Tag Archives: Greece

Will Congress See the Greek Writing on the Wall?

Following the news from Europe is educational. Europe is ahead of America on the downward slope into an abyss of government debt and an unsustainable welfare state. There are plenty of good examples over there of what big government debt and big government spending can do to a country, but the most notorious one is Greece –  a country whose government is desperately trying to stay avoid outright default.

Greece ended up in its current mess because its elected officials refused to take action in time. Now they are in fiscal panic mode, adopting one austerity package after another.

The most frightening part of this sad Greek drama is that our own legislators in Congress have been acting exactly the same way for a long time. They have been in the same state of denial as their Greek colleagues, which opens some rather unpleasant perspectives for the future: panic-driven austerity.

It is unlikely that Americans will respond to such measures the way the Greek people have. There, people have responded to the latest austerity bills by vandalizing buildings, setting fire to cars and staging massive unrest in the streets. But this does not mean that we should welcome harsh austerity as a response to our federal deficit. An orderly retreat of government spending is infinitely more preferable.

The problem is that it is hard to convince our Congress – not to mention the president – that we actually must reduce government. They seem to believe that America is somehow isolated from the world where the laws of economics apply. One way to shake them out of this state of denial is to examine the causes of the Greek crisis and point to American parallels.

To begin with, it is important to dispel the myth, proposed by far-left groups especially in Europe, that “the financial system” is to blame for the fiscal crisis in Greece. One need not take any deeper look at macroeconomic data to see how wrong this is. The true cause of the problems in Greece is, plain and simple, a government that has been overspending and overburdening the private sector for a very long time.

An important step on the way to showing the role of government in the Greek crisis is to examine the role of a big, strong currency. Just like the United States has its dollar, Greece has the European common currency – the euro. The theory behind a big currency is that it somehow reduces the risk taken by those who lend money to a government under that currency. This lower risk is reflected in lower interest rates – and thus lower borrowing costs for that government. But this did work for Greece. As explained by, e.g., the insightful Across the Pond blog out of Indiana University,

Once Greece joined the Eurozone, its interest rates dramatically fell compared those of Germany.  As a result, it was then much easier for the Greek government to borrow money internationally.

In other words, under the euro the Greek government suddenly had borrowing privileges that resembled those of the U.S. government under the dollar. This led to a surge in borrowing for projects that eerily resemble what the Obama administration wanted to pay for with the ARRA Stimulus Bill: large-scale investments, especially in infrastructure.

But the low cost of borrowing for the Greek government not only allowed an infrastructure boom – just as with the U.S. government, it also allowed Greece to borrow for regular government spending at very low cost. With the currency union, the country-specific risks that lenders faced when all European nations had their own currency were wiped out at the “storefront”. Prior to the currency union there were two ways for lenders to set a price on the risks associated with lending to national governments: the interest rate on the national treasury bonds, and the exchange rate of the nation’s currency. With the euro the latter price mechanisms vanished. The former mechanism, namely the interest rate, practically also went away, as the European Central Bank became the lender of last resort within the euro system. (The ECB formally is banned from serving in that capacity, but has, predictably, taken that role anyway since it otherwise would not be able to defend its currency in a crisis.)

As a result, the Greek government saw the price of deficit spending drop dramatically. This explains their zest for fiscal recklessness, as evident in Eurostat macroeconomic data: from 2005 to 2009 – four short years – government spending in Greece, measured as share of the country’s GDP, increased by almost one fifth: from 44 percent of GDP to 53.2 percent.

In two years alone, 2006 and 2007, government consumption (not counting retirement benefits and welfare) increased by more than ten percent, adjusted for inflation.

While government in the U.S. is not yet at these exorbitant levels, it has been growing steadily over the past decade. Taken together, the federal government and the states are closing in on 40 percent of GDP. And let’s keep in mind that more than one third of state spending is funded by the federal government.

Furthermore, in Greece just as in America, the spending sins of recent years are merely the tip of the iceberg. Government spending has averaged 45 percent of the Greek economy for at least the past 15 years. In the meantime, the private sector has exhibited a very volatile behavior: private corporate investment in Greece has undergone violent swings over the past decade, since Greece joined the euro zone. After some remarkable increases early in the past decade, investments took a deep plunge in 2008. By 2010 corporate investments in Greece were back at where they were in 1997, adjusted for inflation.

This investment volatility has in good part been driven by the fact that the euro eliminated the currency part of the risk pricing mechanisms mentioned earlier. In part, they have also been driven by the government’s lavish spending: much like the failed ARRA Stimulus Bill here in America, Greece’s government-spending-gone-wild failed to generate a reliable trajectory of private sector growth. Once the government runs out of other people’s money, economic activity collapses. (And it may be worth noticing that corporate investment in the American economy is currently at almost depression levels.)

When GDP growth slows to a crawl or even reverses – i.e., when the economy begins to shrink – so do tax revenues. Taxes are always paid out of current income (technically, this is true even if you take money out of your savings account to pay them) which has caused some major problems for the Greek government, on top of its exorbitant borrowing.

Again, excessive government is nothing new to the past few years in Greece. Going back to 1965, and counting taxes as a percentage of GDP, we witness a disturbing track record of ever growing government:

  • In 1965 Greece had lower taxes than even the United States: 17.8 percent of GDP vs. 24.7 percent here;
  • By 1985 Greece had caught up with America: taxes were, respectively, 25.5 and. 25.8 percent of GDP;
  • In 2005 government in Greece were claiming 31.4 percent of the nation’s GDP in taxes (27.5 in the U.S.).

The sharp-eyed reader will notice that the taxes in Greece, as share of GDP, are much lower in 2005 than government spending as share of the same GDP. There are three reasons for this. First, the tax-to-GDP ratio is reported in current prices, not constant prices as is the case with government spending. This usually does not create significant disparities, but in a country like Greece, which has a documented track record of high inflation and currency devaluations, the difference between inflation-adjusted and current-price GDP data makes a big difference: it under-estimates the burden of taxes by simply inflating away that burden.

Secondly, Greece has a long history of deficit spending. While never reaching dimensions that could explain the entire gap between the tax and spending ratios reported here, it does account for up to one third of it in isolated years. Third: a good part of the funding of entitlements in Greece has been counted as “fees” instead of taxes. Due to finicky accounting methods used historically, this has allowed some governments in Europe to “cook the books” when it comes to government accounting. Fees have slipped under the radar of national accounting, resulting in an under-estimation of the nation’s tax burden.

With all this in mind, the conclusion stands: the Greek mess is entirely the work of excessive government and an over-the-top spending welfare state.

As such, Greece stands as a warning sign to all of us, even here in America. There is no way we can imagine today that we would end up in the Greek hole, with a government literally running out of credit – and cash. But then again, let us not forget that only four years ago we would never have imagined that we would have a Congress that would violate its constitutional obligation and not pass a budget.

Or a president that would happily sign on to borrowing 41 cents of every dollar the federal government spends. Year in and year out.

Just like Greece, if we continue to do nothing, we will reach a point where we have no other option than panic-driven austerity measures. We are a couple of years away from that point, and we can still start an orderly retreat from the welfare state. As I explain in my new book, Ending the Welfare State, we can indeed make that retreat.

But we need to act now. Time is running out fast.

Is this the week the world economy bites it?

Ok, I know.. I haven’t written an honest-to-goodness analysis piece in awhile – but now.. the world is ending and I’ve noticed that no one else was writing about it.. well not just this moment ..

We’ve been hearing that EU is going to crash any day now, that Americans are over-leveraged and as Conservatives we know all about the looming debt crisis.

Today, Greek Prime Minister Lucas Papademos will be asking for new legislation that would impose losses on anyone who had been foolish enough to invest in the country. This provision would be triggered if no agreement could be reached in debt negotiations that will start on Wednesday. Papademos said, “The talks are not straightforward, because they aim at a voluntary restructuring of public debt, and to achieve a number of objectives simultaneously, objectives that involve trade-offs”

Of course that doesn’t mean the collapse of the Greek banking system (yet) which would lead to the fall of the EU (but not now) and then an eventual collapse of the global economy and life as we know it (if it were really happening). Nope, not that – not just this minute.

What about that middle east and Asia thing? @Zerohedge announced that the Oil Minister of India (one of the hottest new economies in the world) is now preparing for “all eventualities over Iran oil supplies”. And now, somehow, a middle-eastern country is about to run out of .. petroleum products. Nothing to see here, please move along.

The international community has its issues and apparently the United States is also on the precipice of catastrophe. The New York Times reminds us that “Few Cities Have regained Lost Jobs“, Reddit is going on strike, Palin would vote for Gingrich (in South Carolina), the unemployment rate is only getting better because more people have decided to quit looking for work and Colbert is being taken seriously by a major news outlet – you get the point.

So the world sucks, it’s 2012 so the whole Mayan calendar thing is coming, and we’re faced with the prospect of another 4 years of Barack Obama – who wouldn’t build a bunker, trim the hedges to create clear lines of fire and stock up a 50 year supply of that crappy astronaut ice cream  to weather the storm? Who?!

There is an economic storm brewing. The mainstream media needs you to keep trucking along so they can keep a steady stream of viable sponsors paying their bills. The politicians in power need you to believe things are stable so you’ll re-elect them and banks need you to think that it’s just fine to keep borrowing and spending your way to happiness. So don’t worry, be happy.

So who do you believe? Is Greece finally on the edge, will Iran prove a tipping point for Asian and European markets, will America’s debt-to-GDP ratio finally render the world’s largest economy defunct – or as Obama has told us, are things improving? Perhaps you should make sure your food store is stocked, you have cash, gold, chickens or whatever because after all, Rocks from Mars are Falling on Morocco – and if that’s not a indicator of the apocalypse.. what is?

EU Plutocracy on Verge of Collapse

Top Judge Puts the Brakes on Merkel’s EU Bailout Scheme/EFSF Expansion

The EU plutocracy started coming apart at the seems back in September of this year, as Germany’s top Judge, Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to sign away the birthright of the German people without their explicit consent. It is quite refreshing to finally see a top judge demand that politicians decease in creating unconstitutional laws without the express approval of the citizenry. The Judge went on to further explain that if Merkel and company in the EU plutocracy want to continue to grant powers over the German people to the EU, they must do so by calling a referendum and change the constitution. This certainly derails the mini New World European Order plans of taking from the citizenry to continue to support the EU plutocracy.

The main problem seems to be the fact that Merkel and company want to constantly transfer funds and manipulate bailouts in secrecy, as Carsten Schneider the finance spokesman for the Social Democrats of Germany demanded that Chancellor Angela Merkel and finance minister Wolfgang Schäuble clarify their “true intentions ” before the (bailout) vote on Thursday. [We have no wonder how Schneider would feel about Nancy Pelosi’s statement of “We have to pass the bill to see what’s in it,” which she made when she was the third highest politician in America, the Speaker of the House of Representatives.]  As we can see from this article from Reuters, the EU debt crisis pain will undoubtedly be felt in America, as well as around the globe. The EU debt crisis has already claimed  the heads of the Greek and Italian governments with more to come in the following weeks, as the truth about the implications of just what the EU plutocracy has done in the past few years comes to light.

 

 

It would also appear as if the Germans are well aware of Barack Obama’s part in all of this, as we see this little snippet, also from Carsten Schneider, of the German Social Democrats: “A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable,” he said. The New World Order that billionaire manipulator, George Soros so fondly speaks about could very well be on it’s way to being blown into oblivion if the EU collapses as many are predicting today. As Mike Shedlock so aptly put it,”the German court has already killed eurobonds. Now, if the top judge’s call stands, leveraged EFSF just bit the dust as well. Clearly the German court has had enough of Chancellor Angela Merkel, her cronies, and all the politicians who want to rob German taxpayers for their own agenda.” It then comes as no mere coincidence that when the EU bailouts started they always coincided with the unscheduled meetings between Merkel and Obama.

Germany and America both have explicit constitutional mandates limiting the power of those elected into government for the sole purpose of protecting the citizenry from being ruled by a tyrannical plutocracy. Barack Obama and Angela Merkel have trampled both of their country’s constitutions at very dangerous levels, while taking advantage of the ever-increasing world financial crisis where we see the widening gap between the middle class citizens and the elitists running the plutocracy become a source of massive civil unrest. Germany’s top Judge took a stand against Merkel and the EU’s unconstitutional usurpation of power from the people’s Democracy of Germany. Does America have such a courageous judge, one that will stand up for our constitutional laws and protect the citizenry from the tyrannical rule of the Liberal Plutocracy Barack Obama and company have been building for three straight years now? If so, what will it take for you to make a stand, civil unrest, chaos and blood in the streets? By then it will simply be too late. The plutocracy will simply declare marshal law, and the citizenry will be left with the choice between fighting for their freedom from a dictatorship or flight from their beloved America.
2012 can’t get here fast enough!

Greek Debt Crisis Steeped in Social-Mania-Style Hope and Change Politics

Part 1 – Three decades of creeping anti-capitalistic social-mania and big government expansion/intrusion collapses Greek economy.  

Greece’s massive debt problem didn’t just simply appear overnight due to the Global recession of 2007. This was a tragedy created by over three decades of political battles between the last remnants of the once- principled economic party of the New Democracy (ND) versus the Panhellenic Socialist Movement (PASOK), a radical party openly opposed to mainstream European social democracy. These battle lines were drawn in the sand after the fall of the Greek military dictatorship way back in 1974.

After Greece’s long-standing military dictatorship government fell in 1974, it created a political vacuum not unlike what we see in Egypt today. In the beginning of this struggle there were two main factions of governmental leaders that were vying for power: Constantine Karamanlis founded the [conservative] New Democracy party, (ND) while Andreas Papandreou had already founded the Panhellenic Socialist Movement (PASOK), a radical party openly opposed to mainstream European social democracy. ( I call this the irresponsible and undefined Hope and Change political platform and will expound on that in part 2 )

First let’s take a close look at just what type of government Constantine Karamanlis’ (CK) New Democracy party consisted of in it’s initial creation. CK was elected as the Prime Minister of Greece in 1974 and held that position until 1980.  During this time, the Karamanlis-led ND party ran on a platform which consisted of three main planks:

The first plank of the early ND party was the creation of a solid institutional framework meant to produce a two-party system yielding strong governments, and including a new constitution that reinforced the executive in order to enable governments to work more efficiently.

The second plank of Karamanlis’ project was a strong state that was geared towards national economic development.  So insistent was Karamanlis on the pursuit of this goal that he dared apply a massive program of nationalizations in the Greek economy which both friends and foes dubbed as  social-mania.

The third pland of Karamanlis’ ND party project was Greece’s Europeanization. The problems inherent in what was considered at the time to be a mainly conservative-based theme in the Karamanlis’ style of desired government points to severe contradictions between the three components in his plan. He combines an extravagant increase of governmental power under the guise of creating a strong economic development, all the while moving to nationalize a huge chunk of the private sector. This is a great example of how the supposedly conservative “New Democracy” party was actually heavily rooted in Socio-Liberal ideology right from the beginning. Keep in mind that this all started 37 years ago, thus the reference to Greece’s creeping social-mania in the title of this article. This was the actual start of the Greek erosion of operating on sound economic principles that would rear it’s ugly head in the form of the Greek debt crisis we see today. It is amazing to look back at the main planks of the New Democracy party and see that they basically abandoned all conservative principles while still claiming to represent the conservative style of government at the time of their creation.

Meanwhile, at the root of the Greek social-mania movement at the time, was Mr. Andreas Papandreou and his Panhellenic Socialist Movement (PASOK), the very radical anti- European social democracy group. Many economists consider the ND at the time to be actually rooted in left of center ideology ( not conservative by any stretch of the imagination) and the PASOK party, in representing the opposition, as consisting mainly of far left radical social change operatives. That situation could be transposed with America’s current political situation, which we will also explain in parts 2 and 3.

The early PASOK party platform was extremely anti-American and also opposed Greece’s ascension into the EU. ( in the beginning, which they quietly changed later on) As the New Democracy party of Karamanlis won control of the Greek government in 1974 on the three plank platform described above, the PASOK party came out with it’s own platform based on supposedly opposing the ND style of government. The PASOK platform was not well-defined in the beginning, not unlike the Hope and Change platform Americans voted for in 2008. Papandreou was also known as a “brilliant public speaker and political charmer” at the time Greece was struggling to install a new government in 1974. [That should sound eerily familiar to Americans that are today wondering how in the world Barack Obama ascended to his current position of the presidency in America in 2008.]

The first plank in the platform of the PASOK party in the beginning was the elevation of certain people as opposed to citizens in general in which Papandreou promoted the radical economic expansion program based on manipulating the state and it’s resources without giving any thought towards creating a stable tax basis to fund the economic expansion.  This was not unlike the ND party’s first plank in which Karmanlis wanted to expand governmental power towards controlling the private sector under the guise of creating a government-knows-best economic system. Both first planks were rooted in the very same socialistic policies of big government expansion while destroying the private sector revenue-creating economy along the way.

In the initial second plank of the PASOK party platform was a great example of how most politician’s quest for power leads to severe contradictions between promises of a fair government for all, and the supposed PASOK-hated elitist European governmental model opposition. The PASOK party’s second plank turned it’s back on the promised collective national welfare, and instead was heavily rooted in crony-capitalism in which jobs and social benefits were only given to select people, mainly their supporters. That too should sound very familiar to informed Americans today.

The final plank in Papandreou’s initial proposed platform of government is quite difficult to define. It contained an expressed belief in Greek supremacy while at the same time seemed to be rooted in fear of the bigger, stronger nations within Europe. That fear was not unfounded, as we will see the drastic effects of Greece joining the eurozone in 2001 in part 2 of this article. While the ND party seemed to realize early on the importance of joining the eurozone, the PASOK party wanted to rely on what some term protectionism, that would lead Greece to become isolated from doing business with many valuable European markets. Today, when looking back at the Greek debt crisis creation during the past three decades, economists have made cases for both sides of thisa argument. Greece joining the EU opened up eurozone markets for their exports, yet also flooded Greece with products from other European countries, some say at an unfair balance.

During the time of Karmanlis’ ND party rule from 1974-1980, Greece prospered under the new government , as Karamanlis could claim considerable success in all three aspects of his political project. Within a relatively short time, Greece became transformed into a pluralist polity with a democratic constitution, brand new political parties, and a working party system. Its state-led economy brought the country a real GDP growth of 4% a year between 1975 and the second oil crisis of 1979. Crowning his achievements, on January 1, 1981, Greece became a member of the EU, well ahead of her southern European competitors, Spain and Portugal. ( Whom are both also teetering on the brink of insolvency today) We must also keep in mind that pretty much all of the world’s major economies also enjoyed increased prosperity and robust economic growth during the late 70’s. In 1980, Karmanlis resigned as Premier and moved to the presidency of the Rupublic, he had what most people thought to be the prefect successor lined up to replace him in the highly acclaimed moderate George Rallis, who at the time was stated to have impeccable democratic credentials and whom promised the people he would continue the Karmanlis plan of government. Low and behold, the people turned their backs on the recent prosperity they enjoyed under the ND government and instead voted for Andreas Papandreou and his PASOK party’s promise of “allaghi” or the great change.  In a very American-like political platform, Papandreou had campaigned on the platform of a policy plan that was a binding “contract with the people.” Americans should be very familiar with that political motto. Even as Greece and America are separated by thousands of miles of ocean, we see their political campaigns running quite parallel all to often. The political soundbites and media trickery used to get elected to powerful governmental positions have no boundaries, as is proven throughout world political history. The PASOK party platform of “allaghi” ran along the very same rails as FDR’s New Deal progressive big government expansion, and Barack Obama’s “fundamentally transforming America” statement of 2008.  The PASOK party’s fundamental transformation of the Greek economy now has them begging for bailouts from the EU today to avoid a total collapse of their economy.

How did Greece fair under the far left radical Socialist PASOK party and Andreas Papendreou of the 80’s?  PASOK remained in power throughout the 1980s and, save a brief interval during 1990-93, for most of the 1990s and early 2000s. Papandreou had meanwhile died in 1996 and was succeeded in PASOK leadership by Costas Simitis, a mild-mannered technocrat who desired to replace Papandreou’s populism with a new reformist spirit. He consistently pursued convergence, so that in January 2001 Greece was able to join the eurozone, but failed miserably to reform his party, which was eventually defeated at the polls in 2004. What was to be proven to be even more remarkable, however, was that when the ND came back into power in 2004, led by Costas Karamanlis, the very nephew of that party’s founder, far from trying to restore some of the latter’s project, they instead followed PASOK’s well-charted path of irresponsible populism and free-spending ways, patronage politics and toleration to corruption, along with further divergence from Europe. It was the combination of those three factors that, irrespective of party in office, simmered for a long time until it exploded in the form of the fiscal crisis that has recently hit Greece. Carefully consider the following chart of Greek debt and GDP spending from 1970 – 2010. The only reason we see a hint of a decrease in big government debt near the end of 2010 in this chart is due to the austerity measures forced upon the Greek government by the EU, in which resulted in bloody riots due to the massive budget cuts and increased taxes suddenly laid upon the shoulders of the working class. Eventually, America will also collide with that debt-wall, and trouble will ensue in the form of civil unrest. The green line represents total gross external debt as a percentage of GDP. ( most important figure)

 

 

 

 

 

 

 

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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