The Reasoned Review

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Posts Tagged ‘greece

More EU/IMF Confusion

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The Times gets credit for scooping the new plans for Germany and France to help Greece after all. I guess all those big bad threats to leave Greece to the mercy of the IMF weren’t really serious.

In one sense, it really doesn’t matter whether Germany or the IMF ends up on the hook for Greece’s bailout (which is supposed to cost 22 billion Euros, or something like $38 billion). The point is that Greece is not going to be the last country who needs this kind of assistance. As I mentioned previously, Britain, France, Portugal, Ireland, Belgium, Italy, and Spain all have debt crises looming on the horizon. Whoever cleans up after Greece will likely end up mopping up all of Europe. So it’s natural that neither Germany or the IMF want to set the precedent alone.

Again, I cannot stress Wall Street’s complicity in this affair. They were the ones selling Greece absurd amounts of debt on one hand and then buying credit default swaps against that debt on the other. That’s bandit behavior, and they shouldn’t be allowed to walk away from this colossal imbroglio they created without any repercussions. I think it’s clear that Wall Street deserves to pay for some of this mess, if not all of it.

But herein lies the paradox! If Wall Street pays up to bail out Greece, it’s really the US doing it, since all five of the major bank-holding companies are still on TARP life support. So it’s really a no-win situation, unless you happen to be a major bank-holding company on government life support. Then you win.

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Written by pavanvan

March 25, 2010 at 11:43 pm

Germany Flip-Flops on Greek Bailout

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Well, I certainly didn’t expect this. It looks as though Germany is going to rely on the IMF to bail Greece out should the dreaded moment arrive (hint: it will). This does not bode well for the European Union, and indeed, until now, many thought the only way to preserve the integrity of the Euro would be to treat this Greek crisis as an in-house affair. Resorting to IMF loans would do very little to assure investors that the EU is good for its members’ debt, as this basically signals to the rest of the world that Germany (virtually the only healthy economy left in the EU) is either unwilling or unable to shoulder the entire partnership’s burden.

Remember: France, Britain, Spain, Italy, Portugal, Ireland, and Belgium are all facing debt crises of their own, many just as deep, though not as visible, as that of Greece. Germany’s indication that it will not help Greece is effectively a pre-emptive warning to the rest of these countries that when their own respective economies collapse, not to come banging on Germany’s door. Bloomberg reports today that Greece’s Prime Minister has set a deadline for Germany to bail it out, before it goes to the IMF for help. Germany has already indicated that it’s going to let the IMF solve Greece’s problem, effectively rendering that threat moot.

This is big news for several reasons. With Germany, the last healthy EU economy, refusing to bail Greece out, we may be seeing the end of the European Union as a cohesive economic entity. The Euro has been taking a beating ever since fears of a Greek default arose (it’s down more than 10% since this crisis began), and it’s sure to drop further on today’s news. It is unlikely that Greece will default or be forced out of the economic partnership, but if the IMF gets its fingers into Greece, it will only be a matter of time before the rest of the EU comes to the IMF, arms outstretched. Greece will not be the last European country to undergo a debt crisis, as I hope I have shown.

If Greece accepts IMF help, it will be forced into far worse “austerity measures” than anything Germany would have imposed. “Austerity” is generally a euphemism for cutting off social services and indiscriminately firing middle class workers while the rich make off like bandits. Already these measures have caused massive riots and general strikes in Greece, and these are sure to continue if the IMF gets its way.

As always, one can draw a straight line between economic collapse and Wall Street. Many sources have already reported on how Wall Street helped Greece hide its debt for years, and, in fact, encouraged them to take on more debt via “securitized” trades.

But that isn’t all. Wall Street’s “innovative financial instruments” – its Collateralized Debt Obligations and other over-the-counter derivatives – proliferated throughout the European economy, and are at the heart of the myriad debt crises. They made billions selling Europe these worthless junk bonds, and now they’re slowly walking away, whistling, as though they had nothing to do with it. Greece should be demanding massive reparations for the unprecedented fraud of which they, and the rest of the EU, were the victims.

It’s difficult to see where this will end. The IMF bails out Greece instead of Germany – but then what? Portugal, Italy, Spain… then France? What if Britain needs a bailout? Does the IMF have such resources? Are they just going to print the money? Does anyone know what they’re doing?

Europe’s New Debt Solution – Its Own Credit Agency

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Spiegel reports that the EU is unhappy with the standard American credit rating agency, Moody’s, and seeks to create its own. Moody’s is notorious for over-rating US debt, and under-rating nearly everyone else’s, so the frustration is understandable. During the Crisis, Moody’s engaged in outright fraud by pricing worthless derivatives as “Triple-A” paper, along with a raft of other deceptions.

A particular danger now is that Moody’s will downgrade Greece’s debt rating, prohibiting them from borrowing from the EU central bank. If this happens, the Euro is pretty much toast. Their solution is to just create their own rating agency, which seems like a good idea. Relying on Moody’s to gauge the health of an investment is like asking a homeless guy how much he thinks your diamond ring is worth.

But its worth taking a look at the motivations behind Europe’s push for its own rating agency. According to Spiegel, the EU’s major beef with Moody’s is not its widespread fraud and malfeasance during the crisis, but merely the possiblility that it might “downgrade” Greece, along with the “veto power” it exerts over European banks – and indeed, whole countries:

Under existing rules, the ECB can only accept euro-zone sovereign bonds as collateral when lending money if at least one of the three main rating agencies gives the country issuing the securities an A- rating or better. Moody’s is now the only main rating agency that still gives Greece an A2 rating; Standard & Poor’s and Fitch have already lowered their grades to the BBB level.

Although an exception to the rule is in place as a result of the financial crisis — the current minimum rating is just BBB- — that rule will expire at the end of 2010. If Moody’s were to downgrade Greece, as it threatened to do last week, the country would be cut off from ECB loans as of Jan. 1, 2011, triggering a liquidity crisis for the country. This means that Moody’s effectively has a veto over Greece’s access to Europe’s key financing facility.

So what they want is not a stable, accountable rating agency – just one that will consistently give their countries AAA ratings. In effect, they want a “European Moody’s” – a ratings agency that will ignore all tangible market signs and spit out the ratings the big bosses command, just as Moody’s did in America.

I fail to see how this will be an improvement.

Written by pavanvan

March 7, 2010 at 10:01 am

Britain Grapples With Debt of Greek Proportions

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The Times has a pretty strong piece in today’s issue about Britain’s massive debt problems. Yet more evidence that the “Greek Problem” isn’t limited to Greece alone. The whole European Union and most of its satellite economies are probably in for a rough decade:

As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year.

“It’s not just ‘basket cases’ like Greece that can be considered candidates for sovereign crises,” said Simon White of Variant Perception, a research house in London that caters to hedge funds and wealthy individuals. “Gilts and sterling will continue to come under pressure as scrutiny of the U.K. fiscal situation intensifies.”

Now, unlike the United States, other countries’ deficits actually mean something. They aren’t allowed to go around printing as much money as they want, running absurd amounts of debt, and forcing everyone to except their currency at the barrel of a gun. Running budget-busting deficits isn’t just something they can laugh off, like we can here in America – over a long enough time scale, those deficits can make a country’s currency worthless.

It’s tough to see where this will end. The whole EU and attached economies are vulnerable to this “contagion”, which, I cannot stress enough, has a lot to do with Wall Street’s reckless bets during the aughts. If we were living in a fair world, these Wall Street firms would pay reparations to the affected countries for essentially destroying their economies. As it is, it looks as though we’re going to have to watch the EU go down in flames before anyone does anything.

Then, likely, we’ll see some backdoor deals, a few hurried conferences, and the US Government will come out with a new TARP program, this time for Europe. Washington has always had a flair for publicity – maybe they’ll call it a “second Marshall Plan”. It’s inconceivable that the US would allow its most favored “allies” to go down without assistance. And such a move would likely have incidental benefits – namely, bringing the EU firmly under our political control.

Sure, the American taxpayer will eventually have to foot the bill, but who ever cared about that?

Written by pavanvan

March 3, 2010 at 4:00 pm

JP Morgan Says California A “Bigger Risk” Than Greece

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The London Telegraph has the scoop:

Mr Dimon told investors at the Wall Street bank’s annual meeting that “there could be contagion” if a state the size of California, the biggest of the United States, had problems making debt repayments. “Greece itself would not be an issue for this company, nor would any other country,” said Mr Dimon. “We don’t really foresee the European Union coming apart.” The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

California however poses more of a risk, given the state’s $20bn (£13.1bn) budget deficit, which Governor Arnold Schwarzenegger is desperately trying to reduce.

Written by pavanvan

March 1, 2010 at 5:55 pm

Cold Economist on Greece

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The Economist takes a coldly “rational” stance with its editorial exhorting Germany to “Let the Greeks Ruin Themselves“:

A bail-out, Mrs Merkel fears, would break the bargain Germany struck in accepting the euro: that the single currency’s members would never jeopardise its stability nor ask Germans to pay for anyone else’s mismanagement. That said, the currency union was hardly an act of martyrdom by Germany. In the past decade its firms have modernised and their workers have accepted miserly pay rises, boosting their competitiveness. In a euro-less Europe, its trading partners could have erased some of that advantage by devaluing their currencies. Instead, many of Europe’s weaker economies failed to reform and Germany accumulated gratifyingly large current-account surpluses. Nor has the crisis been entirely bad news. The euro has weakened by about 10% against the dollar since the beginning of 2010. Under the circumstances, that was not a harbinger of inflation but a welcome tonic for European exports—especially German ones.

I agree: it shouldn’t be Germany’s responsibility to bail out the “profligate” Greeks from their manufactured crisis. But, again, I want to stress that American banks were a driving factor (some might say a decisive factor) in allowing Greece’s budget to get so out of hand.

We need a systemic way of dealing with these European Union crises, because I guarantee you Greece won’t be the last. Spain, Portugal, Italy, Ireland, and even France are all in danger of being declared insolvent next. The only way we can get this straight is a meaningful audit of our major US banks, along with court-mandated payments to these European countries that suffered from their malfeasance. It’s absolutely criminal that they should get to profit from taking down whole countries.

As far as The Economist’s editorial is concerned, sure – let Greece collapse. Just so long as you know that decision will likely doom the previously mentioned countries at risk. We don’t want a Lehman Bros scenario where Greece is denied emergency funds, but once Spain starts to collapse they immediately get a bailout. That wouldn’t be fair. Letting Greece “ruin itself” means letting a raft of European countries ruin themselves. And they’re not even ruining themselves so much as they were ruined by the American banks.

Written by pavanvan

March 1, 2010 at 10:16 am

Greece to Get $41 Billion Bailout

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The Wall Street Journal reports today that Greece will get a $41 Billion “financing” package from Germany and France, who, I hasten to point out, aren’t exactly swimming in liquidity themselves.

The plan seems to be that Germany and France will soak up some of this Greek debt via public markets and state-owned banks, due to a EU bylaw that prohibits member states from owning the debt of other members. What’s astounding to me is that no one is asking Wall Street to pony up any of this cash. They, after all, are almost entirely responsible for this Greek debt crisis, and they made hundreds of millions of dollars watching Greece go down in flames.

Goldman Sachs alone, who was arguably the single biggest catalyst for Greece’s downward spiral, paid out more than $21 Billion in sheer bonuses to its employees. AIG, another  major player in this, paid out more than $100 million. I mean, shouldn’t some of this money go toward cleaning up the mess they caused? The Times printed an excellent series of articles on Wall Street’s complicity in this just one week ago.

Javier Hernandez  even reported that major bank shares swung upward on rumors of a pending EU Bailout to Greece. So they’re blatantly profiting from their crimes. I mean, how is this legal?

Oh yeah, I keep forgetting. The banks own Congress. They make the laws.

Written by pavanvan

February 28, 2010 at 2:34 pm