Greece, Italy and the Euro

AlephZero

Do you have any evidence for that assumption? (In any case, "Spanish private debt owned by the UK" seems a strange way of doing the accounting, even if you are talking about British nationals with second homes in Spain)

Some numbers from http://www.bbc.co.uk/news/business-15789385

Spain in 1989:
Government debt 39% GDP
Corporate debt 49%
Houshold debt 31%
Financial sector debt 14%
Aggregate 133%

Spain now:
Government 71%
Corporate 134%
Household 82%
Financial 76%
Aggregate 363%

Compare with Italy:
Government N/A in the link
Corporate 81%
Household 45%
Financial N/A in the link
Aggregate 313%

MarcoD

I extrapolated that from the BBC reference you gave, I'll look it over again to see if I didn't get the charts wrong.

Oops: The arrows seemed to be contrary to my intuition, but the foreign UK debt could also be read as the collateral used for investment, and close UK/Spain ties. Hmm, I think I got that wrong to translate that to UK investment, apologies, it is French and German debt - not UK. (Apologies again. My original reasoning was that Germany and France hold Spanish debt, and the Spanish hold UK debt, therefor, the UK is 'working' to pay off the Spanish debt. I think I got the spread number wrong, though.)

But that's the problem with external debt, right? First, external debt sometimes is high whereas the numbers are meaningless, Luxembourg has around 3,400% GDP external debt.

Second, not all debt is bad. If companies invested in production capability by upgrading their machine park with cheap money, then that is a solid investment. Also, household debt is okay if invested in real-estate instead of consumed. So what to do with these numbers?

Third, there is the point that you can't add all these debt together. Sure it says something about an economy, but normally you wouldn't find, in a scenario where IBM has large debt and Apple none, IBM a healthy company, but you could claim that on average, the IT sector is doing okay. (And still you wouldn't know since IBM might be investing and therefor outpace Apple in a few years.)

It looks to me that Italy's government has far larger problems than their economy, and the Spanish government hardly has a problem with debt but solely with the economy, the youth unemployment. As long as they can service their debt, even with 50% youth unemployment, nothing is the matter.

MarcoD

I am still in economy class 101, but puzzling a but further. First, it is odd that Spain would have invested that much in the UK, that doesn't really make sense, right? So there is something strange about the UK debt owned by the Spanish. I think I figured it out.

It has to do with the UK having its own currency.

Say investors in Spain want to sell to the UK. If they find an investor, he pays in British pounds, fine. So a Spanish bank ends up with pounds, doesn't know what to do with it, but it is worthless to have it laying around so the bank buys UK treasuries, and uses those as collateral to buy Euros, and the deal is finished.

So, yeah, the UK debt hold by Spain may well be British investment. Then again, it may also be the result of UK tourists buying sangria, or pensionistas buying homes. No idea.

No idea if this makes economic sense though.

sfs01

The glaring omission in that article is however the same statistic for the UK, with aggregate debt at 469%. Even after gratuitously subtracting the contribution of the London financial sector, it remains above that of Spain in the underlying source (http://www.mckinsey.com/mgi/.../debt...ull_report.pdf)

MarcoD

I hope that the all of you are not too bored with the subject, but the situation is getting grim. Looks like they either solve it or maybe this, maybe next, year we will see countries defaulting and possibly banks topple over.

Interestingly, that means that maybe in a year I'll be standing in line for free food?

John Creighto

It seems like there are lots of good plans in place. It is just a matter of getting the political will to follow them and then implementing them properly

lisab

Boring? No way - I find it very interesting. Not interesting , more like interesting .

I surely hope not. If the Euro fails, it would be catastrophic for most large economies in the world.

Now some companies are making contingency plans (which is understandable - they have to manage risk). Problem is, such plans may make a breakup more likely. What a mess!

Hlafordlaes

So far, correct.

Wildly inaccurate. There are many forms of contract, but the standard and "fearsome" one is the full-time, tenured position. The employee can only be fired "legally" if caught with his/her hands in the till, or for verbally abusing the owner, or something glaring. So, after dismissal, most ex-employees will file a civil suit, declaring the firing "improper," and getting as a financial reward 45 days pay for every year worked, pro-rated. Less often, an employer can be ordered to restore the employee to his former position, although more often than not that is when the firing has been fishy or broke some other formal agreement.

Today, the average spend for firing is around 30 days per year worked, pro-rated. That's not 5 years pay, but it still is a good chunk and can force companies to hold onto less productive dolts and not hire someone better. Lotsa satisficing, iow.

Having been there and done that as both employer firing and employee getting let go, I can say that this is not the greatest of our problems here. What we all do now is give people temp contracts, and let them go when the law would force us to change them over to tenured positions (>3 years on the job). So, what labor law has wrought is tremendously precarious job positions, and poor human capital development.

The main problem is that labor contracts are negotiated by industrial sector and are currently applied nation-wide, so that a smaller, weaker company, or a fledgling start-up, finds itself required to not only follow salaries, but also work rules, that were designed for the largest and strongest in the industry. Ridiculous.

...

Lest you believe the Spanish are completely insane, this mess was created by Franco, the country's former fascist dictator. He granted all these rights and rules to labor in order to reduce strife and prevent wild cat strikes, while otoh absolutely prohibiting organized strikes, most unions, and free speech. Back then it was a good deal for employers, too, since judges and rulings were slanted in their favor. Along came democracy, and when unions were allowed to form freely, and the right to strike restored, someone forgot to eliminate the insane tenured position and mad sectorial contract rules.

mheslep

Yes that's right, and US problems were created by King George III.

Hlafordlaes

Actually, by Kings George I and II, as well and Ronald the Renowned, and all the magical thinking their counselors engaged in.

MarcoD

I doubt the Euro will break up, even if banks and governments topple over, it's near impossible to return to the previous situation. Just imagine Greece would leave, or kicked out of, the Eurozone. We have free transfer of money in the EU. It would take them a year to implement the Drachme, and meanwhile all Greeks would transfer their money to northern Europe, most of the Greek banks would fall since that's equivalent to a bank run, you'ld end up with a shadow Euro economy and the Drachme would be completely worthless and Greece's government would be unable to borrow any money. It would end up akin to a third world nation where everybody prefers to pay in dollars instead of its own currency. Completely impossible.

Meanwhile, if Germany and France would start their own currency, they might impose this scenario on the south, and their loans would be worthless, and their economies a lot weaker.

Everybody keeps on talking about the Euro, but really, the currency is irrelevant. It's a government debt and bank leverage problem, nothing else.

MarcoD

Which is why I think Spain is not that badly off. Implement some structural change and the economy will be boosted by foreign investment, and the government debt would be relatively low. The deflated property bubble is pretty bad though (but if I am right, this debt is mostly owned by UK banks, so it's not Spain, but the UK which has problems.)

LaurieAG

I wondered about the attached NYT cartoon until I noticed that Angela Merkel had a PHD in Physics.
http://www.dw-world.de/dw/article/0,,4580585,00.html

Attached Thumbnails

 

AlephZero

I dunno about the PhD. I think it's a German translation of Zeno's paradox.

russ_watters

Looks like an English version to me.....and I'm not going to have to explain irony to you, am I...?

AlephZero

Well, he's got a Bavarian hat and beer stein ...

I don't do irony, I send my shirts to the laundry.
-- Scott Adams.

lisab

France and 8 other European nations saw their credit ratings downgraded today -

http://money.cnn.com/2012/01/13/mark...x.htm?iid=Lead

I think this news was expected and already build into the markets. But that's just my WAG - anyone think otherwise?