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Greece, Italy and the Euro

by Ivan Seeking
Tags: euro, greece, italy
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MarcoD
#73
Nov13-11, 12:39 PM
P: 98
Quote Quote by John Creighto View Post
Is there sort of a prisoners dilemma going on here. Everyone knows they can benefit from the European Union but everyone is looking for the most advantageous terms.
I think it's the growing pains of a union. Personally, I am not even that opposed to the current debacle, it forces the weak economies to restructure, and the debt position overall of Europe certainly doesn't seem worse in comparison to the US's.

I don't even like the idea of European bonds. I mean, to do what with them? Raise the overall government debt to 100%? A system in which debt is locally held, and in check with market forces, seems more robust in the long term.

The risk, of course, is that the whole of Europe may blow up... But I am gambling on the fact that there still is loads of money going round in most of northern Europe.
MarcoD
#74
Nov13-11, 12:54 PM
P: 98
Quote Quote by John Creighto View Post
I did mean deflation.
Hmm, this is the difference between historical financial fears of the US and Germany right? The US fear deflation, and the Germans fear inflation. The current rate of inflation in Europe was, last I heard, still in the 2%-3% range. I doubt deflation will be a problem anytime soon, but I may be mistaken.

(Anyway, wouldn't people buy government debt -certainly if it goes at 7%- if deflation is a problem?

To be honest, I am not an economist, and not from the US. I don't even understand the problems of deflation that well, seems it just isn't in my historical genes. Weird uh?)
MarcoD
#75
Nov16-11, 06:28 AM
P: 98
Quote Quote by Nikitin View Post
What about the Italian government debt credit default swaps?
Numbers are by Bloomberg, well, kind off.
Vanadium 50
#76
Nov16-11, 07:45 AM
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Quote Quote by MarcoD View Post
I always find the currency argument a bit silly. When it comes to government debt, there is no difference between a haircut, and devaluation of sovereign issued money.
Of course there is. A default affects those people who are holding bonds. A devaluation affects those people who are holding (or will be holding) cash.
MarcoD
#77
Nov16-11, 08:05 AM
P: 98
Quote Quote by Vanadium 50 View Post
Of course there is. A default affects those people who are holding bonds. A devaluation affects those people who are holding (or will be holding) cash.
Yeah, that's true, which is why I said: "When it comes to government debt, ...".

(Anyway, let's say Greece or Italy step out of the Euro. There is little to no chance that their external debt will be redefined it lires or drachmes - all creditors will want it in Euros. So leaving the Euro is hardly an option for them: they'll have external debt which will grow if they devalue their currency, their own assets evaporate, and the only good thing is that devaluing would help their export position but they'll have less export to Europe since their currency will be deemed unstable. There really doesn't seem any benefit to either the creditor or the debtor.)
AlephZero
#78
Nov16-11, 08:08 AM
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Quote Quote by MarcoD View Post
To be honest, I am not an economist, and not from the US. I don't even understand the problems of deflation that well, seems it just isn't in my historical genes. Weird uh?)
I'm still not quite sure what John Creighto means by "deflation", but the standard defintion is usually a good way to start a depression, because when prices are falling there is no incentive for anybody to buy stuff they don't actually need right now. Why buy something today for $100, if you know can buy it tomorrow for $99 or next year for $90?
AlephZero
#79
Nov16-11, 08:11 AM
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Quote Quote by John Creighto View Post
Interesting math but while 3+1 doesn't equal 7 part of the interest on the debt is paid of course from tax revenue.
And in the long term, increased tax revenue comes from increased economic activity. QED.

Of course you can try to "screw the 1%" as a short term measure, but the likely result will be they just move themselves and their wealth to some place else.
MarcoD
#80
Nov16-11, 08:21 AM
P: 98
Quote Quote by AlephZero View Post
I'm still not quite sure what John Creighto means by "deflation", but the standard defintion is usually a good way to start a depression, because when prices are falling there is no incentive for anybody to buy stuff they don't actually need right now. Why buy something today for $100, if you know can buy it tomorrow for $99 or next year for $90?
Yeah, I think I got it, and I think I understand the liquidity trap now. There doesn't seem to be a real danger for that, at the moment.

Back to that Bloomberg report. Anybody else got the feeling that this is a great time to be a banker, and -provided banks don't blow up- (inter-)national banks are soon swimming in GIIPS cash?
AlephZero
#81
Nov18-11, 06:59 PM
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A summary of "who owes what to whom": http://www.bbc.co.uk/news/business-15748696
MarcoD
#82
Nov18-11, 08:49 PM
P: 98
Quote Quote by AlephZero View Post
A summary of "who owes what to whom": http://www.bbc.co.uk/news/business-15748696
Either I am an idiot, or financial markets are. I mean seriously, Spain has an ok-ish public, and a large private debt, which is owned by the UK. That's probably mostly housing, which is worth exactly nada since their housing bubble collapsed. Who has the problem? If anyone is bankrupt, it's the UK's financial sector. But the Spanish are paying an enormous interest???

But I guess I am the idiot.
DoggerDan
#83
Nov19-11, 04:36 AM
P: 77
Quote Quote by John Creighto View Post
Maybe but who decided that above 90% debt to GDP was a dangerous situation.
The 95% of countries who don't share in the miseries of the 5%?
AlephZero
#84
Nov19-11, 08:02 AM
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Quote Quote by MarcoD View Post
If anyone is bankrupt, it's the UK's financial sector. But the Spanish are paying an enormous interest???
Spain not only has an economic depression caused by the property bubble collapse, but also some insanely protectionist employment laws. Employers are requred to give up to 5 years notice of redundancies, or keep paying people their full salary for doing nothing for that length of time.

The consequence is that no Spanish company has much interest in hiring new employees (hence youth unemployment is about 50%, and rising) and certainly no new startup company is going to base itself in Spain if there is an alternative option.

Financial markets work on the basis of predicting the future, not just on the current situation.
MarcoD
#85
Nov19-11, 02:02 PM
P: 98
Quote Quote by AlephZero View Post
Financial markets work on the basis of predicting the future, not just on the current situation.
Yeah, I know that. Housing bubble, expensive healthcare, lots of workers protection rights, large (youth) unemployment.

But that doesn't change the fact that the public debt is low, and that the (bad) private debt is probably owned by the UK. The country itself shouldn't have a fiscal, liquidity or solvency problem but only a structural problem, and the way to deal with that is mostly a political issue.

I mean, this is a scenario where some small Spanish banks will topple, private debt will be restructured, both at the expense of the UK, and Spain will be left with low public debt and a slow economy. That's not a bad position to end up with.

I don't know the cost of bailing out (the clients of) bad banks though.

(I really have the feeling that in this case, high Spanish interest rates are the by product of bad financial news from the UK which wants its investments to pay off, moreover, also dominate the international financial media. I can understand that a US firm went bust on this one, Spanish debt is okay but media coverage is 'irrational' about the situation.)
AlephZero
#86
Nov19-11, 02:44 PM
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Quote Quote by MarcoD View Post
But that doesn't change the fact that the public debt is low, and that the (bad) private debt is probably owned by the UK.
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
#87
Nov19-11, 03:50 PM
P: 98
Quote Quote by AlephZero View Post
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)
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.)

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 (I'll fill in 120% here)
Corporate 81%
Household 45%
Financial N/A in the link (which would mean 67%)
Aggregate 313%
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
#88
Nov19-11, 08:20 PM
P: 98
Quote Quote by AlephZero View Post
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)
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
#89
Nov20-11, 05:57 AM
P: 24
Quote Quote by AlephZero View Post
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%
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
#90
Dec1-11, 10:06 AM
P: 98
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?


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