The Economist: A Greek bailout, and soon?

Rochdale_Pioneers

Generali wrote: »

I realise it may be tough for you to shake off your belief that if other countries are in a worse place than the UK then the UK must be ok so I'll try to break this to you gently.

Firstly, do you really want to compare the UK's position with that of Greece? Is that about where you see the UK's position in Europe or the world.

Thats what the Tories are doing. They keep saying how Britain is worse off than the rest of the EU, that we have more debt than everyone else (no I'm not getting confused with the deficit - they mention both.

Why is international comparison relevant? Because its an international economy. Our economy may be weak right now, but its hardly the only one. The things the Tories keep warning are coming to Britain - bankruptcy, a gilt strike, the IMF etc - all these things will visit a list of other countries before they come here.

Generali wrote: »

Secondly, and more importantly, if the UK goes down the same road as Greece (large deficits with no clear plan to reduce them) then the UK will end up in the same place as Greece!

Labour have spent more money than the productive part of the economy can bear. As a result, when bad times have come along, the Government can't do what they need to: once you strip out welfare spending which has no impact on GDP, Government spending is now falling.

Are Britain and Greece comparable that way? OK so our budget deficit is high and there is very little clarity from either party about how it will be brought down. But we're in substantially less debt than half the EU (according to the OECD before anyone starts spouting their own made up numbers from the Daily Mail book of facts) and have a substantially larger economy than most of the EU - we can sustain a bigger deficit for longer before we get anywhere close to the kind of position that Greece or Italy or Portugal or Germany or France find themselves in.

Do we need to cut the deficit - absolutely. But not at the expense of snuffing out recovery. Growth is how we will pay off the debt - how we always pay off the debt. 71% debt is still lower than its been for most our history - and as I mentioned its lower than most of the EU, the US, Japan.

Generali

Rochdale_Pioneers wrote: »

Thats what the Tories are doing. They keep saying how Britain is worse off than the rest of the EU, that we have more debt than everyone else (no I'm not getting confused with the deficit - they mention both.

Why is international comparison relevant? Because its an international economy. Our economy may be weak right now, but its hardly the only one. The things the Tories keep warning are coming to Britain - bankruptcy, a gilt strike, the IMF etc - all these things will visit a list of other countries before they come here.



Are Britain and Greece comparable that way? OK so our budget deficit is high and there is very little clarity from either party about how it will be brought down. But we're in substantially less debt than half the EU (according to the OECD before anyone starts spouting their own made up numbers from the Daily Mail book of facts) and have a substantially larger economy than most of the EU - we can sustain a bigger deficit for longer before we get anywhere close to the kind of position that Greece or Italy or Portugal or Germany or France find themselves in.

Do we need to cut the deficit - absolutely. But not at the expense of snuffing out recovery. Growth is how we will pay off the debt - how we always pay off the debt. 71% debt is still lower than its been for most our history - and as I mentioned its lower than most of the EU, the US, Japan.

You just don't get it.

Your debt position as an individual, company or country is absolute not relative.

What is the absolute position of the UK? Massive Government deficit which the UK Government predicts will lead to a point at which other countries have been partially or absolutely cut off from private sector debt!

If the UK National Debt is rising by about 25% a year and UK GDP is falling by 5% per year then I don't see how 'growth' is paying back debt. I guess you're making an assumption that the UK is going to return to growth of the order of 2.5% pa. Don't be so sure - high levels of Government debt reduce growth rates as a rule.

Rochdale_Pioneers

Generali wrote: »

You just don't get it.

Your debt position as an individual, company or country is absolute not relative.

The markets disagree with you. They act like a predator, picking off the weakest. We're now talking about Greece falling over with suggestion of which other weak countries would then come under massive market pressure before their own collapse. Exactly what we saw when we fell out of the ERM - a swarm of Pirhana nibbling chunks off various currencies before realising Sterling was the weakest.

michaels

The problem with our resident nu-labour spinster is that just like GB he seems to feel that admitting any sort of failing is weakness not strength. Fact the UK was the last G20 country to come out of recession (and 0.1% growth is so far below capacity as to make no odds anyway) despite one of the biggest fiscal stimuluses (in terms of budget deficit as percent of GDP). Yes total debt is not as high a proportion of GDP as some countries (excluding pfi, off balance sheet, unfunded pensions etc) but if it is growing more quickly then it is more not less of a problem - living with debt at 100% income but not increasing is sustainable. Starting with debt at 50% of GDP but increasing at 13% of (falling) gdp per annum is not.

Generali

Rochdale_Pioneers wrote: »

The markets disagree with you.

Specifically, how do the markets disagree with me or should I meekly accept your assertion?

Rochdale_Pioneers wrote: »

They act like a predator, picking off the weakest.

I maintain, you just don't understand how markets work. Markets match a buyer and a seller and so come up with a price. I'm not sure why that's so complex that you can't or won't get it.

TBH, the rest of your reply isn't really worth discussing.

Rochdale_Pioneers

Generali wrote: »

I maintain, you just don't understand how markets work. Markets match a buyer and a seller and so come up with a price. I'm not sure why that's so complex that you can't or won't get it.

So there's no herd instict or mad panics when they see unexpected movement. Or currency speculation. Or massive hedging against failure.

Why then are the economists talking about the domino effect? Greece falls over leading directly to Ireland, Portugal etc? They may be weak individually but whilst the markets are quiet they are OK. If Greece defaults the moves against the biggest risks quickly push the others over one after another and quickly. If as you suggest relative positions don't matter then these countries would fall over independently, not get knocked down by a panicked market acting like a herd.

If I've got it wrong then explain why all the stories I am reading describing exactly this scenario are wrong?

michaels wrote:

The problem with our resident nu-labour spinster is that just like GB he seems to feel that admitting any sort of failing is weakness not strength. Fact the UK was the last G20 country to come out of recession (and 0.1% growth is so far below capacity as to make no odds anyway) despite one of the biggest fiscal stimuluses (in terms of budget deficit as percent of GDP). Yes total debt is not as high a proportion of GDP as some countries (excluding pfi, off balance sheet, unfunded pensions etc) but if it is growing more quickly then it is more not less of a problem - living with debt at 100% income but not increasing is sustainable. Starting with debt at 50% of GDP but increasing at 13% of (falling) gdp per annum is not.

And where have I tried to dispute the hard numbers you posted above? I don't need to dispute the insinuations about off-books debt - I'm pretty certain that the OECD take all these things into account when publishing numbers. Its called applying the same methodology to all countries. BTW if you're going to mention when we came out of recession in relation to everyone else it might be helpful to point out when they all went in.

Anyway, everyone agrees that the deficit needs to be cut and relatively quickly - are any politicians not saying so? The debate now is how to cut it and whether to front or back weight the cuts. So far neither party has been explicit about details of cuts on the scale that is needed - they just agree that the deficit needs to be sorted.

tomterm8

I guess the thing to remember, from my perspective, is that we are at the end of what can be catalogued as the second most serious recession since the end of the war, far worse than 1973 and 1982, and that we are still in a war footing with regard to afghanistan so it isn't much of a surprise that we have a huge deficit.

What matters is to start tackling problems, I think half of the cause of this distress is that Greece has no realistic prospect of doing what they are claiming. They are not going to get a 13% GDP deficit down to 3% in 3 years. Neither are we.

We can, as a society, start to make some changes however to get deficits down to, say, less than 10% within a year or so. For example, we can adjust retirement age, get rid of compulsory retirement altogether, institute a hireing freeze in the public service, and a pay freeze, and make a plan to end our war footing in afghanistan. We can put a freeze on costly IT services. We can sell the royal mail. And the council owned farms. In other words, we can make a start.

One interesting fact is that Generali tacitly admits the UK government is already taking some steps: they are reducing structural spending. It's a start. But I think we are really talking a long period of time here.

I don't think we can solve the deficit quickly without another massive recession. But, we can start a process of gradual reduction.

Kohoutek

tomterm8 wrote: »

I don't think we can solve the deficit quickly without another massive recession. But, we can start a process of gradual reduction.

I think you're right – huge spending cuts/public sector redundancies would probably be very damaging to the economy, but a process of gradual reduction may not be possible given Britain's lack of fiscal credibility amongst gilt investors. Just look what happened it Greece this week, which has a deficit a similar size to our's - government bond yields jumped to 7% in a very short space of time. If our creditors decide to stop funding the New Labour socialist extravaganza, we will have no choice but to implement brutal spending cuts a la Greece or Ireland.

I think that is the most likely outcome, given the moronic people we have running the country at the moment, e.g. Ed Balls still thinks we can afford to spend billions on building new schools and hospitals, Brown would rather cut hundreds of millions from the higher education budget than trim the vast welfare state.

This is what one investment manager from a firm with assets of $1 trillion, much in government bonds says:

"The UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors."

http://europe.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Investment+Outlook+February+2010+Bill+Gross+The+Ring+of+Fire.htm

blueboy43

tomterm8 wrote: »

I guess the thing to remember, from my perspective, is that we are at the end of what can be catalogued as the second most serious recession since the end of the war, far worse than 1973 and 1982, and that we are still in a war footing with regard to afghanistan so it isn't much of a surprise that we have a huge deficit.

.

Am I just the only one who wonders if this recession is really that much worse than the 1979-1981 recession.

1) The deficit is worse
2) GDP has fallen by a tiny bit more.

On the other hand

3) We don't have raging inflation
4) Unemployment is not anywhere near as bad.
5) Sterling was grossly over-value, partly because it was a 'petro-currency', partly because of moronic policy mistakes by the then government.
6) The unions as a power base are largely broken

Kohoutek

blueboy43 wrote: »

Am I just the only one who wonders if this recession is really that much worse than the 1979-1981 recession.

1) The deficit is worse
2) GDP has fallen by a tiny bit more.

On the other hand

3) We don't have raging inflation
4) Unemployment is not anywhere near as bad.
5) Sterling was grossly over-value, partly because it was a 'petro-currency', partly because of moronic policy mistakes by the then government.
6) The unions as a power base are largely broken

The fake prosperity of the last ten years has been based on debt fuelled consumer spending...how our we going to have a sustainable recovery when the government, banks, and consumers are up to their eyeballs in debt? The inevitable tax increases to pay back the deficit will depress consumer spending even more.

At least in 1979 we actually had some oil and a manufacturing base so we had something to sell to the rest of world...now we have depleted oil fields and only a modest manufacturing sector.

We don't have inflation of c. 20% yet, but if the BOE continues its policy of propping up the government's spending plans by printing money and sterling continues to decline against every major currency...who knows??