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Ilargi: First, any Greek bailout plan that will (may?!) be agreed on doesn't change anything about the country's financial reality. Greece is unable to pay down its debt. If an IMF/ECB/EU package deal is found, that debt will simply now be owed to the "Troika". And Greece will still not be able to pay it back.
You can find comments from those involved in the negotiations that suggest Athens will be "safe“ until 2014, or even for the next 5 years, but this is nonsense. The first aid package hasn't even been paid in full, and the deparate need for a second one has already led to the emergency talks we see now. The only thing that changes is that -much of- the debt is shifted from private investors to the public at large. An all too familiar pattern, and one that is really due for a change.
The situation at the talks, meanwhile, is becoming so opaque it's getting harder to belive there's not at least to some intent intentional. If Germany and France think they can get away with more procrastination, why wouldn't they go that route? They need the euro to weaken vs the UD dollar. These are not good times to have a string currency. But again, they fail to see what the overall perception is in the marketplace. Which is that no matter what they do from here on in, their credibility is shot. For good.
On Friday, Angela Merkel was reported to have given in to French and ECB demands to not press for involuntary haircuts for private investors. Sometime over the weekend, this was denied, or half denied. Now, all of a sudden, Greece may only get half of the next tranche of Bailout 1.0, which it's supposed to receive in July. Moreover, any decision on the topic will be delayed until July as well. By then, we'll know if Papandreou will still be the Greek PM; he has a confidence vote coming up on Tuesday.
Papandreou's (caviar-) socialist party holds 155 of 300 seats. 5 defections and it's game over, both for him and for Bailout 2.0. To prevent this, he made his big party rival Venizelos Minister of Finance, to secure the support of the left wing of the party. If the confidence vote goes awry, Venizelos will probably step in, and Papandreou will gladly pass on the poisoned chalice. Venizelos will then not be able to pass the bailout deal on account of street protests, and thus be stuck with a huge mess. Elections follow, and the next blind power hungry doofus steps in.
Spanish bond rates are rising, as are Italian CDS prices after Moody's threatened a downgrade of Rome's government debt. Italian banks are getting hit hard. That is enough to weaken Greece even further. And that in turn is a major danger in Romania and Bulgaria, where Greek banks are among the main investors.
And if that is still not enough to weaken any- and everything that has to do with the Eurozone, its very head, Jean-Paul Juncker (who, admittedly, is a self-professed obsessive liar -when things get serious-) delivered the coup de grace. And it doesn't look like he meant to do it. I think he meant to strike fear in the hearts of the negotiators. Juncker became the first main voice to include Belgium in the group of endangered European animals. That gives us PIIGS +B. Can I buy a vowel?
Instead, Mr Juncker has now neatly lined up the row of Eurozone sitting ducks for the bond markets: Greece, Ireland and Portugal are obvious. Spain is getting there. Italy, and especially Belgium are the relatively new kids on the -chopping- block. Or the shooting range, if you prefer.
Now, if the EU wants to prevent its members from being picked off one by one, what can they do? Interestingly, I read two completely different approaches over the weekend. Unfortunately, neither makes much, if any, sense. In the Guardian, Larry Elliott writes: Greece must exit the eurozone, while the Telegraph's Edmund Conway argues: Why Germany must exit the euro.
The problems should be clear: if Greece were to leave the Eurozone, either voluntarily or forcibly, conditions would have to be defined to enable it to do that. Such conditions don't exist; there is nothing written on it in EU treaties. Once these conditions would be negotiated (something that can take months, if not years), countries like Ireland and Portugal would also either want to leave or be made to do so. Which would make all remaining parties involved look very closely at Spain and Italy. And Belgium.
If Germany were to leave, it couldn't go alone either. The Netherlands would not remain in the EU without it, and in all likelihood, neither would Finland. With the three arguably strongest economies gone, France would find itself between two rocks and three hard places. Paris might be tempted by the power games, but not by the peripheral debt; it would have to leave, or at least strongly consider doing so.
A Greek exit may seem the more obvious way to go right now, but if such a thing happens, the Eurozone, if not the entire EU, would cease to exist in its present form. A German exit simply won't happen.
For now, the Eurozone countries are stuck with one another. And there's really only one way left to go for them. That is, to deliver haircuts to private investors, as well as to the ECB, the Federal Reserve, the Bank of Japan and perhaps China's central bank. Yes, a credit event. It will take them a while to realize this is the only path to take, the resistance will be formidable. But then, so will the resistance to ever more bank bailouts with public funds.
The Greek protests are an established phenomenon that will not easily be eradicated (even though there's plenty talk of tanks in the streets of Athens). That genie is out of the bottle. Spain's protests are for now more subdued, but a country with over 20% unemployment, and almost 50% of young people jobless, has a limited life expectancy. If the ratings agencies get serious about downgrading French banks, as they announced last week -and given their exposure to Greece it seems inevitable-, and if that raises rates in Paris and beyond, it will be game on. A flag in the Athens protests read: "The French are sleeping – they're dreaming of '68". True enough, but how much longer?
'Don't be surprised if Athens goes up in flames. And don't be sorry, either'
by Aditya Chakrabortty - Guardian
Athenians used to stop off at Syntagma Square for the shopping, the shiny rows of upmarket boutiques. Now they arrive in their tens of thousands to protest. Swarming out of the metro station, they emerge into a village of tents, pamphleteers and a booming public address system.
Since 25 May, when demonstrators first converged here, this has become an open-air concert – only one where bands have been supplanted by speakers and music swapped for an angry politics. On this square just below the Greek parliament and ringed by flashy hotels, thousands sit through speech after speech. Old-time socialists, American economists just passing through, members of the crowd: they each get three minutes with the mic, and most of them use the time alternatively to slag off the politicians and to egg on their fellow protesters.
"Being here makes me feel 18 again," begins one man, his polo shirt stretched tight over his paunch, before talking about his worries about his pension. The closer you get to the Vouli, the parliament, the more raucous it becomes. Jammed up against the railings, a crowd is clapping and chanting: "Thieves! Thieves!"
There is another mic here, and it's grabbed by a man wearing a mask of deputy prime minister Theodoros Pangalos: "My friends, we all ate together." He is quoting the socialist politician, who claimed on TV last year that everyone bore the responsibility for the squandering of public money. Pangalos may have intended his remark as the Greek equivalent of George Osborne's remark that "We're all in it together", but here they're not having it."You lying bastard!" They roar back. "You're so fat you ate the entire supermarket."
This is an odd alloy of earnestness and pantomime, to be sure, but it's something else too: Syntagma Square has become the new frontline of the battle against European austerity. And as prime minister George Papandreou battles first to keep his own job, and then to win MPs' support for the most extreme package of spending cuts, tax rises and privatisations ever faced by any developed country, what happens between this square and the parliament matters for the rest of the eurozone.
The banner wavers here know this. In the age of TV satellite vans and YouTube, they paint signs and coin slogans with half an eye on the export market. Papandreou's face is plastered over placards that congratulate him in English for being "Goldman Sachs' employee of the year". Flags jibe at the rive gauche: "The French are sleeping – they're dreaming of '68." Most of the time, the anger is expressed sardonically. A friend shows me an app on her phone that gives updates on the latest political and industrial actions – its name translates as iStrike.
But it's not hard to see how this situation might boil over. "Are you an indignado?" I ask Nikkos Kokkalis, using the term coined by young Spanish protesters to express outrage at José Luis Rodríguez Zapatero's austerity plans, now swiped by the Greeks. "I'm a super-indignado," he almost shouts. A 29-year-old graduate who lives with his parents, Nikkos has never done a proper job – just menial tasks for a website and an internship for a TV station. "There are 300 people over there," he waves at the MPs' offices. "Most of them make decisions without asking the people."
For their part, protesters with salaries and wrinkles are fuming at the spending cuts already inflicted on them. Chryssa Michalopolou is a teacher who calculates that her annual pay has already gone down by the equivalent of one and a half months, while her living costs have shot up, thanks to rising taxes and inflation. Does she buy the government's line that it needs to trim the public sector? "After 15 years' service, I'm only on €1,200 (£1,056) a month," she says. "I didn't see any boom; I simply paid my taxes and now I am being punished."
On display here is more than a personal grievance; it also reveals a glaring truth that politicians across Europe have so far ignored. In their efforts to hammer out a second loan agreement for Greece, eurozone ministers are focusing on the differences between bond swaps and bond rollovers, the tensions between Berlin and the International Monetary Fund and the European Central Bank or how far continental banks can withstand another massive shock.
Taken for granted in these negotiations is that the Greeks (and by implication, the Irish and the Portuguese) must accept more austerity. Yet in Athens, whether on the streets or even at a policy-making level, these technical details barely figure on the agenda. It's not just that the terms are different, the entire debate is too. Here, the argument concerns how much more austerity the Greek economy, its people and even the government can take – because all three are already at breaking point.
When Greece was all but locked out of the financial markets last May, Papandreou accepted a €110bn loan from Europe and the IMF. The idea was that the money would tide the country over for a year, in which time his government would at least start sorting out its public finances. For Angela Merkel, Nicolas Sarkozy and the rest of Europe, the loan came with some pretty tight strings attached: they charged the Greeks interest well above the official eurozone rate, and set demanding budget targets for the Pasok socialist government.
A year in, and the deal is not working. Greece has been in recession for two years and on official forecasts this will be its third. When I ask Athens University economist Yanis Varoufakis to describe the economy, he shoots back one sentence: "It's in freefall."
Sitting on the balcony of his flat behind the Acropolis, he throws out some statistics: 50,000 businesses went bankrupt last year, industrial production fell 20% and will drop another 12% this year. Unemployment has surged, so that one in six of the workforce doesn't have a job. These are the sort of figures associated with a depression, and the predictable result is that the public finances are getting worse. Greece's debt has ballooned to 153% of GDP; on Varoufakis's projections, even if ministers manage to make all their promised cuts, the government will owe three times the entire national income.
Behind these numbers lie the stories of a society in distress. One man talks about his daughter who works in the in-store restaurant of a large supermarket outside Athens; at closing time, she and her workmates have started giving out the unsold meals to the newly unemployed – the 21st-century equivalent of a soup kitchen. An employee of a local council notes that they pick up 17% less rubbish than a year ago, simply because people have cut back on food. The owner of an art gallery tells me her son has just started his first job; holding a master's in accountancy, he works six hours a day in a mobile-phone shop.
The lazy accusation to hurl at Greece is that it had a bloated public sector and so was bound to come a cropper. Not so, says Varoufakis: the country has a public sector in line with the rest of Europe (although, nearly everyone I speak to agrees, one that does not work as well), but takes in taxes some 35% below where they should be.
Wealthy Greeks have always treated the country's tax system like a church collection plate: what they give is strictly optional. This gap was covered up for as long as the Greek state could get cheap credit; then in 2008 it became glaringly obvious. The other problem covered up during the boom years was the rotting away of the industrial base. That too is now the subject of angry public discussion.
I take a tour of the shipbuilding yard in Perama, just outside Athens. Greece has the largest commercial fleet in the world, and yet Perama is utterly silent. There is a rusting hulk, abandoned a few years ago, when those who commissioned it could no longer afford to pay for it. A decade ago, this yard employed 7,000 workers – now it has around 500. There was a time when assembling small cargo vessels was seen as pedestrian work; last year, the yard was contracted to build two boats, and the jobs were fought over. A few minutes away lives Tassos Alexandris, who was laid off from Perama in 2008. The hall of his flat is decorated with needlepoint; inside are pictures of the Virgin Mary put up by his wife, Nikki. She is ill, and his 26-year-old daughter has worked for six months in her entire career. How do they make ends meet? Nikki snorts with laughter.
"The electricity connection is inside the flat; otherwise the board would have cut us off," begins Tassos. His mother-in-law lives upstairs and, while he is too ashamed to ask her for food, she allows him to raid her fridge at night. They had a small green Citroen, but couldn't afford to keep it. Now he runs a motorbike, although with no plates and no taxes. "I can't sleep at night for worry," he says. "It has affected every part of our lives: personal, sexual, the lot." How many families in this block do they think are in a similar situation? Nikki tots them up: "80%."
Tassos doesn't just support the protesters of Syntagma; he thinks they will go further. "Don't be surprised if Athens goes up in flames," the 50-year old says. "And don't be sad, either." His words initially sound melodramatic, but the anger keeps coming up. "Politicians now walk around with bodyguards," says Aris Chatzistefanou, the co-director of Debtocracy, a film about the Greek crisis that has become a sensation. He quotes a newspaper report of how restaurateurs are taking down those cheesy framed photos of dining politicians, of how one government spokesman went to dinner a few weeks ago only for the rest of the restaurant to start shouting "You are eating the blood of the people".
The anger against the austerity and the politicians imposing it is palpable; whether it will translate into political success is debatable. Papandreou may be one of the most hated men in Greece, but there is no mainstream politician who has an alternative to acting under creditor's orders. This isn't about an electorate taking on a government, either, but the impossible political arithmetic of disparate groups of Greeks on one side versus the IMF, the European Central Bank and 16 other eurozone members on the other.
Run that by the protesters of Athens, though, and even the older, more pragmatic ones have an answer. "We may lose," one grey-haired trade unionist said to me. "But what matters is how you lose."
Ramping Up Pressure on Athens: Euro Group Postpones Decision on Greek Aid
by Carsten Volkery - Spiegel
The euro-zone finance ministers have decided not to approve the next tranche of aid to Athens until the Greek parliament passes new austerity measures. The move increases pressure on the Greek government, but it is unlikely to reassure the financial markets.
It's a reliable rule of thumb with European Union summits that the bigger the problem, the longer the meeting. In this case, the discussion lasted seven hours. It was not until early Monday morning that the finance ministers of the euro-zone countries emerged one by one from the conference center in Luxembourg City's deadly quiet Kirchberg plateau, home to various EU institutions. The euro group -- as the euro-zone finance ministers are collectively known -- had been discussing how to deal with Greece's debt crisis. But the result they announced came as a surprise: The decision about whether to grant Greece new loans has been postponed.
Observers had been expecting that the ministers would at least approve the next tranche of aid, worth €12 billion ($17 billion), from the current €110 billion package that was agreed on by the EU and International Monetary Fund in May 2010. Greece needs the money by mid-July at the latest to avoid a national default. But the euro-zone partners want to wait until the last minute before giving the green light. In a statement, the euro group said that the Greek parliament would first have to approve the latest round of austerity measures and a €50 billion privatization program before the next tranche was disbursed.
The motive behind the finance ministers' tactic is obvious: They want to keep up the pressure on the Greek government -- not to mention the recalcitrant opposition. On Tuesday, Prime Minister George Papandreou will face a confidence vote in parliament, which will also vote on the austerity package next week. The euro-zone ministers explicitly appealed to all political parties in Athens to support the austerity measures. "Given the length, magnitude and nature of required reforms in Greece, national unity is a prerequisite for success," the statement read.
Voluntary Involvement of Private Sector
The euro group's decision to postpone a decision might be clever from a tactical point of view. But whether it will impress the financial markets is another matter. Investors, who value transparency and predictability, are unlikely to be reassured by the euro-zone governments' desire to put off dealing with the problem. The original plan was that Greece would be able to return to the capital markets to refinance its debt in 2012. But that will no longer be possible -- private investors simply lack the necessary confidence in the country. Hence a second aid package is required, which is expected to have a similar magnitude to the first €110 billion package.
It's unclear who will pay for this. The ministers only managed to agree on principle that this time, in addition to European taxpayers, private creditors will have to be involved on an "informal and voluntary" basis. Chancellor Angela Merkel and French President Nicolas Sarkozy had already agreed on that position during their summit in Berlin on Friday, with the German government abandoning its demand that private creditors be forced to make a "substantial contribution."
Before the start of the Luxembourg summit on Sunday evening, German Finance Minister Wolfgang Schäuble stated the German position once again. It had to be made clear "that the risk will not be borne solely by taxpayers," he said.
The euro-zone finance ministers were able to quickly agree to that demand in principle. But they were divided over how it would work in practice. In their closing statement, the ministers said that the "parameters" of the new financing strategy should be clarified by early July -- effectively passing the buck to the 27 EU heads of state and government who will meet at the EU summit in Brussels on Thursday and Friday.
When it comes to deciding whether to involve private creditors, two diverging aims must be taken into account. On the one hand, European taxpayers have a legitimate interest in getting private investors, particularly German and French banks, to share in losses resulting from Greek debt. On the other hand, there is the concern that forcing private investors to get involved could cause the rating agencies to declare the country bankrupt. Euro-zone governments unanimously agree that a Greek default would have unpredictable and far-reaching consequences for the currency union.
Thus, it seems unlikely that the banks' share will be particularly large -- even if Merkel and Schäuble continue to talk about encouraging the CEOs of banks to make a "substantial" contribution. Experts expect that the private financial institutions will only pony up a sum in the single-digit billions -- a somewhat paltry amount, given that the expected aid package could comprise up to €120 billion.
Political Problem for Merkel
In this event, Merkel would find herself facing a huge problem. Voices in her coalition government of the conservatives and the business-friendly Free Democratic Party say that the private sector will have to be involved if the German parliament, the Bundestag, is to approve a second rescue package for Greece. Some members of the opposition center-left Social Democrats are already speculating that the issue could lead to the downfall of Merkel's government and early elections, should the chancellor fail to get a majority in parliament to back her plans.
In the meantime, the debate over how best to involve private creditors will continue -- as will the discussion over why European politicians have been so slow in taking action. It already became clear in April that Greece would need a second rescue package. Now it is mid-June, and still there is no plan. Dennis Snower, the president of the respected Kiel Institute for the World Economy, slammed the EU's indecisiveness in comments to the newspaper Welt am Sonntag on Sunday, saying it was a "completely unnecessary failure of politics." With their agreement to postpone a decision, the euro-zone finance ministers have confirmed that impression yet again.
Deal on Lifeline to Avert Greek Bankruptcy Is Postponed
by Stephen Castle and Niki Kitsantonis - New York Times
Europe’s finance ministers unexpectedly put off approval early Monday of the next installment of aid to debt-laden Greece, delaying the decision until July and demanding that the Greek Parliament first approve spending cuts and financial reforms that include a large-scale privatization program.
After nearly seven hours of talks in Luxembourg, ministers announced a holding action that reflected their struggle over how to avert a potentially disastrous default by Greece. Athens needs the next payout of 12 billion euros from its existing 110 billion euro bailout package by mid-July in order to remain solvent.
The decision adds to pressure on the Greek government and its prime minister, George Papandreou, who on Sunday began urging Parliament to support his reform plans in a confidence vote scheduled for Tuesday night.
The ministers’ action fell short of expectations raised Thursday when Olli Rehn, the European commissioner for economic and monetary affairs, said in a statement that he was confident the leaders would reach agreement in Luxembourg to provide Greece the next installment of aid in early July.
Jean-Claude Juncker of Luxembourg, who leads the group of 17 euro zone finance ministers, said he expected the disbursal to be approved if deep spending cuts and new reform measures were enacted. "I cannot imagine for one second that we would commit to finance Greece without knowing that the Greek Parliament has given a vote of confidence to the Greek government,” he said.
Mr. Papandreou’s Socialist Party has been working to shore up its tenuous political position in the face of widespread anger in Greece over strict austerity measures that have produced job losses and cuts to wages and pensions. Late last week Mr. Papandreou shuffled his cabinet and appointed a Socialist stalwart, Evangelos Venizelos, as the new finance minister.
The ministers did fall into line with an agreement made on Friday between the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, over the extent to which private investors would be involved in a second bailout package, which Greece needs on top of its existing rescue package in order to meet its debt obligations through next year.
The ministers did agree that a second bailout would involve the private sector "in the form of informal and voluntary rollovers of existing Greek debt” — a solution deemed acceptable by the European Central Bank. Before backing down on Friday, Mrs. Merkel had initially pressed for debt swaps instead.
Asked about the mood of the talks, the Belgian finance minister, Didier Reynders, said "the atmosphere was good.” "The problem was that we have to make progress on the role of the private sector, and we have made progress,” he said.
The discussion proved more complex than expected because the International Monetary Fund was insisting that the European Union effectively underwrite the Greek government if its financing plan did not add up over the next year, said one European official not authorized to speak publicly. Many governments resisted that effort because of the uncertainty in knowing how much of a financing gap there could be next year. It is also unclear what proportion of it could be covered by the private sector.
Devising a new bailout that would include voluntary private sector involvement, so it would not be classified as a default, will be complex, said one official not authorized to speak publicly, because the amount that the private sector agrees to contribute will largely determine how big a gap reluctant European governments will have to fill. Another big source will be Greece’s privatization program, intended to raise as much as 50 billion euros.
After a week of intense turmoil that ended with an overhaul of the ruling Socialist Party’s cabinet on Friday, Mr. Papandreou signaled on Sunday that he was prepared to make radical changes to the indebted Greek state system, and proposed an overhaul of the Constitution.
Declaring that the bloated government sector was largely to blame for the state of the Greek economy, Mr. Papandreou called for a referendum in the fall on a proposal to "change the political system” and revise the Constitution, which protects some 800,000 government workers.
Mr. Papandreou confirmed that talks were progressing between Greece and its foreign creditors for a second bailout package "approximately equal” to last year’s emergency loan package of 110 billion euros.
The stakes still remain high, with politicians aware of the risk of contagion. "Nobody’s lending to the Greeks at the moment and that’s why we need to find a solution,” said Maria Fekter, Austria’s finance minister. "A default would be an ever bigger damage.”
All this comes a little more than a year after the international community offered the government in Athens its first package of 110 billion euros in loans to prevent it from having to borrow at crippling rates on the financial markets. But Greece has since then failed to meet its economic goals because of a worse-than-expected recession, which has depressed revenues, as well as its own failure to install reforms.
Greece’s creditors have demanded that Mr. Papandreou secure a broad political consensus on a number of austerity measures — chiefly tax increases, cuts in public spending and privatization of state assets — that are to be voted on in Parliament by the end of this month.
Europe delays decision on emergency loans to Greece
by Julien Toyer and Barry Moody - Reuters
Euro zone finance ministers postponed a final decision on extending 12 billion euros ($17 billion) in emergency loans to Greece, saying Athens would first have to introduce harsh austerity measures.
The ministers said they expected the money, the next tranche in a 110 billion euro bailout of Greece by the European Union and the International Monetary Fund, to be paid by mid-July. Greece has said it needs the loans by then to avoid defaulting on its debt. But keeping up their pressure on Athens, where public opposition to austerity has been growing, the ministers insisted that disbursement would depend on the Greek parliament first passing laws on fiscal reforms and selling off state assets.
"To move to the payment of the next tranche, we need to be sure that the Greek parliament will approve the confidence vote and support the programme, so the decision will be taken at the start of the month of July," said Belgian Finance Minister Didier Reynders. The euro fell moderately against the dollar in early Asian trade on Monday because of the delay.
In a statement issued after a seven-hour meeting in Luxembourg that ended in the early hours of Monday morning, the ministers also announced they would put together a second bailout of Greece, which missed debt targets in the first rescue plan by big margins. The new plan, to be outlined by early July, will include more official loans and, for the first time, a contribution by private investors, who will be expected to maintain their exposure to Greece through voluntary purchases of new bonds as existing ones mature.
The statement did not say how large the new bailout would be, or give details of the private sector contribution beyond describing it as "substantial." Euro zone official sources have told Reuters the new plan is expected to fund Greece into late 2014 and total about 120 billion euros: up to 60 billion euros of fresh official loans, 30 billion euros from the private sector, and 30 billion euros from Greek privatisation proceeds.
In an attempt to win the cooperation of the European Central Bank, which opposes any scheme that would cause credit rating agencies to declare Greece in default, the ministers said the private sector debt rollover would avoid even a limited or "selective" default. They did not say how this would be managed. Underlining the extent to which the Greek crisis has become a threat to global stability, Japanese Finance Minister Yoshihiko Noda said top finance officials of the Group of Seven, which includes the United States, Japan and Canada as well as major European nations, held a teleconference over the weekend to discuss Greece.
On Sunday, Prime Minister George Papandreou asked Greeks to support the austerity steps and avoid a "catastrophic" default. Addressing the Greek parliament, he appealed for the nation to accept deeply unpopular tax hikes, spending cuts and privatisation plans. "The consequences of a violent bankruptcy or exit from the euro would be immediately catastrophic for households, the banks and the country's credibility," Papandreou said at the start of a confidence debate on his new crisis cabinet.
Facing public protests and dissent in his Socialist party, which has a slim majority in parliament, Papandreou reshuffled his cabinet last week and called a confidence vote for next Tuesday in an effort to push his reforms through the legislature this month.
Political analysts think he is likely to succeed, but public opposition means it is unclear if he can stick to austerity over the long term. More than 10,000 people protested in front of parliament on Sunday, chanting: "We won't pay! We won't pay" and thrusting their open hands forward in a traditional insult.
Opposition leader Antonis Samaras demanded in parliament that Papandreou quit to pave the way for early elections and a renegotiation of the terms of Greece's current bailout.
At 340 billion euros or more than 150 percent of its annual economic output, and still rising, Greece's public debt is so large that many investors think the bailouts envisaged by the EU and the IMF will not succeed -- and that a more radical solution is needed, such as imposing deep losses on its creditors.
The head of Pimco, the world's largest bond fund, said in an interview published on Sunday that Europe risked wasting more money for nothing if it kept pumping billions into the weak Greek economy. "After a year, every indicator has unfortunately worsened, despite the incredible quantity of financial assistance," Mohammed El-Erian told Italy's Corriere della Sera daily.
"All of this has terrible human consequences and it's associated with a transfer of liabilities from private creditors to European taxpayers. Why? Very little is being done to deal with the excess of public debt, and the conditions for higher growth are not being put in place. "Further on, if this approach is kept up, more money will be wasted to save private creditors and the risk of a disorderly restructuring of the debt will be greater.
Greek power firm unionists launch strikes
PPC protest action to cause rolling blackouts, starting Monday
The powerful union representing workers of the Public Power Corporation, GENOP, is to start rolling 48-hour strikes on Monday morning in protest at the government’s insistence on pushing ahead with the privatization of PPC. It is expected that the strikes will cause widespread blackouts. Unionists have called the action two weeks before the government is to submit legislation in Parliament paving the way for the state to reduce its holdings in PPC from 51 percent to 34 percent.
The provision is part of the government’s controversial midterm fiscal program which also foresees new tax increases and spending cuts in the public sector. PPC unionists have demanded talks with new Finance Minister Evangelos Venizelos and his predecessor George Papaconstantinou, who has assumed the Environment and Energy portfolio.
Europe May Withhold Half of Greek Payment
by James G. Neuger and Jonathan Stearns - Bloomberg
European governments weighed withholding half of Greece’s next 12 billion-euro ($17.2 billion) aid payment, seeking to keep the country solvent while maintaining pressure on the government to slash the debt that pitched the euro area into crisis.
Euro-area finance ministers may authorize only a 6 billion- euro loan to tide Greece through bond redemptions in July, while further aid hinges on Greek budget cuts, Belgian Finance Minister Didier Reynders said. "We will in any case try to release the necessary funds for the short term,” Reynders told reporters before a meeting of euro-area finance ministers in Luxembourg tonight.
Europe’s financial brinksmanship ran in parallel with Greek Prime Minister George Papandreou’s effort to save his government from collapse and win parliamentary backing for spending cuts, tax increases and state-asset sales needed to keep bailout funds flowing.
Tonight’s euro-area finance ministers’ meeting coincided with the start of a three-day Greek parliamentary debate in Athens over a confidence vote in a new cabinet at what Papandreou called a "critical crossroads.” Papandreou has 155 seats in the 300-seat parliament. Papandreou said he planned to hold a referendum later in the year for changes to the constitution that would reform the political system in the country. The prime minister said his goal was to tackle the root causes of the country’s debt and deficits that are "symptoms of the illness, not the cause.”
The new Greek finance minister, Evangelos Venizelos, who was named in a cabinet overhaul two days ago, came to Luxembourg with a "strong commitment” to the planned 78 billion euros in budget cuts that provoked street protests last week. "We can achieve our target thanks to the efforts of our people and thanks to the cooperation and the assistance of our partners,” Venizelos said.
More than 47 percent of 1,208 Greeks surveyed by Kapa Research SA for To Vima newspaper oppose the wage and spending cuts and higher taxes, and want early elections. Almost 35 percent said the package should be approved. Germany, which as Europe’s largest economy is the biggest guarantor of aid packages to Greece, Ireland and Portugal, insists on an "ambitious” economic overhaul in Athens, Finance Minister Wolfgang Schaeuble said.
"We will surely work on laying the groundwork for paying out the tranche,” Schaeuble said. "It also depends on Greece making the necessary decisions with a fundamental consensus of the political parties so that we can be confident that Greece will live up to its commitments.”
Germany raised the prospects for a second aid package on June 17 by dropping calls for a mandatory bond exchange that might lead rating companies to declare Greece in default. Chancellor Angela Merkel’s concession gave a lift to stocks, bonds and the euro, spurring optimism that Europe would get ahead of the debt crisis that has exposed the weaknesses of the 17-country currency union.
While Germany bowed to European Central Bank and French demands not to compel investors to buy new Greek bonds as old ones expire, the lines are blurry between a "voluntary” and "compulsory” rollover that would lead rating companies to declare Greece in default. On the table are incentives for bondholders to maintain their exposure to Greece, said Luxembourg Prime Minister Jean- Claude Juncker, chairman of the talks. He ruled out an agreement tonight on a new three-year package for Greece, pointing to July for a "final and overall answer.”
Germany 'dismisses Greek debt compromise plan'
A German compromise plan to resolve a dispute with the European Central Bank over the Greek rescue that was reported by Der Spiegel magazine is no longer on the table, a government source said Sunday.
Der Spiegel had reported ahead of its Monday issue that the German finance ministry called for a beefed-up version of Europe's temporary bailout mechanism lending to Greek banks to insure they have adequate collateral with the ECB. It would boost the effective lending capacity of the Emergency Financial Stability Facility (EFSF) to 440 billion euros ($629 billion) and see member states double the amount of guarantees they provide the fund.
Germany's share of guarantees would climb to 246 billion euros from 123 billion euros, according to the report. But a German official, who spoke on condition of anonymity, said that while "several options" were being debated to involve private creditors in an Athens rescue, the reported proposal was "no longer on the agenda". The source added that the initial plan had differed from the reported proposal in "key aspects".
German officials say they seek a plan with as few "unwanted side effects" as possible. The ECB has repeatedly warned that requiring creditors to swap existing Greek debt for new bonds with longer maturities could amount to a default, something which could send shock waves through the European and global financial systems.
German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed Friday to a plan through which private bondholders could volunteer to buy new government bonds to replace ones that matured. This "rollover" option was favoured by the ECB and France, since it avoids the risk of rating agencies declaring Athens in default. Germany had previously called for full-scale debt restructuring but Merkel appeared to back down after the meeting with Sarkozy. Eurozone finance ministers were to meet in Luxembourg later Sunday for talks on saving Athens from default as early as next month.
Merkel said in a separate interview released Sunday that she was upbeat about the eurozone despite the Greek crisis. "We are already far better equipped now in Europe," Merkel told Super Illu magazine, referring to austerity measures taken by debt-laden member states. But she said the countries sharing the euro still had to work through "significant failures" and "sins of the past" in terms of fiscal discipline.
Merkel said Greece had "achieved a great deal in the last year -- we should recognise that". "It has cut new borrowing by five percent -- that is remarkable savings but it is not enough," she said.
Greek Default Would Spell 'Havoc' for Banks
by Aaron Kirchfeld and Elena Logutenkova - Bloomberg
A year after European officials bailed out Greece, investors say the region’s banks haven’t raised sufficient capital or cut loans enough to withstand the contagion that may follow a default.
While European lenders reduced their risk tied to Greece by 30 percent to $136.3 billion last year by not renewing loans, writing down the value of debt and shifting it off their books, they still have almost $2 trillion linked to Portugal, Ireland, Spain and Italy, figures from the Bank for International Settlements show, leaving them vulnerable if the crisis spreads.
"The Greek debt situation certainly has the potential to create havoc with the European banking system,” said Neil Phillips, a fund manager at BlueBay Asset Management Plc in London, which oversees about $45 billion. "A Greek default and the ramifications of that would be too ghastly for Europe and the European banking system to contemplate right now.”
German Chancellor Angela Merkel retreated last week from a confrontation with the European Central Bank that threatened to shove Greece into the euro zone’s first sovereign default, softening demands that bondholders be forced to shoulder a big part of a rescue. Questions remain about how any such burden- sharing agreement would work without prompting ratings companies to declare a default and whether Greek Prime Minister George Papandreou can persuade legislators to pass the austerity measures needed for a bailout.
"We forcefully reminded the Greek government that by the end of this month they have to see to it that we are all convinced that all the commitments they made are fulfilled,” Luxembourg Prime Minister Jean-Claude Juncker told reporters early today after chairing a euro-crisis meeting in Luxembourg.
European governments failed to agree on releasing a loan payout to spare Greece from default, ramping up pressure on Papandreou to first deliver budget cuts in the face of domestic opposition and leaving open whether the country will get the full 12 billion euros ($17.1 billion) promised for July. Decisions on the next payout and a three-year follow-up package were put off until early next month.
A Greek sovereign default could lead to insolvency of the country’s banks and a liquidity crisis as a result of a run on deposits, Standard & Poor’s said in a June 15 report.
Concern that Greece was lurching toward insolvency drove the 48-company Bloomberg Europe Banks and Financial Services Index to a one-year low on June 16 and lifted the cost of insuring against default on the sovereign debt of Greece, Ireland and Portugal to record levels. The cost of insuring Greek debt saw the biggest weekly increase last week, while credit-default swaps on National Bank of Greece, the country’s biggest bank, rose to a record, according to CMA, a data provider owned by CME Group Inc. that compiles prices quoted by dealers in the privately negotiated market.
Analysts say contagion following a Greek default could play out like this: Refinancing costs for Ireland, Portugal, Spain and possibly Italy and Belgium would soar, thwarting efforts to rein in public deficits and putting states under pressure to restructure their debt as well; banks in countries with weak finances could face a run by depositors, while other lenders would see their capital eroded by credit writedowns; investors would shun equity markets and the euro and seek the safest securities. In a worst-case scenario, panic could freeze credit markets, as happened after the bankruptcy of New York-based Lehman Brothers Holdings Inc. in September 2008.
"If, after a year of discussion without conclusion, we conclude there will be a haircut, the next morning the market will massacre Ireland, Portugal and maybe other countries,” Federico Ghizzoni, 55, chief executive officer of UniCredit SpA, told journalists in Vienna June 16, referring to a Greek default.
The concern is already having an impact on European banks. BNP Paribas, France’s biggest bank, and rivals Societe Generale and Credit Agricole may have their credit ratings cut by Moody’s Investors Service because of their investments in Greece, the ratings company said on June 15. German banks could also be at risk from contagion, Fitch Ratings said last month.
Merkel, 56, said on June 17 she would work with the ECB to get Greek creditors to participate in a rescue on a voluntary basis, seeking to appease ECB President Jean-Claude Trichet, 68, who contends that any compulsory move to involve bondholders would trigger a default. The ECB doesn’t accept defaulted debt as collateral when providing the cash banks in Greece, Portugal and elsewhere depend on after being shut out of credit markets.
Merkel said June 18 in Berlin that policy makers must make sure the Greek crisis doesn’t infect the rest of the euro region and spark a new global financial crisis. "We all lived through Lehman Brothers,” she told a meeting of activists from her ruling Christian Democrat party. "I don’t want another such threat to emanate from Europe. We wouldn’t be able to control an insolvency.”
The risk that euro-area banks holding Greek government bonds will be saddled with losses increased after S&P slapped Greece with the world’s lowest sovereign credit rating June 13. Greece should "absolutely not default,” Josef Ackermann, CEO of Frankfurt-based Deutsche Bank, said in a June 17 interview in St. Petersburg, Russia. The EU needs to provide more aid to the country if required, he said.
Ackermann, 63, told CNBC the same day that the risk of a Greek default lies in "what is going to happen in other markets and what is going to happen in other countries,” concluding that "no one has a clear answer.”
Ackermann knows about contagion firsthand. He told an audience in Frankfurt’s Congress Center in September 2007 that risks from the U.S. subprime mortgage market were "manageable.” The crisis spread to other markets soon after, leading to more than $2 trillion of losses and writedowns worldwide and the collapse of Lehman Brothers a year later.
"The worst consequence of any Greek sovereign default for German and other European banks would be a sharp increase in general capital market and creditor risk aversion at a time when many banks are still in rehabilitation mode,” Michael Dawson- Kropf, a Frankfurt-based Fitch analyst, said in a May 25 report.
European banks are more at risk from a "disorderly” market reaction to Greek debt restructuring than any losses on their holdings of the country’s bonds, James Longsdon, a managing director at Fitch, said in an interview in Seoul today. Greek government debt held by European banks isn’t large enough to trigger an "insolvency event” at the lenders, he said.
European banks have raised 59 billion euros since stress tests last July, according to calculations by Huw van Steenis, an analyst at Morgan Stanley. Independent Credit View, a Swiss ratings company that predicted Ireland’s banks would need another bailout last year, said in a stress-test study earlier this month that 33 of Europe’s biggest banks would need $347 billion of additional capital by the end of 2012 to boost their tangible common equity to 10 percent from 9.1 percent at the end of 2010. The group chose that threshold because it’s about 30 percent above the average ratio for the past 10 years.
An S&P stress test published in March estimated European banks would need as much as 250 billion euros in fresh capital if faced with a "sharp” increase in yields and a "severe” economic decline. French lenders had the highest overall foreign claims on Greek borrowers of $56.7 billion, including $15 billion in public debt, at the end of 2010, data from the BIS showed. French banks had $589.8 billion of loans tied to Ireland, Italy, Portugal and Spain.
Germany Tops Lenders
German lenders were the biggest foreign owners of Greek government debt with $22.7 billion in holdings last year and had the second-most overall claims, the BIS said. Their claims on Ireland, Italy, Portugal and Spain amounted to $498.8 billion. The two countries hold more than 60 percent of all foreign claims on Greece, according to BIS data.
Banks in the two countries have lowered their risk tied to Greek public debt by 25 percent to $37.6 billion from the end of March 2010 through December. The main reason for the decline is companies letting bonds or loans expire without renewing them, according to Lutz Roehmeyer, who helps manage about $17 billion at Landesbank Berlin Investment in Berlin. Lenders also have been writing down the value of Greek holdings, setting aside provisions and moving assets into so-called bad banks, as well as selling shares to boost reserves, he said.
Too Big to Shoulder
"The direct hit from Greece is manageable because investors have had time to prepare, but contagion to other countries is the big risk,” Roehmeyer said. "If the crisis spreads to Ireland, Portugal and Spain, it would be too big for the banks to shoulder.”
The impact of credit-default swaps, which led to the near- collapse of American International Group Inc. in 2008, may be limited in a Greek default. Credit-default swaps on Greek sovereign debt cover a net notional $5 billion, according to the Depository Trust & Clearing Corp., which runs a central registry that captures most trades. That’s only 1 percent of the government’s $482 billion of bonds and loans outstanding, according to data compiled by Bloomberg.
Swaps on Italian sovereign debt cover a net notional $25 billion, the most of any country or company in the world, according to DTCC. That compares with $2.3 trillion of debt. Most banks have already had to write down the value of their Greek bond holdings as they have fallen in the market, said Florian Esterer, who helps manage more than $60 billion at Swisscanto Asset Management AG in Zurich.
"The biggest problem that we have is less to do with the loss of Greece as such and more to do with the question of what would happen to other countries,” Esterer said. "The risk of contagion is probably exactly the same as a year ago.”
Nervous investors send market to lower close
by GARETH COSTA and AAP, The West Australian
Global equity markets remained on a knife edge ahead of the Greek parliamentary confidence vote tomorrow, with the Australian sharemarket finishing a choppy session at a fresh 10-month low. European leaders dashed hopes of a weekend solution to the Greek sovereign debt crisis, and the S&P-ASX 200 surrendered two morning rallies to close 33.2 points or 0.74 per cent down at 4451.7 points, as weak regional data added to the gloomy outlook. The broader All Ordinaries index was 38.6 points or 0.84 per cent lower at 4,512.5, the day’s low.
The Japanese economy tumbled into a $10.1 billion trade deficit in May as exports slumped 12.4 per cent, while Chinese interbank overnight SHIBOR lending rate soared from 3.86 per cent to 6.83 per cent, indicating an acute cash shortage in China.
German radio reported today that German Finance Minister Wolfgang Schaeuble said Greece must deliver deficit-reduction steps before further loan payments can be approved. Weekend reports suggested Greece would receive half of a €12 billion payment for July, but EU officials are set to wait until after the Greek parliamentary confidence vote and acceptance of an austerity package before approving any payment.
Japan’s Nikkei index finished marginally higher, while the Shanghai composite index was off 1.2 per cent at the Sydney close. Copper led base metals lower on concern over global demand, falling 1.3 per cent to $US8980 a tonne, while nickel dropped to a one per cent low of $US21,441 a tonne. Gold held steady at $US1539 an ounce, but the Australian dollar reversed early gains to $US1.0610, slipping to $US1.0530 as investor appetite deteriorated throughout the day. The Australian dollar price of gold climbed to a one-year high of $1460.60 an ounce.
IG Markets analyst Ben Potter said investors were concerned with both the macro economic outlook and local conditions. “The market is selling into any sign of strength at the moment,” Mr Potter told AAP. “People don’t see the strength lasting, so they are taking the chance to jump ship.”
The latest in a series of earnings downgrades by industrials, this time by Caltex Australia, didn’t help to improve sentiment. Caltex downgraded its first half profit guidance to between $100 to $115 million, prompting its shares to lose 78 cents, or 6.85 per cent, to $10.60. It was the worst performer among the S&P top 100 companies on the ASX.
The major resource companies also fared poorly. BHP Billiton lost 59 cents, or 1.41 per cent, to $41.36, while Rio Tinto was down 52 cents, or 0.67 per cent, at $77.30. Mr Potter said local conditions, including the strong Australian dollar, potential for an interest rate rise and tight consumer discretionary spending were concerning investors. “Australia has so many other headwinds on top of the problems globally,” Mr Potter said. “There is a bit focus overseas, but the local concerns are still weighing on the back of people’s minds.”
The major banks also sank in late trade. Commonwealth lost two cents to $49.50, Westpac was down nine cents at $21.12 and ANZ lost 10 cents to $21.24. NAB outperformed its peers to close up eight cents at $24.44. In other news, Chi-X Australia has reached an agreement with the nation’s main stock exchange operator, Australian Securities Exchange, to provide clearing and settlement services. Preliminary national turnover was 2.3 billion shares worth $4.7 billion, with 331 stocks up, 875 down and 376 unchanged.
Austerity protests continue to roil Greece
by Demetris Nellas - AP
Several thousand pro-Communist union members marched through central Athens yesterday to protest the government’s latest austerity measures and plans to sell off state enterprises to appease international creditors.
Greece has seen near-daily protests against the belt-tightening that has slashed salaries and pensions in an attempt to stem its ballooning debt. "People should have no illusions . . . [the government] and creditors will sit together to skin the Greek people alive,’’ Communist party secretary Aleka Papariga told the crowd of 5,000, which dispersed without incident. Greece was roiled by political and market turmoil in the last week over new spending cuts and tax hikes.
Prime Minister George Papandreou ousted his finance minister and appointed his main party rival, Evangelos Venizelos, to the post. Germany, fearing that Greece would soon default, calmed market fears Friday by retreating from its stance that banks and other private lenders should be forced to share the pain of a second bailout for Greece.
Venizelos will face his European colleagues for the first time today at a meeting of eurozone finance ministers that is expected to approve payment of a fifth installment from the $143.15 billion rescue package approved for Greece in May 2010. The International Monetary Fund is widely expected to approve releasing its own share of the installment in early July. If approved, the EU and the IMF will provide Greece with a badly needed $17 billion.
Also today, Papandreou will open a three-day parliamentary debate that will conclude midnight Tuesday with a vote of confidence. With 155 deputies in the 300-strong Parliament, he is expected to win the vote. He is then expected to pass a $40 billion package of steep tax hikes and budget cuts before the end of the month, in the face of mounting protests by unions and the nonpartisan crowds that gather each evening outside Parliament.
The powerful state electricity company employees’ union GENOP has announced that it will begin rolling 48-hour strikes next week, threatening to cause blackouts, while public and private sector unions are expected to stage a 48-hour general strike on the date, yet to be determined, that the new austerity package will be voted on.
"We must vote this package, because our credibility with [Greece’s creditors] is at stake and because we must ensure that servicing our debt remains sustainable,’’ Venizelos told Greek media late Friday. "We must then embark on a radical change to our tax system, make it simpler. I am open to proposals from the opposition,’’ he added.
Battle lines drawn for a eurozone debt war
While Molotov cocktails burn on Athens’ streets, more vitriolic battles yet are blazing over Greece’s debt crisis behind the scenes, as financial markets and eurozone politicians fight their ground.
War has broken out in Greece. But the battleground is not on the streets, where rioters are venting their fury at planned spending cuts and painful social austerity. It’s on stock market floors and in the political corridors from Athens to Berlin and Brussels. The debt-ridden Mediterranean country is fighting for its future while, for the rest of Europe, Greece has become the frontline for the battle to save the euro.
"I am here by patriotic duty to carry out a real war,” the new Greek finance minister, Evangelos Venizelos, said on taking up the post on Friday. "I did it with much thought and not without doubts,” he added. With good reason. It will be the biggest fight of the former defence minister’s life. His first sortie comes today, when the eurogroup of finance ministers meets in Brussels with International Monetary Fund (IMF) representatives to agree to release the fifth tranche of the €110bn (£97bn) bail-out package agreed in May last year.
For Venizelos, it will be an easy introduction. Last week, Olli Rehn, the European Union’s economic commissioner, indicated the decision had already been made to hand over the €12bn of loans. In an official statement, he said: "I am confident that Sunday, the eurogroup will be able to decide on the disbursement of the fifth tranche of the loans for Greece in early July.”
Venizelos’s bigger battles start almost immediately. In a now well-worn analogy, the disbursement to Greece will be little more than "kicking the can down the road” — buying time for a proper solution. In August, Greece faces redemption of €6.6bn of five-year bonds. The market is currently charging interest on 5-year Greek debt at 17.8pc — a level that reflects the risk of default but one that is also so high it would inevitably cause one. Greece could simply be unable to refinance.
The IMF and European loan, which will be extended despite Greece technically being in breach of the original agreement, will get the country through to September. By then, a second bail-out of as much as €150bn is expected to have been struck.
For Venizelos, the challenge will be to moderate the demands that accompany the new money. Greece is in uproar. The streets are ablaze as the people riot in protest at the €28bn package of tax hikes and budget cuts already being demanded by the donors. Social unrest threatened to strip the country of political leadership last week.
First, Prime Minister George Papandreou offered to resign to form a party of national unity as ministers defected in protest at the austerity measures. When the opposition said it would only accede on unreasonable terms, Papandreou instead reshuffled his cabinet – pushing out his longstanding ally George Papaconstantinou as finance minister and installing Venizelos, a former rival for the Prime Minister’s post of more socialist leanings.
Meanwhile, the popular opposition, leading in the polls, has refused to support an extra €6bn of austerity measures to bring down the budget deficit. A game of brinkmanship is developing, with Greece demanding easier terms for an even larger IMF and European rescue or threatening to tip the whole euro area into crisis by risking a default.
For Germany, Europe’s powerhouse and the main donor nation, easier terms are simply not acceptable. Chancellor Angela Merkel’s ratings have plummeted in recent weeks as frugal Germans react with anger to the prospect of bailing out the profligate euro periphery yet again — following rescues of Portugal and Ireland. Greece was the author of its own downfall, the thinking goes. Unaffordable promises to state workers and crony capitalism made the people comfortable and rich at the expense of proper fiscal management. It’s come-uppance time.
Struggling to suppress its angry public, Germany has turned on the third player in the Greek drama — the private sector. Wolfgang Schaeuble, the hard-line finance minister, has been urging creditors to agree to swap their Greek bonds for paper with a seven-year maturity. Although packaged as a voluntary "reprofiling”, such a dramatic measure would qualify in the markets as a default. Under Schaeuble’s plan, an estimated €270bn of Greece’s €347bn of sovereign debt would be restructured — meaning bondholders would have to mark down the value of their holdings.
As far as the European Central Bank (ECB) is concerned, the plan would be catastrophic — turning a local Greek disturbance into a continental struggle. Greece’s crisis would spill across its borders into Portugal, Ireland and, worst of all, the far larger economies of Spain and Italy. It would be Europe’s Lehman Brothers moment as the financial system would seize up once again, triggering an even more painful recession as governments have nothing left in their armoury to fight the crisis.
"In the worst case, the restructuring of a member state could overshadow the effects of the Lehman bankruptcy,” ECB executive board member Juergen Stark said earlier this year.
Revelations in The Sunday Telegraph today prove that the risk is very much alive. In a frightening replay of the early stages of the credit crunch, Standard Chartered and Barclays are pulling out of Europe’s inter-bank funding markets and shifting billions of dollars to Asia. They fear a systemic meltdown that could leave them facing losses on supposedly low risk, short-term funding to a stricken rival bank. Asia is the new safe haven, just as European sovereign debt was – ironically – in the original financial crisis.
Political sympathy for imposing some of the pain on creditors has fanned the market’s fears in recent weeks. Germany’s strong posturing followed outline reforms to the euro system that will enforce losses on bondholders in member states that require a rescue from 2013 onwards.
At the same time, the Irish government last week laid out plans to impose losses on senior holders of debt in the nationalised lenders Anglo Irish Bank and Irish Nationwide — debt that had been guaranteed by the state.
The message has been becoming increasingly clear. The private sector is in the gunsights. A new front is opening up in the battle to save the euro. A fight with the bond markets. The bond markets, though, are the nuclear power of the financial world. By comparison, Europe’s weakened economies are joining battle with pistols and bayonets. Bar Germany and France, the euro area is struggling.
Risks are increasing, the IMF said last week, not least from Greece. The fund’s "spillover report” into the euro area, due tomorrow, will warn of inherent weaknesses in the euro system and the fragility of the recovery. Last Friday, Moody’s threatened to cut Italy’s credit rating from AA2. The agency has already cut Spain’s rating twice since September to the same level.
Moreover, Europe’s big bail-out fund, the European Financial Stability Facility (EFSF), has just €440bn of firepower. If there is a "Lehman moment”, the EFSF would need to be three times larger, Nout Wellink, a member of the ECB’s Governing Council, said last week — €1.5 trillion to secure private sector support for a second Greek bail-out package and to cover potential contagion risks.
Contagion is the big fear. French banks have €49bn of exposure to Greek sovereign debt, German banks €30bn, and UK banks €14bn, according to Fathom Consulting’s analysis of Bank for International Settlements’ data. Nasty though a default would be, that alone would be manageable. If it triggers fears of a default in Portugal and Ireland as well, the crisis could rapidly spiral out of control. Spain has a €79bn exposure to Portugal, Germany €38bn, France €24bn, and the UK €22bn. In Ireland’s case, UK banks own €145bn of the country’s sovereign debt and Germany €119bn.
With so much potentially toxic exposure in the banks, money market funds and other counterparties could start pulling funding lines in a repeat of the first credit crunch — as Standard Chartered and Barclays have already begun doing.
The biggest fear is that Spain’s banks, already facing major domestic problems, would topple — forcing a state-funded rescue that would drag the whole country into a bail-out. Any threat of default in Spain would be devastating. Germany owns €167bn of Spanish debt, France €131bn and the UK €103bn. By comparison, when Lehman went down, it had debt stock of $610bn (€425bn/£375bn).
Holger Schmieding, chief economist of Berenberg Bank, explained that while a Greek default would be manageable, the contagion risks might not. "The key issue for Europe is not the fate of small Greece,” he said. "If Athens were to reject the bail-out terms for good, support for Greece might end and Greece might default. In the event of a Greek default, Europe would likely switch to contagion control, trying to prevent the turmoil from spreading to Spain and Italy.”
Tim Kirk, a partner at accountants BDO, added: "Like Lehmans, the shock could spread across the entire financial system. The effect will be to drive investors away from government bonds of other countries, especially Ireland, Portugal, Spain and Italy and there simply isn’t enough money to bail all these countries out.”
Faced with the might of the bond markets, Germany retreated last week. Schaeuble’s demands were dropped. In a show of unity with President Nicolas Sarkozy of France, Merkel accepted that creditor restructuring would have to be genuinely "voluntary”, saying "a Vienna-style initiative would be a basis for the involvement of the private sector.” She was referring to the collaborative effort of banks to prevent an escalation of the financial crisis in January 2009 by agreeing to maintain their exposures to troubled central European countries.
The new proposal, for a rollover of debt falling due in the next three years, would affect not the €270bn of bonds Schaeuble was targeting, but just €85bn. And of those €85bn, not all creditors are expected to "volunteer”.
The deal is expected to secure private sector backing. Last week, the Market Monitoring Group (MMG), a forum of private sector leaders affiliated to the Institute of International Finance, indicated as much, saying after a meeting of members: "To facilitate Greece’s adjustment efforts, some form of voluntary participation from the private sector will have to be considered.”
With the private sector on side, a new rescue is expected to be announced by July 11 — the next meeting of eurogroup finance ministers. Britain, despite earlier suggestions that it could be on the hook for up to €1.2bn, is not expected to play a part in the rescue, bar its share of any IMF contribution. Some have estimated the total bail-out at €150bn, others about €105bn – with the private sector providing €30bn of support, Greece delivering €30bn from privatisation sales, and the remainder coming from the IMF, where French Finance Minister Christine Lagarde is poised to be made managing director, and bilateral European loans or use of the EFSF.
The plan, a form of détente with the bond markets, simply "kicks the can down the road” — yet again — to 2013. Under the original rescue package, Greece was expected to return to the markets next year for around €27bn. It is now painfully clear that it will not be able to. A default is still expected by the markets, rating agencies and economists — just a little later than before. Standard & Poor’s last week downgraded Greek debt to CCC, the lowest junk level before default, implying that investors have just a 30pc-50pc chance of recovering their principal.
Some economists believe Greece needs to write off 50pc or more of its outstanding €347bn of sovereign debt. Giada Giani, a European economist at Citi, said: "Eventually a debt restructuring will have to happen, in our view, but probably not before the end of the new bail-out program, sometime in 2013-2014.” Even Alan Greenspan, the former chairman of the US Federal Reserve, has said it is very simple. "The chances of Greece not defaulting are very small.” Greek debt is now the most expensive to insure in the world, the next being Venezuela’s.
Kicking the can down the road has its advantages, though. For Greece, it gives the country time to get its fiscal house in order – to get the 10.5pc budget deficit under control, to return to economic growth following this year’s expected 3.5pc contraction, to restructure its labour market to deal with record unemployment of 15.6pc, to sell assets, and ultimately to start reducing the scale of national debt from its unsustainable current level of 150pc of GDP.
For the euro area, buying time gives Ireland, Portugal and Spain in particular longer to fix their public finances and banking systems to minimise the risk of contagion. But there are risks. David Dodge, former governor of the Bank of Canada and co-chair of the MMG, said: "You can kick the can down the road in the hope that something is going to come along. Well, something isn’t going to come along in this case .... The longer you let it go, the greater the chance that another event will come along and create a bigger problem.”
For Europe’s taxpayers, though, can-kicking hurts. The less pain creditors take, the more taxpayers bear — be they in Germany, France or the Netherlands. When Greece eventually does default, as expected, a larger portion of the loss will be socialised. According to one senior debt specialist, holders of Greek bonds will have already taken write-downs on their positions. Others still have sold the debt at a heavy discount to vulture funds in the secondary market.
Consequently, every one of those bonds that is bought or accepted as collateral by the Greek central bank or the ECB is effectively awarding private creditors a profit at the expense of taxpayers. It’s not just the German public that will find that hard to stomach. The combatants have staked out their positions, but the war over Greece’s debt has a long way to run.
UK banks abandon eurozone over Greek default fears
by Harry Wilson - Telegraph
UK banks have pulled billions of pounds of funding from the eurozone as fears grow about the impact of a "Lehman-style” event connected to a Greek default.
Senior sources have revealed that leading banks, including Barclays and Standard Chartered, have radically reduced the amount of unsecured lending they are prepared to make available to eurozone banks, raising the prospect of a new credit crunch for the European banking system. Standard Chartered is understood to have withdrawn tens of billions of pounds from the eurozone inter-bank lending market in recent months and cut its overall exposure by two-thirds in the past few weeks as it has become increasingly worried about the finances of other European banks.
Barclays has also cut its exposure in recent months as senior managers have become increasingly concerned about developments among banks with large exposures to the troubled European countries Greece, Ireland, Spain, Italy and Portugal. In its interim management statement, published in April, Barclays reported a wholesale exposure to Spain of £6.4bn, compared with £7.2bn last June, while its exposure to Italy has fallen by more than £100m.
One source said it was "inevitable” that British banks would look to minimise their potential losses in the event the eurozone crisis were to get worse. "Everyone wants to ensure that they are not badly affected by the crisis,” said one bank executive.
Moves by stronger banks to cut back their lending to weaker banks is reminiscent of the build-up to the financial crisis in 2008, when the refusal of banks to lend to one another led to a
seizing-up of the markets that eventually led to the collapse of several major banks and taxpayer bail-outs of many more. While the funding position of UK banks is far stronger now than it was back in 2008, the banking systems of several other major European countries, including Spain, Germany and Italy, are showing increasing signs of weakness.
Analysts at UBS have warned that eurozone banks are "particularly exposed” having not done enough since the crisis to cut their reliance on the wholesale funding markets and remain acutely sensitive to the withdrawal of liquidity from the inter-bank market.
Simon Adamson, a banks analyst at CreditSights, said it was clear many eurozone banks had been having trouble funding themselves for several months. "Clearly there are some banks that are finding it difficult to access markets. I think this is a long term sign of the way the markets are going,” he said.
Spanish banks have become the main focus of market concerns with the latest European Central Bank (ECB) figures showing that Spanish banks have been forced to increase their use of ECB lending facilities and borrowed a total of €58bn (£51bn) in May, up from €44bn in April. "We have been amazed at the ability of Spanish banks to find ways to fund themselves, but it is clear they are running out of options,” said one senior analyst at a major investment bank.
Greece debt crisis likely to hit Italy, Belgium, warns Luxembourg PM
by International Business Times
Jean-Claude Juncker, head of eurozone finance ministers, on Saturday cautioned that the ongoing debt crisis of Greece and other countries in the region could hit Italy and Belgium, Suddeutsche Zeitung, a German daily reported.
Juncker, who is also prime minister of Luxembourg said Italy and Belgium with their high levels of debt could get affected by the sovereign crisis in eurozone countries even before the crisis hits Spain. Noting that the crisis could have disastrous effect on the currency of the region, euro, he warned "we are playing with fire".
"Solving the euro area's debt crisis will take time. We see more turmoil but no hard restructurings. We see an additional €50-60bn of European Union (EU) / International Monetary Fund (IMF) loans to Greece, possibly with a "softening " of maturity extensions,” said Societe Generale in a note.
He said private sector participation in the bailout of Greece, which is currently under consideration, would send wrong signals to the rating agencies as it was seen as a debt default. If Greece was deemed to be a defaulter that would have drastic consequences for the rest of the eurozone, he said.
Juncker said Greece would take more time than previously estimated to solve its problems, La Libre, a Belgian daily quoted him as saying. "If we could agree on a new aid program, submitted to strict conditionality, we could develop an overall solution that would enable Greece, in a timeframe that will probably be longer than forecast, to return within the rails," he said.
Merkel wants 'substantial' bank aid for Greek debt
German Chancellor Angela Merkel Saturday urged "substantial" aid from private creditors to resolve Greek debt woes, as the Eurogroup warned the crisis could spread like a firestorm through EU economies. "We must be sure to try to have a substantial contribution" from private creditors like banks and insurance companies for debt-laden Greece, Merkel told a meeting of her Christian Democrat Union party in Berlin. However the German leader added that "at the moment we can only get the participation of the private investors on a voluntary basis."
The "voluntary" nature of such involvement is key for many observers, who fear that forced input from the private sector would be seen as a debt default on the part of Greece, with ramifications far beyond. German Finance Minister Wolfgang Schaeuble echoed Merkel but also stressed that the private sector's role should be "quantifiable" and "guaranteed", in comments made to the daily Boerrsenzeitung.
The EU and the International Monetary Fund are trying to assemble a second bailout package for Greece worth almost as much as last year's 110 billion euro ($156 billion) loan deal. However in return Athens must introduce strict austerity measures to rein in the burgeoning national debt, leaving the government to deal with widespread public protest.
Greek Prime Minister George Papandreou announced a new government line-up on Friday, bringing in political veterans to ward off economic meltdown and seek to avoid the civil unrest growing.
In the latest mass demonstration, police said up to 3,000 protesters took to the streets of Athens on Saturday. Supporters of the All Workers Militant Front (PAME) marched towards the city's main Syntagma square and the parliament, the site of a three-week-long protest of the group calling themselves "The Indignants".
The Greek General Confederation of Labour (GSEE) also announced plans to strike during an upcoming parliamentary debate and vote on the country's future budget plans. As Greece's new cabinet works to muster parliamentary support for the tough package demanded by the EU and IMF, finance ministers from the 17 euro nations will gather Sunday evening in Luxembourg for the first of a series of meetings this week, vital to the euro crisis.
As Greece faces imminent default, they will debate whether to release the next installment of the bailout from 2010 -- 12 billion euros Athens needs to pay the bills in July. With the IMF demanding assurances that Athens can finance itself over the next year before paying out, the terms of a second rescue package will also come under scrutiny. The informal conclave, due to carry on Monday and expand to the full 27 EU finance chiefs, comes ahead of a key bloc summit on June 23 and 24 that is due to put the final stamp on an economic governance package.
Initially aimed at assuring markets that Europe would avert future debt crises through closer monitoring and streamlining of economic policies, the summit instead will be overshadowed by events in Greece. In Luxembourg ministers will look at how to involve banks and private lenders in the next Greek bailout in line with demands from countries such as Germany, Finland and The Netherlands, keen to reassure taxpayers unwilling to pay for excesses elsewhere. "We are working on a new programme to be finalised rapidly with additional financing," EU president Herman Van Rompuy said in Dublin this week.
Merkel's comments came a day after she appeared to give ground on her previous demands for private involvement following talks in Berlin with French President Nicolas Sarkozy. Merkel had been pressing for private investors to contribute up to a third of the second rescue package by accepting later repayment on their Greek bonds. She said she now backed a new package along the lines of a deal on Romanian debt agreed in Vienna in 2009, whereby private banks agreed to buy new government bonds to replace ones that matured.
Eurogroup chief Jean-Claude Juncker said Saturday that the problems which have forced Greece, Ireland and Portugal to seek emergency aid could affect Italy and Belgium, even before Spain, tipped as the next casualty. The Luxembourg prime minister, who heads the group of eurozone finance ministers, told the German daily Suddeutsche Zeitung, "we are playing with fire."
Pension funds, banks face risk in new Greek rescue
by Ivana Sekularac - Reuters
Pension funds and banks will take a big risk if they agree to take part in a new rescue plan for Greece, a European Central Bank policymaker said in a newspaper interview published on Saturday. "Pension funds must act in the interests of their beneficiaries," said Nout Wellink, a member of the ECB's governing council, in an interview with Dutch newspaper NRC Handelsblad.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said on Friday that they were united on an aid package for Greece that would include voluntary private sector participation, lifting hopes for a new Greek aid package. Wellink, who is the outgoing president of the Dutch central bank, said while there would be pressure not to dump Greek government bonds and to extend the maturity of that debt, banks and pension funds must also consider their own customers, adding that it was "an extremely complicated case."
Papandreou seeks 'national consensus'
by Peter Spiegel and Kerin Hope - Financial Times
George Papandreou, Greek prime minister, on Sunday asked parliament for a vote of confidence in his new government as eurozone finance ministers prepared to seek agreement amongst themselves on the structure of a €120bn bail-out for Greece. Mr Papandreou on Friday unveiled a cabinet dominated by tough socialist personalities, including Evangelos Venizelos, a former political rival, as finance minister, to push through a four-year package of new tax hikes and spending cuts agreed with international lenders.
"‘I ask for a vote of confidence because we are at a critical juncture...the debt and deficits are national problems that have brought Greece into a state of (diminished sovereignty) that may have protected us from bankruptcy, but which we need to get out of,” Mr Papandreou told parliament. Mr Venizelos was due to join the meeting of eurozone finance ministers starting in Luxembourg at 7pm local time and expected to continue into Monday.
Markets were buoyed on Friday after prospects for agreement among European leaders on a deal improved markedly when Angela Merkel, the German chancellor, backed down from her demand that the package include measures to coerce private holders of Greek debt into swapping their bonds for new bonds that would not be repaid for 7 years.
Pressure has also been reduced on the finance ministers after the International Monetary Fund said it would not hold up the next €12bn aid payment to Greece, due in a matter of weeks, if a deal on a bail-out is not reached by Monday. EU officials have said a final deal is now not expected until July 11, the next scheduled meeting of finance ministers in Brussels. But the focus of markets and EU leaders has now switched to Athens, where Mr Papandreou must get parliamentary approval for the new austerity measures by the end of the month. If he fails, the deliberations in Luxembourg will be meaningless, since EU and IMF officials have made clear no new aid will be released without Greece implemeting newly-agreed reforms.
Mr Papandreou appealed for cross-party support to tackle Greece’s financial problems, warning the country "will quickly run out of funds” if it is unable to draw down the €12bn IMF loan tranche as expected next month. He spoke as supporters of the "Indignant Citizens” movement encamped outside the parliament building were gathering to protest against a fresh austerity package agreed with the European Union and the IMF in return for another loan.
"The country finds itself at a critical crossroads…so I am seeking a national consensus to address the problems of the debt and the budget deficit,” the premier said. He added:"Our problems won’t be solved by sending away the IMF or our European partners,” as anti-austerity protestors have demanded.
Analysts said that parliament – where Mr Papandreou’s socialist party holds a six-seat majority– was expected to approve the new government in a roll-call vote of confidence on Tuesday. The socialists face a more difficult test at a second parliamentary vote due on June 28 to approve the medium-term austerity package, and allow the next tranche of the current EU-IMF loan to be disbursed.
Antonis Samaras, conservative opposition leader, rejected the prime minister’s request for consensus, saying the government should re-negotiate the austerity package with the EU and IMF. Mr Samaras told parliament:”The policy mix in the first package didn’t work…we asked the government to change the mix but it hid behind the insistence of the EU and IMF. " He added:”But what they’re asking now still won’t work.”
The four-year package of tax increases, public sector job cuts, and privatisations of state-controlled companies aims at creating a primary budget surplus and raising €50bn in privatisation revenues to reduce public debt. An opinion poll published in the To Vima newspaper on Sunday showed 47.5 per cent of Greek voters believed the medium-term package should be rejected by parliament and a general election held.
Against the odds, the euro will scrape through
by Wolfgang Münchau - Financial Times
Last week taught us something important about the political economy of the eurozone. There were two serious and overlapping crises. The first was a deteriorating dispute between Germany and the European Central Bank. It was about whether private investors should be forced to pay a contribution to the next loan programme for Greece. The dispute promised to derail the discussion for a follow-up loan, and could have forced Greece into a default. The second crisis was the near-collapse of the government of George Papandreou, Greek prime minister.
At the end of the week, Germany capitulated. And the Greek prime minister reshuffled his cabinet, ending up with with more reformers in it than before.\ During the week, market commentators fell over themselves to predict the imminent default of Greece, and the inevitable break-up of the eurozone. They were wrong. Both may yet happen. Greek politics is unpredictable. And so may be the reaction of German parliamentarians. But it is not going to happen next week, or next month. And I am fairly sure that it is not going to happen over the next year either.
To keep Greece within the programme of the European Union and the International Monetary Fund, two things need to happen. Athens must comply with the conditions, and the conditions must be reasonable. The programme has been too reliant on austerity. It must, over time, shift towards reforms to be credible. Austerity alone cannot work.
Even if a sensible programme were implemented in full, I doubt the Greeks would be able to pay back their debt in full. But why would they want to default right now? The state ran a primary deficit of 3.2 per cent of gross domestic product in 2010. Since then, public finances have deteriorated. Daniel Gros, director of the Brussels-based Centre for European Policy Studies, estimates the net borrowing requirement, on a cash flow basis, went up from 5.8 per cent of GDP in the period from January to May 2010 to 9.3 per cent in the same period this year. Greece is still some distance from a primary balance.
A premature default would cut the country off from EU-IMF aid, from international capital markets, and possibly also from ECB lending. It would lead to an immediate collapse of the state. The government would not be able to pay salaries and pensions. The present austerity programme is mild by comparison. If you were Greek, opposed to austerity and rational, you would not default now. but comply until you reached primary balance and then default. But that will not happen until next year at the earliest, possibly 2013.
Angela Merkel, German chancellor, also seems to have concluded that she does not want Greece to default. That public recognition weakens her negotiating position. But it, too, is rational. Germany would be a massive loser from a Greek default. And a collapse of the eurozone would cripple the German economy. The whole world would blame Ms Merkel. She would go down in history as the east German who sank the EU. Her U-turn is therefore perfectly rational, but I still wonder why she allowed Wolfgang Schäuble to move so close to the brink last week. Until the middle of last week, the German finance minister was still digging in over the minimum conditions he wanted to attach to a private sector participation as a precondition for a new loan.
His spokesman insisted on a contribution that was "substantial, quantifiable, voluntary, and reliable”. He also explicitly rejected a Vienna-style initiative, which Ms Merkel now accepts as a blueprint for the forthcoming negotiations. This was a voluntary initiative in 2009 by EU banks to maintain credit flows to central and east Europe during that part of the financial crisis. The Greek problems are clearly of a different category. The best outcome would therefore be for the banks to agree to support and co-finance the Greek privatisation programme. But do not expect anything in terms of debt relief.
I expect that we are still on course for a second loan package, to be agreed either this week or in July. It would really be best if they could do this now to end the uncertainty that has led to an increase in the bond spreads, mostly importantly in Spain. Now that Ms Merkel has removed the biggest obstacle to an agreement, there is really no reason to delay the decision any further.
Unfortunately, the loan programme as discussed by the EU and the IMF is inadequate. For a start, the assumptions it makes about the scale of private sector participation are too optimistic. It is also irresponsible to set aside a sum for privatisation receipts in the financing package itself. It would be much more credible to use the receipts for debt reduction. I expect a third package to be necessary some time next year. Instead it would be better to agree a cast-iron package until 2014 that leaves no room for interpretation.
If Ms Merkel were really serious about ending the Greek crisis, as she promised on Friday, she would now have to capitulate on several more fronts. An announcement of partial debt forgiveness, a eurozone bond and a small fiscal union would end the crisis. We are not there yet. But the lesson of last week is that the political economy of the eurozone is driving us in that direction.
Could the Eurozone Break Up? Possible Over a Five-Year Horizon
by Nouriel Roubini
The current "muddle through” approach to the eurozone (EZ) crisis is not a stable disequilibrium; rather, it is an unstable disequilibrium. Either the member states move from this disequilibrium toward a broader fiscal, economic and political union that resolves the fundamental problems of divergence (both economic, fiscal and in terms of competitiveness) within the union…
…or the system will move first toward disorderly debt workouts and eventually even break-up, with weaker members departing. Over a five-year horizon, the odds of a break-up are at least one-third.
The EMU Has Always Fallen Short…
The EMU has never fully satisfied the conditions for an optimal currency area: Synchronized economic activity and growth rates; a high level of labor and capital mobility; fiscal federalism allowing the fiscal risk sharing of idiosyncratic national shocks; and a significant degree of political union. The hope was that the EMU’s lack of independent monetary, fiscal (the Growth and Stability Pact fiscal constraints) and exchange rate policies would lead to the acceleration of structural reforms that would in turn lead to the convergence of productivity and growth rates, rather than increased divergence.
The reality turned out to be different… Paradoxically, the early interest rate convergence became damaging as it allowed a severe lack of fiscal discipline in some countries (such as Greece and Portugal) and the build-up of asset bubbles in others (such as Spain and Ireland). Moreover the lack of market discipline delayed the necessary structural reforms and led to divergences in wage growth relative to productivity growth, and thus a rise in unit labor costs in the periphery and a loss of competitiveness that led to economic divergence between the PIIGS and the core. And the straightjacket of common monetary and currency policy exacerbated the real growth divergence at a time when structural and fiscal policies diverged.
Figure 1: Divergent Unit Labor Costs (ULCs, relative to EZ average, 1998 = 100)
Note: ULCs are computed as the ratio between compensation per employee and real GDP per employed person. Source: European Commission
Any successful monetary union has eventually been associated with political and fiscal union. Political union in the EZ and EU has stalled and a backlash against anonymous Brussels bureaucrats imposing their views on nation states is brewing. The EU does not have a common foreign policy or a common defense policy; while economic and financial policy convergence has reached an impasse.
A fiscal union would require that a significant amount of federal/central revenues be mobilized for the provision of EU/EZ-wide public goods, but there is no mechanism or will to provide the EU with enough power to create a semi-federal system of taxation, transfers and spending. Fiscal risk-sharing also includes the sharing of losses from financial crises, which requires a central EU-based system of supervision and regulation of financial institutions rather than the current national approach. Losses would be shared throughout the EZ only if the responsibility for properly supervising and regulating financial institutions were at the central level.
Fiscal union would also require the widespread issuance of Eurobonds, where the taxes of German (and core) taxpayers backstop not only German debt but also the debt of the members of the periphery. But the German (and core) taxpayers would not accept that unless binding rules are established to ensure that periphery countries cannot again indulge in persistently and systematically large fiscal deficits; while periphery taxpayers would not accept the total loss of fiscal independence—fiscal slaves to the views of the core—that binding fiscal rules would require.
It is also clear that the heavy burden of private and public debt in a number of periphery countries— Greece, Ireland, Portugal—is so large that a debt restructuring and reduction will eventually have to occur, thus imposing—slowly or sharply—a capital loss on these periphery agents’ foreign creditors (mostly financial institutions in the core). This will exacerbate conflicts between the core and periphery as it will redistribute wealth from savers and creditors to debtor and borrowers.
Figure 2: General Gross Government Debt Projections (if fiscal adjustments go as planned, % of GDP)
And while an orderly debt reduction may at least resolve the issue of excessive debt in some insolvent economies or financial systems, the restoration of economic convergence requires the restoration of competitiveness convergence. Without it, part of the periphery will stagnate or even contract for many years to come and eventually decide to exit the monetary union and return to a system of domestic national currencies.
So, How Can Competitiveness Be Restored and Growth Resume in the Periphery?
One way would be for the euro to sharply fall in value toward—say—parity with the U.S. dollar. But with Germany being uber-competitive, the core running current-account surpluses and the ECB always more hawkish than the Fed, there is little chance that the euro would fall sharply enough to restore the competitiveness of the PIIGS.
A second solution would be to take the German reform approach: Accelerate structural reforms to increase productivity growth and keep a lid on wage growth below productivity growth to reduce unit labor costs. But this will not work: Structural reforms show their gains only in the medium term—in the short run, they can actually reduce growth as you shed labor and capital from declining firms and sectors; also, it took 15 years for Germany to reduce unit labor costs by keeping wage growth below productivity growth; if Greece, Portugal, etc. start today, the benefit in terms of competitiveness and growth will occur only in a decade, too late to be politically acceptable.
A third option is deflation: If the PIIGS could reduce prices and wages by 5% per year for five years, you would get the necessary cumulative compound fall of 30% in nominal prices/wages to restore competitiveness. The problem with the deflation route to a real depreciation is twofold.
First, deflation is associated with persistent recession and no social or political body could accept another five years of recession to reduce prices/wages by 30%; Argentina tried the deflation route to a real depreciation, but after three years of an ever-deepening recession gave up and decided to default and exit its currency board peg.
Second, even if by some miracle deflation was feasible and successful, the real value of the already-high private and public debts would rise sharply (a balance-sheet effect), forcing even-larger defaults and debt reductions. All the talk by the ECB and the EU of an "internal depreciation” is thus faulty: Even the often-heard argument that reducing public salaries would lead to a rapid real depreciation is erroneous as it would require private wages and prices to fall accordingly and would not prevent the damaging balance-sheet effects.
The alleged case of a successful internal devaluation— that of Latvia—is not relevant here: Entering the crisis, its public debt was 9% of GDP, not the 100%- plus of Greece; losses from depression and deflation were taken by foreign banks dominating its banking system; and accepting a draconian 20% fall in output was politically feasible as Latvia did not want to fall into the arms of the Russian bear again.
And let us not forget that the necessary fiscal austerity has—in the short run—a negative effect on economic growth; thus, it postpones the recovery of growth that is necessary to make the reforms and austerity socially and politically feasible; and that is also necessary to make the debt and deficit ratios sustainable (as falling GDP increases those ratios, despite fiscal austerity efforts).
If the euro is not going to fall sharply, if reducing unit labor cost takes too long to restore competitiveness and growth and if deflation is unfeasible or (if achieved) self-defeating, there is only one other way for the PIIGS to restore competitiveness and growth: Leave the monetary union, go back to national currencies and thus achieve a massive nominal and real depreciation. After all, in all emerging market financial crises where growth was restored, a move to flexible exchange rates was necessary and unavoidable on top of official liquidity, austerity and reform and, in some cases, debt restructuring and reduction.
Surely a Break-Up Remains Inconceivable? Not the Way We’re Going…
Of course, today, the idea of leaving the EZ sounds inconceivable, even in Athens and Lisbon. It is simply not on the table. And of course, the costs of exit would be significant: A country leaving the EZ might also be kicked out of the EU as there is no mechanism to exit EMU without exiting the EU. Also, exit would impose: 1) Trade losses on the rest of the EZ via massive real depreciation; and 2) massive capital losses on the creditor core as the sharp increase in the real value of euro debt once the new currency is sharply depreciated would either force a default on private and public euro debts, or a conversion of such euro debts into the new depreciated national currency (the equivalent of the Argentine pesification of dollar debts). The latter would be a not-so-disguised massive capital levy on the creditor core.
But scenarios that are inconceivable today might not be so far-fetched five years from now if some of the periphery economies stagnate or contract for the next five years, an outcome that is not unlikely if competitiveness is not restored, if the burden—debt overhang—of unsustainable private and public debts is not reduced and if there is little move toward more burden-sharing within the EZ via the progressive adoption of some form of a fiscal union.
What has glued the EZ together has been the convergence of interest rates and low real rates sustaining growth, the hope that reforms will maintain convergence when a one size-fits-all monetary and exchange policy opposes growth and the prospect of a move toward a fiscal and political union. But now, the benefits of interest rate convergence are no longer there as: Bond vigilantes have woken up and periphery spreads will remain high for a long time; increasingly, a common monetary policy and currency is a size that does not fit all; while fiscal union, risk-sharing and political union don’t seem to be on the horizon.
So, it is not a matter of if or whether debt restructurings will occur, but rather when (sooner or later) and show (orderly or disorderly) they occur. And even debt reduction will not be sufficient to restore competitiveness and growth. So, unless the latter can be achieved in other ways, the option for PIIGS of exiting the monetary union will become dominant as the benefits of staying in will be lower than the benefits of exiting, however bumpy or disorderly that exit may end up being.
Messy marriages lead to messy divorces, but if the marriage doesn’t work, even the threat of a messy divorce cannot keep couples together that are not a long-term match. Ok, this just thoughtful insight in from my friend Richard Yamarone, chief economist for Bloomberg. It is part of an email thread where a number of us were commenting on the recent swoon in the market and how much of it could be tied to Greece?
"When Greece folds like a wet gyro, and it will, the real game begins. It’s no different that when Bear was taken over by JP Morgan, the markets ignored the Bear Stearns story (the media didn’t). When all business televison and newspapers did stories about the $2 price tag on Bear, investors were saying ‘who’s next?’ The fact that Bear went down was old history — most knew it was going to happen. The focus was where do we turn next?
"The Greece story is like the sick uncle at the annual family picnic…Mom would say, go take a plate of food to Uncle Larry, he’s really sick. This goes on for three, five, ten years. Then Uncle Larry dies. Everyone turns to each other shocked, ‘I can’t believe that Uncle Larry died!’0 What’s so surprising? Everyone knew, he was dying for over a decade. That’s what’s going to happen to Greece…The financial press will say Whoa, Greece folded, defaulted, whatever. But the markets will say, ‘Who’s next?’ Then the entire EU will come under pressure. I don’t believe they will exist in two year’s time. – Rich”
Has it Really Come to This?
There are stories and movies where the end of the plot is sad. "Has it really come to this? After all our dreams and hard work and this is what we get?” But this is real. And worse, there are so many people who have been saying "I told you so” for so many years. It is like watching a really bad play and not being able to leave, and knowing you are going to have to watch it the next day and pay even more for the tickets!
The headline on my European Wall Street Journal this morning says "Greece Faces Demands for Deeper Cuts.” On TV, 20,000 people are surrounding the Greek parliament. The "troika” is meeting this weekend and you can bet Bernanke and Geithner have people there with second row seats, discreetly placed. My bet? They find the measly 12 billion euros to paper over the current crisis.
Then comes the July meeting. That’s when it gets interesting. They are going to need at least 150 billion euros (for a total of 340 billion, give or take) to get this done for a few years.
Joan McCullough sent me these really great paragraphs: "Lemme tell you something right now. Yesterday, all these warring factions in Europe went from a hardcore game of "chicken” to blinking. Each and every one backpedaled. And the spin became "broad-based cooperation” to get it done. Because they were facing meltdown. And I’m thinkin’, the next thing we’re gonna’ see is the Greek Army and then it’ll be all over. I am sure all this was not lost on the rest of the world’s leadership who are watching Greece unfold from the edge of their seats.
"That same backpedaling baloney has continued this morning now to where Merkel is tryin’ to smooch it up with the ECB. They’re talkin’ Vienna-style resolution. Again. (That’s the one where the paper matures but the banks have formed a consortium and have agreed collectively to let the bet ride, i.e., roll over. I guess a roll-over at gunpoint does not count as a default. Whatever. We are so far into delusional, I’m actually enjoying it now. You?)”
Let me repeat myself. Reading and listening to people over here I get the distinct feeling that the politicians at these meetings will not be the same ones at a similar meeting in two years. This is not a happy group of voters. There are no good choices. It is between choosing between pretty bad today and really bad in a few years and a disastrous choice forced on the world after that. Let me suggest to my fellow US citizens that you really pay attention to this. If you think that we can somehow avoid making difficult choices by kicking the can down the road, watch the European theater. And coming to a theater near you in a few years will be a real Japanese monster movie. Godzilla on steroids.
Greek Protesters Are Better Economists Than The European Authorities
by Mark Weisbrot, CEPR - Guardian
Imagine that in the worst year of our recent recession, the United States government decided to reduce its federal budget deficit by more than $800 billion dollars – cutting spending and raising taxes to meet this goal. Imagine that, as a result of these measures, the economy worsened and unemployment soared to more than 16 percent, and then the president pledged another $400 billion in spending cuts and tax increases this year. What do you think would be the public reaction?
It would probably be similar to what we are seeing in Greece today, including mass demonstrations and riots, because that is what the Greek government has done. The above numbers are simply adjusted for the relative size of the two economies. Of course the U.S. government would never dare to do what the Greek government has done – recall that the budget battle in April that had House Republicans threatening to shut down the government resulted in spending cuts of just $38 billion.
What makes the Greek public even angrier is that their collective punishment is being meted out by foreign powers – the European Commission, European Central Bank (ECB), and the International Monetary Fund (IMF). This highlights perhaps the biggest problem of unaccountable, right-wing, supra-national institutions. Greece would not be going through this if it were not a member of a currency union. If it had leaders that were stupid enough to massively cut spending and raise taxes during a recession, those government officials would be replaced. And then a new government would do what the vast majority of governments in the world did during the world recession of 2009 – the opposite, i.e. deploy an economic stimulus, or what economists call counter-cyclical policies.
And if that required a renegotiation of the public debt, that is what the country would do. This is going to happen even under the European authorities, but first they are putting the country through years of unnecessary suffering, and taking advantage of the situation to privatize public assets at fire sale prices and restructure the Greek state and economy so that it is more to their liking.
I have maintained for some time that the Greek government has had more bargaining power than it has used, and the past week’s events seem to confirm this. Because of the massive opposition to further economic self-destruction – the latest polls show that 80 percent of Greeks are opposed to making any more concessions to the European authorities – the Greek government has so far been unable to reach an agreement with the IMF for the release of their latest loan tranche on June 29. So what happened? The IMF is going to hand over the money anyway, while the European authorities (who are in control of IMF decision-making on matters of Greek economic policy) continue to quarrel over how long they will postpone Greece’s inevitable debt restructuring, roll-over, or whatever they choose to call it.
That’s because the prospect of a disorderly default – as would be triggered by the IMF simply sticking to its program and not lending Greece the money – is too scary for the European authorities to contemplate. For this reason the many news articles about the possibility of a financial collapse comparable to what happened after Lehman Brothers went under in 2008 are somewhat exaggerated. The European authorities are not going to let that happen over a measly $17 billion loan installment. The events of the past week were all a game of brinkmanship, and the European authorities had to blink because the Greek government, as much as it wanted to, couldn’t get approval for the deal.
A democratically accountable Greek government would take a much harder line with the European authorities. For example, they could start with a moratorium on interest payments, which are currently running at 6.6 percent of GDP. (This is a huge interest rate burden, and the IMF projects it to increase to 8.6 percent by 2014. For comparison, despite all the noise about the U.S. debt burden, net interest on the U.S. public debt is currently at 1.4 percent of GDP.) That would release enough funds for a serious stimulus program, while they negotiate with the authorities for the inevitable debt write-down. Of course the European authorities – who are looking at this from the point of view of their big banks and creditors’ interests generally -- would be enraged, but at least this would be a reasonable opening bargaining position.
The IMF’s latest review of its agreement with Greece suggests that the Euro, for the Greek economy, is still 20-34 percent overvalued. This makes a recovery through "internal devaluation” – i.e., keeping unemployment so high and therefore lowering wages to make the economy more internationally competitive – an even more remote possibility than it would otherwise be. But the big problem is that the country’s fiscal policy is going in the wrong direction, and of course they cannot use monetary policy because that is controlled by the ECB.
The European authorities have more than enough money to finance a recovery program in Greece, and to bail out their banks if they don’t want them to take the inevitable losses on their loans. There is no excuse for this never-ending punishment of the Greek people.
Greece in turmoil: Run into the ground
by Kerin Hope and Peter Spiegel - Financial Times
Stelios, a 28-year-old electrician, has been spending several evenings a week at a tent camp outside the Greek parliament run by Indignant Citizens, a new protest movement. He joins hundreds of others attending a self-styled "popular assembly” – a nightly open-microphone event at which Greeks vent their anxieties and frustrations with the country’s disastrous economic and political situation.\ "I’m lucky because I’m still in work,” he says. "But my mother’s pension was cut last year and she’s struggling. It’s a relief to get out there and discuss stuff – and maybe the protest will help make things less bad.”
In addition to promoting public debate, the Indignants have succeeded in reducing violence at demonstrations by chasing off hooded extremists who mingle with marchers and trigger clashes with riot police. They have even scrubbed the tarmac around the square to remove the chemical residue left by tear gas. But Stelios admits the protesters’ chances of persuading MPs to vote down a €28bn ($40bn) austerity package are slim. "Greece is broke – we need the money, so the European Union and the International Monetary Fund hold all the cards,” he says.
If the package is rejected, George Papandreou, the prime minister, will have to call a snap election. Greece would not receive a €12bn loan tranche due in July and would risk defaulting on repayments of principal and interest on its debt.
In a traumatic political week, Mr Papandreou mooted and then dropped a plan to form a national unity government, then made concessions to hardliners in his Pan-Hellenic Socialist Movement in a cabinet reshuffle. On Friday, he replaced George Papaconstantinou, the finance minister who has been berated both by the EU and IMF for failing adequately to improve tax revenues and cut spending, and by Greeks for cutting salaries and pensions by about 20 per cent.
Mr Papaconstantinou was moved to the energy ministry to handle another tough job: pushing through regulatory reform and handling the privatisation of the state electricity utility in the face of resistance by its trade union. The political upheavals appear to have caught leaders in Brussels and other European capitals by surprise. For months, officials at the European Commission and in the continent’s largest countries had been locked in debate over a new €120bn bail-out for Greece. That pitted Germany against the Frankfurt-based European Central Bank over how to treat private holders of Greek bonds in a new rescue.
According to officials involved in the deliberations, European leaders began waking up to the coming financial car crash in April in Washington, where several were attending a regular meeting of Group of 20 finance ministers. On the sidelines, says one attendee, Tim Geithner, the US Treasury secretary, pulled Europeans aside and gave them a blunt warning: the IMF, in which the US is the largest stakeholder, might have problems disbursing its June aid payment to Greece because it was unclear that Athens could pay its bills under its current €110bn bail-out. Without the money, Greece would default in July.
EU leaders, aware that they did not have an answer for Mr Geithner, convened a secret meeting in Luxembourg. In order not to spook the markets, the gathering was kept small – mainly comprising eurozone finance ministers who had been in Washington, as well as Jean-Claude Trichet, the ECB chief. But they also invited the man at the centre of the storm: Mr Papaconstantinou. Word leaked out, shaking the markets amid rumours that the ministers were discussing a Greek withdrawal from the euro.
Yet the reality was nearly as stark: Mr Papaconstantinou was harangued for not getting a long-promised privatisation programme started and failing to keep Greece on course for deficit targets it had agreed to when the bail-out was launched a year earlier.
After the tongue-lashing, the assembled ministers tried to hash out a solution. But to the chagrin of Mr Trichet, Wolfgang Schäuble, German finance minister, was insisting that this time, bondholders had to share the pain – a "soft” restructuring that would force them to accept new bonds with longer repayment schedules. According to people briefed on the meeting, Mr Trichet became so incensed that he walked out after only an hour. The bust-up would set the tone for weeks of acrimonious deliberations, with both the ECB and the German government digging in their heels. Only on Friday, with Greece on the brink, did Germany back down. After a Berlin summit with French President Nicolas Sarkozy, chancellor Angela Merkel agreed to a less coercive plan to ask bondholders voluntarily to buy longer-maturing Greek bonds once current holdings expire.
. . .
Even as high policy was being fought over in Brussels, Berlin and Frankfurt, however, signs that low politics were unravelling in Athens began to emerge. The first sign of trouble came during negotiations between Greece and the so-called troika – the IMF, ECB and European Commission – of representatives for bail-out lenders.
Talks dragged out after it became clear just what troika officials wanted: to make Greece’s €50bn privatisation programme happen, outsiders were to be brought in to run it. Because Greece seemed incapable of collecting taxes, international experts would come in to do that, too. "Greece is like an EU candidate country,” says one official involved. "Croatia has a better tax collection system.” Such ceding of sovereignty grated in Athens. Greek officials warned that voters – who unlike their Irish and Portuguese counterparts had not yet turned against the government for accepting a bail-out – were beginning to go sour on the whole process.
But creditor countries were adamant, particularly Germany and its northern allies, Finland and the Netherlands. The Dutch pushed for a wholesale takeover of the privatisation programme, urging that it be given to an agency run by international experts. Finland, which had just suffered its own political upheaval when the populist True Finns party came within a hair of winning national elections, insisted that Athens assets should be securitised so they could be used as collateral. If Greece defaulted, lenders would gain an airport or some other utility.
After a month of bitter negotiations, the deal that was struck was not so drastic. But it was close. According to a leaked copy of the troika’s main findings, the new Greek cuts would include a drastic shrinking of the public payroll – only one person could be hired for every 10 exits for the rest of 2011, for instance – and pension reductions of €4.2bn. Privatisation would indeed be run by outsiders.
Mr Papandreou was charged with selling the package to the Greek parliament. European leaders had hoped the American-born, British-educated scion of a Greek political dynasty would achieve not only a parliamentary majority but cross-party agreement on the austerity programme. The result instead has been riots in the streets of Athens and a slow but steady stream of defections from Mr Papandreou’s party.
Having sacked Mr Papaconstantinou, Mr Papandreou must now rely on Evangelos Venizelos to sell the plan to an unhappy country – someone who analysts say brings political street smarts to the job but lacks the financial experience that could prove critical. "The new minister has to understand that conditionality for the next bail-out loan will be much tighter and if Greece doesn’t meet quarterly targets, the consequences will be dire,” says Yannis Stournaras, director of Iobe, an Athens think-tank.
Most analysts and many European officials agree the main reason Greece has fallen behind with its reform programme is a lack of political will. Mr Papandreou’s government dutifully drafted framework laws in line with reform benchmarks set under the current bail-out programme but left gaps to be filled in by ministerial decrees. Months later, many such decrees are languishing in ministers’ in-trays, making the legislation unworkable. Following cuts last year in civil servants’ salaries, some ministers quietly handed out additional allowances to their staff without informing the finance ministry, says Miranda Xafa, a former Greek representative to the IMF.
"Effectively the [previous] ministers sabotaged the programme, believing they could fool the troika,” she says. It helped that the establishment of a central payments agency for public sector workers, another troika requirement, has been delayed.
The reshuffle appears to have boosted Mr Papandreou’s chances of getting the package through parliament. Some are convinced that if he does, Greece may be able to turn its economy around and make good on its promises. Stefanos Manos, who as finance minister launched its first privatisations 20 years ago, says selective spending cuts will help the country quickly achieve the primary budget surpluses needed to eliminate the deficit and make a start on reducing the public debt. Such cuts could include funding for political parties, local broadcasters, and colleges unable to attract enough students to fill courses.
"Can we live without these amenities for the space of three years? If we can, we’ll hit the targets and will have a chance of changing the market’s psychology,” says Mr Manos. "Instead of disappointment and anxiety, we might even see enthusiasm.”
Spanish Marchers Protest Unemployment, Austerity
Tens of thousands of Spanish protesters— young and old, those with jobs and those without—marched Sunday in Madrid to drive home their anger over high unemployment, bleak economic prospects and politicians they consider inept.
Similar demonstrations were being held in other cities including Barcelona in the north, Valencia in the east and Seville in the south. Police were out in force after a Wednesday protest in Barcelona turned violent. Protester Antonio Cortes, 58, said Spain's workers were being asked to bear the brunt of the financial crisis. "This crisis was created by the capitalist financial system and we are paying for it. All the cuts shouldn't be aimed at the working class," he said.
Nearly two years of recession have left Spain with a 21.3-percent unemployment rate — the highest in the 17-nation euro zone — and saddled with debt. The jobless rate, which has more than doubled since 2007, jumps to 35 percent for people aged 16 to 29. Many young, highly educated Spaniards can't find jobs as the eurozone's No. 4 economy struggles with low growth.
Protests began May 15 and spread to cities across the country, striking a chord with hundreds of thousands fed-up with the wage cuts and tax hikes needed to resolve a financial crisis they see as created by banks and wealthy developers. Police estimated that 35,000 marchers left from six points around Madrid, then crowded into central Neptuno square adjacent to the country's parliament building. Some carried banners reading "Let's march together against the crisis."
"I'm taking to the streets because I know another world is possible and I want to persuade our leaders to listen to our arguments," said Rosa Simarro, a 28-year-old chef, as a brass band went past playing a rousing march. Beside a statue dedicated to Neptune, the mythological god of the sea, some protesters were preparing a fish stew lunch using two parabolic-shaped solar-powered cookers. "If we don't stand up for what we believe in now that this movement has momentum, we will surely regret it," said Marta Rojo, 20.
Prime Minister Jose Luis Rodriguez Zapatero's government has tackled the debt crisis by cutting government spending, freezing pensions, raising the retirement age and making it easier and cheaper for companies to lay people off. Spain slipped into recession in 2008 after a real estate bubble burst, halting a credit-fueled consumer spending spree. It has not needed or sought an international bailout like fellow eurozone members Greece, Ireland and Portugal, but its financial troubles strike fear in other European capitals due to the sheer size of its economy.
British unions threaten biggest wave of industrial action since the 1926 strike
by Robert Mendick - Telegraph
Britain is facing the biggest wave of industrial action since the 1926 general strike, Dave Prentis, the leader of the largest public sector union, has warned. In issuing his threat, Mr Prentis, the general secretary of Unison, has stoked the row over Government pension reforms. Unions are considering walking out on negotiations over plans to make most public sector employees work longer and pay more for less generous pensions. Mr Prentis said: "It will be the biggest since the general strike. It won’t be the miners’ strike. We are going to win.”
Danny Alexander, The Chief Secretary to the Treasury, provoked union anger by warning public sector workers it would be a "colossal mistake” to reject a deal that was the best they could hope for. The reforms include increasing the general retirement age in the public sector from 60 to 66, moving from a final salary system to benefits based on career-average earnings and raising contributions by an average 3.2%. But Mr Alexander insisted that those on the lowest incomes would not have to pay any more and that low and middle earners would get roughly the same benefits as they do now.
The GMB threatened to pull out of talks altogether, as union chiefs accusing him of trying to sabotage negotiations by announcing details of the Government’s position to the media. Mr Prentis, whose union has more than 1.3 million members, said the country should brace itself for "rolling action over an indefinite period” until workers get their message across. He said: "I strongly believe that one day of industrial action will not change anyone’s mind in government. We want to move towards a settlement."
"The purpose of industrial action is not industrial action, it is to get an agreement that is acceptable and long-lasting. "But we are prepared for rolling action over an indefinite period. This coalition has got to open its eyes and see that in just reacting to a Daily Mail view of the public sector they are walking into a trap of their own making.”
The pensions proposals came amid a threatened wave of industrial action starting with up to 750,000 teachers and civil servants going out on strike on June 30. Mr Prentis said the government cuts were hitting public services hardest and were paving the way for privatisation. "You can’t just look at what’s happening around pensions as a single issue. All our members provide public services. You look at what this coalition has decided to do to reduce the deficit and it’s decided that most of the deficit reduction programme will be at the expense of our public services,” he said.
"The people that we represent are facing redundancy, a two-year pay freeze, while inflation is 5% and gas prices are going up 20%, and they are desperately worried about privatisation of the services they have committed their working lives to. "It means that cowboys that we used to have in the 1980s can put in bids that will always undermine the public service bid and they will get the contract not on the quality of work but because they are cheapest. It’s just to soften the way for privatisation.”
TUC general secretary Brendan Barber said that Mr Prentis was reflecting the "real anger” felt right across the union movement at the Government’s "crude attack” on public service pensions. "I want to see this resolved by negotiation but if the Government are determined to push through a huge attack on people’s pension entitlement, they are not prepared to negotiate in a sensible, reasonable, fair-minded way, then the unions will have no option open to them other than to try to defend their members through industrial action,” he said.
He said that he believed there was "very strong, broad public support” for the action the unions were taking. "I don’t think the wider public see their public service colleagues in the way that some people like to portray them,” he told the BBC Radio 4 Today programme. "The nurses and health care workers in our hospitals, the teachers in our schools, the carers who look after the elderly and infirm - they don’t see these people as the kind of parasites some media commentators present public servants to be.”
How Sweden Steered Clear of the Greece Fiasco
by Brendan Greeley - BusinessWeek
The case for national sovereignty: By staying out of the euro, the Swedes have steered clear of Greece's mess. Brussels, take note
They are taking to the streets in Stockholm, but not with demands. Swedes, this month, ask for no more than a spare patch of grass or dockside granite to bask in the midsummer. The country has never really gone in for protest anyway, and right now there's nothing to protest about. The economy grew at an annual rate of 6.4 percent in the first quarter, after 5.7 percent last year, which was the strongest recovery in the European Union. And Sweden still has its krona.
Though it joined the union in 1995, Sweden never adopted the euro. It still enjoys the advantages of a tariff-free common market. It sends ministers, commissioners, and members of parliament to Brussels and Strasbourg. And right now, Swedes are looking south with relief. While Sweden enjoys monetary independence, Germany—another strong exporter with high-end manufacturing and solid growth—shoulders responsibility for saving Greece and preventing a wider financial collapse among the 16 other countries that use the euro.
On June 13, Standard & Poor's gave Greece the world's lowest credit rating, while Greece's debt load reached 143% of gross domestic product, the highest in Europe. Sweden's krona has joined the Swiss franc as a favored currency for traders looking to profit from Germany's expansion while avoiding the European debt crisis. "If you are buying the Swedish krona," says Nick Parsons, head of markets strategy in London at National Australia Bank, "you are getting European growth without Greek politics."
Sweden's doing fine. The EU should find this only slightly less distressing than the chaos in Athens. The European project has always fed off of the momentum of ever more integration.
Now Sweden's success offers a counterargument: Less integration works, too. It turns out that sovereignty matters, not just to the euroskeptical fringe but to the Swedes, the people who gave the world ABBA, Ikea, and benign socialism.
Sweden cherishes its modern tradition of neutrality, and the Baltic Sea serves the same function as the English Channel: Sweden keeps a cold, English distance from Europe and has a comfortable sense of its place in the world. Swedes lean on an untranslatable word, Lagom, to describe the fairness, comity, and reserve they practice in public life. They believe their system works, and suspect that continental Europe's doesn't.
Sweden has stayed out of the euro through an elegant legal dance. Denmark and the U.K. negotiated in the early 1990s to opt out of a monetary union, if they chose to. (They did.) When Sweden joined the EU in 1995, it theoretically agreed to the union's goal of a single currency. But the country's economy was still recovering from a domestic banking crisis earlier that decade, and public opinion in Sweden turned against the EU after accession. When the euro launched in 1999, Sweden deliberately failed to fulfill all of the common currency's membership criteria, and held on to its krona.
In 2003, Sweden scheduled a referendum on joining the euro. Swedish industrial organizations and large companies supported monetary union; it would reduce transaction costs and currency risk, and increase the competitiveness of Swedish companies on the Continent. Trade unions opposed the euro, worrying about its effects on wages and, more generally, Sweden's unique social contract. Figures in the country's major political parties were divided on the euro, but Sweden's voters were clear.
56 percent voted against the common currency, with a turnout of 83 percent, higher than the previous year's parliamentary elections. Brussels reacted with paternalism. The European Commission released a statement showing confidence that "the Swedish Government will choose the way forward to keep the euro project alive in Sweden." Romano Prodi, then head of the commission, told the Italian newspaper la Repubblica that Sweden's influence in the union would fade, and that "Sweden was afraid."
If so, there was wisdom in fear. From 2004 to 2007, Sweden averaged annual growth of 3.7 percent, compared with about 2.4 percent for the euro-zone countries. Prime Minister Fredrik Reinfeldt's government, which won a second four-year term last September, has cut income taxes four times since 2006 and has said it may do so again next year.
In the wake of debt crises in Ireland, Greece, Portugal, and now Greece again, support for joining the euro has plummeted further. In May 2010 it stood at 28 percent. One year later it's at 24 percent, and few Swedish politicians are inclined to test the anti-euro mood. Håkan Juholt, the current leader of Sweden's perennially ruling Social Democrats, still supports the unified currency, but with less enthusiasm than in 2003, when he campaigned for a "yes." More important, he knows it's a nonstarter, politically. He told Bloomberg Businessweek on June 9 that there are no plans for a referendum this parliamentary term.
An independent monetary policy, meanwhile, is looking like a pretty good idea. Like the Fed and the European Central Bank, Sweden dropped rates during the crisis, but can tune them now to its expansion, avoiding a housing bubble. The ECB, meanwhile, is stuck trying to cool off Germany without smothering Greece. In a way, Sweden played a dirty trick on Europe. It sends 40 percent of its exports to euro countries and benefits from the reduced transaction costs and increased trade and competition within the euro zone. Dependent on exports, Sweden isn't entirely immune from the rest of the Continent's ills. And yet it stands apart, holding on to its options.
Lars Calmfors, a prominent Swedish economist who advocated for the common currency in 2003, believes the economic arguments for the euro balance out the economic arguments against it. He says that the "yes" camp focused too much on the economic arguments for a common currency, and not enough on the political arguments.
But maybe the political arguments just weren't that compelling. Europe lacks effective anti-federalists. The European Commission, which has the sole right to write legislation, self-selects for European enthusiasts. The European Parliament contains euroskeptics, but they're voted in through nationalist parties, which by definition don't like to work together.
The European Council, composed of ministers from each of the states, often works in the national interest of individual member states but cloaks its decisions in praise for the European project. The institutions of the EU often ask whether it's more important to make the union wider (by bringing in more countries) or deeper (by strengthening treaties and institutions). Few voices in Brussels push for narrower or shallower. To understand that city, imagine Washington with no Republican party.
The divide on federalism tends to put political leaders of major parties on one side, and voters on another. The only effective brake on integration comes from national referendums. Europe rumbles ahead, and when voters get the chance to say "no" they often take it, as they did more recently in France, the Netherlands, and Ireland when asked to adopt the European constitution. Sovereignty is more an instinct than a policy, but it's not just for knuckle-draggers. In 2003, a simple "no"—an urge to hold on to Swedish money, Swedish choices, and the Swedish model—turned out to be a sophisticated monetary strategy for the next decade.
In the '90s, European leaders wondered if it was possible to have monetary union without political union. It seemed an abstract question then, but now the answer looks painfully obvious. When the EU is done with Greece, Portugal, and maybe Spain, it will have to take another look at political union. Sweden's euroskepticism wasn't wrong back in 2003. The real trouble is that Europe's "no" votes happen in referendums, when it's too late to fix what the vote is about. Rather than wish the next referendum result away as an inconvenience to be corrected later, the EU will have to figure out how to get people to say "no" more often in Brussels, too.
Euro Jitters Ricochet Across U.S.
by Michael Corkery - Wall Street Journal
Municipal Borrowers Pay More Because of Link to Belgian-French Bank; An Extra $30,000 a Month
Dozens of U.S. cities and towns are being bruised by the deepening Greek debt crisis even though they are thousands of miles away and don't own any of the country's bonds. From a skating rink in Everett, Wash., to New York City's schools to Chicago's O'Hare International Airport, interest rates on some bonds have soared since late May and could rise even further because money-market investors are less willing to buy some of the $17 billion in municipal bond deals backed by Dexia SA, a Belgian-French bank shaken by its exposure to government debts in Greece.
"We are far from Wall Street or Greece, but the impact is being absorbed to the core in small-town America,'' said Kate Reardon, a spokeswoman for Everett, Wash., a city of 104,000 people, where interest costs are rising on a local rink and concert arena.
In the Perris Union High School District in Perris, Calif., which already was furloughing workers and considering pay cuts, borrowing costs have risen by $30,000 a month, or about two-thirds of the cost of a first-year teacher, who earns about $46,700.
When times were good, Dexia gave governments across the U.S. easy access to the same cheap financing tapped by homeowners and companies by agreeing to backstop their municipal bonds. In turn, the interest rates on more than 100 municipal bonds fluctuate through daily or weekly sales called remarketings, in which big investors can either roll over their holdings at market rates or opt out. Few public officials knew about the lender's vulnerability to Greece; Dexia has €4.3 billion ($6.11 billion) in direct exposure to the country's debt, according to ratings firm Standard & Poor's Corp.
After S&P warned last month of a possible downgrade of Dexia's investment-grade credit ratings, wary money-market funds dumped bond deals tied to Dexia, analysts and traders say. Such mutual funds typically are among the most cautious of large investors and are owned by tens of millions of Americans.
While other investors are stepping in to buy those bonds, they are demanding sharply higher yields. As a result, borrowing costs for some municipalities are now the steepest since the financial crisis. "If your cost of borrowing is tripling and quadrupling in a matter of weeks, that can be pretty painful depending on who you are,'' said James Ahn, a municipal-bond portfolio manager at J.P. Morgan Asset Management."There may be some issuers that can't tolerate the strain for a prolonged period."
And there are signs of even deeper trouble. Dexia is obliged to buy as much as $17 billion in municipal bonds if investors balk during the remarketing process. Since last month, Dexia has been forced to take back about $400 million because of "tensions on remarketing," said Alexandre Joly, the bank's head of strategy, portfolios and market activities. In those cases, the European bank has the right to dramatically increase the interest rate paid by many municipalities—and accelerate how quickly they must pay off their debt. Such a worst-case scenario is equivalent to an adjustable-rate mortgage on a house where the borrower suddenly faces a huge balloon payment.
Dexia recently warned some cities that the interest rate on their debts is likely to continue rising. "As a result, it may be advisable to seek another provider" that would replace Dexia as the backstop on outstanding bonds, according to a letter to Everett's treasurer, Susy Haugen. Dexia sent similar letters to other cities. Everett officials said they are in no rush to heed Dexia's advice.
While many cities have hired other banks to replace Dexia, that isn't always possible. "We are continuing to get new bank capacity but not enough to cover all of our Dexia bonds," said Carol Kostik, New York City's deputy comptroller for public finance. Dexia backs about $1.6 billion of the city's $13.1 billion variable-rate bonds, used to finance everything from schools to water pipes. Many municipal-bond issuers have the option of refinancing their debt into fixed-rate bonds in order to avoid such volatility. But the cost is likely to be much higher because those rates are aligned with long-term borrowing rates, not short-term rates.
The Perris Union High School District east of Los Angeles, which has 10,000 students, probably would have to pay an annual interest rate of as much as 6% if it refinanced, said Candace Reines, an assistant superintendent. For now, the school district has "budgeted for additional expenses," she said. Its variable-rate bonds sold in 2004 now carry an interest rate of 3%, up from 1%. Under the terms of its deal with Dexia, the rate could soar to 12%, as it did in 2008, before interest rates fell as the financial crisis receded.
Dexia once was one of the biggest providers of backstops on U.S. municipal bonds. With a small Manhattan staff, Dexia beat out much larger rivals on Wall Street by charging municipalities some of the lowest fees around, according to competitors. "Our goal was to be the leading provider to the public sector in the world," Mr. Joly said.
The bank ran into trouble during the 2008 financial crisis, when its access to short-term cash dried up, and had to be bailed out by the Belgian and French governments. It was also one of the largest users of the Fed's discount window, an emergency lending program. As bond buyers pulled back, Dexia was forced to buy back $16 billion of the $50 billion of municipal bonds that it had backstopped at the time, Mr. Joly said. Within a few months, municipalities were able to refinance and pay back Dexia.
As part of an ongoing restructuring program, the lender's exposure to the U.S. municipal-bond market has shrunk 69% from a peak of $55 billion before the credit crisis. Few people in Everett, near Seattle, had heard of Dexia in 2007, when the bank agreed to back a portion of the $72 million in bonds that financed an ice rink and concert arena. "We thought we were pretty lucky at the time," Ms. Haugen, the treasurer, said in an interview.
Those bonds now have an interest rate of 1.75%, up from 0.65% when S&P warned of the downgrade. If the rates remain there, the arena's monthly borrowing costs will increase by about $24,700. City officials say the increased rates are still far lower than what the arena would pay to refinance. "There is no financial incentive to make a change," said Debra Bryant, Everett's chief financial officer.
America flirts with a fate like Japan’s
by Clive Crook - Financial Times
The stalling of the US recovery raises big, scary questions. After a recession, this economy usually gets people back to work quickly. Not this time. Progress is so slow, the issue is not so much when America will return to full employment but what "full employment” will mean by the time it does.
The administration thinks the pace of recovery will pick up soon. Last week President Barack Obama called the pause a "bump in the road”. Others think the slowdown will persist and might get worse, fears that cannot be dismissed. One alarming possibility is that the traits the US has relied on to drive growth in the past – labour market flexibility, rapid productivity growth – might have become toxic. If the US is unlucky, traits seen as distinctive strengths are now weaknesses, and a "lost decade” of stagnation, like Japan’s in the 1990s, might lie ahead.
The mainstream view is more optimistic and goes as follows. The recovery in the first half of the year was weak but special or temporary factors were to blame: bad weather, the timing of defence expenditures, the phasing out of fiscal support, the Japanese earthquake, the oil-price surge, worries over Europe’s debt, and so on. Together these could have cut 1.5 percentage points from growth in the first half of this year, yielding a feeble 2 per cent – too slow to put a dent in unemployment.
Some of those factors should fade in the second half, letting the growth rate recover to between 3 and 4 per cent. That would be disappointing with so much ground to make up – though unemployment would be falling, albeit slowly. Even optimists acknowledge it will take a while for consumers to cut debt to comfortable levels, for the housing market to stabilise, and for other aftershocks of the Great Recession to be worked out. But, in the end, the economy will bounce back and close the gap between actual and potential output.
Strong productivity growth, reflecting the US economy’s famous ability to cut jobs promptly, is central in all this. Potential output is growing even as actual output and employment stutter. This hurts now, the optimists acknowledge, but when conditions improve workers will be rehired. A low-friction labour market is fast to hire as well as to fire, and American companies will take up the slack quickly once conditions allow. In the end, US labour-market exceptionalism will deliver new jobs and strong growth as in the past.
But will it? Two things might work differently this time. First, since the recession was unusually deep and the recovery unusually slow, the US is experiencing unheard-of long-term unemployment rates. The housing slump and its associated plague of negative equity aggravate this by making it harder for the unemployed to move to find work. Long-term joblessness erodes skills and employability. Structural unemployment is surely inching closer to European levels. America has not been here before.
As Financial Times columnist Martin Wolf recently pointed out, after a recession such as this you can make a case for welcoming low productivity growth if it keeps more people in work. Better to spread the pain around through short-time working, he argued, than cut jobs. In a new paper, Robert Gordon of Northwestern University makes essentially the same point. He shows that in the past quarter-century the US labour market has become markedly more exceptional – more organised around the "disposable worker”. Management thinking and declining unions have driven friction ever lower, while employment subsidies and regulation have made Europe’s labour markets stickier. The Great Recession and its surge of long-term unemployment are a severe test of what was once seen as a distinctive US economic strength.
The second danger also works through productivity, but arises from the role played by debt in this cycle. Under circumstances such as today’s, with households striving to cut debt and interest rates at zero, economies can behave in strange ways. In a paper last year, Paul Krugman of Princeton and The New York Times, and Gauti Eggertsson of the Federal Reserve Bank of New York drew attention to the possibility of a "paradox of toil”, akin to the paradox of thrift (whereby if everyone tries to save more, the economy shrinks and so does aggregate saving). The logic of the paradox of toil is simple. Suppose the supply of labour increases, or productivity rises. Initially, prices would tend to fall. If nominal interest rates are stuck at zero, the real interest rate and burden of debt both rise. This leads overleveraged consumers to cut spending still more. Demand is not just slow to respond: the economy shrinks.
It is a peculiar world where higher productivity reduces output; and willingness to accept wage cuts worsens unemployment (which Mr Krugman and Mr Eggertsson call the "paradox of flexibility”). The idea that easy hiring and firing might permanently raise long-term unemployment is less bizarre, but still not something the US has needed to worry about in the past.
A gradually improving recovery would put things right side up. US strengths would be strengths again. But a prolonged slowdown, with consumers still not on top of their debts, might be self-reinforcing. Some would say this has already begun, hence the pause. The optimists say no, not yet – and they had better be right.
Toxic lending still capable of contamination
by Aline van Duyn - Wall Street Journal
It has been several years since an American with a poor record of paying debts or with no significant source of income was able to borrow to buy a house. Subprime lending has been largely consigned to the history books. But this does not mean that subprime mortgages have been shoved into the dustbin of history. At least $500bn worth of securities backed by such mortgages are still floating around the financial system.
These securities, and derivatives linked to them, were at the centre of the financial crisis, when they were reclassified from "safe” to "toxic”. After inflicting great damage in 2007 and 2008, subprime mortgage-backed securities have been flying below the radar. Some hedge funds have even made juicy profits from them, as prices on distressed mortgage assets rallied in line with stocks and junk bonds.
Yet, in recent weeks, the toxicity of subprime MBS has been felt again. After a rally in 2010, subprime MBS prices started cooling off a little in the early months of 2011. Then, two things happened that pushed prices sharply lower.
First, evidence emerged that the US housing market declines were still not over – and falling house prices generally mean more defaults and greater losses on subprime mortgages.
Second, the Federal Reserve started selling parts of the $30bn Maiden Lane II portfolio of MBS it acquired when it bailed out AIG in 2008. It soon became clear that the Fed would not be the only seller. European banks are planning sales this year, not least to avoid higher capital charges.
All told, some subprime MBS prices fell 20 per cent in a matter of weeks. Losses to investors betting on high-risk markets such as distressed debt may not be a tragedy. However, a worrying dynamic also occurred, which should be of concern.
Once MBS prices started to fall, investors began to worry. To protect themselves against further declines, they had to take a position that would move in the opposite direction. Buying such hedges in subprime derivatives is difficult – it is a very illiquid market. Instead, investors looked to a more liquid substitute: derivative indices linked to junk bonds. Yields are similar and the markets tend to move in similar directions. Hedging demand was so great that prices on junk bond derivatives began to fall, which then pushed down prices on actual junk bonds too.
Why does this matter? First, it is a reminder that the toxic spill has not yet been cleaned up. Whether the prospective sellers are able to dispose of their subprime MBS at anything other than much lower prices is far from clear.
Second it is proof that the connections between markets remain at a dangerously high level. The contagion cycles that caused such financial distress in the run-up to the crisis are still alive and well in the post-crisis world. This is also shown in cross-asset correlations, which measure the extent to which prices in different asset classes such as currencies, commodities, stocks and credit move together. They are at high levels.
Assets under management of "macro” hedge funds, which can invest in a wide range of asset classes, are 30 per cent higher than in 2007, a Bank of America Merrill Lynch report said. At the end of 2010, macro hedge funds had a record $380bn of assets under management. The subprime dynamics are a taste of the possible, wider dangers of having so much money managed by fast-moving investors chasing the same yields. "Cross-asset portfolios could be a potential for a contagion risk,” the report said.
The subprime MBS price plunges also put back the prospects for reform of mortgage financing in the US, which relies almost entirely on the US government. The seeping of subprime toxins into the financial system makes it harder than ever to tackle this. The subprime mortgage crisis is not over and these loans still have the ability to damage.
UK homeowners benefit from fourfold surge in prices from to 1998 to 2008
by Julia Kollewe - Guardian
Homeowners in the fastest-growing parts of the UK have seen the value of their properties more than treble over the decade to 2008 while those in poorer areas lagged far behind, according to research by Halifax, the mortgage lender.
Its report came as a US private equity firm, JC Flowers, backed a new business, Castle Trust, that will offer investments to private and institutional investors providing access to UK house price returns and mortgages. The management team is led by Sean Oldfield and is chaired by a former chairman of the Financial Services Authority, Sir Callum McCarthy, who is one of seven non-executive directors.
Oldfield said: "The housing market is the largest asset class in the UK, worth in excess of £4,000bn, most of which has previously been unavailable to investors. Castle Trust has been designed to help customers with the two most important financial decisions in their lives – investing their savings and buying their home."
According to Halifax, in the 10 areas with the highest economic growth – including London, Belfast, Cambridgeshire, Edinburgh, Cornwall, Glasgow and Liverpool – the average house price leapt by 219% from £67,178 in 1998 to £214,162 in 2008.
Inner east London, which includes Canary Wharf and the boroughs of Tower Hamlets and Hackney, topped the list with the biggest gain in economic activity and a 236% house price increase over that decade. This compares with a 195% increase in average prices, from £56,018 to £165,430, in the slowest-growing areas such as Thurrock in Essex, Coventry, Stoke-on-Trent and Blackpool. The average house price in the 10 fastest-growing areas in 2008 was 61% higher than the average in the 10 locations with the lowest levels of activity.
Suren Thiru, economist at Halifax, said: "Unsurprisingly, house price growth over the past decade has been stronger in the areas that have seen the biggest increases in economic activity. The north-south divide that has opened up with the outperformance of the market in southern England appears to reflect the stronger economic performance of these regions."
Since 2008, when the financial crisis struck, house prices have also fared better in the most economically resilient areas. House prices have fallen by 24%, on average, in the ten areas with the biggest rises in unemployment, which include Kingston upon Hull, Belfast and Blackpool. This is almost double the average 13% decline in house prices in the ten areas that recorded the smallest increases in unemployment since 2008 - including Oxfordshire, Dorset and Cambridgeshire.
Seven of the ten areas that have seen the smallest falls in economic activity over the last three years are in southern England. In contrast, all ten locations that have recorded the largest falls in economic activity are in the north.
Economists, it’s time for the lawyers
by Alan Beattie - Financial Times
Got an economy that needs fixing? Hire a lawyer. That, disgruntled economists darkly mutter, is an emerging trend. Another grim week for the dismal science began with the International Monetary Fund’s executive board blocking Stanley Fischer, governor of the Bank of Israel, from applying to become its managing director. Mr Fischer is a legend within the economics profession but his pleas to appoint an economist to the job failed. He was two years over the age limit and that was that.
Instead, a lawyer – Christine Lagarde, the French finance minister – is clear favourite. Agustin Carstens, the only other candidate, seems to have spent more time defending the fact that his economics PhD was awarded by the University of Chicago – a known incubator of the neoliberal virus – than has Ms Lagarde for not having one at all. And when talking to the fund’s most troublesome client, Ms Lagarde will, if appointed, now have to deal with one of her own. The week ended with Greece replacing a PhD economist finance minister with one with a doctorate in .... well, take a wild guess.
What with Robert Zoellick being president of the World Bank and Gene Sperling the chief economic adviser to Barack Obama, if Ms Lagarde is chosen, three of the top economics policy jobs in the world will be occupied by lawyers. Now, those three are smart, hard-working officials with long records of private and public service. But hear the cries of anguish from university economics faculties. How did that happen? Surely it is clear evidence of market failure? What happened to comparative advantage? Ou sont les economistes d’antan? (In the case of former economics professor Dominique Strauss-Kahn, the recently departed IMF managing director, the answer is "awaiting trial”, but let’s skip over that.)
Some economists will concede that the credibility of the discipline has taken a knock from the global financial crisis. But they will also be asking, who was it who thought: "You know what? We’ve had too many people running policy round here by making bold assertions with unwarranted certainty in abstract jargon. Let’s hire some lawyers!” There have long been attorneys in politics, particularly in America, where eight out of the first 10 presidents were lawyers. Not only does it evidently help to practise law before trying to write it, but experience in verbal obscurantism and taking sides for money is also excellent preparation for a career in public office.
Yet their stealthy infiltration of public life reaches new heights. As well as Ms Lagarde, the current German and Italian finance ministers are lawyers; Nicolas Sarkozy is the first practising lawyer to ascend to the French presidency in modern times. China, traditionally run by engineers, is about to appoint its first premier with a law degree. As one Twitter wit noted, if the public finances of so many countries are in such disarray it’s probably because half of their ministers are billing by the hour.
Maybe here is what’s going on: economists have always enjoyed being regarded as sages imparting scientific wisdom to untutored civilians but their claim to be dispassionate dispensers of settled knowledge was always undermined by half the profession despising the other half almost as much as they despised non-economists. And though the global financial crisis suggested much of the economists’ advice was wrong, they disagree ever more virulently about which part.
Since it is very hard for civilians to judge these debates, it is tempting to dispense altogether with the idea of being right and instead just get in someone who argues cases for a living. Lawyers may try to make you offers you can’t refuse but at least they don’t take pride in showing you models you don’t understand.
That said, be sure to get the right kind. You probably don’t want one on the model of Tony Blair, the UK’s most recent lawyer-prime minister. A classic English barrister, Mr Blair was eloquent, quick-witted and persuasive. He constructed arguments that slid almost imperceptibly back and forth between the general and the particular, using convenient facts if any were to hand and elegant sophistry if they were not. Ultimately, his skill in weaving a compelling narrative out of scraps of circumstantial evidence ended with the British army crawling over Iraq looking for non-existent weapons of mass destruction. His conviction, as it were, turned out to be unsafe.
Better to get one of those rigorous and methodical types, even at the cost of entertainment value. Barack Obama, former president of the Harvard Law Review, may have campaigned for the White House with the soaring perorations of a heroic defence lawyer rousing the hearts of a jury with an appeal to the timeless principles of justice. But since arriving, he has more often governed with the demeanour of a corporate attorney painstakingly explaining to a client a particularly dull aspect of the tax implications of capital asset depreciation schedules.
As my closing statement, ladies and gentleman of the jury, I make the following plea: if you must have lawyers running the world economy, it is beyond reasonable doubt that they must be of the second, more predictable, type. What with Greece and all, there is quite enough volatility in the markets as it is. More uncertainty about the reaction function of fiscal and monetary policymakers will increase the probability of a suboptimal outcome from a general equilibrium point of view.
Any economist will tell you that.
The writer is the FT’s international economy editor. Previously, he worked as an economist. Some of his best friends are lawyers
US orders news blackout over crippled Nebraska Nuclear Plant: report
A shocking report prepared by Russia’s Federal Atomic Energy Agency (FAAE) on information provided to them by the International Atomic Energy Agency (IAEA) states that the Obama regime has ordered a "total and complete” news blackout relating to any information regarding the near catastrophic meltdown of the Fort Calhoun Nuclear Power Plant located in Nebraska.
According to this report, the Fort Calhoun Nuclear Plant suffered a "catastrophic loss of cooling” to one of its idle spent fuel rod pools on 7 June after this plant was deluged with water caused by the historic flooding of the Missouri River which resulted in a fire causing the Federal Aviation Agency (FAA) to issue a "no-fly ban” over the area.
Located about 20 minutes outside downtown Omaha, the largest city in Nebraska, the Fort Calhoun Nuclear Plant is owned by Omaha Public Power District (OPPD) who on their website denies their plant is at a "Level 4” emergency by stating: "This terminology is not accurate, and is not how emergencies at nuclear power plants are classified.”
Russian atomic scientists in this FAAE report, however, say that this OPPD statement is an "outright falsehood” as all nuclear plants in the world operate under the guidelines of the International Nuclear and Radiological Event Scale (INES) which clearly states the "events” occurring at the Fort Calhoun Nuclear Power Plant do, indeed, put it in the "Level 4” emergency category of an "accident with local consequences” thus making this one of the worst nuclear accidents in US history.
Though this report confirms independent readings in the United States of "negligible release of nuclear gasses” related to this accident it warns that by the Obama regimes censoring of this event for "political purposes” it risks a "serious blowback” from the American public should they gain knowledge of this being hidden from them.
Interesting to note about this event was the Nuclear Regulatory Commission (NRC) Chief, Gregory B. Jaczko, blasting the Obama regime just days before the near meltdown of the Fort Calhoun Nuclear Power Plant by declaring that "the policy of not enforcing most fire code violations at dozens of nuclear plants is "unacceptable” and has tied the hands of NRC inspectors.”