Showing all posts tagged: debt crisis
The inevitable has happened: the technocratic government of Mario Monti, which imposed huge austerity measures in Italy with the approval of the financial and political elite of the EU, has fallen. He announced his intentaion to resign after Berlusconi’s People of Liberty party expressed no confidence.
Where’s the populist that will rally a new deal in Italy? Surely not Berlusconi?
Greece is led by technocrats hand-picked by the European troika — the European Commission, International Monetary Fund, and European Central Bank — who have done their bidding, up to and including cramming a recent €9.4 billion increase in 2013 taxes, and €17 billion by reducing pensions and public-sector salaries over the next four years.
But those efforts may not be enough. The troika is debating whether the weakened economy of Greece — worn down by the austerity theater being played out they — will be able to sustain the new debts being incurred. Note that this money is not a ‘bail out’: it is new debt being used to pay off old creditors, primarily. It is not streaming into Greece to build infrastructure or clean children’s teeth.
James Kanter, Euro Zone Finance Ministers to Wrestle With Greek Debt
Many analysts agree that at some point, Greece’s official lenders will have to take politically unpalatable losses, or haircuts, on their holdings of Greek debt in order to keep the country in the euro area, even if a range of other measures is taken to reduce the size of the state deficit and reform the economy.
“The euro area is at a very critical juncture” over Greece, Zsolt Darvas, a research fellow at Bruegel, a research organization, wrote in a report issued Friday. “Policy makers have to recognize the impossibility of the trilemma of no additional funding, no restructuring of official loans, and no default and exit from the euro.”
I predict that this will all fall apart, because the troika will determine that the juice is not worth the squeeze, and they’ll engineer an exit from the eurozone and the EU for Greece. Because if it’s understood that Greece can’t pay its creditors, and those banks have to take an enormous haircut, Europe might be better off with an independent Greece: one that is not screwing up EU finances.
Paradoxically, an exit from the EU will be better for Greece, at least after the wrenching changes involved, since they will be able to control a new drachma, and thereby gain productivity and competitiveness. Austerity economics are accelerating the decline in Greece, not helping it.
This whole drama is about banks wanting to be paid, and the beggar-thy-neighbor politics that follow from that. In retrospect, commentators will say that it would have been better for everyone — except for the banks and their investors — if Greece had left the Euro in 2009 or 2010.
Official Warmth and Public Rage for German Leader in Athens - Rachel Donardio and Nicholas Kulish via NYTimes.com
Indeed, even as the prime minister greeted Ms. Merkel as “a friend of our country,” in a crisis that has revealed the deep divisions and even hostility within Europe, Ms. Merkel’s visit sometimes seemed more akin to President Richard Nixon’s famous 1972 visit to the People’s Republic of China than a routine bilateral summit between allies.
Three years of grinding austerity in exchange for foreign funding to pay back banks and meet expenses has seen Greece’s gross domestic product shrink 25 percent. Unemployment is now at 50 percent for young people and 24 percent overall. A series of governments has dramatically cut spending without improving the functioning of the state, resulting in cuts to essential services like hospitals.
[…]
In the news conference, Ms. Merkel acknowledged the “suffering” that the Greek people had endured as the government forced through deep spending cuts in the midst of a recession that has lasted for years. But she said the country was headed in the right direction. “I am convinced that the path, which is a difficult path, will lead to success,” Ms. Merkel said.
But many Greeks disagreed. “It’s just spin, it means nothing,” said Vassiliki Tsitsopoulos, a literature professor who attended Tuesday’s demonstration. “It’s never been worse, it’s just going to get worse, there’s no bottom, there’s just spin.”
“We’re just keeping up appearances,” Ms. Tsitsopoulos added. “Including the demonstrators. At this point we’re part of the scenery.”
Others believed the protests were necessary. “This is pure provocation, we have to answer back,” said the nurse, Christina Amanti, 37. “It’s like she’s visiting her protectorate. What’s she going to do, pat us on the back and tell us to keep getting poorer, that it’s good for us?”
While German policy makers have complaints about their struggling partners, the realization appears to have dawned on Ms. Merkel and officials in her chancellery that with Mario Monti in Italy, Mariano Rajoy in Spain and Mr. Samaras in Greece, Ms. Merkel has the most cooperative partners she is ever going to have to work with.
And the Greek government has lost the trust of the Greek people.
Here’s a scenario: The Greeks will fail to achieve the necessary ‘reforms’ — cuts in spending, increased taxation, reduction of services — and the Europeans will delay or block the next round of funds (which are just more loans). The Greeks will default on at least some of their debt payments, which will lead to many calling for their expulsion from the eurozone and the EU. The Greeks will throw out the technocrats that the troika wanted, and Syriza will take office and push to leave the eurozone. They will nationalize the banks, and devalue the currency.
Behind all this is magical dreaming about growth. There cannot be enough growth in time to save the debt holders: the banks and the rentiers want to get paid back, and are unwilling to accept the obvious: they have to write off these bad debts based on real estate and other high risk speculation that all collapsed in 2008. But they are managing the world’s governments to avoid the losses, and instead composed these technocrat governments to gouge the money out of the people who had no upside in the gambles being made, and now are being forced to pay back the losses from their savings, pensions, jobs, and future prospects.
The people will finally rise up and revolt. They always do.
The US has over 800,000 repossessed homes already, and the mortgage debt overhang is estimated at $150B. The government has failed in its efforts to help 4 or 5 million homeowners refinance, mostly because the banks don’t want to take the hit on their balance sheet by writing down the value of the homes’ mortgages. But we should, and it shouldn’t be placed on the backs of the home ‘owners’ — the people paying the mortgages — or socialized by government bailouts. The banks — and the investors that bought securitized financial instruments based on mortgages — should take a massive write down, across the board, and drop the face value of mortgages, with corresponding lower mortgage payments. But they will fight this tooth-and-nail.
Ireland is moving toward such a solution, however:
Ireland Mortgage Bill Aims to Aid Owners and Jump-Start Economy - NYTimes.com
With its economy still reeling from the housing crash, Ireland is making a bold move to help tens of thousands of struggling homeowners.
The Irish government expects to pass a law this year that could encourage banks to substantially cut the amount that borrowers owe on their mortgages, a step that no major country has been willing to take on a broad scale.
The initiative, which would lower a borrower’s monthly payment, could prevent a tide of foreclosures, an uncertainty that has been hanging over the Irish housing market for years. If it works, the plan could provide a road map for other troubled countries.
[…]
Most countries that have suffered housing busts, including the United States, have made limited use of so-called mortgage write-downs, the process of forgiving a portion of the principal on the loan. The worry has been that some borrowers who can afford their mortgages will stop making payments to take advantage of a bailout. Banks have also been reluctant since they could face unexpected losses.
Ireland is different from the United States and most countries. During the financial crisis, Ireland bailed out the banks, and the government still has large ownership stakes in some of the biggest mortgage lenders. So taxpayers are already responsible for mortgage losses. In other countries, the burden of principal forgiveness would largely fall on privately owned banks.
But the debate is the same: whether to push lenders to take losses now, in hopes that things will get better faster, or wait for the housing market to heal on its own, which could cloud the economy for years to come.
No, the argument isn’t the same at all. Ireland has already socialized the losses, while here, in the US, most of the potential losses are still in the balance sheets of private banks. Which is why nobody is talking about a write down, but we should make them do it.
We Catalans have long been attached to our distinct identity and never accepted the loss of national sovereignty after being defeated by the Spanish monarchy in 1714. For three centuries, Catalonia has striven to regain its independence. Most attempts to establish a state were put down by force. The “Catalan question” was a major catalyst of the Spanish Civil War in the 1930s, and Gen. Francisco Franco’s dictatorship harshly repressed Catalan culture.
At the core of Catalonia’s unique identity is the Catalan language, which is distinct from Spanish. Since the re-establishment of Spain’s democracy in 1977 and Catalonia’s autonomy in 1979, Catalan has been revived in the region’s schools. However, a recent ruling by Spain’s Constitutional Court threatens this policy. To most Catalans, our language is a red line. If the current system of autonomy can’t guarantee protection of it, independence is the only solution.
The independence movement is not driven by hatred of Spain. Catalan nationalism is civic and cultural, unlike the ethnic nationalism that has so often plagued Europe. Indeed, most of the two million Spaniards who migrated to Catalonia in the 1960s and ’70s are today fully integrated and many of them have embraced secessionist ideals.
The growth of the secessionist movement is also a reaction to a renewed wave of Spanish nationalism. When Catalonia passed a more far-reaching autonomy law in 2006, some political parties and media outlets unleashed a fierce anti-Catalan campaign that included a boycott of Catalan products. This campaign caused an emotional rift, and many Catalans concluded that only independence would protect them. Once mutual trust was lost, other possible solutions, like a federal state, lost their appeal. The fact that the Spanish government is now seeking to curb the powers of autonomous regions by blaming them for the economic crisis doesn’t help.
Opponents of secession often argue that Catalan independence doesn’t make sense in a globalized world where state sovereignty is progressively being eroded. However, the opposite is true: it has never made more sense — at least for small European nations. Europe’s common market and its increasing move toward greater political union enhances the viability of small countries. Small states are more competitive and tend to react faster to global economic challenges. Catalonia has a population of just over 7.5 million. Twelve current European Union members, including Ireland and Denmark, have smaller populations.
Although secession sounds drastic, it doesn’t need to be. The European Union’s internal borders are already blurred and its citizens cross them in order to travel, work and emigrate without visas. Spaniards and Catalans would continue to be members of a community of nations, and the most important economic and cultural links would be preserved.
A New Call for Catalonia’s Independence - Ricard González and Jaume Clotet via NYTimes.com
The (obvious) case for an independent Catalonia. What goes unsaid is that one of the levers that could make an independent Catalonia more agile is an independent currency, which would mean a/ secession from Spain, and b/ leaving the eurozone. A double whammy.
Spain’s fiscal crisis exposes deep regional fault lines - The Irish Times
Last week [Prime Minister Mariano] Rajoy rejected a demand from the Catalan nationalist first minister, Arturo Mas, for a new “fiscal pact” that would give the region full control of its own taxes. Mas then threatened early elections that could become a surrogate referendum on establishing a separate state.
And now Spain, on the left at least, is suddenly full of federalists, willing to contemplate the prospect of a new state structure that would give full recognition to Catalonia’s status as a nation, rather than face the nightmare of the break-up of Spain.
These sudden converts to radical constitutional reform include Felipe González, the very influential former prime minister for the Socialist Party (PSOE), and that party’s current leader, Alfredo Peréz Rubalcaba. One of Spain’s leading opinion formers, the founder and former editor of El País, Juan Luis Cebrián, warned Catalan nationalists at the weekend that they risked awakening “the wild beast” of right-wing Spanish nationalism. He predicted that Catalan independence would lead to poverty and misery for both Catalonia and Spain, and then also advocated a federal state as the solution. This proposal, however, is still anathema to most conservatives, so it is hard to see how it could attract the necessary consensus to gain national traction.
Meanwhile, the far right, which has so far found a curiously comfortable home within Rajoy’s conservative Partido Popular (PP), is reacting to the Catalan challenge with a rhetoric that suggests Cebrián’s “wild beast” is already wide awake and baring its teeth. For example, Martin Prieto, in La Razón, has accused Mas of “high treason”. He added with apparent regret that the Catalan leader “enjoys the advantage of knowing that in these times nobody in Spain gets executed”.
One of the many reasons that I am glad to have left California behind: the state has an intractable debt problem, and it will only get worse in the coming few years. Gov. Brown announced $28B in debt last year that had to be handled by cutting spending and raising taxes. Now it seems the debt might be as high as ten times larger.
California Debt Higher Than Earlier Estimates - Mary Williams Walsh via NYTimes.com
Directors of the State Budget Crisis Task Force said their researchers had found a lot of other debts that did not turn up in California’s official tally. Much of it involved irrevocable promises to provide pensions to public workers, health care for retirees, the cost of delayed highway maintenance and an estimated $40 billion bill to bring drinking water up to federal standards.
They also pointed out many of the same unpaid bills from previous years that the governor had brought to light, like $8 billion in delayed payments to schools and community colleges, and $250 million that was raided from a fund dedicated to transportation and treated as revenue.
The task force estimated that the burden of debt totaled at least $167 billion and as much as $335 billion. Its members warned that the off-the-books debts tended to grow over time, so that even if Mr. Brown should succeed in pushing through his tax increase, gaining an additional $50 billion over the next seven years, the wall of debt would still be there, casting its shadow over the state.
California is the world ninth largest economy, and has a number of cities — like Stockton — proposing to completely default on some municipal bonds. Note that while officials are scrambling to prop up what is a failing state, where taxes cannot be raised without a full plebiscite, California public services — schools, health care, infrastructure, public safety — are rapidly degrading.
[Take a look at my speculative scenario My California Dream: The California Territory.]
It is often said that Europe needs tighter political and fiscal integration to save the euro, but there is no political will for that, and likely never will be. […] The reason Europe lacks a lender of last resort is that its citizens don’t want one.
Joe Nocera, How Not to Solve a Crisis via NYTimes.com
I contend that the European Union itself is like a bubble. In the boom phase the EU was what the psychoanalyst David Tuckett calls a “fantastic object” – unreal but immensely attractive. The EU was the embodiment of an open society –an association of nations founded on the principles of democracy, human rights, and rule of law in which no nation or nationality would have a dominant position.
The process of integration was spearheaded by a small group of far sighted statesmen who practiced what Karl Popper called piecemeal social engineering. They recognized that perfection is unattainable; so they set limited objectives and firm timelines and then mobilized the political will for a small step forward, knowing full well that when they achieved it, its inadequacy would become apparent and require a further step. The process fed on its own success, very much like a financial bubble. That is how the Coal and Steel Community was gradually transformed into the European Union, step by step.
Germany used to be in the forefront of the effort. When the Soviet empire started to disintegrate, Germany’s leaders realized that reunification was possible only in the context of a more united Europe and they were willing to make considerable sacrifices to achieve it. When it came to bargaining they were willing to contribute a little more and take a little less than the others, thereby facilitating agreement. At that time, German statesmen used to assert that Germany has no independent foreign policy, only a European one.
The process culminated with the Maastricht Treaty and the introduction of the euro. It was followed by a period of stagnation which, after the crash of 2008, turned into a process of disintegration. The first step was taken by Germany when, after the bankruptcy of Lehman Brothers, Angela Merkel declared that the virtual guarantee extended to other financial institutions should come from each country acting separately, not by Europe acting jointly. It took financial markets more than a year to realize the implication of that declaration, showing that they are not perfect.
The Maastricht Treaty was fundamentally flawed, demonstrating the fallibility of the authorities. Its main weakness was well known to its architects: it established a monetary union without a political union. The architects believed however, that when the need arose the political will could be generated to take the necessary steps towards a political union.
But the euro also had some other defects of which the architects were unaware and which are not fully understood even today. In retrospect it is now clear that the main source of trouble is that the member states of the euro have surrendered to the European Central Bank their rights to create fiat money. They did not realize what that entails – and neither did the European authorities. When the euro was introduced the regulators allowed banks to buy unlimited amounts of government bonds without setting aside any equity capital; and the central bank accepted all government bonds at its discount window on equal terms. Commercial banks found it advantageous to accumulate the bonds of the weaker euro members in order to earn a few extra basis points. That is what caused interest rates to converge which in turn caused competitiveness to diverge. Germany, struggling with the burdens of reunification, undertook structural reforms and became more competitive. Other countries enjoyed housing and consumption booms on the back of cheap credit, making them less competitive. Then came the crash of 2008 which created conditions that were far removed from those prescribed by the Maastricht Treaty. Many governments had to shift bank liabilities on to their own balance sheets and engage in massive deficit spending. These countries found themselves in the position of a third world country that had become heavily indebted in a currency that it did not control. Due to the divergence in economic performance Europe became divided between creditor and debtor countries. This is having far reaching political implications to which I will revert.
It took some time for the financial markets to discover that government bonds which had been considered riskless are subject to speculative attack and may actually default; but when they did, risk premiums rose dramatically. This rendered commercial banks whose balance sheets were loaded with those bonds potentially insolvent. And that constituted the two main components of the problem confronting us today: a sovereign debt crisis and a banking crisis which are closely interlinked.
The eurozone is now repeating what had often happened in the global financial system. There is a close parallel between the euro crisis and the international banking crisis that erupted in 1982. Then the international financial authorities did whatever was necessary to protect the banking system: they inflicted hardship on the periphery in order to protect the center. Now Germany and the other creditor countries are unknowingly playing the same role. The details differ but the idea is the same: the creditors are in effect shifting the burden of adjustment on to the debtor countries and avoiding their own responsibility for the imbalances. Interestingly, the terms “center” and “periphery” have crept into usage almost unnoticed. Just as in the 1980’s all the blame and burden is falling on the “periphery” and the responsibility of the “center” has never been properly acknowledged. Yet in the euro crisis the responsibility of the center is even greater than it was in 1982. The “center” is responsible for designing a flawed system, enacting flawed treaties, pursuing flawed policies and always doing too little too late. In the 1980’s Latin America suffered a lost decade; a similar fate now awaits Europe. That is the responsibility that Germany and the other creditor countries need to acknowledge. But there is no sign of this happening.
George Soros, Remarks At The Festival Of Economics Trento Italy
