It all starter in 2008 imho. Nationalizing private debts and pumping money into the markets was a bad move. The public debts are huge and there's no easy was to get soften the problem.
Strange to see noone's talking about the cowboys here?
Eurozone debt crisis
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CaerMyrddin
- Posts: 1271
- Joined: Mon Sep 07, 2009 10:47 am
I remember that the majot private bank in Portugal priced €4.20 before the 2008 crisis. They hit an ever minimum of €0.30 today. It's shocking.
It all starter in 2008 imho. Nationalizing private debts and pumping money into the markets was a bad move. The public debts are huge and there's no easy was to get soften the problem.
Strange to see noone's talking about the cowboys here?
It all starter in 2008 imho. Nationalizing private debts and pumping money into the markets was a bad move. The public debts are huge and there's no easy was to get soften the problem.
Strange to see noone's talking about the cowboys here?
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superfrank
- Posts: 2762
- Joined: Fri Aug 14, 2009 8:28 pm
people are stuck in blinkered 'investor' mode and can't see the wood for the trees (which will soon be more valuable as wood than the paper money they go to produce!).
there comes a point when adding more debt becomes self-defeating, it's called a compound debt spiral. many countries are already in one, and the rest not far off.
sooner or later printing money becomes like pushing on a piece of string (it won't stop Bernanke though, it's all he knows).
there comes a point when adding more debt becomes self-defeating, it's called a compound debt spiral. many countries are already in one, and the rest not far off.
sooner or later printing money becomes like pushing on a piece of string (it won't stop Bernanke though, it's all he knows).
Portugal's Prime Minister Pedro Passos Coelho discovers 'colossal' budget hole - http://uk.finance.yahoo.com/news/Portug ... 8.html?x=0
How can a 2 billion Euro hole be accidentally overlooked?!?
Jeff
How can a 2 billion Euro hole be accidentally overlooked?!?
Jeff
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CaerMyrddin
- Posts: 1271
- Joined: Mon Sep 07, 2009 10:47 am
The previous government had forced the SS to buy portuguese bonds at 6% interest rate over the last year, but as interest rates are soaring, the bonds have devaluated by 30 to 40%.
The previous government made a lot of mistakes and kept pushing the garbage under the carpet :-\
The previous government made a lot of mistakes and kept pushing the garbage under the carpet :-\
Hi Antonio
Do you sense that Portugal is losing patience with the Eurozone, as this article says? http://blogs.telegraph.co.uk/finance/am ... th-europe/
Jeff
Do you sense that Portugal is losing patience with the Eurozone, as this article says? http://blogs.telegraph.co.uk/finance/am ... th-europe/
Jeff
Only Germany can save EMU as contagion turns systemic - 'Europe's leaders have finally run out of time. If they fail to agree on some form of debt pooling and shared fiscal destiny at Thursday's emergency summit, they risk a full-fledged run on South Europe's bond markets and a disorderly collapse of monetary union'.
http://www.telegraph.co.uk/finance/comm ... temic.html
Why is the BBC talking about nothing but a few phones being hacked into when events are taking place that could affect the lives of millions of people for years to come?!?
Jeff
http://www.telegraph.co.uk/finance/comm ... temic.html
Why is the BBC talking about nothing but a few phones being hacked into when events are taking place that could affect the lives of millions of people for years to come?!?
Jeff
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CaerMyrddin
- Posts: 1271
- Joined: Mon Sep 07, 2009 10:47 am
This is really a delicate situation.
We don't lose our patience with the Eurozone, we're a very peaceful people. No way you would see what happenned with Murdoch here!
In the meanwhyle, a solution must be forged. Whether we default, or the cavalry must be sent in, but things as are are unsustainable. It's impossible for a country to maintain a growth that allows him to repain his loans at the current interest rates.
You might remember I supported Merkel a few months ago when she said privates would have to take their chances. Right now I can see no sense on what she is doing. All the countries in trouble need to default or get a big loan with low rates during long time. Right now the problem is just growing. Do you know for how long Germany payed the loan they had to rebuild he country after WW2?
We don't lose our patience with the Eurozone, we're a very peaceful people. No way you would see what happenned with Murdoch here!
In the meanwhyle, a solution must be forged. Whether we default, or the cavalry must be sent in, but things as are are unsustainable. It's impossible for a country to maintain a growth that allows him to repain his loans at the current interest rates.
You might remember I supported Merkel a few months ago when she said privates would have to take their chances. Right now I can see no sense on what she is doing. All the countries in trouble need to default or get a big loan with low rates during long time. Right now the problem is just growing. Do you know for how long Germany payed the loan they had to rebuild he country after WW2?
I agree - the current situation is unsustainable, particularly as there is now contagion to Italy and Spain.CaerMyrddin wrote: All the countries in trouble need to default or get a big loan with low rates during long time.
This is an interesting article on the situation - http://www.bbc.co.uk/news/business-14203824.
No, although I know Britain only repaid it's post World War II loan from the USA in 2006...CaerMyrddin wrote:Right now the problem is just growing. Do you know for how long Germany payed the loan they had to rebuild he country after WW2?
Jeff
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mulberryhawk
- Posts: 165
- Joined: Thu Oct 29, 2009 12:37 am
A quick hypothetical question for the all the economists out there in bet angel land.
What happens to all the household and corporate debt in a country if it is forced to leave the euro?
Will it just be converted into the new currency eg(drachma, punt) or will the debts remain denominated in euros, which will surely cripple households and companies in these countries, inevitably leading to default on a massive scale. Anyone know what the answer is or are we sailing into unchartered waters here
What happens to all the household and corporate debt in a country if it is forced to leave the euro?
Will it just be converted into the new currency eg(drachma, punt) or will the debts remain denominated in euros, which will surely cripple households and companies in these countries, inevitably leading to default on a massive scale. Anyone know what the answer is or are we sailing into unchartered waters here
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aligammack
- Posts: 104
- Joined: Wed Apr 15, 2009 2:49 pm
We are definitely sailing into unchartered waters so it is difficult to say what would happen to the domination of household debt however I would expect the debt to remain in Euros. Can’t see how the lenders would want to convert the debt if they didn’t have to.
If Greece for example was to leave to Euro and revert back to the Drachma it is pretty safe to say that the currency would plummet over night. If household debt remained in Euros then the debt value would multiply many times over and become extremely costly of the Greeks who would then be earning in Drachma.
If Greece or any other of the troubled countries do look like they are on the way out of the Euro then if the people haven’t already I’m sure we would see huge withdraws of cash from banks, similar to Argentina a few years back.
If Greece for example was to leave to Euro and revert back to the Drachma it is pretty safe to say that the currency would plummet over night. If household debt remained in Euros then the debt value would multiply many times over and become extremely costly of the Greeks who would then be earning in Drachma.
If Greece or any other of the troubled countries do look like they are on the way out of the Euro then if the people haven’t already I’m sure we would see huge withdraws of cash from banks, similar to Argentina a few years back.
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enzabella2009
- Posts: 747
- Joined: Tue Nov 03, 2009 3:58 pm
Hi, Ferru
There are things you already know but, it will keep you busy for sometime
I have translated 3 more articles just for you before I go. I will send it to you if you wished
good read..
The euro officially came into force on 1 January 1999 as a virtual currency, in bank accounts and wire transfers denominated in euros, three years after the concrete has been done in the circulating passage: euro in your pocket instead of francs, marks, lira .
The euro has become a major international currencies: euro banknotes began to circulate around the world, and the bond market in euros he soon began to compete with the dollar bond market. The creation of the euro has instilled a new sense of confidence, especially in those European countries that were historically considered as risk countries for investment.
The ECB's monetary policy has been based primarily on the needs of Germany: the lack of domestic demand caused by the policies of the German tax and wage moderation required interest rates low enough, that do not depress it further. However, real rates were very low in peripheral countries, characterized by a structurally inflation above the European average.
These countries, which previously had high rates, were taken from the euphoria of the loans. Capital flows are determined as cheap a building boom and household debt in Spain and Ireland, and the public sector in Greece.
In Greece it was mainly the government to turn large loans: During the years of easy borrowing, the Conservative government has done a lot of greek debt - more than allowed by the Stability Pact. When the government changed in 2009, the accounting tricks came to light, and suddenly it appeared that Greece had a deficit and a debt substantially much larger than previously thought, with a consequent crisis of confidence by investors who demand higher returns to comedy to buy debt securities greek, aggravating the situation more and more.
But Greece is actually a case is not representative. Just a few years ago, Spain, by far the largest economies in crisis, was a member of the European model, with a balanced budget and public debt as a percentage of GDP was half of that came the German. The same applies to Ireland. And then what happened?
With low rates, these countries have had a property boom: the construction industry is a driving force of the economy and in fact these countries have grown, but at the same time also grew in nominal wages and prices. In Ireland house prices have increased from 1998 to 2007 of 180 percent. Even prices in Spain rose by almost the same. The productivity in some of these peripheral countries has grown more than in Germany, but given that nominal wages grew more than productivity, these countries lost competitiveness relative to Germany, where nominal wage growth was however lower than the growth in productivity. Germany and his entourage (Austria, Netherlands, etc.) have gained in terms of net exports for the growth of demand in the peripheral countries. Over the years, so a strong peripheral countries accumulate foreign debt.
When the housing bubble has burst and house prices have fallen below the mortgage, the families have become insolvent and the banks have accumulated huge losses. To stave off a chain of bank failures have taken the states, whose debts have grown dramatically.
In addition, there was a big tax backlash due to the collapse of the real estate industry. Overall employment has declined, increasing spending on unemployment benefits, while simultaneously bringing down the revenue, because tax revenue depends heavily on real estate transactions.
As a result, Spain and Ireland have gone from surpluses on the eve of the crisis of enormous budget deficit in 2009, with a consequent increase in government bond yields and worsening of the situation.
The spread of returns within the monetary union
The economic crisis and large public deficits and debt have meant that creditors lose confidence in the peripheral European economies, and in their ability to repay the debt. Thus, the yields of the peripheral countries have gradually increased, showing a differential with German bond yields higher and higher. (See tables on the spreads between German Bunds to 10 years and the corresponding titles of PIIGS, updated to April 2011). This means for assuming the risk of buying the securities of these countries, investors demand higher and higher yields, and that no longer exists as a single rate in Europe, despite the fact that money is only one.
An estimate of the risk of default on debt to European countries is also given by the credit default swaps are an insurance policy against the credit risk of a counterparty. CDS insuring the bonds of various countries (by paying an annual premium will be insured against the risk of default on debt and insurance will refund the face value of bonds insured) will get more expensive as the related risk of default on debt increases. CDS also on peripheral European countries are therefore constantly on the rise.
The particular weakness of the eurozone
Still, there are other nations - in particular, the United States, Japan and Britain - who have registered substantial deficits and debts which are higher than those charged in many European countries. Japan's debt exceeds 200% of GDP, the U.S. 100%. Yet these countries have not suffered a comparable loss of trust or similar speculative attacks.
What is the difference with the euro countries?
The first obvious difference is that countries that are part of European monetary union does not have the tools they may have other countries improve their economies and avoid a real fiscal crisis: Japan and the U.S. have a central bank can purchase securities directly by the State, by printing dollars or yen, in case the markets refuse to do so. This helps maintain large deficits by expansionary fiscal policies to sostenre the economy in times of crisis, without incurring major immediate problems of distrust of markets and unsustainable debt. Except, of course the serious problem of inflation, if monetary expansion is not well directed toward the real economy rather than to speculation, and well controlled.
The ECB, for decision-laws, a policy of monetary, according to which the central bank is only required to follow the simple rule of setting the rate of money growth to be very low, because if the currency in circulation grows too (with an expansionary monetary policy), you will have the reflexes, rather than on production, prices, resulting in a surge in inflation.
According to the monetarist fiscal policy is unable to correct the economic fluctuations, even if it does not cause itself (when used incorrectly), it is completely ineffective and may cause beneficial effects for a short period.
Hence the impossibility of the monetization of deficits and the importance assigned to balance the budget. So the purchase of government bonds to ease the crisis can only be strictly on the secondary markets without the corresponding money issue.
Secondly, there are reasons why the euro area is considered by economists is not optimal currency area, and therefore inherently weak.
When at the beginning was proposed single European currency, it was said that the common currency would have great advantages on intra-European trade, with reset uncertainties related costs and the exchange rate, and this in turn suggested large benefits for the 'economy.
But many economists (especially American and British) from the beginning have been skeptical about the euro project and its ability to survive in the face of so-called asymmetric shocks, ie the economic crisis affecting one country or one geographical area .
In fact, given that the common currency area lacks the ability to use the devaluation of the currency (which normally allows the instrument to return to growth by increasing exports and lowering imports become more expensive at the same time), other conditions would be necessary for the absorption of the crisis, such as labor mobility and fiscal policy, monetary union euro both absent and present in the U.S. instead.
First Robert Mundell has highlighted the importance of a perfect labor mobility, which can help absorb the crisis in one country or one region through the movement of labor to the richer regions: the Americans are highly mobile and if historical patterns are still valid, migration will bring the unemployment rate of the states most affected by the crisis in line with the average of the United States in a few years, and the problem of unemployment will be significantly weakened by emigration.
Although the Europeans have the legal right to move freely in search of work in practice imperfect cultural integration - in particular, the lack of a common language - makes workers less mobile geographically than their American counterparts.
Another important point stressed by Peter Kenen, is the integration tax. Europe is not integrated tax: taxpayers are not automatically part of the German pension scheme greek or Irish bank bailouts. Not having a common budget, the crisis that invests in one area can not be compensated by transfers from the most economically advanced areas.
In short, the countries that are part of European monetary union does not have the tools they may have other countries improve their economies and avoid a real fiscal crisis.
Monetary policy determined centrally monetarist type does not allow the funding of the State by the Central Bank. They can devalue the exchange rate because of the single currency. They can not absorb the shocks that affect individual areas or through the mobility of labor, either through budget transfers. In addition, individual countries do not even have autonomy in decisions about their public deficits to a possible expansionary fiscal policy, because the sources of funding are not and the accounts are subject to supranational control.
As a result, the euro countries still do not have it available to other tools but a long and painful deflation to find the way of competitiveness and replace their accounts.
The possible ways to overcome the crisis
The road traveled so far
The finance ministers of the 'Eurogroup as a first step towards Greece emergency that threatened the default no longer having normal access to markets for the financing of its debt, have developed a system of bilateral loans from other countries (for a rate of about 5% below the performance levels required by the market), each in proportion to its share in the capital of the ECB, in addition to a loan from the IMF, for a total amount that covered almost the entire value of Greek bonds maturing in 2010 (53 billion euros).
Subsequently, however, as the crisis deepened and triggered the domino effect in the increase in spreads involving the other weak countries, the so-called PIGS or PIIGS as Ireland, Portugal, Spain, Belgium and even Italy and perhaps the Union has decided to organize the rescue for countries in trouble through the so-called European fund-saving states, a "European financial stabilization mechanism" (EFSF) of 500 billion euros, it added another 250 guaranteed by the International Monetary Fund. The 500 billion euros serve as collateral for issuing bonds through which European funding goes to countries in crisis. In practice, the fund raises money markets and transfers them to the requesting States. Bonds issued by the Fund have a AAA rating, the highest possible index of the debtor's solvency and financial stability, and this allows the fund to borrow on the capital market at a cost (interest rate) lower than they could aspire to obtain financing in the Member States more difficult.
These are guaranteed loans from the Fund:
in part from the budget of the European Union (60 billion) and indirectly by all EU Member States
in part by a fund made up of the eurozone countries in proportion to GDP to 440 billion (then Germany, France and Italy are the first guarantors)
in part by the International Monetary Fund (involving all states at the global level, each for a share in proportion to its GDP, then the U.S. in the first place) for a maximum of 250 billion and not more than 50% of the aid coming from European sources.
The first use of the Fund went to the benefit of Ireland, for a total of 85 billion euros.
Notwithstanding Articles 124 and 125 of the Treaty prevent the financing of the European states from the Union, has found a legal basis in Article 122 provides that "the Union's financial assistance" to a member state "in serious difficulty or threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control. " Speculation in financial markets can be considered, in fact, an exceptional circumstance beyond the control of governments.
To become the future the EU will create a fund anti-crisis likely to offer financial assistance to the Union on a permanent basis, and this transformation from temporary to permanent anti-crisis fund, however, makes it necessary to amend the Treaty on European Union, where it will be inserted a clause allowing Member States that have divided the Euro as the ability to create a stability mechanism to preserve the stability of the single currency.
For this purpose, the procedure will be used simplified amendment introduced by the Lisbon Treaty (Article 148 TEU), which does not require the signature of a new treaty to be ratified, but simply an endorsement by the European bodies.
The timetable for this procedure comes to 2013, the date by which this fund so called European Stability Mechanism (ESM), would become permanent.
The famous "Eurobonds" proposed by Minister Tremonti and Jean-Claude Juncker (Prime Minister of Luxembourg) are something other than bonds issued by states and by the Future Fund, Save the ESM. European bonds should be issued normally beyond critical situations, a pan-European agency for the benefit of the debt of individual states and the second fixed gear ratios to GDP produced annually by individual nations. This would allow European countries to have access to capital markets on a comparable basis, then to an intermediate stage of favorability with respect to emissions from individual states. For this reason, are strongly opposed by France and Germany, which currently emit debt (AAA) at a cost lower than that of other countries.
During the European Summit of 24-25 March 2011 is also acceding countries have signed the "Pact for the euro," a plan under which the granting of these loans is conditional on implementation of structural reforms, privatization and strict policies and austerity to restore budget balance and debt relief. The countries that we have over 60% of GDP will reduce by one-twentieth year, as required by the Stability and Growth Pact reform.
Governments must submit annually to the European Commission a document of Economics and Finance, which will plan the budget balances according to the dictates of the stability plan. The DEF is not subject to parliamentary approval. Thus, even economic policy fall within the competence of Europe, without amending the Treaties, and until the debt crisis was the responsibility of national states.
The governments of the PIGS (Portugal, Ireland, Greece and Spain, and - in the corridors of international meetings it says openly - Italy) in practice must adapt their economic structures to those of the dominant countries: to put the rule of "constitutional" a balanced budget, raising to 67 the minimum age for retirement and the abolition of wage indexation, as well as policies of spending cuts and sales of public assets to balance the budget.
Doubts about the validity of this approach
Many observers do not believe in the effectiveness of the fund have been saved, primarily because the funds made available may be enough to save the smaller countries, but they are not for the larger countries, like Spain or Italy.
In addition, the Italian economist Luigi Zingales, pointed out that the mechanism EFSF, created to assist countries in situations of '"illiquidity", is designed as a CDO (Collateralized Debt obbligations) financial instrument infamous for having created the famous crisis subprime mortgages overseas. Europe is following a similar path. The EFSF bond issue to buy AAA-rated bonds of countries that have difficulties in raising funds on markets (eg, Ireland). According to Zingales, this is a dangerous alchemy that seeks to transform lead into gold: a large part of the guarantee comes from countries like Italy and Spain, in turn, likely candidates for a fiscal crisis. Only France and Germany are the reliable guarantee. As long as you're saving is the only country in Ireland, there are no problems. But if the vehicle incurs EFSF Spain, it is not certain that Germany is really willing to pass on to its German taxpayers to save PIIGS. Then there is the serious fact that the French and German banks are notoriously overexposed on sovereign bonds of the peripheral countries, and even their governments would be forced to save them. And, therefore, how much tax burden would be France and Germany, under such circumstances? In essence, a fiscal crisis in Spain could bring down the entire building.
Another important issue, austerity policies aimed at achieving high primary surpluses to reduce debt, with spending cuts and revenue increases, which are required as a condition for countries receiving aid from the European fund, have the effect of worsening the economic crisis lead to a fall in GDP, with a consequent fall in tax revenue, so that the readjustment of the accounts is a Sisyphean task and social sacrifices and increasingly expected to last for several years before we see perhaps a light at the end of the tunnel.
The possible scenarios
The debt restructuring
According to many economists, the final outcome can not be that a debt restructuring for countries in crisis. Generally, it is more likely to Greece, Ireland and Portugal, while it seems less likely for Italy, which has a strong private savings and high debt despite the deficit has more content.
Debt restructuring can be done in different ways, for example changed the schedule of debt repayments and interest payments. However, a measure almost always required is the devaluation of the value of the debt generally between 30% and 60% of the nominal vaore.
The debt restructuring is thus a measure different from the default real, in which the debtor does not honor its commitments over, because they do not repay the principal and not paying the interest, then repudiates the entire existing debt.
The restructuring is obviously lose at least for a time (as long as the economy recovers) the possibility to obtain credits from abroad. Therefore involves an immediate rebalancing of the trade balance and government accounts. There remains therefore the need for policies of austerity, even if deflation becomes a strategy in this case potentially more feasible, although more brutal, to get to a recovery.
One of the biggest obstacles to restructuring seems that the German and French banks are heavily exposed to the peripheral countries most at risk, and should therefore meet capital losses that would put serious strain on their economies, and public accounts if governments were to save them. This seems to be one of the reasons why Europe has so far strongly insisted that the crisis countries to accept "aid" of the fund have been saved.
Another option is to restructure debts, or even the deafult, with the release of the euro.
This would allow a faster recovery in the economy due to the devaluation, as happened in Argentina.
The European country that came closest to Argentina is Iceland, whose banks had foreign debts amounting to many times its national income. Unlike Ireland, which sought to save its banks by guaranteeing their debts, the Icelandic government has forced banks to foreign creditors bear the losses, leaving its banks went into default.
At the same time, Iceland has taken advantage of the fact that he had not joined the euro and still had its own currency. He soon became more competitive, leaving very down its currency against other currencies, including the euro. Wages and prices in Iceland have rapidly declined by about 40 per cent compared to those of its trading partners, triggering an increase in exports and falling imports, that has helped offset the blow of the collapsed bank.
But this was possible because Ireland had not joined the monetary union.
As noted by Barry Eichengreen of Berkeley, if a country out of the union even hinted at by the euro would trigger a devastating stroke at the counters of banks, as depositors will rush to avoid the devaluation of moving their funds into safer havens . And Eichengreen concluded that this obstacle "procedural" exit, in fact, makes the euro irreversible.
Governments should act surprised, blocking or limiting withdrawals in advance, and then returning to devalue the national currency without triggering the race.
The central fact to consider is that the external debt of these countries continue to be denominated in Euros, and then the weight of that debt would increase compared to the local currency devalued. In the event of withdrawal from the euro debt would certainly suffer a renegotiation (a not returned, and the rest returned over a longer time).
Integration policy and fiscal and structural problems
The last option would be to proceed more decisively toward a 'fiscal and political integration among European countries, one of the classic conditions necessary to operate a monetary union.
A first step in this direction was proposed in early December 2010 by Jean-Claude Juncker, Luxembourg Prime Minister, and Giulio Tremonti, finance minister in Italy, who proposed the "Eurobonds", other than bonds issued by the fund been saved, because they would be guaranteed by the European Union as a whole, and issued by a special "agency debt (EDA)", at the behest of individual European countries to cover its debt, until the limit of 40% of GDP .
Governments would have access to sufficient resources, the interest rate Eda, in order to put public finances without being exposed to short-term speculative attacks.
These measures could accompany the possible restructuring of the debt of countries that, despite everything, they must remain insolvent.
But at the same time should also be addressed structural problems related to competitiveness and its German growth model based on exports: Germany should give up at least partially tax and wage moderation, so that its economy lost a little 'competitiveness and bases its pattern of growth not only on exports but also on boosting domestic demand.
There are things you already know but, it will keep you busy for sometime
I have translated 3 more articles just for you before I go. I will send it to you if you wished
good read..
The euro officially came into force on 1 January 1999 as a virtual currency, in bank accounts and wire transfers denominated in euros, three years after the concrete has been done in the circulating passage: euro in your pocket instead of francs, marks, lira .
The euro has become a major international currencies: euro banknotes began to circulate around the world, and the bond market in euros he soon began to compete with the dollar bond market. The creation of the euro has instilled a new sense of confidence, especially in those European countries that were historically considered as risk countries for investment.
The ECB's monetary policy has been based primarily on the needs of Germany: the lack of domestic demand caused by the policies of the German tax and wage moderation required interest rates low enough, that do not depress it further. However, real rates were very low in peripheral countries, characterized by a structurally inflation above the European average.
These countries, which previously had high rates, were taken from the euphoria of the loans. Capital flows are determined as cheap a building boom and household debt in Spain and Ireland, and the public sector in Greece.
In Greece it was mainly the government to turn large loans: During the years of easy borrowing, the Conservative government has done a lot of greek debt - more than allowed by the Stability Pact. When the government changed in 2009, the accounting tricks came to light, and suddenly it appeared that Greece had a deficit and a debt substantially much larger than previously thought, with a consequent crisis of confidence by investors who demand higher returns to comedy to buy debt securities greek, aggravating the situation more and more.
But Greece is actually a case is not representative. Just a few years ago, Spain, by far the largest economies in crisis, was a member of the European model, with a balanced budget and public debt as a percentage of GDP was half of that came the German. The same applies to Ireland. And then what happened?
With low rates, these countries have had a property boom: the construction industry is a driving force of the economy and in fact these countries have grown, but at the same time also grew in nominal wages and prices. In Ireland house prices have increased from 1998 to 2007 of 180 percent. Even prices in Spain rose by almost the same. The productivity in some of these peripheral countries has grown more than in Germany, but given that nominal wages grew more than productivity, these countries lost competitiveness relative to Germany, where nominal wage growth was however lower than the growth in productivity. Germany and his entourage (Austria, Netherlands, etc.) have gained in terms of net exports for the growth of demand in the peripheral countries. Over the years, so a strong peripheral countries accumulate foreign debt.
When the housing bubble has burst and house prices have fallen below the mortgage, the families have become insolvent and the banks have accumulated huge losses. To stave off a chain of bank failures have taken the states, whose debts have grown dramatically.
In addition, there was a big tax backlash due to the collapse of the real estate industry. Overall employment has declined, increasing spending on unemployment benefits, while simultaneously bringing down the revenue, because tax revenue depends heavily on real estate transactions.
As a result, Spain and Ireland have gone from surpluses on the eve of the crisis of enormous budget deficit in 2009, with a consequent increase in government bond yields and worsening of the situation.
The spread of returns within the monetary union
The economic crisis and large public deficits and debt have meant that creditors lose confidence in the peripheral European economies, and in their ability to repay the debt. Thus, the yields of the peripheral countries have gradually increased, showing a differential with German bond yields higher and higher. (See tables on the spreads between German Bunds to 10 years and the corresponding titles of PIIGS, updated to April 2011). This means for assuming the risk of buying the securities of these countries, investors demand higher and higher yields, and that no longer exists as a single rate in Europe, despite the fact that money is only one.
An estimate of the risk of default on debt to European countries is also given by the credit default swaps are an insurance policy against the credit risk of a counterparty. CDS insuring the bonds of various countries (by paying an annual premium will be insured against the risk of default on debt and insurance will refund the face value of bonds insured) will get more expensive as the related risk of default on debt increases. CDS also on peripheral European countries are therefore constantly on the rise.
The particular weakness of the eurozone
Still, there are other nations - in particular, the United States, Japan and Britain - who have registered substantial deficits and debts which are higher than those charged in many European countries. Japan's debt exceeds 200% of GDP, the U.S. 100%. Yet these countries have not suffered a comparable loss of trust or similar speculative attacks.
What is the difference with the euro countries?
The first obvious difference is that countries that are part of European monetary union does not have the tools they may have other countries improve their economies and avoid a real fiscal crisis: Japan and the U.S. have a central bank can purchase securities directly by the State, by printing dollars or yen, in case the markets refuse to do so. This helps maintain large deficits by expansionary fiscal policies to sostenre the economy in times of crisis, without incurring major immediate problems of distrust of markets and unsustainable debt. Except, of course the serious problem of inflation, if monetary expansion is not well directed toward the real economy rather than to speculation, and well controlled.
The ECB, for decision-laws, a policy of monetary, according to which the central bank is only required to follow the simple rule of setting the rate of money growth to be very low, because if the currency in circulation grows too (with an expansionary monetary policy), you will have the reflexes, rather than on production, prices, resulting in a surge in inflation.
According to the monetarist fiscal policy is unable to correct the economic fluctuations, even if it does not cause itself (when used incorrectly), it is completely ineffective and may cause beneficial effects for a short period.
Hence the impossibility of the monetization of deficits and the importance assigned to balance the budget. So the purchase of government bonds to ease the crisis can only be strictly on the secondary markets without the corresponding money issue.
Secondly, there are reasons why the euro area is considered by economists is not optimal currency area, and therefore inherently weak.
When at the beginning was proposed single European currency, it was said that the common currency would have great advantages on intra-European trade, with reset uncertainties related costs and the exchange rate, and this in turn suggested large benefits for the 'economy.
But many economists (especially American and British) from the beginning have been skeptical about the euro project and its ability to survive in the face of so-called asymmetric shocks, ie the economic crisis affecting one country or one geographical area .
In fact, given that the common currency area lacks the ability to use the devaluation of the currency (which normally allows the instrument to return to growth by increasing exports and lowering imports become more expensive at the same time), other conditions would be necessary for the absorption of the crisis, such as labor mobility and fiscal policy, monetary union euro both absent and present in the U.S. instead.
First Robert Mundell has highlighted the importance of a perfect labor mobility, which can help absorb the crisis in one country or one region through the movement of labor to the richer regions: the Americans are highly mobile and if historical patterns are still valid, migration will bring the unemployment rate of the states most affected by the crisis in line with the average of the United States in a few years, and the problem of unemployment will be significantly weakened by emigration.
Although the Europeans have the legal right to move freely in search of work in practice imperfect cultural integration - in particular, the lack of a common language - makes workers less mobile geographically than their American counterparts.
Another important point stressed by Peter Kenen, is the integration tax. Europe is not integrated tax: taxpayers are not automatically part of the German pension scheme greek or Irish bank bailouts. Not having a common budget, the crisis that invests in one area can not be compensated by transfers from the most economically advanced areas.
In short, the countries that are part of European monetary union does not have the tools they may have other countries improve their economies and avoid a real fiscal crisis.
Monetary policy determined centrally monetarist type does not allow the funding of the State by the Central Bank. They can devalue the exchange rate because of the single currency. They can not absorb the shocks that affect individual areas or through the mobility of labor, either through budget transfers. In addition, individual countries do not even have autonomy in decisions about their public deficits to a possible expansionary fiscal policy, because the sources of funding are not and the accounts are subject to supranational control.
As a result, the euro countries still do not have it available to other tools but a long and painful deflation to find the way of competitiveness and replace their accounts.
The possible ways to overcome the crisis
The road traveled so far
The finance ministers of the 'Eurogroup as a first step towards Greece emergency that threatened the default no longer having normal access to markets for the financing of its debt, have developed a system of bilateral loans from other countries (for a rate of about 5% below the performance levels required by the market), each in proportion to its share in the capital of the ECB, in addition to a loan from the IMF, for a total amount that covered almost the entire value of Greek bonds maturing in 2010 (53 billion euros).
Subsequently, however, as the crisis deepened and triggered the domino effect in the increase in spreads involving the other weak countries, the so-called PIGS or PIIGS as Ireland, Portugal, Spain, Belgium and even Italy and perhaps the Union has decided to organize the rescue for countries in trouble through the so-called European fund-saving states, a "European financial stabilization mechanism" (EFSF) of 500 billion euros, it added another 250 guaranteed by the International Monetary Fund. The 500 billion euros serve as collateral for issuing bonds through which European funding goes to countries in crisis. In practice, the fund raises money markets and transfers them to the requesting States. Bonds issued by the Fund have a AAA rating, the highest possible index of the debtor's solvency and financial stability, and this allows the fund to borrow on the capital market at a cost (interest rate) lower than they could aspire to obtain financing in the Member States more difficult.
These are guaranteed loans from the Fund:
in part from the budget of the European Union (60 billion) and indirectly by all EU Member States
in part by a fund made up of the eurozone countries in proportion to GDP to 440 billion (then Germany, France and Italy are the first guarantors)
in part by the International Monetary Fund (involving all states at the global level, each for a share in proportion to its GDP, then the U.S. in the first place) for a maximum of 250 billion and not more than 50% of the aid coming from European sources.
The first use of the Fund went to the benefit of Ireland, for a total of 85 billion euros.
Notwithstanding Articles 124 and 125 of the Treaty prevent the financing of the European states from the Union, has found a legal basis in Article 122 provides that "the Union's financial assistance" to a member state "in serious difficulty or threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control. " Speculation in financial markets can be considered, in fact, an exceptional circumstance beyond the control of governments.
To become the future the EU will create a fund anti-crisis likely to offer financial assistance to the Union on a permanent basis, and this transformation from temporary to permanent anti-crisis fund, however, makes it necessary to amend the Treaty on European Union, where it will be inserted a clause allowing Member States that have divided the Euro as the ability to create a stability mechanism to preserve the stability of the single currency.
For this purpose, the procedure will be used simplified amendment introduced by the Lisbon Treaty (Article 148 TEU), which does not require the signature of a new treaty to be ratified, but simply an endorsement by the European bodies.
The timetable for this procedure comes to 2013, the date by which this fund so called European Stability Mechanism (ESM), would become permanent.
The famous "Eurobonds" proposed by Minister Tremonti and Jean-Claude Juncker (Prime Minister of Luxembourg) are something other than bonds issued by states and by the Future Fund, Save the ESM. European bonds should be issued normally beyond critical situations, a pan-European agency for the benefit of the debt of individual states and the second fixed gear ratios to GDP produced annually by individual nations. This would allow European countries to have access to capital markets on a comparable basis, then to an intermediate stage of favorability with respect to emissions from individual states. For this reason, are strongly opposed by France and Germany, which currently emit debt (AAA) at a cost lower than that of other countries.
During the European Summit of 24-25 March 2011 is also acceding countries have signed the "Pact for the euro," a plan under which the granting of these loans is conditional on implementation of structural reforms, privatization and strict policies and austerity to restore budget balance and debt relief. The countries that we have over 60% of GDP will reduce by one-twentieth year, as required by the Stability and Growth Pact reform.
Governments must submit annually to the European Commission a document of Economics and Finance, which will plan the budget balances according to the dictates of the stability plan. The DEF is not subject to parliamentary approval. Thus, even economic policy fall within the competence of Europe, without amending the Treaties, and until the debt crisis was the responsibility of national states.
The governments of the PIGS (Portugal, Ireland, Greece and Spain, and - in the corridors of international meetings it says openly - Italy) in practice must adapt their economic structures to those of the dominant countries: to put the rule of "constitutional" a balanced budget, raising to 67 the minimum age for retirement and the abolition of wage indexation, as well as policies of spending cuts and sales of public assets to balance the budget.
Doubts about the validity of this approach
Many observers do not believe in the effectiveness of the fund have been saved, primarily because the funds made available may be enough to save the smaller countries, but they are not for the larger countries, like Spain or Italy.
In addition, the Italian economist Luigi Zingales, pointed out that the mechanism EFSF, created to assist countries in situations of '"illiquidity", is designed as a CDO (Collateralized Debt obbligations) financial instrument infamous for having created the famous crisis subprime mortgages overseas. Europe is following a similar path. The EFSF bond issue to buy AAA-rated bonds of countries that have difficulties in raising funds on markets (eg, Ireland). According to Zingales, this is a dangerous alchemy that seeks to transform lead into gold: a large part of the guarantee comes from countries like Italy and Spain, in turn, likely candidates for a fiscal crisis. Only France and Germany are the reliable guarantee. As long as you're saving is the only country in Ireland, there are no problems. But if the vehicle incurs EFSF Spain, it is not certain that Germany is really willing to pass on to its German taxpayers to save PIIGS. Then there is the serious fact that the French and German banks are notoriously overexposed on sovereign bonds of the peripheral countries, and even their governments would be forced to save them. And, therefore, how much tax burden would be France and Germany, under such circumstances? In essence, a fiscal crisis in Spain could bring down the entire building.
Another important issue, austerity policies aimed at achieving high primary surpluses to reduce debt, with spending cuts and revenue increases, which are required as a condition for countries receiving aid from the European fund, have the effect of worsening the economic crisis lead to a fall in GDP, with a consequent fall in tax revenue, so that the readjustment of the accounts is a Sisyphean task and social sacrifices and increasingly expected to last for several years before we see perhaps a light at the end of the tunnel.
The possible scenarios
The debt restructuring
According to many economists, the final outcome can not be that a debt restructuring for countries in crisis. Generally, it is more likely to Greece, Ireland and Portugal, while it seems less likely for Italy, which has a strong private savings and high debt despite the deficit has more content.
Debt restructuring can be done in different ways, for example changed the schedule of debt repayments and interest payments. However, a measure almost always required is the devaluation of the value of the debt generally between 30% and 60% of the nominal vaore.
The debt restructuring is thus a measure different from the default real, in which the debtor does not honor its commitments over, because they do not repay the principal and not paying the interest, then repudiates the entire existing debt.
The restructuring is obviously lose at least for a time (as long as the economy recovers) the possibility to obtain credits from abroad. Therefore involves an immediate rebalancing of the trade balance and government accounts. There remains therefore the need for policies of austerity, even if deflation becomes a strategy in this case potentially more feasible, although more brutal, to get to a recovery.
One of the biggest obstacles to restructuring seems that the German and French banks are heavily exposed to the peripheral countries most at risk, and should therefore meet capital losses that would put serious strain on their economies, and public accounts if governments were to save them. This seems to be one of the reasons why Europe has so far strongly insisted that the crisis countries to accept "aid" of the fund have been saved.
Another option is to restructure debts, or even the deafult, with the release of the euro.
This would allow a faster recovery in the economy due to the devaluation, as happened in Argentina.
The European country that came closest to Argentina is Iceland, whose banks had foreign debts amounting to many times its national income. Unlike Ireland, which sought to save its banks by guaranteeing their debts, the Icelandic government has forced banks to foreign creditors bear the losses, leaving its banks went into default.
At the same time, Iceland has taken advantage of the fact that he had not joined the euro and still had its own currency. He soon became more competitive, leaving very down its currency against other currencies, including the euro. Wages and prices in Iceland have rapidly declined by about 40 per cent compared to those of its trading partners, triggering an increase in exports and falling imports, that has helped offset the blow of the collapsed bank.
But this was possible because Ireland had not joined the monetary union.
As noted by Barry Eichengreen of Berkeley, if a country out of the union even hinted at by the euro would trigger a devastating stroke at the counters of banks, as depositors will rush to avoid the devaluation of moving their funds into safer havens . And Eichengreen concluded that this obstacle "procedural" exit, in fact, makes the euro irreversible.
Governments should act surprised, blocking or limiting withdrawals in advance, and then returning to devalue the national currency without triggering the race.
The central fact to consider is that the external debt of these countries continue to be denominated in Euros, and then the weight of that debt would increase compared to the local currency devalued. In the event of withdrawal from the euro debt would certainly suffer a renegotiation (a not returned, and the rest returned over a longer time).
Integration policy and fiscal and structural problems
The last option would be to proceed more decisively toward a 'fiscal and political integration among European countries, one of the classic conditions necessary to operate a monetary union.
A first step in this direction was proposed in early December 2010 by Jean-Claude Juncker, Luxembourg Prime Minister, and Giulio Tremonti, finance minister in Italy, who proposed the "Eurobonds", other than bonds issued by the fund been saved, because they would be guaranteed by the European Union as a whole, and issued by a special "agency debt (EDA)", at the behest of individual European countries to cover its debt, until the limit of 40% of GDP .
Governments would have access to sufficient resources, the interest rate Eda, in order to put public finances without being exposed to short-term speculative attacks.
These measures could accompany the possible restructuring of the debt of countries that, despite everything, they must remain insolvent.
But at the same time should also be addressed structural problems related to competitiveness and its German growth model based on exports: Germany should give up at least partially tax and wage moderation, so that its economy lost a little 'competitiveness and bases its pattern of growth not only on exports but also on boosting domestic demand.
This is a good interview and Alistair Darling is correct on most of the points he makes: -
http://news.bbc.co.uk/today/hi/today/ne ... 544163.stm
http://news.bbc.co.uk/today/hi/today/ne ... 544163.stm
