately encouraging'.
"Alternatively, you could argue that the massive fiscal deficits are unsustainable and that attempts to rein them in, in the eurozone and UK, are going to cause renewed recession and political strife. We have also barely begun reducing private debts, which will take years. The banks are far too big and have too many doubtful assets on their books. Meanwhile, emerging countries are too small and weak to be locomotives for the world. Some people worry that China is overheating or suffering from huge asset price bubbles, too, though I disagree. And then there is geopolitical uncertainty over North Korea and Iran. In short, markets are volatile because of all the uncertainty out there."
Bobby was beginning to find this familiar: his father tended to see the gloomy side. But he could be wrong, as his mother enjoyed pointing out.
"Anyway," concluded his father, "these aftershocks are likely to go on for years, with fiscal worries undermining confidence in the financial sector and back again. It will affect you, too: western governments are going to be short of money for decades. It's going to be miserable. But you can learn Chinese and go east."

[the Deel Rover]

This was in the sindo on sunday 

What would happen to your money if Ireland defaulted?
Sunday May 15 2011

WITH uber economist Morgan Kelly forecasting that the national debt could hit €270bn, it's becoming increasingly clear that Ireland can't afford to pay back all its borrowings. Defaulting on this debt is a common call. Even taxi drivers are at it. But the impact of a default or exit from the euro could blast a hole in your pocket.

Some of the countries that have defaulted on foreign debt in the past include Argentina, Peru, Mexico and Liberia.

If Ireland defaults on the IMF-EU debt, it could find itself thrown out of the eurozone -- if indeed, it hasn't decided to leave of its own accord. Default doesn't necessarily mean we'll leave the eurozone -- but nations that have defaulted in the past have usually had their own local currency.

The Irish punt could then be reintroduced -- but over time that punt would most likely plummet. And if that happened, the country would find itself in the middle of a currency crisis.

This happened to Argentina when it defaulted on its foreign debt in 2001. Before they defaulted, the Argentine peso was pegged at a par to the US dollar. After the country defaulted, the peso lost about 70 per cent of its value. So how exactly could a default eat into your pockets?

Your savings

A default would probably wipe out the value of your savings -- and it could also make it impossible for you to get your hands on them.

"If Ireland defaulted on its foreign debt and reintroduced the punt, the money in most bank accounts would be in punts rather than euro," said Kevin O'Doherty, director of the regulatory consultants Compliance Ireland.

"Because of the economic situation the country would be in, the value of the punt would plummet. The value of your savings would go down as the currency depreciated.

"If you have your life savings squirrelled away in the credit union, you'd find the value of those savings diminished as the price of foreign goods and services becomes more expensive."

Cian Twomey, a lecturer in financial economics at NUI Galway, said the value of people's savings would be at the very least halved if Ireland defaulted and left the eurozone.

"Our savings would be worth between 50 and 70 per cent less in punts than they would have been worth in euro," said Mr Twomey.

You might also find yourself locked out of your savings accounts. When Argentina defaulted in 2001, the Argentine government froze deposits to prevent savers converting their deposits into a more valuable foreign currency.

They also restricted the amount of money that Argentinians could withdraw from their accounts to about 250 pesos a week (worth about €134 in the wake of the default). Not long after the default, it was a common sight for Argentinians to be searching for ATMs that weren't empty.

You could lose your savings if your bank or credit union went bust. The Government guarantees savings of up to €100,000 held in Irish banks. In some cases, savings of more than €100,000 are also protected.

"If Ireland defaults, how would the Government continue to guarantee deposits?" said Mr Twomey. "The Government can only continue to guarantee deposits if it can continue to borrow."

If, however, Ireland defaults on its IMF-EU loans, the chances of finding anyone to lend us money at non-prohibitive interest rates are slim.

More than €100bn worth of savings were withdrawn from Irish banks last year amid fears of our banks collapsing.

If Ireland defaults and the Government clamps down on savings like the Argentines did, billions could leave the country. People would take desperate measures. "People with a bit of money would fly off to France and other European countries and open a euro bank account," said Mr O'Doherty.

Your mortgage

If you're lucky enough to have a cheap tracker mortgage, some believe you might have to kiss goodbye to it if Ireland leaves the eurozone. "The interest rates on your mortgage would be set to the Irish punt," said Mr O'Doherty. "That means your ECB tracker would disappear."

Your tracker mortgage is a contract which you have with your bank, so whether or not you would lose it if Ireland left the eurozone remains to be seen. However, if the interest rates on mortgages were tied to the Irish punt after an Irish exit of the eurozone, interest rates could soar.

Less than 20 years ago, a currency crisis hit Ireland. The Irish punt was devalued by about 10 per cent at the time and Irish interest rates reached unprecedented levels. Mortgage interest rates in Ireland climbed as high as 16 per cent in 1993.

Those who had taken out a loan from a European bank would also be walloped. An Irish citizen would find it much harder to pay back a mortgage in euro if he is being paid in punts -- as the punt would very rapidly be worth a lot less than the euro.

Your pension

If you're put out by the Government's move to raid pension funds so it can finance its latest jobs plan, you'll be even more put out if Ireland followed in the footsteps of other countries that have defaulted. When Argentina defaulted, it expropriated pension funds, transforming them into government-backed loans to service debt.

Your shopping trolley

The price of foreign goods has exploded in countries that have found themselves embroiled in currency crises. In Argentina, inflation hit 30 per cent just a few months after the default. The same would probably happen here.

Domestic prices, such as for your newspaper or pint of milk, would remain the same. "The prices of things made outside of Ireland would become much more unaffordable," said Mr O'Doherty.

"That would include things like foreign holidays, Japanese or German cars or bottles of wine. The foreign goods you put into your supermarket trolley each week could double or treble in price."

Chances are that at least half of the goods in your supermarket trolley come from abroad.

Tourists would be one of the few to benefit from an Irish currency crisis. As their foreign dollars or euro could be twice or triple the value of the Irish punt, they'd get more bang for their buck here.

Your child benefit and dole

If Ireland defaults on its EU-IMF loan, it would no longer have the financial support that it needs to plug its massive budget deficit. The Government could have to unleash spending cuts of €18bn to fund itself. To achieve that, the Cabinet could slash child benefit, dole payments, state pensions and public sector wages by about a third, the Department of Finance warned last week.

Your jobs

Ireland's international reputation has already been hammered by the banking crisis and recession. If we were to default on top of this, our reputation might never recover.

Multinationals could pull out of lreland, leading to major job losses. Foreign companies eyeing up Ireland as a possible base could pull back from their plans. "If Ireland suddenly defaulted, it would damage future investment in the country and dissuade people from doing business with us," said Mr Twomey.

The way you pay

Paying by credit card could be impossible if Ireland defaults. In Argentina in 2002, many stores wouldn't accept them.

Millions of Argentinians were also forced to barter for food and petrol that year because they were not allowed to spend the money in their bank accounts.

The very least we can expect is a thriving black economy. By 2005 -- only four years after Argentina defaulted -- it was believed about half of its population worked in the black economy which can lead to a big drop in the government's tax take.

This would lead to less money for public services -- in essence, we'd become a third-world country.

[muppet]

Don't think that Indo article is anything other than scaremongering. Firstly it slags uber economist Morgan Kelly and incorrectly states he predicts the National debt will be €270bn. Kelly said it could be as much as €250bn and he was attacked by the Indo for inaccuracy in his figures so they could at least not exaggerate his figure.

Then there is this:

Your mortgage

If you're lucky enough to have a cheap tracker mortgage, some believe you might have to kiss goodbye to it if Ireland leaves the eurozone. "The interest rates on your mortgage would be set to the Irish punt," said Mr O'Doherty. "That means your ECB tracker would disappear."

Your tracker mortgage is a contract which you have with your bank, so whether or not you would lose it if Ireland left the eurozone remains to be seen. However, if the interest rates on mortgages were tied to the Irish punt after an Irish exit of the eurozone, interest rates could soar.

Less than 20 years ago, a currency crisis hit Ireland. The Irish punt was devalued by about 10 per cent at the time and Irish interest rates reached unprecedented levels. Mortgage interest rates in Ireland climbed as high as 16 per cent in 1993.

Those who had taken out a loan from a European bank would also be walloped. An Irish citizen would find it much harder to pay back a mortgage in euro if he is being paid in punts -- as the punt would very rapidly be worth a lot less than the euro.

As for the currency crisis 20 years ago the interest rate rises were as a result of the crisis (which was as a result of speculators) - not the devaluation. This is deliberately allowing people to believe that the devaluation caused the high rates. It didn't.

As for the last paragraph, I'm not convinced either. Let's say RBS loaned you €100,000 and AIB lent you another €100,000. Those loans were with Irish regulated banks in Irelands. At the instant of the currency change both €100,000s would convert into the same amount of punts (depending on the devaluation) which would be your new debt. I don't see why the former would convert to a different amount of punts than the latter.

In conclusion, I think it is spin.

[seafoid]

Me too, Muppet. The Sindo is all over the place since they stuck the knife in FF .