EU to accept that Greece should default on some of its bonds

Thrugelmir

libertysurf wrote: »

Thanks - some thoughts.
I heard that Greece makes up only 5% of the Euro economy.

Greece is 3%

Greece, Ireland, and Portugal combined only make 5.5%. Which is less than 20% of Germany's share.

Germany is forecast to have growth of 3.4% this year

Wookster

A._Badger wrote: »

Participate in the strikes? Mason is an NUJ 'Father of the Chapel' and a 'former member' of the Far Left group, 'Workers Power'. The Labour supporting Harry's Place described him as the 'SWP pin-up boy'.

A curious choice as an economics editor for the 'famously impartial' BBC, you might think.

Everyone's entitled to their own views. What gets me is that as a trained economist, in touch with the crux of the problems of today (one of his blogs said that 'someone needs to take the hit for all the bad debt clocked up' - few other people have said that openly) and yet he thinks the very problems that we are coming to terms with - that we aren't as rich as we thought we are - don't apply to him.

Its pretty bl00dy stupid.

Loughton_Monkey

A._Badger wrote: »

Participate in the strikes? Mason is an NUJ 'Father of the Chapel' and a 'former member' of the Far Left group, 'Workers Power'. The Labour supporting Harry's Place described him as the 'SWP pin-up boy'.

A curious choice as an economics editor for the 'famously impartial' BBC, you might think.

Maybe, but aren't you falling into the trap of using the word 'impartial'? My own view is that they are extremely 'partial' but try to do it in a 'balanced' way.

In other words, if the Government spends huge money bailing out Greece/Ireland, then the responsible minister will be hauled onto Newsnight and such and given a huge grilling. "Throwing good money after bad..... wasting tax payers' money.... sucking up to Merkel...."

On the other hand, if UK doggedly refused to pay a penny, they would still be hauled onto Newsnight for a grilling. "Failure to help out our biggest trading partners.... not entering into the spirit of Europe.... not honouring commitments to IMF...."

By far the most 'partiality' is to be seen in so-called investigative stuff like Panorama. OK, some of it is fine, but generally the quality of their back-room research and the 'balance' [or strictly complete lack of 'balance'] they put into it is usually appalling. I tend to think, though, that this is just ignorance and stupidity rather than any 'political' agenda.

A._Badger

Wookster wrote: »

Everyone's entitled to their own views. What gets me is that as a trained economist, in touch with the crux of the problems of today (one of his blogs said that 'someone needs to take the hit for all the bad debt clocked up' - few other people have said that openly) and yet he thinks the very problems that we are coming to terms with - that we aren't as rich as we thought we are - don't apply to him.

Its pretty bl00dy stupid.

What makes you think Mason is a trained economist? He actually qualified as a music teacher.

Wookster

A._Badger wrote: »

What makes you think Mason is a trained economist? He actually qualified as a music teacher.

One doesn't only train at University

Read his blog and you'll see that they are actually pretty sensible and well informed.

Mr_Mumble

Graham_Devon wrote: »

Basically he suggested we've, or they, have bought 3 years.

Three years sounds generous. With debt to GDP of 150-155% and this deal knocking around 20-25% off the figure Greece is back 15-18 months to just before its first bail out. Lower interest rates will help but there still needs to be a reasonably quick turn around in the Greek economy.

libertysurf

Mr_Mumble wrote: »

Three years sounds generous. With debt to GDP of 150-155% and this deal knocking around 20-25% off the figure Greece is back 15-18 months to just before its first bail out. Lower interest rates will help but there still needs to be a reasonably quick turn around in the Greek economy.

Well that has me back in the dunce's corner. What does that mean when it's at home??

Mr_Mumble

libertysurf wrote: »

Well that has me back in the dunce's corner. What does that mean when it's at home??

The value of everything everyone produces in a given country is called Gross Domestic Product (GDP). The GDP for Greece in 2010 was 230,173 million Euros [1]. The government debt for Greece in 2010 was 328,588 million Euros. So, Greek debt-to-GDP at the end of 2010 was 142.8% (328,588/230,173 * 100) . Seven months later its around 150-155% (we won't know exact numbers for a while).

Debt-to-GDP is a barometer for a government's ability to pay its bills. I'd argue not a great one but it is the most prevalent. Latest economic thought suggests once a government passes 90% debt-to-GDP it will hurt the economy of the entire country [2]. The only significant economy in the world with a larger debt-to-GDP ratio than Greece is Japan. But, Japan is a very special case since it has a very efficient, competitive economy and its in a unique position of almost all the Japanese government's debt is held by the very asset rich Japanese people.

My disagreement with Paul Mason's point (via Graham's post quoting of him) is illustrated by something Stephanie Flanders says:

President Sarkozy said yesterday that the deal would lower the Greek debt stock by about 24% of GDP. By extending maturities, it will also make that debt easier to service.

That sounds impressive. Until you hear that the IMF has revised up its forecast for Greek debt in 2012 by 23 percentage points in the past 12 months alone. In July 2010, it forecast that Greek debt would be 149% of GDP in 2012. In its latest report, a few weeks ago, that number had gone up to 172%.

The debt level is increasing at such a rate that this whole bailout, 20-25% of GDP, is only the equivalent of giving Greece 12-18 months respite if Greece's deficit (government spending minus tax revenue) continues as it has done over the past couple of years. Greece's debt to GDP was 'only' 110.7% thirty months ago at the end of 2008.

Folk will point to this latest deal giving Greece lower rates of interest (3.5% from Europe and 4-6% from private). I'd make the counterpoint while these will help they are similar to the rates of interest Greece was paying when they got themselves into trouble in the first place!

Hope that helps

[1] Numbers from Eurostat (page 5):
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-EN.PDF

[2]Its also a little controversial, here's a quick explanation and intro to the arguments:
http://www.economist.com/blogs/buttonwood/2010/07/debt_ratios_and_growth

Loughton_Monkey

These are horrific figures.

I'm a 'fundamentalist' at heart, and believe that all the restructuring in the world will not change the position unless and until the Greeks start reigning in their debt. It's either [or both] spending cuts or tax rises ultimately. What we don't know is the degree to which the Greeks will actually do anything. I'm sure their 'friends' in Germany and France have tapped them on the shoulder and given a little bit of 'advice'.

Same problem as a wayward son living at the family home. Earns £20K but maintains a credit card with £30K balance. He is not paying the 'minimum' interest, and so it's rising every day. He still spends £20.5K. If the lad does nothing about this, he will simply go bust ultimately. It's all very well 'Dad' stepping in and subsidising his interest for him, but short of 'gifting' him £30K or so, there is nothing else that can be done.

Letting the lad default, and go bankrupt might work in the family context (because we have laws preventing the family being tainted with his debt). But it cannot work in a National context. It will just bring the 'family' [Eurozone] down with it!

This is one reason to be a bit sceptical about whether Dave and Nick are really cutting our own defecit quickly enough! We don't have a 'Eurozone' to worry about us. Just IMF and they're probably bankrupt by now!

A Greek Tragedy on a major scale!

michaels

Thanks for the data.

I don't think the example is relevant. The reason the markets have lost confidence is that it is socially impossible for the greeks to pay back the sort of annual sums needed even to make the debt stand still. For example with debt/GDP at 150% and an interest rate of 4% (typical long term 'risk free' govt borrowing rate) the greeks would have to have a primary fiscal surplus (before interest) of 6%. This would imply Govt revenues of say 50% of GDP and spending of only 44%. Achieving a 2% reduction in Govt expenditure as a proportion of GDP (so a 4% reduction overall) tends to be politically very difficult. Greece needs probably a 10% of GDP turnaround ie a 20% reduction in Govt spending and it needs to do so straight away, not over several years which sounds close to impossible.

Then we need to look at the full ratio - the denominator is GDP - in theory just making the interest payments whilst GDP increases will in time reduce the problem to manageable proportions, however the public sector cuts required to make the interest payments are likely in the short and medium term to reduce GDP (it is argued that the private sector is more productive so reducing the govt sector will increase GDP overall but few would disagree that in the short term the economic restructuring required is likely to reduce GDP) and thus the debt to GDP ratio will increase and therefore the primary surplus as a proportion of GDP will also increase producing a vicious circle - hence the markets loosing faith in Greece 'trading' its way out of the hole.

So if mathematically it is impossible for Greece to service their debts the only options are a structured default (haircut) or unstructured chaos. The plan with the haircut goes something like this - Greece can pay a maximum of Eur X billion PA, if the debt priciple is reduced to the level at which the X billion is enough to make the capital and interest payments then the problem is solved (at the cost of the write down of course). Unfortunately the write down proposed so far i not enough to put the (reduced) debt figure on to a sustainable path but merely enough (with the EU/IMF loans) to allow Greece to pay its bills for the next 18-36 months. The reasons however for not solving the problem in 1 hit are 3-fold:
(1) Those lenders taking the haircut probably could not afford to do it in one hit and would need bailing out themselves
(2) The creditors taking the loss (German taxpayers) would not accept the loss in its totality in one go
(3) If the total haircut implied that other countries debts were also unsustainable then those countries would also by implication be likely to suffer the same sort of potential default thus accelerating their loss of market confidence.

Even if solving the problem in one hit was desirable there is actually genuine doubt that those countries that were doing the bailing out would have the resources to provide all the funds necessary.