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

[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.

 

[Nikitin]

The Italian 10 year loan rents hit 7% yield due to irrational fear, and I'm certainly no financial expert.

The only thing I fear at this moment is the yield due to this evil circle: the higher the yield the more fear and the more fear the higher the yield. Will the rents go down? I think if people get greedy enough and start buying, it will.As for the great depression, as far as I know it happened due to loaning and speculation on the stock market. It's an interesting pattern that pretty much every stock market crash happens after a rosy bull-market period.

 

[Borg]

The rates are going up because people who live and breathe market analysis see the Italian debt as unsustainable. There is a real probability that they will borrow more money than they can pay back. That increased risk is what is driving the rates.

Cautious investors don't want the risk and the investors that are willing to take the risk want a return that is commensurate with the risk that they are taking. Even the Chinese, who have huge amounts of cash, don't want anything to do with them right now. That could change but China would probably want additional guarantees.

Italy can possibly fix this but not if they continue with the status quo of their spending habits. The longer that continues, the more likely it is that they could have a default of some sort and someone will get stuck holding a bag of worthless Italian bonds.

 

[mheslep]

As for the great depression, as far as I know it happened due to loaning and speculation on the stock market. It's an interesting pattern that pretty much every stock market crash happens after a rosy bull-market period.

Clearly margin buying and rampant speculation were causes of the 1929 stock crash; the follow-on great depression was caused by the Federal Reserve acting to cut off the money supply, and, I think, was in part due to the actions of the federal government, especially raising tariffs on imports and other dramatic interference in the private economy, along with a deliberate PR campaign to vilify business.

 

[Nikitin]

I don't know much about the federal government's involvement, though I seriously doubt its involvement was destructive, but I'm pretty sure the stock market crash was not merely a symptom. Loads of people were loaning money from the banks and putting the money into the stock market. When the stock market crashed, lots of people were without money to repay the banks.

The rates are going up because people who live and breathe market analysis see the Italian debt as unsustainable. There is a real probability that they will borrow more money than they can pay back. That increased risk is what is driving the rates.

Cautious investors don't want the risk and the investors that are willing to take the risk want a return that is commensurate with the risk that they are taking. Even the Chinese, who have huge amounts of cash, don't want anything to do with them right now. That could change but China would probably want additional guarantees.

Italy can possibly fix this but not if they continue with the status quo of their spending habits. The longer that continues, the more likely it is that they could have a default of some sort and someone will get stuck holding a bag of worthless Italian bonds.

Yup. Though if you're buying 10-year bonds It'd be silly to worry about Berlusconi being booted and some financial problems. Chances are Italy will get into much bigger trouble than this during a 10 year period, thus the yield increase isn't really rational.

 

[Nikitin]

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.

No, the CDS predicted that Greece would default on its loans {again}. The prediction was right, as Greek debt was haircut (not a technical default as that would be catastrophic, but a default none the less).

 

[Borg]

I don't know much about the federal government's involvement, though I seriously doubt its involvement was destructive, but I'm pretty sure the stock market crash was not merely a symptom. Loads of people were loaning money from the banks and putting the money into the stock market. When the stock market crashed, lots of people were without money to repay the banks.
Yup. Though if you're buying 10-year bonds It'd be silly to worry about Berlusconi being booted and some financial problems. Chances are Italy will get into much bigger trouble than this during a 10 year period, thus the yield increase isn't really rational.

I didn't say anything about Berlusconi or that this has anything to do with him. You're not making sense w.r.t. the bonds. If Italy defaults, the 10 year bonds will be worth zero. That is clearly something for the markets to worry about.

 

[Nikitin]

This has everything to do with Berlusconi. The yield jumped from a sustainable rate to 7,4% directly due to the political squabbling and Berlusconi's removal.

Italy will not default due to some political instability. Italy will default if its debt gets out of control and economy start to break down.

My point was, that it is highly improbable that Italy won't get into worse trouble than it is in today. The yield of 10 year bonds shouldn't really be affected much by current events, but by the structural health of the Italian economy (which isn't nearly as bad as Greece's or Protgual's).

 

[MarcoD]

No, the CDS predicted that Greece would default on its loans {again}. The prediction was right, as Greek debt was haircut (not a technical default as that would be catastrophic, but a default none the less).

I agree, I stand corrected. The market predicted a haircut and it happened in the Greek case. I saw that the Italian CDSs became somewhat more expensive but I can't translate it to a probability on an Italian default. I think I heard it being translated to around 50% on the radio, but I might have gotten it wrong.

I am a bit baffled by people proposing that the ECB should buy the Italian debt though. I mean, that's equivalent to just printing money to buy debt, right? Looks to me that they can do that a little bit, but at the risk of (hyper-)inflation, pushing up the interest rates of all European economies, and subsequently blowing up the whole of Europe. I mean, Dutch interest rates are 2.2% now, what happens if all European governments need to borrow at 7%?

 

[mheslep]

Greece, Italy and the Euro Thread:

I don't know much about the federal government's involvement, though I seriously doubt its involvement was destructive, ...

There had been several similar panics prior to 1929; in those instances the market and economy always recovered within a year or so. The 1907 panic caused a 50% stock drop which returned to previous highs within eight months. In the months after the 1929 panic the stock market recovered half its value before the government via the actions of the Federal Reserve turned the panic into a national banking collapse which began the Great Depression. There is debate about the impact of policy actions by the US government itself (i.e. not the central bank) with regards to extending or shortening the Depression, but there is no question that at least some of those actions were destructive; http://en.wikipedia.org/wiki/National_Industrial_Recovery_Act" in particular was found unconstitutional and was cancelled.

"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again.

http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

 

[John Creighto]

I agree, I stand corrected. The market predicted a haircut and it happened in the Greek case. I saw that the Italian CDSs became somewhat more expensive but I can't translate it to a probability on an Italian default. I think I heard it being translated to around 50% on the radio, but I might have gotten it wrong.

I am a bit baffled by people proposing that the ECB should buy the Italian debt though. I mean, that's equivalent to just printing money to buy debt, right? Looks to me that they can do that a little bit, but at the risk of (hyper-)inflation, pushing up the interest rates of all European economies, and subsequently blowing up the whole of Europe. I mean, Dutch interest rates are 2.2% now, what happens if all European governments need to borrow at 7%?

If all of the European governments needed to borrow at 7% then certainly the Dutch interest rate wouldn’t be 2.2%. If the European central banks were trying to not change the money supply they could sell their Dutch debt and buy Italian debt. All central banks influences the money supply by their actions. The only question is how should they do it and how much should they do it.