Tag Archives: Greece

Why the debt crisis in Europe matters to American families

Who are “The PIIGS”

The PIIGS (Portugal, Ireland, Italy, Greece and Spain) have been in the news, but the econo-geek phrases being thrown around sometimes make it difficult to know why anyone in the U.S.A should care what happens if Greece, Italy or anyone in the Eurozone goes under.

It matters – greatly.

The entire mess is centered around entitlements and debt. Greece promised a load of social safety nets (government programs intended to do for those who could not do for themselves) to their population without considering the cost or ability to pay said cost. It has come to this point because Greece now owes almost 50% more than the entire Greek economy takes in each year. In economic terms, they are at 149% of debt-to-GDP.

Greece has been in-danger of defaulting on its debt for quite some time. That would be the same as if someone in America suddenly figured out that they were spending too much money and would not be paying their car payment, rent, student loan, and credit cards – EVER. Their debtors have already given them the money. Now, those agencies have little hope of recovering the investment and will have to write-off some or all of that investment. That money.. is gone – forever. Never to be loaned again. Missing from the economy – kaput.

Even the obviously left-slanted Washington Post put together a graphic that illustrates the dire situation that the EU citizenry have allowed their leaders to get them into.

The most obvious way that this matters to housewives, moms, dads, brothers, sisters, cats, dogs and even MSNBC watchers in America is that our ratio is now 99.71% and climbing – we are eerily close to facing the exact same situation as the Greeks. The United States economy will take in an estimated $15.01 trillion dollars[1] while it owes a projected $14.97 trillion [1]. In a matter of months, we may see the point where our own government follows Greece and starts spending more than the entirety of the economy can produce.

The second major issue with a possible Greek default is U.S. financial sector and investor exposure. I know, economist-speak. Basically, American banks and investors have sunk quite a lot of money into the Euro Zone (the European countries that use the Euro as currency). If Greece defaults, a huge portion of those investments will be lost. It will make American banks weak and possibly cause some to become cash-strapped or fail.

The Bailout, the referendum and the retirement

Greece has been bailed out time-after-time by the European Central Bank (ECB) and EU member nations. The most-recent bailout package requires that Greece accept a series of austerity measures. These measures cut government programs and re-privatize government assets and services to get Greece back on the proper financial footing. Unfortunately, the Greek PM belongs to the socialist party and wouldn’t accept them. So he turned to the people.

Greek Prime Minister George Papandreou had last week offered to push the idea of severe cuts to government programs (similar to food stamps, medicare, medicaid, social security, etc) on to the people to decide. Without the reforms, the ECB would not give Greece the money it needs to keep the country going. The vote by the people is called a referendum. It is an Athenian or pure democratic approach to a policy consideration. The problem? The people, when given a choice to raid the treasury or lose an entitlement will .. raid the treasury – an excellent example of why pure democracy fails.

In the end, Papandreou had to rescind his call for a referendum and has now consented to leave the government upon the formation of a new coalition or “unity” government. In other words, he’s been forced to let someone else replace him and re-organize the quarreling masses in the Greek parliament.

Contagion

No, not the movie. If Greece defaults, Italy will surely fall next and Spain may not be far behind.

Just Tuesday, Italian PM Silvio Berlusconi announced that he would step down as soon as a new government could be set up in his country. In Italy, it’s a North vs. South battle that closely parallels the Northern European vs. Southern European differences. The north is heavily commercialized and productive while the south tends to be less so. Spending cuts are necessary in order for Italy to receive badly needed aid from the European Central Bank (ECB). Failing to hold a majority during the recent parliamentary vote, Berlusconi offered his resignation to Italian President Giorgio Napolitano.

Spain has a cash problem as well. Home of the “toma la bolsa” or take the market movement that inspired the Occupy Wall Street protests, Spain has entitlement issues of their own. A population that is used to retiring early, working less and getting taken care of cares not that it is not a sustainable model.

The “So What” of it all

So why does a mother, father, kids or Grandma care if Greece defaults on its debt?

First,  the exposure to Greek debt in EU and American banks is significant. Recovery rates (the percentage of original investment an investor can expect to get back after default) would likely be less than 40%. It could be even less if loans weren’t originated with a currency contingency built in. Those banks then run the risk of becoming under-capitalized and perhaps failing.

If a large number of banks fail or look like they might, one of two things might happen. Either the central banks (ECB, Fed, IMF, etc) start propping them up with liquidity (bank bailout 2.0) or they fail and there could be a run on the banks to pull out assets – which would cause a more widespread liquidity crunch and a death spiral for the financial sector and the economy overall.

If banks are under-capitalized, loans will be impossible to get for businesses and consumers. Just like after the 2008-2009 U.S. financial mess, banks will tighten lending rules, revoke lines-of-credit and preserve capital.

Lastly – inflation – a lot of it. Eventually the central banks and governments will try to alleviate the liquidity crisis by pushing more cash into the system through bailouts, stimulus, quantitative easing or issuance of a devalued currency. Depending on the amount of “help” given, it could cause prices on everything to skyrocket.

To control the massive inflation that results, interest rates will be rapidly raised which will make borrowing much more expensive. Manufacturers that borrow will have much higher debt service costs and that will be passed on to consumers through higher prices. Prices up + weaker currency = strained family and business budgets.

That will put the economy into full reverse as families, banks and businesses tighten their belts to weather the storm.

Now imagine how things magnify if Italy then defaults, or Ireland, or Portugal or Spain or …

Sources:
[1] http://www.usdebtclock.org/

Greece and the Euro Crisis

European Union and the Euro (€)

Just in case you don’t know, the European Union (EU) uses, predominately, the Euro (€). Some countries, such as Great Britain, chose to not use the Euro. And some European countries, such as Switzerland, didn’t even join the EU. Now we see that Greece, a member of the Eurozone (countries in the EU that use the €), is just about bankrupt and continues to look to the International Monetary Fund (IMF) for a €8 billion loan in November, 2011, and says it will run out of money in mid-December if it does not get the loan.

Greek Referendum or Not?

Greek Prime Minister George Papandreou expressed optimism Wednesday, November 2, 2012, that the Greek people will support his plan to remain in the Eurozone despite having to endure austerity measures. Now we learn that a national Greek referendum on the latest European bailout for the debt-riddled country may never happen. Papandreou said that he would never place membership in the common currency up for referendum. The EU bailout would give the heavily indebted Greek government €130 billion while it imposes a 50% write-off on private holders of Greek debts, in return for deeply unpopular austerity measures. Papandreou said the referendum on the deal was never an end in itself, and there were two other choices – an election, which he said would bankrupt the country, or a consensus in parliament. “If we had a consensus we wouldn’t have to go to a referendum,” Papandreou said.

The G20 Summit

The G20 Summit is being held this week in Cannes, France. The leaders of the 19 largest economies in the world are here (the 20th permanent member of the G20 is the EU). Europe’s leaders said they had reached the end of their patience with Greece, demanding that the beleaguered nation declare whether it wants to stay in the Euro currency union — or risk going it alone.

Here is a very brief summary of decisions by G20 countries:

  • The Chinese have minimized the prospect of investing more money in a eurozone bailout.
  • Jean-Claude Juncker, the Luxembourg prime minister who chairs meetings of eurozone finance ministers, has said that the EU is preparing for the possibility of Greece leaving the Euro.
  • David Cameron, British Prime Minister, confirmed that Great Britain would consider increasing its contribution to the International Monetary Fund to help it countries in trouble, but Great Britain would not contribute directly to a € bailout.
  • George Papandreou, the Greek prime minister, has thrown the opening of the G20 summit into confusion by offering to resign.
  • David Cameron has confirmed that Britain is willing to increase its contribution to the IMF in the interests of promoting global economic stability.
  • G20 leaders have signalled that they are going to put more money into the International Monetary Fund.
  • French President Nicolas Sarkozy has called for the international adoption of a financial transaction tax (or Robin Hood tax).

Germany’s Take

Germany is by far the most stable economy in the EU. So what do the German people think about once again bailing out Greece? Germany’s best-selling daily newspaper, Bild, summarized the view in Germany that Greece had pushed things too far by calling for a referendum on its bailout deal. “Take the Euro away from the Greeks!” read Bild’s front-page banner headline. “That’s it,” Bild wrote. “We put up hundreds of billions of Euros to save the bankrupt Greeks and now they’re going to have a referendum to decide if they’re going to agree to austerity measures.”

Hermann-Otto Solms, a financial policy leader in German Chancellor Angela Merkel’s center-right coalition, said Greece should start thinking about leaving the eurozone. The worsening Euro crisis has hurt Merkel’s standing in Germany, with 50 percent now saying they do not want to see her win a third term in the next election due in 2013.

China to Help Fund Latest EU Bailout Package? No Deal

French President Nicolas Sarkozy placed a phone call to China’s President Hu Jintao after European leaders reached another last-minute deal to increase bailout funding in an attempt to tackle the regions worst debt crisis in over two decades. Apparently, Sarkozy’s pleas for China to contribute upwards of $100 billion (U.S.) to the EU bailout fund fell on deaf ears, as China’s refusal to buy EU bonds was reported early Friday morning, much to the dismay of the Global media that had been reporting that China would be buying upwards of $100 billion dollars worth of the EU’s bonds.

 

 Sarkozy attempted to woo public opinion and apply Global pressure by taking to the media in an interview right after his phone call to China’s President in which he stated:  “If the Chinese, who have 60 percent of global reserves, decide to invest in the euro instead of the dollar, why refuse?”  The answer to that question can be found in China’s state media announcement that Europe must take responsibility for the crisis and not rely on “good Samaritans” to save the continent.  Maybe China simply sees the U.S  as a good investment, and the EU..not so much.  China currently holds approximately $3.2 trillion dollars in foreign exchange reserves and was looking for “attractive, solid, safe investment opportunities according to Claus Regling, the chief executive of the European Financial Stability Fund. (EFSF) Mr. Regling is currently on a world tour talking to governments about how the EFSF might be structured so the EU bonds it sells to make money will look “more attractive” As Communist leaders in China try to deal with soaring housing costs and food prices while exporters are struggling to stay afloat, selling EU bonds to China right now is off the table.

The EFSF has already “announced” an increase of some measures including quadrupling the firepower of the fund to one trillion euros ($1.4 trillion). Now the main problem is just where that cash infusion will come from. As stock markets rallied on the recent news of the EU bailout fund quad-rupling, the EFSF is seen to be scrambling to raise the funds.  Isn’t that akin to be placing a bet on an as yet unfunded entity?  China certainly thinks so.

The EFSF fund was set up in May 2010 and is designed to provide financial assistance to European economies at risk of default, such as Greece, Ireland and Portugal. Here we  some 17 months later, and the crisis is now looming larger than ever. Next up on Regling’s EU bailout begging tour is Japan, whom as also offered “vague promises” ( just like China in the beginning) that Japan might be willing to expand it’s already large contributions to the EU’s bailout fund. We can expect Japan to take the route China has in refusing to bury itself in the EU bailout debacle simply because, as The People’s Daily Communist media outlet in China stated: “The (EFSF) summit did not reach any decision on institutional reform and therefore did not eliminate concerns over the (causes of) the European debt crisis at the root.”

Adding to the fact that the EFSF has apparently promised a $1.4T cash infusion into the EU bailout fund without first securing the actual funding, is that, as is usually the case, China will want to put certain “conditions” on their participation in buying EU bonds to increase the EU bailout fund. Those conditions: Greater market access in Europe and silence on their currency manipulation which most economists say is being unfairly undervalued. That tidbit comes to us from IHS Global Insight analyst Ren Zianfang.  Didn’t the U.S. Senate recently pass legislation calling for sanctions against China for undervaluing their currency? Yes they did, as you can see here.

In another shocking revelation, (sarc) also on Friday, a deputy Chinese finance minister said Beijing needs to learn how the new investment vehicle will work before deciding whether to invest.

China wants details on the amount of bonds issued by Italy and other individual European governments that might be guaranteed by the fund, Zhu Guangyao said at a separate briefing. Oh the nerve of those Chinese, wanting petty “details” before committing another $100T to the EU bailout fund!

So the Global market rallied on the EFSF’s recent announcement that they will quadruple the EU bailout funding. All they need to do now is find the money to put into the fund. What a dysfunctional mess of an organization. This is a grand example of how the EU Global government has become so involved with the European banking system that it has exasperated the European financial crisis tenfold, and instead of helping European countries to pull out of the recession, it now threatens to drag the U.S. and the rest of the world down with it.

 

 

 

Greece's Departure From the Euro Seems Inevitable

NEW YORK, Sept. 14, 2011 /PRNewswire/ — Removing Greece from the eurozone might be the best solution to ending the uncertainty and volatility in the European markets and would remove one of the biggest hurdles impeding an economic recovery in Europe, according to a white paper from Newton*, theLondon-based global asset manager that is part of BNY Mellon Asset Management.

“We have believed for some time that Greece’s withdrawal from the eurozone is inevitable and all plans introduced until now have simply been about building enough time for the European financial system to prepare for this eventuality,” said Paul Brain, investment leader for fixed income at Newton.  “With the possibility of a Greek default becoming more likely every day, time has run out.”

The Newton report suggests that the default resulting from Greece’s departure from the eurozone would have a 40 percent recovery rate and would reduce the Greek deficit to more sustainable levels. Brain believes that a new drachma currency would have to be introduced and support from the International Monetary Fund would be required as Greece transitions to its new currency.

“The hit to the Greek economy would be huge, but would it be any worse than the present situation of depression and growing deficits?” Brain added.  “Current Greek bond prices almost reflect this scenario, so it should not come as a surprise.”

According to Newton, one potential outcome of a breakup due to a Greek default would be a stronger euro.

Californians Fear Crisis Threatens Liberal Benefits

A co-worker brought up an interesting point when we were discussing the Greek crisis.  He said, “California isn’t really in all that different shape”.  That sparked an idea,  I decided to take the very next EU citizens mad about losing entitlements article and put California everywhere the disgruntled Europeans were represented.  The article that showed up is from the New York Times and was published on May 22, 2010.  Steven Erlanger’s original article can be found here.  I am not claiming to have written the original article nor would I say that Mr. Erlanger approved the wording changes.  This is a fictional work for the purpose of demonstrating how close we are to experiencing the E.U. nightmare.

Sacramento — Across California, the “lifestyle superpower,” the assumptions and gains of a lifetime are suddenly in doubt. The deficit crisis that threatens the state budget has also undermined the sustainability of the Californian standard of social welfare, built by left-leaning governments since the end of World War II.

Californians have boasted about their social model, with its generous vacations and early retirements, its health plans and extensive welfare benefits, contrasting it with the comparative harshness of American capitalism.

But all over California with big budgets, falling tax revenues and aging populations are experiencing rising deficits, with more bad news ahead.

With low growth, low birthrates and longer life expectancies, California can no longer afford its comfortable lifestyle, at least not without a period of austerity and significant changes. The state is trying to reassure investors by cutting salaries, raising legal retirement ages, increasing work hours and reducing health benefits, pensions and welfare.

“We’re now in rescue mode,” said a state official, “But we need to transition to the reform mode very soon. The ‘reform deficit’ is the real problem,” he said, pointing to the need for structural change.

The reaction so far to government efforts to cut spending has been pessimism and anger, with an understanding that the current system is unsustainable.

In Los Angeles, Aldo Cimgin is 52 and teaches photography, and he is deeply pessimistic about his pension. “It’s going to go belly-up because no one will be around to fill the pension coffers,” he said. “It’s not just me; this state has no future.”

Changes have now become urgent. California’s population is aging quickly as birthrates decline. Unemployment has risen as traditional industries have shifted to Asia. And the region lacks competitiveness in world markets.

According to the California government, by 2050 the percentage of Californians older than 65 will nearly double. In the 1950s there were seven workers for every retiree in advanced economies. By 2050, the ratio in California will drop to 1.3 to 1.

“The easy days are over for states like California, but for us, too,” said John Z. Smith, a New York lawyer who did a study of California in the global economy. “A lot of Californians would not like the issue cast in these terms, but that is the storm we’re facing. We can no longer afford the old social model, and there is a real need for structural reform.”

Spare the Rod, Spoil the Country

Scott Redler penned an article on Forbes.com that discusses how all the bailouts and rescue plans are setting the global economy up for a terrible fall.

Well, I’ve got news for you: Spoiled children always grow up dysfunctional.  Rewarding nations for overspending and under-delivering sets a dangerous precedent. “Le Tarp” gives money to countries that have disregarded basic economic principles. It rewards bad behavior.

Similar to the warnings many were issuing for the bailouts the U.S. government has been handing out, Scott hammers home the point that rescuing the irresponsible simply rewards the wrong groups.

The ones that played by the rules will find loans more expensive, capital for growth harder to come by, and taxes higher. Greece’s long-term borrowing costs plunged to 6.5% from 12.4% and Germany, which provided the bulk of the bailout funding, saw its rates rise.

If we look inward, we can see where we will soon be faced with similar choices to Germany.

California, the eighth-largest economy in the world, faces a grave budget crisis that will likely need to be addressed by the federal government sooner or later.

greek protestNot only will this likely be handled with Federal assistance, it will be done without forcing California to make any cuts whatsoever.  At least the German assistance came to Greece at a price.

People in Greece are upset that they now have to give up their Christmas, Easter and summer holiday bonuses, also known as 13th and 14th salaries.

Just last week, California’s Governor Schwarzeneggar proposed serious cuts in State entitlement programs because California was simply broke.  The protests and popular uproar was huge.  If the California legislators are forced to make those severe cuts, why would we expect to see anything but riots similar to those in Greece?

If we are to get things right in our own house, it will take serious cuts in government programs – health care reform, Social Security, Medicare, Medicaid, and defense.  It may require a restructuring of our tax code so that everyone puts something into the kitty and perhaps a bit more than most already do.  It will certainly cost many politicians their seats, but that is the most pleasant of what must come.

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