“Five Minutes to Midnight” in Athens

(6 pm. – promoted by ek hornbeck)

  Events are rapidly coming to a head in Greece, and the consequences could ripple through all of Europe.

 Leading Greek economists and bankers yesterday warned George Papandreou, prime minister, that he had to announce bold initiatives to rescue the country’s collapsing bond market and avert the possibility of defaulting on a rising public debt.

 Yannis Stournaras, an Athens University economics professor and former chief adviser at the finance ministry, said: “Other countries in trouble have already taken measures. If we don’t quickly follow suit the adjustment will be imposed by markets and it will be violent.”

 How violent? Maybe not as violent as the protests in the streets of Athens. Already there are student, pensioner, and public worker protests and strikes. Remember that the current government is only two-months old, after the old government nearly collapsed under the pressure from street riots.

  This puts the current government in an extremely difficult situation. The public debt is set to rise next year to 124 per cent of GDP, with a fiscal deficit of over 12%. Meanwhile, the public pension fund is expected to go into the red as early as 2011. The fiscal squeeze requires draconian cuts, but the public workers of Greece are not a wealthy group. They will have no choice but to turn out into the streets en mass.

  Premier George Papandreou recognizes that.

 “Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state,” he said.

  On the other side are the foreign creditors, and they don’t care about Greece’s internal problems.

 “It’s five minutes to midnight for Greece,” Buiter, who will join Citigroup Inc. as its chief economist next month, said in a Bloomberg Television interview today. “We could see our first EU 15 sovereign default since Germany had it in 1948.”

 The bond markets are looking at a combination of spending cuts and higher taxes totaling at least 7% of GDP – an amount so high that it would cause Greece’s recession to become a depression, and would ultimately lead to the collapse of the government.

 What foreign creditors are expecting is Greece to go to the IMF and the European Commission for bailouts. Those bailouts are likely, but at a steep price. The IMF and EU would almost certainly require an austerity program much like Latvia recently was. However, those austerity programs frequently solve nothing. Latvia, for example, is poised to fall back into an economic crisis despite slashing public salaries and closing almost all of its hospitals. Ukraine is another nation that the IMF bailouts have failed to fix.

 For half a century, the IMF’s solution has caused a deflationary spiral more often than not.

 Greece’s situation is compounded by being a European Monetary Union member. This prevents it from using a monetary solution to its debt problems, like quantitative easing or devaluing its currency. However, EMU membership doesn’t have to be forever.

 Greece and Ireland are among countries in an “intolerable” economic situation, which may lead to bailouts or even an exit from the euro area by the end of next year, according to Standard Bank Plc.

  “Countries like Ireland and Greece may not be able to grow out of the current crisis,” Barrow said in a telephone interview today. “With interest-rate cuts, exchange-rate depreciation and significant fiscal support all off limits for these countries, bailouts or even pullouts from EMU may happen next year.”

 A Greek exit from the EMU would be drastic, and would have serious risks for Greece. It would cause a drastic currency fall and price inflation. On the other hand, the risks would be shared.

 Greek exit from EMU would be dangerous. Quite apart from the instant contagion effects across Club Med and Eastern Europe, it would puncture the aura of manifest destiny that has driven EU integration for half a century.

 No doubt, EU institutions will rustle up a rescue. RBS says action by the European Central Bank may be “days away”. While the ECB may not bail out states, it may buy Greek bonds in the open market. EU states may club together to keep Greece afloat with loans for a while. That solves nothing. It increases Greece’s debt, drawing out the agony. What Greece needs – unless it leaves EMU – is a permanent subsidy from the North. Spain and Portugal will need help too.

 Eventually the bond holders are going to have to suffer a haircut, just as they did when Argentina defaulted. While it caused immense short-term pain, it cleaned the bad debt out of the system and didn’t cause the long-term Armageddon that was predicted by the bond market.


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    • gjohnsit on December 14, 2009 at 6:29 am
    • Inky99 on December 14, 2009 at 8:03 am

    that the dominoes are just starting to fall.

    So much for “green shoots”.

    Did you read about the Australian politician who got in trouble for saying they should prepare for America’s default?  

    Ah, here it is:

    Australian Senator: Contingency Plan Needed for Possible “Economic Armageddon”

    THE OPPOSITION finance spokesman, Barnaby Joyce, believes the United States government could default on its debt, triggering an “economic Armageddon” which will make the recent global financial crisis pale into insignificance.

    Senator Joyce said yesterday he did not mean to alarm the public but there needed to be a debate about Australia’s “contingency plan” for a sovereign debt default by the US or even by a local state government.

    “A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that,” Senator Joyce said.

    His warning came as the Rudd Government ramped up its attack on Senator Joyce as an economic extremist by highlighting his strong opposition to Chinese sovereign investment in Australia.

  1. poorer members of the EU, as we all knew they would.  Part of the problem, is that in bailing out their own industry first, they caused more jobs (for instance auto) in Germany or France, at the expense of southern Europe.    

    • gjohnsit on December 15, 2009 at 12:33 am

    Prime Minister George Papandreou has proposed some austerity measures.

      In a much-awaited speech to business and labor leaders, Papandreou said his government would cut the deficit to below an E.U.-mandated ceiling of 3% of gross domestic product within four years, from a forecast 12.7% of GDP this year.

      “The deficit will be below the 3% limit of GDP before the end of the first four-year term for the [government], by 2013,” he said, adding that Greece would cut the deficit through a series of “structural and permanent measures.”

      Beginning in 2012, Greece would take measures to start reducing its giant debt burden, expected to surpass 120% of GDP by next year, Papandreou said.

      However, the speech was met with skepticism by economists and investors, who said it contained few surprises and fell short of the bold deficit-cutting goals announced this month by the Irish government.

      In the bond market, the interest rate spread between the 10-year Greek government bond and its benchmark German counterpart–a measure of credit risk–widened to 222 basis points after the speech, compared with 207 basis points before Papandreou’s remarks.

     The markets don’t believe the talk, and I don’t see why they should.

  2. Latvia, for example, is poised to fall  back into an economic crisis despite slashing public salaries and closing almost all of its hospitals.

    No health care — that will itself cause an economic crisis.

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