You could replace Greece with America in that post and still be correct. Except multiply it all by 100, or so.
Greece and Iceland are two very different cases. For one Iceland never defaulted. In Iceland it was the banks that screwed up, and the state that was stuck with the tab – it’s still going to pay back, but there’s some debate on which interest rates it should be done with. In Greece it is the state itself that is fucked up, indebted and unable to balance its budget (whereas the banks seem to have been run remarkable sound). Iceland had a surplus in all the years running up to the crisis. When did Greece last have a surplus? Iceland had, and has, a trade surplus and many natural resources to draw on. Greece is dependent on foreign capital and have few natural resources. Iceland has a highly educated, productive and extremely hardworking (much more than the rest of Scandinavia) workforce. Greece has none of those things. A closer examination of the books in Iceland revealed that things were far from as bad as they first appeared, a closer examination of the books in Greece revealed a cover up to disguise that things were far worse that they appeared. Iceland is one of the least corrupt nations on the globe. Iceland initially was only able to borrow from other Scandinavian countries. Even so I think the Icelandic population was at least as hard hit by the effects as the Greeks are. Pretty much everybody went bankrupt. A very large number emigrated (10%-20% I think was the talk).
People in Greece will be unable to gain credit because the nation is running a trade deficit and dependent on foreign capital and there’s not a person in the world that would trust them with their savings until they have proved themselves able to manage an economy. Ask yourself if you’d put your pension savings in Greek bonds. When Greece will be able to generate a surplus, they’ll have the capital inside the country necessary for investments. But the transition will be painful. However they can look to the Baltic nations to see that it is possible.
And I agree that perhaps a bankrupt scenario is the best solution. The only concern of the Greek government should be the Greek nation. Foreign banks that have rashly invested in bad bonds have only themselves to thank for their own miseries. But if the protestors see it as an alternative to austerity, then they could hardly be more mistaken.
I tend to think that Greece needs control over its currency, otherwise we’ll simply see the same thing a year or two down the line. What’s more worrisome to me is that by dragging this out endlessly, France is putting the entire EU at risk. Their concern is probably motivated by both fears that a loss of Greek debt in French banks could seriously hurt France, but also that the entire EU project could be discredited or at least weakened. And that’s a risk. But because they keep pulling thigns along it makes the entire system more vulnerable. THe time may be fast approaching when the choice will be between a broken, minimal EU and no EU at all if this keeps up.
Now, I have very little interst in the EU, so I may be biased. But from my perspective Sarkozy is doing exactly the wrong thing if he wants to protect it. European heads of state need to show some steel now, or they won’t have another chance.
Perhaps Greece should check the couch cushions. Ireland found some pennies.
Sorry, but this is mostly nonsense. Iceland and Greece face exactly the same problem: the banks screwed up. The only difference was that, in Iceland’s case, it was their own banks that screwed up (financial sector debt alone was over 500% of GDP), while in Greece’s case it was foreign banks that screwed up, in part by lending lots of money to Greece (I know this bothers people, that Greece took all that money and now can’t pay it back, but you can’t let the banks off the hook for exposing themselves in the first place). Iceland elected not to assume responsibility for the debts, let the banks default, and took over their domestic operations. They did this because they realized that they couldn’t afford to make good on all the money the banks owed. Greece faces a similar dilemma, with most of Europe leaning on them to embrace austerity and eventually make good on these massive debts. The only question Greece needs to concern itself with is whether they can reasonably expect to ever make good on their debts while still tied to the euro, with the ECB unwilling to spread some of the pain around throughout the entire eurozone through expansive monetary policy. It should be obvious that they cannot. If they leave the euro and go back to the drachma, they can lower real wages in the country through an internal devaluation and become much more competitive without that massive debt burdening them.
And austerity does not work. It “worked” in the Baltic nations only with massive drops in real GDP and big gains in unemployment. 15% unemployment does not equate with any measure of success that I’m aware of. When Iceland repudiated their banks’ debt, it allowed their government to, among other things, continue making unemployment and welfare payments to its citizens, which took the sting off of the recession that followed. So if the choice is between letting its citizens go high and dry in order to pay foreign bankers, or to tell the bankers to piss off and help the citizens, then I would say yes, default is an alternative to austerity.
Well Papandreou faces a confidence vote tonight. He’s scheduled to speak at 21:30 GMT with the vote to follow.
Here’s a list of other upcoming European events to watch in November (Again from zero hedge)
I’m picking Greece to at least partially default on the repayments due on Friday 11 November, Italy to find no buyers for it’s T-bills and a massive drop on sharemarkets around the world to follow.
So, tell me like a 1st grader: What are the consequences of a Yes vote tonight? A no vote?
Really short answer: If Greece’s parliament votes yes tonight the Papandreou government falls and a new government will have to be formed. A no vote means the government may remain in power for now.(edited to add: I forgot to include the third possibility which was the actual result, see below
Longer answer: While I’m not sure of the exact details of the Greek constitution, in a Westminster-style parliamentary system a vote of no confidence is a test of the government’s approval by the Parliament. Going into the vote Papandreou was reported to have a majority of just two MPs, so if two or more of his supported vote with the opposition the vote of no confidence will pass.
A yes vote means the Parliament has no confidence in the government. So the government lacks the support of the legislature and must resign (as they can no longer secure the passage of legislation through the house, including money bills). A new government will have to be formed, either by the existing MPs forming a new coalition or by going to an election.
A no vote means the Parliament still supports the current government and that government may continue in power until the next scheduled election (unless another vote of no confidence is passed in the mean time).
While I was typing this the results came in Papandreou’s government won the vote 153-145 so it seems that some of the opposition MPs defected towards the government.
Consequences: Papandreou remains as Prime Minister but he’s promised to form a wider coalition government. Once again I’ll quote zerohedge:
Now that the vote is over, a Yes vote meant that the current majority party, PASOK, can still govern and can still keep George Papandreou as the PM to make decisions about what to do next.
A No vote would mean that most of the Parliament had no confidence in George Panandreou and that would have resulted in immediate elections - within a month or so.
That would be total chaos.
The next step now is for Parliament to vote for the new measures the EU is imposing on Greece in order to receive the next bailout – 50% of the Greek debt written off, some 1xx Billion Euro in payments to Greece to pay its immediate debts, a bit lower interest rate on its debt and a continuation of the same sick and problematic situation that the EU is dealing with the past few years, which is:
Greece, Ireland, Portugal, Spain and Italy (gasp!) have too much debt and they can’t sustain the established economies of the past few decades, based on speculation and creative accounting, rather than production and real economic growth.
I notice a fondness in continental Europe for blaming economic crises on speculators. Seems like “shooting the messenger” to me. Or populist rhetoric from politicians who are trying to deflect the blame from themselves. Speculation only works when something is priced incorrectly, either by mistake or by artficial manipulation of the price. The blame for either of those things does not lie with the speculators.
In case anyone’s still following this:
Papandreou has agreed to resign as PM with a new Prime Minister to be appointed by the Greek cabinet tomorrow. The new government is expected to accept the terms of the ‘bailout’.
Meanwhile across the Adriatic, Italy seems to be sliding into the abyss, with the interest rate on it’s bonds topping 6%.
Looks like Berlusconi’s gone now. This is not turning out to be a good year for leaders of Mediterranean governments. Still, I now predict another sucker’s rally on the stock markets before they work out that Italy is still screwed.
Italy isn’t really all that screwed. The debt is rather big and growth is anemic, but the deficit is one of the lowest in the Euro zone and the foreign trade balance is almost even, and the private household debt is also one of the lowest in Europe. Northern Italy is one of the richest regions of Europe. With the right political leadership and some labour market reforms to spur growth they’d be ok.
A side question: I assumed that a prime minister serves at the pleasure of his party and if they want him gone, he goes. However, Berlusconi resisted quitting for quite a while, so I guess that assumption isn’t true?
He’s not gone yet. He’s waiting until the “reforms” are passed through the parliament until he resigns. Naturally, he’s going to tack on a hell of a lot more on to these reforms than what the Eurozone big boys want: in particular, he’s been trying to get the laws governing how estates are inherited changed for ages, due to him wanting his kids from his second marriage to inherit his businesses, not those from the first.
His party consists of those on his payroll, and those he openly bribes. Pretty much everybody in his party is paid in one way or another directly by him. Further, opposition is fractured and weak. Before Berlusconi came around, governments didn’t last long in Italy.
When your cost of borrowing hits 7% and is still rising rapidly and your debt is huge, then, yes, you are rather screwed. Further, as you point out, growth is anaemic. But growth in Italy is anaemic for a reason: the necessary reforms needed to get Italy growing are going to be incredibly unpopular.
As a follow up to this, some Barclay’s analysts are now stating that no matter what Italy does, it has possibly already reached the point of no return:
Yeah, which is why I believe one of Italy’s main problem is political, since the underlying numbers aren’t necessary all that scary. Or at least compared to many other nations. Italy actually has a pre-debt-servicing budget surplus. How many Western nations can boast of that? The UK numbers seems to be at least as awful, but at the same the UK has very low interest rates. So I assume much of it has to do with that the big investors think more highly of Cameron than of Berlusconi. Even despite Cameron’s very annoying sideline Eurozone coaching.
There also appears to be some sort of self-reinforcing trend to it, as investors sell out because they think others will sell out which will be driving prices down and nobody wants to be the last man out.
On a side note I saw somewhere that the cost of insuring yourself against a German default has been climbing up. That doesn’t appear very rational either. Like insuring oneself against Ragnerok. Yeah sure the world is going to end, but at least I’ll get 10,000 euro when we’re all dead.
At least it finally seems like Europe woke up and made good use of the crisis. Many of the reforms being put in place in many countries will make Europe stronger in the years to come.
What reforms?