News Can the Eurozone Survive the Economic Challenges of Greece and Italy?

[Ivan Seeking]

Wow, the Dow dropped almost 1000 points today as traders watched the riots in Greece. Luckily it seems to be recovering now - back up about 500 points at 10,330.

It scared the hell out of me. For a time it was looking like 2008 all over again. Nonetheless, contagion is a problem.

 

[mgb_phys]

Interesting technical question though - what happens if Greece goes bust?

Greek euros aren't any different from any other, so you can't have an exchange rate.
Although there has apparently been lots of people in Germany insisting the bank change their foreign euro notes for German ones!

If you were to kick Greece out of the euro and force it to print it's own notes you would need to do it instantly and in secret - otherwise people would simply hoard euro cash (assuming the replacement new-drachma would drop like a stone)

But it took years of planning and months of implementation to swap to the Euro - there's no way a country could leave it without people finding out in advance

 

[Ivan Seeking]

One trader is saying that it was a technical artifact relating to something that happened with Procter & Gamble stock.

Being up about 70% over the last year [the Obama market], some analysts are saying that the market is due for a 20% or so correction. Many are expecting this. So, beyond everything else, there is a predisposition for volatility.

 

[cronxeh]

I was waiting for this to happen for a while now. I'm hoping the DOW stabilizes around 9200, but really this is a good thing for the US Dollar.

 

[Office_Shredder]

Which is bad for the American manufacturing base (at least the ones that want to export)

 

[mheslep]

I think Greece will either
1. default because their parliament will not implement the agreed cuts and then see Argentina 2001 for the rest (including bank failures in other countries).
2. leave the Euro, switch to a devalued national currency, a huge undertaking which will cause banking failures in Greece as all the local Euro deposits flee to banks outside Greece.

 

[cronxeh]

Which is bad for the American manufacturing base (at least the ones that want to export)

That is not exactly the case though. Considering USA doesn't export much of anything, what we do export (capital goods, industrial supplies, consumer goods and agricultural products) is still something that you can't get anywhere else in the world. Anything from Apple to pharmaceuticals we are essentially in an anti-trust with the rest of the world as far as exports go.

Just because it is more expensive for the rest of the world to buy our stuff does not mean they will stop buying it. The prices may have to be pushed down but that will be picked up by the local demand, and in turn stimulate the growth of these companies. If anything the increased aggregate demand should push us through this recession and set us up to be the dominant player in the global market. I just wish I planned for a vacation sooner

 

[Ivan Seeking]

I thought it was interesting to note [wiki] that Greece has a gdp of about 356 billion; about the same as the State of Michigan. The European Union has a combined GDP of 16.5 trillion. So the Greek economy only represents a little over 2% of the Euro economy.

 

[cronxeh]

Sun is up in Tokyo, market opens in about an hour.. grab some popcorn and wait to see what happens. My gasoline is finally going below 3 bucks a gallon this weekend, woohoo

Here is a http://www.google.com/finance?q=INDEXNIKKEI:.N225" to Nikkei 225 index. Any bets on how low it will go? I want to say.. 10500.

 

[cronxeh]

10,470.99 !

Oh man

 

[lisab]

That is not exactly the case though. Considering USA doesn't export much of anything, what we do export (capital goods, industrial supplies, consumer goods and agricultural products) is still something that you can't get anywhere else in the world. Anything from Apple to pharmaceuticals we are essentially in an anti-trust with the rest of the world as far as exports go.

Just because it is more expensive for the rest of the world to buy our stuff does not mean they will stop buying it. The prices may have to be pushed down but that will be picked up by the local demand, and in turn stimulate the growth of these companies. If anything the increased aggregate demand should push us through this recession and set us up to be the dominant player in the global market. I just wish I planned for a vacation sooner

...? You mean the http://en.wikipedia.org/wiki/List_of_countries_by_exports" "doesn't export much of anything"?

 

[lisab]

Wow, the Dow dropped almost 1000 points today as traders watched the riots in Greece. Luckily it seems to be recovering now - back up about 500 points at 10,330.

It scared the hell out of me. For a time it was looking like 2008 all over again. Nonetheless, contagion is a problem.

The situation in Greece is clearly causing jitters in worldwide markets, but it may not have been the primary cause of today's precipitous drop.

CNBC reported that the wild ride, which played out largely from 2:30 to 3 p.m. ET, might have been caused by human error when a trader hit B for "billion" in a trade instead of M for "million." CNBC said trading sources told it that the error may have happened at Citigroup, the nation's No. 3 bank company.

Citi said it had no evidence of a bad trade but was looking into the situation, a spokesman said.

http://www.msnbc.msn.com/id/36999807/ns/business-eye_on_the_economy/

Wow, if that turns out to be true, it's amazing that one slip of the finger can have that effect!

 

[mheslep]

Considering USA doesn't export much of anything,

Eh? US goods and services exports to all countries for 2008 were http://www.trade.gov/press/press_releases/2009/export-factsheet_021109.pdf" , a little more than 10% of the US economy.

Edit: I see that also caught lisab's attention. Also I'd have to check, but I believe some of those lists short change services of which the US is particularly strong. If one uses the US Dept of Commerce figures the US is the worlds largest exporter by several hundred billion dollars.

 

[mheslep]

So the Greece bailout so far seems to be $145 billion (so far), or about $13k per Greek. I fail to see why the United States has to be paying a large portion of that, especially under current conditions.

 

[mgb_phys]

I fail to see why the United States has to be paying a large portion of that, especially under current conditions.

1, It isn't. The US is about 15% of the IMF and the IMF is about 20% of the bailout.
2, It's a loan - and at "no one else would lend to you" rates Germany is going to make a killing

 

[mheslep]

1, It isn't. The US is about 15% of the IMF and the IMF is about 20% of the bailout.

Sorry $4 billion still qualifies as a lot to bailout early retirement in the Aegean.

2, It's a loan -

No improvement, as the US can only loan money via the IMF that it has already borrowed and pays interest upon these days.

 

[Office_Shredder]

2, It's a loan - and at "no one else would lend to you" rates Germany is going to make a killing

The whole point of the bailout is that it's not at 'no one else would lend to you' rates, otherwise it wouldn't actually fix any problems

 

[mgb_phys]

Germany is still borrowing at German bond rates and lending at Greek bond rates - quite a spread.
Of course it's not going to fix the problem - the problem is for 40years they voted in governments that promised to spend but not collect taxes.

 

[CRGreathouse]

Germany is still borrowing at German bond rates and lending at Greek bond rates - quite a spread.

And taking on its risk, of course.

 

[Ivan Seeking]

http://www.abc.net.au/news/video/2010/05/20/2905304.htm

 

[Monique]

That's funny and sad at the same time, the whole situation is ridiculous. I hope the Greek will take responsibility for their actions soon, the population needs to step up and actually do something to improve their economy.

In little over a week there will be elections to vote for a new Dutch government. Naturally the financial crisis is the major subject of the elections and some major cuts need to be made to stop the deficits from rising. The polls indicate that we've never had people voting so much for the right parties before, this indicates that people realize something needs to be done and we can't lay back and expect problems to be solved.

 

[magpies]

Well it's not just the greek as I understand it most of the states in the us have a bit of debt. Of course the question is debt to who? Mother nature imo.

 

[magpies]

Did you say the dow went down 1000 on one day? I was fairly sure they passed regulation that states it can't go down more then 500 in a given day.

 

[mgb_phys]

And taking on its risk, of course.

Yes that's the real point. Germany is really just taking over the loan payments Greece has to make. So this is really a bailout of German banks by German taxpayers - it's just a bit more palatable to the voters if you pretend it's either a generous gesture to the poorman of europe or a sound financial sense to protect the euro.

 

[mheslep]

Well the Greek referendum effectively dumps the EU backed debt deal.

Next up, Italy. Italy's debt is ~$2.2 trillion which it will now have to roll over at 6+%.

10 year Italian bond
[PLAIN]http://www.bloomberg.com/apps/chart?h=200&w=280&range=1y&type=gp_line&cfg=BQuoteComp_10.xml&ticks=GBTPGR10%3AIND&img=png
European banks hold ten times more Italian debt than they do Greek.

Going, going, ...

 

[AlephZero]

The fundamental disinterest in democracy of the EU "project" has finally met a nemesis, and it's just ironic that it happens to be Greece.

Remember the situation over the last EU treaty changes, where some member states had a constitutional requirement to hold a referendum? The EU attitude was "OK, that's fine, but if you get the wrong result you will have to keep holding referendums till you agree with what WE want."

You can only play that game for so long before something turns nasty.

 

[mheslep]

Question: Do you thing the recent introduction of the euro will lead to formation of other common-currency areas?

That’s an extremely interesting question. I think that the euro is one of the few really new things we’ve had in the world in recent years. Never in history, to my knowledge, has there been a similar case in which you have a single central bank controlling politically independent countries.

The gold standard was one in which individual countries adhered to a particular commodity—gold—and they were always free to break or to leave it, or to change the rate. Under the euro, that possibility is not there. For a country to break, it really has to break. It has to introduce a brand new currency of its own.

I think the euro is in its honeymoon phase. I hope it succeeds, but I have very low expectations for it. I think that differences are going to accumulate among the various countries and that non-synchronous shocks are going to affect them. Right now, Ireland is a very different state; it needs a very different monetary policy from that of Spain or Italy.

On purely theoretical grounds, it’s hard to believe that it’s going to be a stable system for a long time. On the other hand, new things happen and new developments arise.

The one additional factor that has come out that leads me to raise a question about this is the evidence that a single currency—currency unification— tends to very sharply increase the trade among the various political units. If international trade goes up enough, it may reduce some of the harm that comes from the inability of individual countries to adjust to asynchronous shocks. But that’s just a potential scenario.

You know, the various countries in the euro are not a natural currency trading group. They are not a currency area. There is very little mobility of people among the countries. They have extensive controls and regulations and rules, and so they need some kind of an adjustment mechanism to adjust to asynchronous shocks—and the floating exchange rate gave them one. They have no mechanism now.

If we look back at recent history, they’ve tried in the past to have rigid exchange rates, and each time it has broken down. 1992, 1993, you had the crises. Before that, Europe had the snake, and then it broke down into something else. So the verdict isn’t in on the euro. It’s only a year old. Give it time to develop its troubles.

http://www.bankofcanada.ca/wp-content/uploads/2010/08/keynote.pdf
That's so prescient I suspect the guy had his own time machine.

 

[John Creighto]

I initially thought the Austerity measures were hard on Greece but it seems to have gotten spending under control there. Greece has been offered a deal which will forgive 20% of their debt (although it is pitched as 50% by 2020) to get their debt to a sustainable level. I think it would be wise to take it but if they don’t then I presume Greece will be forced to leave the Euro and spending will be corrected by having inflation eat at wages. Their needs to be a plan B for the case that Greece leaves the Euro and how much debt will be allowed to be converted to the New Greek currency which will emerge. To help make the terms of the deal easier the EU should do a round of quantitative easing to inflate away some of the debt in Europe.

 

[DoggerDan]

European banks hold ten times more Italian debt than they do Greek.

So you're saying the Greek issue is merely a weatherbell?

 

[MarcoD]

So you're saying the Greek issue is merely a weatherbell?

Nobody knows at the moment. The Italian interest on government bonds skyrocketed after Greece's downfall such that it is barely manageable for them. At the same time, the Italian debt is smaller than Greece's, and the economy is much stronger. The only deal which came out of Cannes is that Italy now will be monitored by the IMF. Probably they just want lower interest rates, I don't think anyone will buy into it. They need to get their debt down, like everyone else.

Italy doesn't seem to need IMF support at the moment, but it may fall at some point.

 

[LaurieAG]

Well the Greek referendum effectively dumps the EU backed debt deal.

The Greek PM only used the democratic card of last resort to get support for the bailout from opposition politicians, he did not really want to give the Greek people a referendum vote. So, instead of a quick and bloody correction there will just be a very long and drawn out opportunity for making money out of volatility, especially if the opposition gets a new election.

But if Greece still continues its downward trend then separation from the Euro will be necessarilly imposed on Greece by external forces for wider political/economic survival reasons.

The only problem with this approach, when compared with the one taken in Iceland, is that the amounts of money involved will get larger while delaying the inevitable will only weaken any governments/citizens ability to manage this eventuality in the future.

 

[mheslep]

So you're saying the Greek issue is merely a weatherbell?

Yes.

 

[mheslep]

The Greek PM only used the democratic card of last resort to get support for the bailout from opposition politicians, he did not really want to give the Greek people a referendum vote. ...

Plausible but how do you know this?

 

[LaurieAG]

Plausible but how do you know this?

If you read the articles on NYT or any other major newspaper you would probably get the general idea. Paul Krugman has been analysing the differences between Iceland and Greece.

Its much of a muchness now as the Greek PM looks like resigning anyway.

 

[Nikitin]

Well, I did back up my hunch in the OP.

You guys saw the market panic today? damn, a shame though a bit interesting. People are actually afraid that Italy & Greece will go for the worse due to some political instability which most likely will be over soon (the politicians know the seriousness of the situation).

The main problem though, is that people stop buying Italian government bonds. Since most of these bonds take 5-10 years to mature, Italy is bound to get in bigger trouble than Berlusconi the mafiaso finally being booted + some economic insecurity (which has lasted for years, anyway), thus the fear is irrational. Or my guessing is rubbish.

 

[mheslep]

Well the Greek referendum effectively dumps the EU backed debt deal.

Next up, Italy. Italy's debt is ~$2.2 trillion which it will now have to roll over at 6+%.

10 year Italian bond
[PLAIN]http://www.bloomberg.com/apps/chart?h=200&w=280&range=1y&type=gp_line&cfg=BQuoteComp_10.xml&ticks=GBTPGR10%3AIND&img=png
European banks hold ten times more Italian debt than they do Greek.

Going, going, ...

The chart link updates in real time.
Now 7.25 (November 9)
Going, going, going, ...By contrast Ireland implemented an austerity program, some real spending cuts. The Irish 10 Year bond:
[PLAIN]http://www.bloomberg.com/apps/chart?h=200&w=280&range=1y&type=gp_line&cfg=BQuoteComp_10.xml&ticks=GIGB10YR%3AIND&img=png

 

[MarcoD]

Yes.

Well, seems you were right on the weather bell. Italy's government bonds now passed the 7% interest magic limit. Most financial experts believe that the 7% interest limit signals the point where a government is bankrupt; i.e., there's no manner in which a government can pay back the debt.

Probably, the next couple of weeks -if interest stays at 7% or above- we'll see Italy apply for EU/IMF support (i.e., cheaper financing).

 

[Nikitin]

What about the Italian government debt credit default swaps? These would be the true indicator of the marked betting against Italy.

Anyway I'm no economist but I think you are worrying too much. I mean when was the last time a collapse was predicted by most media outlets in the world at the same time? And the Italian economy isn't that indebted, http://en.wikipedia.org/wiki/Net_international_investment_position . One might guess that the Spanish economy with its heavy trade deficit, huge unemployment and debt would buckle before Italy.

 

[Borg]

You might want to read this:

http://news.yahoo.com/italys-crisis-why-worry-161155642.html"

Today's selloff was mainly due to Italian Bond Yields going over the 7% mark combined with the massive amount of debt that they have. If Italy doesn't get its house in order, today's drop could look like a picnic. And, don't forget the US supercommittee has a huge deadline later this month. This summer's budget fights don't bode well for that either. There isn't a lot of good news out there.

 

[Nikitin]

Budget fights, fear mongering, fighting over power.. I don't see this is a big problem, politicians aren't dumb (most of them) and they will resolve this.

I am of course nervous about investors running away from Italian bonds (no rational reason to run away from Italy but to stay with Spain or Portugal, though) and thus increasing the yield, but what about US manufacturing companies posting generally good numbers from Q3+ increasing employment in the US economy? Inflation in China is decreasing as well, so maybe the Chinese government will start pumping money into the economy again?

Correct me, but all in all I think there's disproportionally much doom and gloom in the markets.

 

[MarcoD]

What about the Italian credit default swaps?

I don't know, really, I am not a financial expert. But it seems to me that CDSs, which are 'bets' in the hands of others than the government, are indifferent to Italy's government debt position. The market is weird, the CDSs predicted a 100% certain Greek collapse which didn't happen yet. I am pretty certain the CDS rates, whatever they are at the moment, are not a good predictor since I imagine most people will expect Europe to take over the debt; i.e., the debt is mostly guaranteed, but the Italian government will not be able to borrow from the financial markets itself but will need to go through the IMF/EFSF. At worst, they are a market predictor of the whole of Europe going bankrupt.

Tbh you are worrying too much, when was the last time a collapse was predicted by most media outlets in the world at the same time? And the Italian economy isn't that indebted, http://en.wikipedia.org/wiki/Net_international_investment_position . One might guess that the Spanish economy with its heavy trade deficit, huge unemployment and debt would buckle before Italy.

Again, I don't know. I don't think in this case the international debt figures -which I don't understand,- are that relevant. The 7% interest limit is seen as a hard limit on government debt, I doubt it matters whether the liabilities are international or national.

My best guess is that if the financial experts believe that the 7% is unsustainable, then either Italy implements a number of austerity measures fast -which is what they are doing now, while also kicking Berlusconi out- and hopefully get the interest number below that before a substantial part of the debt needs to be rolled over, or the rest of Europe will need to bail out Italy. The latter, of course, is an informal but not a technical bankruptcy.

At the moment, in Italy, the government is asking wealthy Italians to buy the debt?

Again, these are all the best guesses of a financial nitwit. Best I can do is repeat what the real experts think, which I didn't do in the above speculations.

(Italy is different than Greece. The Italians are rich, the economy is strong, though their government may be broke. I don't think there is a need for a hair-cut like in Greece, they just need to reform government, and probably raise taxes to get out of the current debt hole... and maybe apply to the EFSF/IMF meanwhile.)

 

[SW VandeCarr]

Correct me, but all in all I think there's disproportionally much doom and gloom in the markets.

OK. In 1929 there were no wars, shortages, plagues, or even a lot pessimism before October. Why did stock markets and eventually the world economy collapse? Today the interest rate demanded by the market for Italian government 10 year bonds hit 7%. For Italy, that rate is unsustainable. What would make that rate go down? What would make that rate go even higher? It's a gamble that has little to do with business activity and that's the mistake that you and many financial advisers are prone to. Markets are affected by many things, and it's quite obvious that a major default in the Euro zone will have severe ramifications. You can be cautious or you can be daring. But to say there is too much gloom and doom and that we can rely on politicians to do the right thing is bologna!

 

[klimatos]

So the Greece bailout so far seems to be $145 billion (so far), or about $13k per Greek. I fail to see why the United States has to be paying a large portion of that, especially under current conditions

Because if Greece defaults a very large number of very influential Americans will loose very large sums of money. This bailout is part of the ongoing process to make investment profits private and investment losses public.

 

[rootX]

Because if Greece defaults a very large number of very influential Americans will loose very large sums of money. This bailout is part of the ongoing process to make investment profits private and investment losses public.

Can't they take over all Greece assets (government land properties/historical sites)?

I was thinking the most ideal way out of this is let Greece default and get ownership of all its assets to pay back the investors.

It angers me when I see how others are punished for irresponsible Greeks behavior.

 

[AlephZero]

Again, I don't know. I don't think in this case the international debt figures -which I don't understand,- are that relevant. The 7% interest limit is seen as a hard limit on government debt, I doubt it matters whether the liabilities are international or national.

It's not a "hard" limit, it's just a measure of the risk investors are prepared to take in the current low-interest-rate low-inflation environment.

There's another factor. The clearing house for settling bond trades (LCH Clearnet) has raised its margin deposits on Italian bond trades by about 75%in the last few days. That instantly makes trading them much less attractive compared with the alternatives.

At the moment, in Italy, the government is asking wealthy Italians to buy the debt?

We are talking big numbers here - more than 350 bn Euros in 2012 just to "recycle" the short term debt that will come due for repayment. I don't know if the Vatican and the Mafia can afford that sort of money

Nobody knows what the worst case scenario would be, but 2000 bn Euros is one credible estimate.

The Italians are rich, the economy is strong, though their government may be broke.

Not only broke, but completely broken. An analogous scenario in the US would be something like this: imagine Rupert Murdoch had bought up several more media channels (including public service broadcasting) and had more or less 100% control over the national news media; he then became President while keeping full personal control of his media empire; he then stayed in office for 16 years; oh, and he also changed the law so that he was untouchable by the legal system on any grounds whatever...

 

[MarcoD]

Can't they take over all Greece assets (government land properties/historical sites)?

I was thinking the most ideal way out of this is let Greece default and get ownership of all its assets to pay back the investors.

I think the British did that once when Greece defaulted. They seized lots of Greece's cultural heritage. In the end, they gave it all back.

What are you going to seize? You can ask for an island, then what? You own an island with twenty thousand grumpy Greeks on it? What are you going to do? Tax them?

Again, Greece is not a problem. It is 2% of the EU. If Germany wanted, it could probably buy Greece's debt by itself. Nobody cares. It ain't nice for Greece's public what's happening, I sympathise, but they are nothing in comparison to Italy. Italy is the third economy of the EU with a debt larger than most of the other PIIGS combined.

It may be that interests rise since investors are worried the EU will inflate their way out of (Italian) debt. No idea.

 

[AlephZero]

Can't they take over all Greece assets (government land properties/historical sites)?

You have the "being in debt" problem the wrong way round. It's the old joke: if you owe your bank $10,000 and you can't pay, you have a problem. If you owe the bank $10bn and you can't pay, the bank has a problem.

But I guess once the US has lost interest in screwing up Iraq and Afghanistan, it could try invading Greece as its next adventure. Just so long as you don't try to claim the British Museum in London is also US territory because the Elgin Marbles are there.

 

[MarcoD]

... because the Elgin Marbles are there.

I looked that up. Seems I got my history screwed up. I thought I remembered British seizing Greek assets, but looks like I was mistaken.

 

[klimatos]

Can't they take over all Greece assets (government land properties/historical sites)?

I was thinking the most ideal way out of this is let Greece default and get ownership of all its assets to pay back the investors.

It angers me when I see how others are punished for irresponsible Greeks behavior.

Unfortunately, this is not possible. These assets were not pledged as collateral for the loans. They cannot be legally seized upon default. Greek bonds, like US bonds, are back by the "good faith and credit" of the nation. The credit disappeared a long time ago, and the good faith followed soon after.

My complaint is with the whining of the investors. For years they received high yields to compensate them for high risks. Well, . . . they lost. They should either take their lumps like men or give all those yields back with interest.

 

[mheslep]

Because if Greece defaults a very large number of very influential Americans will loose very large sums of money. ...

Perhaps, but how do you know this? For all I know Greek bonds are held by the Wisconsin teachers union pension fund, and they, or those like them, are exerting political influence on the IMF level pullers.