How Much Spanish Government Debt Should the UK Government Take On?

Generali

HAMISH_MCTAVISH wrote: »

With the interconnection of systems these days, there would be no way to contain the contagion.

Letting Lehmanns fall was a stupid mistake, that almost took out the global banking system.

Letting an entire Eurozone country fall is a mistake on a whole new level, and the consequences could be far worse.

Why would the consequences be worse? I think that (unusually for you) you've failed to grasp what happens when a country defaults on its debt.

When a country defaults, the value of the bonds it has issued falls in price (usually more than zero as there is usually a negotiation that follows as to how much debt the country will repay unless the country repudiates its debt as Russia and China did after their revolutions for example). Clearly that's bad news for holders of the debt but sometimes investments go bad which is why diversification is important. If an investor doesn't diversify they deserve to lose their money.

So what happens next? The Government carries on levying taxes and even raising debt (although usually only domestically and from the IMF). In the long run, a default is usually good news for a country as it forces the Government to stop pursuing unsustainable polices and balance the books.

Since this banking 'crisis' there seems to be some kind of bizarre fear that if any large company is allowed to fail then it'll be the end of Capitalism and the start of a new Dark Ages. Rubbish. Don't get sucked in. It's just large corporates pushing their interests ahead of everyone else's as usual.

HAMISH_MCTAVISH

Generali wrote: »

Why would the consequences be worse? I think that (unusually for you) you've failed to grasp what happens when a country defaults on its debt.

When a country defaults, the value of the bonds it has issued falls in price (usually more than zero as there is usually a negotiation that follows as to how much debt the country will repay unless the country repudiates its debt as Russia and China did after their revolutions for example). Clearly that's bad news for holders of the debt but sometimes investments go bad which is why diversification is important. If an investor doesn't diversify they deserve to lose their money.

No, I do grasp the difference between repudiation and a a partial default, and granted I am looking at a full repudiation as a worst case scenario.

But again, I think you are failing to see (unusually for you;)) the sheer scale of the problem and the systemic risk that it poses.

Banks all over the world are on life support. Taking a 20%, 35%, 50%, 75% haircut on just the Greek debt alone could well push the UK banking system, with it's quarter trillion pound exposure, right back into meltdown. And the banking system of many other countries with bigger exposure down with it. And thats just Greece. If Greece falls, the speculators and bond vigilantes will move onto the next domino. The defaults will grow, the contagion will spread.

So what happens next? The Government carries on levying taxes and even raising debt (although usually only domestically and from the IMF). In the long run, a default is usually good news for a country as it forces the Government to stop pursuing unsustainable polices and balance the books.

But IMF bailouts come in two parts..... The first is the bailout and forced austerity, the second, traditionally, has been currency devaluation to help soften the pain and drive export growth and economic recovery.

The PIIGS cannot devalue. They cannot control interest rates. The cannot, in any way, control their own monetary destiny. This is the fundamental flaw of the EMU.

Since this banking 'crisis' there seems to be some kind of bizarre fear that if any large company is allowed to fail then it'll be the end of Capitalism and the start of a new Dark Ages. Rubbish. Don't get sucked in. It's just large corporates pushing their interests ahead of everyone else's as usual.

Of course large companies can fail, and plenty have been allowed to go to the wall.

But the entire banking system is a different matter altogether.....

Generali

The PIIGs can devalue. They just have to leave the Euro to do so.

If the solvent continue to bail out the insolvent, the solvent will go bust.

Mr.Brown_4

Whoops. I voted "open ended commitment" as I thought it was one of those bullsh1t phrases that mean we won't actually do anything but are appealing to the electorate. I realise "nada" is probably the MSE 'right' option now.

tbh I am a bit of a floater.

aelitaman

HAMISH_MCTAVISH wrote: »

Absolutely right Degenerate.

This is a problem for the EMU states to resolve. But at the end of the day, they have little choice.

They can either stand back and watch as the PIIGS burn their currency to the ground, triggering an inflationary crisis in France, Germany and the Benelux states, or they can backstop the debts of the PIIGS in return for concessions around fiscal cuts, give the bond vigilantes and speculators a good kicking in the process, and prevent the contagion from spreading.

I know which one I'd choose. In fact, there is really no choice at all.

Nation States bring a whole new meaning to the term "too big to fail"...... As once you start toppling those default dominoes, there is no way to know where it could end.

The UK's banks are exposed to a quarter of a trillion pounds in loans to Greece alone, its surely over a Trillion, maybe much more, to the PIIGS combined. And other European countries are on the hook for far more.

Generali, if you can think of a way where default of one or more of the PIIGS doesn't take down the global financial system with it, by all means feel free to share it with us.

Until you can do that however, I wouldn't be betting against them.

UK banks are not exposed to Greece alone for quarter of a trillion pounds.

http://www.independent.co.uk/news/business/news/uk-banks-exposed-to-struggling-european-economies-1890514.html

UK Banks have a total exposure of 76billion to Greece, Spain and Portugal. The total exposure of UK banks to Greece is 12bllion quid or 95% less than you think it is. The largest exposure is to Spain so Greece and Portugal can go bust and our banks would survive but Spain would be a different issue.

The coutries with the largest exposure to Greece are France and Switzerland. With 50billion quid exposure to Greece alone each, now that is stupid banking.

http://www.guardian.co.uk/business/2010/feb/11/greece-debt-france-switzerland

HAMISH_MCTAVISH

Generali wrote: »

The PIIGs can devalue. They just have to leave the Euro to do so.

And back in the real world, there's a greater chance of PIIGS flying than the break-up of the EMU.

If the solvent continue to bail out the insolvent, the solvent will go bust.

We'll see soon enough.

Generali

HAMISH_MCTAVISH wrote: »

We'll see soon enough.

We're seeing it.

Graham_Devon

Degenerate wrote: »

Absolutely zero. We had the sense to stay out of their idiotic currency experiment - those countries whose leaders put politics above economics have to deal with the consequences themselves.

Well I do take issue here.

We may well need help ourselves, due to exactly what you have stated.

As for how much? I don't really care. Nothing is affordable anymore. We have no money anymore. It may be just a couple of billion we are required to help with, which lets face it, has recently become shrapnel.

HAMISH_MCTAVISH

aelitaman wrote: »

UK banks are not exposed to Greece alone for quarter of a trillion pounds.

You're absolutely correct.

I just double checked, and its a quarter trillion exposure to the PIIGS, not just Greece.

Well spotted.

http://blogs.telegraph.co.uk/finance/edmundconway/100003661/britains-quarter-of-a-trillion-pound-exposure-to-the-piigs/

The total exposure of UK banks to Greece is 12bllion quid or 95% less than you think it is.

Ah well thats alright then.

Let Greece go bust, I just stopped caring.:D

The countries with the largest exposure to Greece are France and Switzerland. With 50billion quid exposure to Greece alone each, now that is stupid banking.

Actually on second thoughts... Perhaps thats not such a good idea after all. What are our banks exposure to France and Switzerland?

Not to mention if Greece goes, the other PIIGS almost inevitably will too, and that quarter trillion is back on the table again.

And if they all go, other European countries with bigger exposure than us will surely follow, and whats our exposure to them?

The systemic risk is too great. The chain reaction too dangerous.

Again, if one bank failling almost brought down the global financial system, what do you think a series of countries would do to an already weakened system????

aelitaman

You are right do no worry about Greece. They have a choice - do an Ireland and prove you are taking action and France and Germany will fund the lower borrowing or carry on as you are, try to raise money on the International money markets when nobody will lend you any then Greece will be forced to start again. If they can not borrow they can only spend thier tax reciepts instant cuts in public expenditure.