Tag Archives: greek debt crisis

What Happens When Greece Defaults?

24 May

Andrew Lilico, an economist with Europe Economics and a member of the Shadow Monetary Policy Committee in the UK, outlines the coming domino effect.

From The Telegraph UK ‘Finance’:

It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

What happens when Greece defaults. Here are a few things:

– Every bank in Greece will instantly go insolvent.

– The Greek government will nationalise every bank in Greece.

– The Greek government will forbid withdrawals from Greek banks.

– To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

– Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

– The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.

– The Irish will, within a few days, walk away from the debts of its banking system.

– The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

– A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.

– The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

– The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter.  On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

– They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.

– There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.

– This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.

– Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.

– Attention will turn to the British banks. Then we shall see…

CIA: The ALP Are Donut Punchers

14 May

While our lamestream media continue to look the other way, the CIA says that our Labor government is right up there with the Greeks at punching donuts:

There is no doubt Australia is one of the most heavily indebted countries. A list compiled by the American Central Intelligence Agency puts us at No. 14 on the foreign debt scale with about $1.2 trillion owing to offshore lenders.

When you consider our relatively small population, and our strong but comparatively tiny economy, that means we are punching well above our weight in the spendthrift stakes. In fact, total foreign debt easily outstrips national income. The CIA reckons we owe the rest of the world 132 per cent of our annual gross domestic product.

That’s not too far behind Greece which, at 165 per cent, finally appears to have tipped the balance and is heading towards bankruptcy (more politely expressed these days as a debt refinancing).

Yes, the ALP are good at punching O’s.

As are our “safe as houses” Big Four banks.

Bend over Australia, and grab your ankles.

This won’t hurt a bit.

Trust us.

Complete And Definitive Guide To The Sovereign Debt Crisis

30 Jun

Professor Niall Ferguson, of the acclaimed book and ABC documentary series The Ascent of Money, has recently published a brilliant guide to the global sovereign debt crisis.  Click here to read it.

Back in February, Professor Ferguson had this to say in the Financial Times:

… it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate…

BIS: Global Economy “Vastly Worse” Than In GFC

29 Jun

The latest report from the Bank of International Settlements (BIS) – the central bank to the central banks – warns that the global financial system is in a “vastly worse” position than 3 years ago.

From the Associated Press:

An organization bringing together the world’s major central banks warned Monday that the global economy risks a replay of the 2008-2009 financial crisis, with massive public debt in Europe and the United States replacing the private debt that fueled the credit crunch two years ago.

“A shock of virtually any size risks a replay of the events we saw in late 2008 and early 2009,” the Basel, Switzerland-based organization said in its 206-page annual report.

In a stark warning to governments to clean up their finances, the central bankers noted that “macroeconomic policy is in a vastly worse position than it was three years ago, with little capacity to combat a new crisis.”

The report recommended winding down stimulus packages, raising interest rates in the long term and forcing through reforms of the financial system to prevent sudden shocks from causing market-wide collapse as they did two years ago.

Europe Faces Gravest Challenge Since WWII

17 May

From AAP (via The Australian):

Warnings that Europe faces its gravest challenge since World War II and that the “contagion” from troubled states such as Greece could quickly spread have heightened anxiety in global markets after a steep plunge on Friday reversed much of the week’s gains.

The optimism that followed last week’s E750 billion ($1.05 trillion) European bailout evaporated late on Friday, with markets across the continent plunging and Wall Street closing sharply lower.

The euro tripped to its lowest level against the US dollar in 18 months on Friday on fears of years of weak economic growth in the 16-nation European bloc. The euro is at a record low against the Australian dollar, buying just $1.3974, down from more than $2 early last year.

The euro was not helped by comments by US President Barack Obama’s top economic adviser Paul Volcker, who spoke on Friday of the potential “disintegration” of the 16 nations that share the euro currency. And Paris has had to deny reports that President Nicolas Sarkozy threatened to pull France out of the euro to force German Chancellor Angela Merkel to bail out Greece.

European Central Bank president Jean-Claude Trichet at the weekend called for more action by euro-zone governments to improve fiscal governance.

“We are now experiencing extreme tensions,” he said in an interview with Germany’s Der Spiegel magazine. “In the market, there is always a danger of contagion — like the contagion we saw among the private institutions in 2008.”

And from Business Spectator:

Yesterday, Angela Merkel, German chancellor, warned that the $1 trillion rescue package had only bought Europe time, and that further steps were needed to address the differences in competitiveness and budget deficits between the member countries.

In a speech to the annual German trade union conference, Merkel emphasised that speculation against the euro was only possible because of the huge differences in economic strength and the levels of debt between individual eurozone members.

Meanwhile, the head of the European Central Bank, Jean-Claude Trichet, emphasised that it was urgent that eurozone countries rectify their budget deficits.

In an interview with the German magazine, Der Spiegel, Trichet said that the world was now facing “the most difficult situation since the Second World War – perhaps even since the First World War. We have experienced – and are experiencing – truly dramatic times.”

He said that after the events of 2007-8, “private institutions and markets were about to collapse completely”. That triggered governments to step in with very bold and comprehensive financial support.

The problem was that markets were now questioning whether some governments could afford to repay their debts.

Click here for 9 simple charts that show why a collapse of the Eurozone is inevitable.

BIS: Western World Spending Its Way To Disaster

13 May

From the UK’s Globe and Mail:

The Swiss-based Bank of International Settlements (BIS), the oldest international financial institution in the world, has functioned as the central bank of central bankers for 80 years. In a working paper written by three senior staff economists (“The future of public debt: prospects and implications”), released in March, BIS warns that Greece isn’t the only Western economy with hazard lights flashing.

Indeed, it names 11 more: Austria, France, Germany, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, Britain – and the United States. Without “drastic measures,” BIS says, all of these countries will hit a wall of debt.

When the senior economists at BIS warn 12 of the richest countries on Earth that they must take drastic action to reduce debt, you know that it’s time to check the air bags. The only thing you don’t know, that you need to know, is the precise time of the crash. The lesson is already obvious: Governments can’t drive recklessly, use only the accelerator for braking and not eventually crash.

By the end of 2011, the BIS economists calculate, U.S. government debt will have risen from 62 per cent of GDP in 2007, not quite three years ago, to 100 per cent. Britain’s debt will have risen from 47 per cent of GDP to 94 per cent. Italy’s debt will have risen from 112 per cent of GDP to 130 per cent. All together, the public debt of the 12 countries will have risen from 73 per cent of combined GDP to 105 per cent.

At this debt level, the risk of sovereign default rises rapidly. But the BIS analysis says this unprecedented debt level will itself increase “precipitously” in coming years. It will not, as each of these countries separately insists, fall.

For one thing, the BIS report says, countries that proclaim spending restraint generally do not actually do it. Normally, they hold the line – temporarily. Normally, they slow the rate of increase – temporarily. All pronouncements aside, the BIS report says, these 12 countries have made such grandiose spending commitments that they are predestined for higher debt. The U.S. debt-GDP ratio will hit 150 per cent in the next decade. Britain’s debt-GDP ratio will hit 200 per cent. Japan’s debt-GDP ratio will hit 300 per cent.

These increases in debt, the BIS report says, are untenable. The financial markets, of course, won’t permit them. The only mystery, the BIS report says, is exactly when the markets will intervene. History shows, the report says, that when the markets do rebel, they often do so instantaneously and decisively – often without much warning.

9 Charts Show Why Eurozone Collapse Is Inevitable

10 May

Here are some simple charts that demonstrate why anything and everything that the EU, ECB and/or the IMF can do now, is simply to delay the inevitable disintegration of the Eurozone.

From Der Spiegel: (click on images to enlarge)

And finally, one more chart showing how interconnected (thus vulnerable) the Eurozone countries are, due to the enormous sums of money owed by member countries just to each other: (click on image to enlarge)

Eurozone Faces Bankruptcy, Disintegration

10 May

Could the Eurozone go bankrupt? One of Germany’s leading newspapers believes so.

From an excellent major article in Der Spiegel:

Huge National Debts Could Push Eurozone Into Bankruptcy

Greece is only the beginning. The world’s leading economies have long lived beyond their means, and the financial crisis caused government debt to swell dramatically. Now the bill is coming due, but not all countries will be able to pay it.

The euro zone is pinning its hopes on (IMF negotiator) Thomsen and his team. His goal is to achieve what Europe’s politicians are not confident they can do on their own, namely to bring discipline to a country that, through manipulation and financial inefficiency, has plunged the European single currency into its worst-ever crisis.

If the emergency surgery isn’t successful, there will be much more at stake than the fate of the euro. Indeed, Europe could begin to erode politically as a result. The historic project of a united continent, promoted by an entire generation of politicians, could suffer irreparable damage, and European integration would suffer a serious setback — perhaps even permanently.

And the global financial world would be faced with a new Lehman Brothers, the American investment bank that collapsed in September 2008, taking the global economy to the brink of the abyss. It was only through massive government bailout packages that a collapse of the entire financial system was averted at the time.

A similar scenario could unfold once again, except that this time it would be happening at a higher level, on the meta-level of exorbitant government debt. This fear has had Europe’s politicians worried for weeks, but their crisis management efforts have failed. For months, they have been unable to contain the Greek crisis.

There are, in fact, striking similarities to the Lehman bankruptcy. This isn’t exactly surprising. The financial crisis isn’t over by a long shot, but has only entered a new phase. Today, the world is no longer threatened by the debts of banks but by the debts of governments, including debts which were run up rescuing banks just a year ago.

The banking crisis has turned into a crisis of entire nations, and the subprime mortgage bubble into a government debt bubble. This is why precisely the same questions are being asked today, now that entire countries are at risk of collapse, as were being asked in the fall of 2008 when the banks were on the brink: How can the calamity be prevented without laying the ground for an even bigger disaster? Can a crisis based on debt be solved with even more debt? And who will actually rescue the rescuers in the end, the ones who overreached?

So, the GFC is ‘over’, is it Ken?

Cracks Multiply In Europe

7 May

From Business Spectator:

Global share markets plunged overnight as panicked investors worried that the eurozone could fragment as a result of the escalating European financial crisis.

The European banking system is under huge strain* as banks are increasingly reluctant to lend to each other. The European banks are worried about how much other banks have lent to the weaker eurozone countries – the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) – and the catastrophic losses that could ensue if any of these countries defaulted on their debt.

At the same time, there’s been a flight of capital out of the eurozone as investors have worried the common currency might crumble as a result of the problems in the vulnerable economies of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).

The huge question mark over the eurozone’s survival is causing the euro to plummet. Increasingly, market analysts are predicting that the currency, which broke through the $US1.30 earlier this week for the first tine since April 2009, is set to hit parity with the US dollar.

There is an increasing consensus that the $US145 billion European Union-IMF rescue package for Greece is not sufficient to solve Greece’s basic problem – that it is simply unable to service its colossal debts. There are also questions as to whether Greece will be able to implement the punitive austerity measures it is being forced to adopt in exchange for the bailout.

At the same time, there are increasing signs that even if it bails out Greece, Germany will not be prepared to write the huge cheques required to help other vulnerable PIIGS.

German taxpayers are already outraged at having to pick up a large chunk of the cost of the Greek bail-out, and Germany’s largest opposition party, the centre-left SPD, has said that it will not vote in favour of the bill.

Predictions that the cascading PIIGS debt crisis will cause the eurozone to collapse are becoming more widespread.

* That the European banking system is “under huge strain” and is beginning to freeze up (again) has profound implications for our economy. Why?

As explained in this post a few days ago, even the heads of our major banks quietly admit that our banking system has an “achilles heel” – it is desperately dependent on the international wholesale capital markets for funding.  If/when the banking system abroad seizes up again, our banks will be in deep trouble.

Watch out for the emergency reinstalment of the government’s Bank Guarantee, hoping to again prop up international confidence in our banks so that they can continue to attract funding in a second credit crunch.

Watch out also for higher interest rates charged by the banks – irrespective of the RBA cash rate – due to their having to pay ever higher interest rates in order to get that international funding in the first place.

GFC Wave II Coming?

7 May

From headline news around the globe (in this case, The Australian):

Wall Street Plunges On Eurozone Contagion Fears

US stocks plunged today in a flashback to the panicked trading of 2008 and at one stage the Dow was down almost 1000 points — its biggest intraday fall in history.

Investors fled everything from stocks and risky corporate bonds to commodities and poured money into safe assets such as US Treasuries and gold.

The US stockmarket fell for a third-straight session, as jittery investors grew even more restless over southern Europe’s festering sovereign-debt woes.

The sell-off turned ugly quickly, with Bank of America, Procter & Gamble and 3M among the big decliners, as potentially erroneous trades accelerated the drop.

The Dow Jones Industrial Average ended the session down 347.80 points, or 3.20 per cent, to 10,520.32, its biggest point drop since February 2009. The average at one point fell as much as 998.50 points, or 9.2 per cent, the biggest intraday drop in its history.

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