Thursday, April 15, 2010

Economics 15/04/2010: Greece problems back to the frontline

So, as I have predicted in the interview with BBC World Service (excerpt here), the markets have little faith in the Greeks and, indeed, in the EU’s ability to effectively underwrite Greek crisis.

Greek bond yields are now rising again on the investors’ view that German, French and Irish legislators might veto the deal. And in Germany there is a growing movement to challenge the Greek deal in a constitutional court, as being an illegal subsidy. The yield on Greek two-year bonds jumped 66bps yesterday reaching 6.99% and 5-year CDS rose 56bps to 436bps.

And FT’s Daniel Gros argues that the EU package is unlikely to solve anything, as the country needs about €30-50bn annually, depending on the future deficits path assumptions. Either way, 3-year package of up to €45bn won’t cut it. And the interest bill savings are also too thin – under the EU proposed deal, Greece will be facing an interest rate of ca 5%, which will provide the country with only €900mln in annual savings relative to market rates. Going lower to 4% - something opposed by Germany – will raise savings to ca €1,350 million per annum – still short of what is needed. Per Gros: the Greek problem is not one of liquidity but of insolvency.

And the IMF is severely constrained in what it can do in Greece by the fact that it can only lend 10-12 times the reserves position that Greece holds with IMF. And this means, at a maximum €15 billion.

So here we go – for all who thought the story is over, the most likely thing is that the actual story is just beginning.


Anonymous said...


You might want to check out Matt Taibbi's article in the latest issue of Rolling Stone. Should be instructive in terms of the Greek tragedy.

TrueEconomics said...

Very good piece. I especially liked the following:
"The sewer bill, in fact, is what cost Pack and her co-workers their jobs. In 1996, the average monthly sewer bill for a family of four in Birmingham was only $14.71 — but that was before the county decided to build an elaborate new sewer system with the help of out-of-state financial wizards with names like Bear Stearns, Lehman Brothers, Goldman Sachs and JP Morgan Chase. The result was a monstrous pile of borrowed money that the county used to build, in essence, the world's grandest toilet — "the Taj Mahal of sewer-treatment plants" is how one county worker put it. What happened here in Jefferson County would turn out to be the perfect metaphor for the peculiar alchemy of modern oligarchical capitalism: A mob of corrupt local officials and morally absent financiers got together to build a giant device that converted human shit into billions of dollars of profit for Wall Street — and misery for people like Lisa Pack."

Now, as far as I can see it - there is really one major culprit here and one accomplice to the crime. The culprit - the County Government - of which poor Lisa was a part, as an employee. This culprit decided to waste taxpayers' cash on the 'Taj WC' in a reckless disregard for any value-for-money assessment.

County employees benefited from the same culprit's actions - by having their wages paid in the first place by the looted taxpayers.

Accomplice - the Wall Street - is, of course, off the hook (except Bear and Lehman are no longer there)- was rescued by the US taxpayers, including the same taxpayers who paid county employees their wages (for not doing their jobs and protecting taxpayers from gratuitous waste) and also paid the bills of the accomplices.

Who's the real victim here? A business person or a private sector worker in Birmingham who:
1) paid county bills to get waste in return;
2) rescued Wall Street banks to get nothing in return (if not higher mortgage costs);
3) paid Lisa and her colleagues to get barely any mentioning in return in the whole lengthy article?

Or is it county employees and politicians who failed to do their jobs?

wpower said...

The Greek rescue package prescribed by the EU totally ignores the basic fact that "the Greek problem is not one of liquidity but of insolvency".How are governments especially our Irish government able to fool nations and get away with lies even for a short time and usually doing immense damage by comparison to facing the truth in situations such as Greece or Anglo or NAMA?.
How much could we have paid Matthew Elderfield to regulate the Irish financial industry for the last 10 years?He is a hero even though he is 10 years late.

TrueEconomics said...

@wpower -
Yes, Elderfield has done the right thing by hiking the capital ratios for the banks. Four years ago I told John Hurley - then Governor of the Central Bank of Ireland to do exactly this. He refused point blank, saying that it would be "politically unacceptable".

The problem with Mr Elderfield's latest move - as correct as it is - is that it will be banks' mortgage holders (and the most vulnerable ones amongst them) who will be paying the cost of higher capital ratios this time around.

What we now need is a robust consumer protection body, not the 'friends-of-friends' of Bertie crowd.

We have some hope, though - Bill Prasifka is in charge of the FS Ombudsman.

Unknown said...

Re your tweet "Beats Greece, Nama & our official 'finance' clowns...".

In my opinion they are not clowns, rather " economic psychopaths" in a mad rush to the bottom of the property market,
while the nurses,doctors, lawyers, architects who cant find work leave this country in the thousands every week leaving a massive "brain drain" in Ireland, not good for Natural Selection is it???

Unknown said...

Re Matthew Elderfield

Anonymous said...

Glad you enjoyed the piece.
I think you are being a little hard on Lisa though. It’s not fair to blame her or county workers at her level for the theft and corruption. That would be like saying the helpdesk operators in Quinn Direct bear partial responsibility for their boss’s decisions to bet the house on Anglo CFDs. Private sector workers obviously lose out too; but I think that’s a given. The thrust of Taibbi’s piece (and he has written others in this vein over the last two years) is to underline the venality of the Wall Street Banks and the need to rein them in. Lest we forget, so to speak.
In terms of where to apportion blame, let’s look at who the big winners are. The gombeen men politicians greased the wheels but it was the big banks that made the most money. Like vampires, they had to be invited in, but once they were the banks fed until the last drop of blood, blinding the gombeen men with offers of Synthetic rate swaps and other financial jiggery pokery that they knew they couldn’t possibly understand.
Let’s hope Obama is serious about financial regulation.

TrueEconomics said...

@Anonymous - of course, I agree that Lisa is probably (as in 99.999...%) not to be blamed personally. What angers me most - in the article and in the entire crisis management approach adopted here (to a far lesser extent in the US) is how the taxpayers are being treated. I keep repeating in public the simple truth that is incontrovertible:

There is not a single financial services contract, with exception of sovereign bonds - which has in it a single reference to the taxpayers being the bearers of liability.

Equity holders bear liability for the losses, then subordinate debt holders, then senior bond holders. That's it. Full stop.

What the crisis should have shown beyond any doubt is not the extent of the 'greed' or of the willingness to take reckless risks by the bankers. These are corollaries. The main proposition is the intrinsic lack of controls on the state.

Vi Kažite, Mi Gradimo! said...

This isn't going to work out for the Euro-Zone. In my opinion they made a huge mistake when choosing for one currency.

You can not have one currency, If all countries in the Euro_Zone keep there own governments.

Now every government/country has to be successfull to push the Euro up. Which is impossible, so the weaker countries will always pull the strong countries down.

If you have 1 currency you need ONE central government and one monetary pollicy. You would have to have a set up like the USA. 1 president leading all the separate states.

For Europe and the EUro the only way is down. THe issue that countries can not print more of their currency to solve or help with their deficit problem will show to be a economical fatality.