Sunday, July 5, 2015

So it's "No!"

Greece has voted strongly, but not overwhelmingly, to reject the European Union's financial package and defy its creditors.

Good.  This mess had to end, one way or another.  This result may finally allow that to happen.

There's more than enough blame to go around on all sides.  Greece borrowed money like there was no tomorrow, and spent it like a whole fleetful of drunken sailors.  Its creditors lent it money like there was no tomorrow, despite knowing that the money would be poured down a bottomless pit and Greece would soon be back for more.  It got to the point where the vast majority of loans made to Greece were for no other purpose than to repay existing loans, as we pointed out this morning.  That sort of wilful misbehavior makes both sides equally guilty of the present situation, IMHO.  Neither had any sense of responsibility.

That's now come back to bite both sides in the ass.  If Greece refuses to go along with the only rescue package so far offered, it's facing really serious economic hard times - worse than the past five years.  It'll almost certainly have to leave the Eurozone and revert to the drachma, it's pre-Euro currency.  There's talk by some in Syriza that Greece could simply print its own Euros, but if it does that will devalue the currency throughout the entire Eurozone, because there'll be no control over the number of Euros in circulation.  (Then again, Syriza might not be averse to such a result.)  Other debt-burdened Eurozone nations such as Italy, Spain and Portugal might seriously consider following Greece's example and defaulting.  Even a threat to do so would probably force concessions from their creditors, because their debts are vastly greater than Greece's and a default would be correspondingly more harmful.

As for the USA, the New York Post states the obvious.

Most Americans look at the rerun of the Greek euro crisis with something between smug amusement and condescending disapproval. When will those profligate Greeks get their economic house in order and stop looking to others to bail them out?

But, should people living in glass economic houses really throw stones?

After all, just like Greece, the United States government has been living beyond its means, running up an enormous debt that will eventually need to be repaid.

. . .

Our national debt currently approaches $18.2 trillion, roughly 101% of GDP. That’s right. We owe more than the value of all the goods and services produced in this country every year. It is as if your credit-card bills exceeded your entire pay check.

That’s not quite as bad as Greece, of course, whose debt exceeds 177% of their GDP. But it is worse than countries like France or Spain.

And give us time! Like Greece, the driving force behind our debt is the growing cost of entitlement programs for health care and retirement. If one includes future unfunded liabilities for Social Security and Medicare, our real debt exceeds $90 trillion. That’s more than five times our GDP. Greece is still in worse shape — their unfunded liabilities top 875% of GDP — but we’re gaining.

At the heart of Greece’s problems lies a government grown too big, too intrusive, and too expensive. The Greek government spent nearly half of the country’s GDP last year (49.3%), and that actually represents a decline from the 51.8% it averaged since 2006. The Greek’s may complain about austerity, but they’ve hardly practiced it.

Our government is far smaller than Greece’s today. Federal spending is just 20.5% of GDP. But, according to the Congressional Budget Office’s alternative fiscal scenario, that could rise to almost 34% by mid-century. Factoring in state and local government spending, which already accounts for roughly 14.4% of GDP, total government expenditure in the US could reach 48% to 50% in 2050, roughly Greek levels.

There's more at the link.  Sobering reading.

The next week or two are going to be interesting times for the whole economy of Europe - interesting in the sense of the fabled Chinese curse.  My earlier caveats and precautions still apply.  Anything could happen.  If fiscal contagion spreads, or bursts out of control, things could happen with breathtaking speed.  Who, just nine days ago, would have foreseen a Greek referendum that might yet rip apart the Eurozone?



Glen said...

Greece can't print Euros, as there is not a printer in Greece currently able to print currency. I expect the EU would fight a contract to do the printing in the EU. Given they are in default, it would be difficult to find a printer in any case.

Old NFO said...

So the question now is what currency WILL they use... Revert to Drachma? And what will it be worth?

MadMcAl said...

Actually trying to print Euros could be constrained as an act of war.

I mean, what would the US say when... well, Mexico or Cuba would begin to print Dollars?

About the culpability of the lenders, there is one factor that most articles, blogs or "experts" seem to ignore.
The risk of a credit is normally reflected in the interests. So that when the debtor defaults at least higher interests are extracted.
In this case, true, the lender is responsible for his own demise if the debtor is expected to default. But in most cases the lender does not calculate the risk by himself, but is reliant on some rating agencies.
Now if the rating agencies make errors it should be at least laid at their feet when the credit goes in arrears.
And until 2010 Greece had a credit rating of A and partially even A+. That means until 2010 everyone who was knowledgeable about the true state of the greek finances "knew" that Greece was a good place to park your money, because the rating agencies certified it a "high potential of interest and capital repayment."
So was it the fault of the rating agencies?
Not really, because if the potential debtor actively and fraudulently deceives the rating agencies or the potential lenders, then that makes it a not a dumb move on the lenders but a criminal one of the debtor.
And Greece did exactly that. They hired Goldman&Sachs to literally hide their overspending with "creative accounting".
For everyone but a sovereign nation that would earn a confiscation of most of the goods and state sponsored vacation with extreme limited evening program.
That does not absolve the Banks from the whole responsibility, but much of it.

Greece is not in dire straights at this moment because they borrowed to much.
They are on sh*tcreek without a paddle because they lied to the markets, and had to confess.
Normally the markets don't let the situation out of control so much, as they regulate the credit via the risk and the interests.
But by circumventing this mechanisms, Greece not only borrowed much more than was healthy for them, they destroyed the trust the markets had in them.
Everybody seems to ignore that Greece is already cut of from the markets.
They only can borrow money from the other EZ-countries.
And that source is unfortunately for them coupled with some demands.

MadMcAl said...

Oups, forgot a word...

Should mean:
That means until 2010 everyone who was not knowledgeable about the true state of the greek finances

Inconsiderate Bastard said...

I don't know that there's an official effort for Mexico or Cuba to print dollars, but there are organizations within Mexico - and a few other countries, including the U.S. - trying to print dollars that will pass scrutiny. It's called "counterfeiting."

On a small scale, if the printing job is good enough, it works; on a very large scale it doesn't, because currency - which should not be confused with "money", although currency is conflated with "money" and does possess a value relationship with it - is merely a portable document which represents a share of value. What value it represents a share of is often open to conjecture, and obviously quite flexible, examples of which abound (a portable generator in south Florida on August 15, 1992 did not require much currency to obtain; ten days later no amount of currency could procure one). Increasing the amount of currency - technically - doesn't necessarily degrade that share value, at least not until those establishing the share value come to realize that it has decreased through currency volume increase (it is also possible to degrade the share value through the increase of "money", not just currency).

Greece's problem, or, rather, the problem everyone has with Greece, is that its indebtedness extends beyond its borders, a not uncommon occurrence in today's interconnected world, and that it's so far undecided whether Greece's major problem is economic or financial, or both.

Printing Euros, should that even be possible in Greece (and here I use "printing" as referring to both "currency" and "money") will not resolve Greece's problem because it is not Greece that solely establishes the value relationship between currency and money insofar as the Euro is concerned (a plausible argument can be made that Greece's actions have, in fact, noticeably degraded the value of both "currency" and "money" represented by the Euro). Attempting to do so would pose an interesting dilemma for those countries dependent upon the Euro: Is Greece authorized to create value associated with the Euro, and if not, is all the value Greece supposedly created by that action counterfeit? If so, or if not, whom is responsible for determining that?

MadMcAl said...

Yes, of course the action of printing dollars by a private organization is counterfeiting.
These organizations are relative small on the other side (only a relative small percentage of all currency is counterfeited).
What I wanted to illustrate was the idea of not a counterfeiting ring, but a sovereign nation simply using the $ as its own currency and instead of getting it from the outside simply print their own.
Technically also counterfeiting, but with the resources to do it "right". So good that even the Treasury can only identify them by the serial numbers.

The Bank of Greece is (at this moment) still authorized to issue €-notes.
This authority is delegated directly from the ECB, that is politically the only entity that has the right to issue them but delegates that to the various NCB's.
But the Bank of Greece has its own printshop.

So to stop them from printing their own it has to be drastic. Either a confiscation of the plates, or a complete redesign of the € and immediate invalidation of the old notes, or a war.