More EU/IMF Confusion

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.

Germany Flip-Flops on Greek Bailout

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

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.

Britain Grapples With Debt of Greek Proportions

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?

JP Morgan Says California A “Bigger Risk” Than Greece

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.

Cold Economist on Greece

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.

Greece to Get $41 Billion Bailout

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.

Banks Bet Hard Against Greek Debt They Sold

The Times continues its reporting on the Greek crisis:

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

Fabulous. So let me see if I have this straight: our banks sold Greece predatory loans which they knew Greece would never be able to repay – then they took out “insurance” on those loans, effectively betting against Greece’s solvency. Heads they win; tails Greece loses. It’s important to note that this is the exact same behavior they indulged in during the sub-prime fiasco. They sold loans to people whom they knew would never be able to pay them back, and then bet that those loans would default. If, by some miracle, the debtor was able to pay these banks back, they’d get a nice interest rate. If, as the banks bet, the debtor couldn’t pay them back, they’d get re-imbursed via the Credit Default Swaps. It’s a classic win-win for the banks – and a lose-lose for whatever poor sucker they entrapped.

Only now its happening on the level of entire countries. I want to stress that Greece is neither the first nor the last nation to default on account of the malfeasance of US banks. Iceland came before it, and Spain, Ireland, or even France are likely to come afterward.

It is clear that our banks are purely malevolent forces, who benefit only from the destruction of others, and that, for the sake of the world economy, they must be thoroughly audited and broken up. And it is equally clear that this will never happen.

Are US Taxpayers Bailing Out Greece?

(c/o The Daily Digest)

Ron Paul makes sense (on this, at least):

Is it possible that our Federal Reserve has had some hand in bailing out Greece?  The fact is, we don’t know, and current laws exempt agreements between the Fed and foreign central banks from disclosure or audit.

Greece is only the latest in a series of countries that have faced this type of crisis in recent memory.  Not too long ago the same types of fears were mounting about Dubai, and before that, Iceland.  Several other countries (Spain, Portugal, Ireland, Latvia) are approaching crisis levels with public debt as well.  Many have strong ties to Goldman Sachs and the case could easily be made that default could have serious implications for big US banking cartels.  Considering the ties between the Fed and these big banks, it is not outlandish to wonder if the US taxpayer is secretly bailing out the entire world, country by country, even as our real unemployment tops 20 percent.  Unless laws are changed to allow a complete and meaningful audit of the Federal Reserve, including its agreements with foreign central banks, we might never know if this is occurring or not.

The point is, we don’t know. In fact, we know very little about what the Federal Reserve does with the trillions and trillions of dollars in cash that it’s empowered to print and distribute as it sees fit. I remember a couple months ago people were seriously discussing whether or not to audit the Fed. This never happened, and after a couple weeks people just stopped paying attention and turned their gaze to the next shiny object on the horizon.

Without a meaningful audit of the Federal Reserve, we will never know where our money goes. The Fed, as we all know, as been bestowed massive new powers as a result of this crisis (which they helped cause), and this makes an audit all the more important. I guess I would suggest you phone your congressperson about this, but we all know how much good that’ll do.

Paul Krugman Agrees With Me

Check out his column, in which he makes a similar point to what I made a couple posts down:

Now what? A breakup of the euro is very nearly unthinkable, as a sheer matter of practicality. As Berkeley’s Barry Eichengreen puts it, an attempt to reintroduce a national currency would trigger “the mother of all financial crises.” So the only way out is forward: to make the euro work, Europe needs to move much further toward political union, so that European nations start to function more like American states.

It’s an ugly picture. But it’s important to understand the nature of Europe’s fatal flaw. Yes, some governments were irresponsible; but the fundamental problem was hubris, the arrogant belief that Europe could make a single currency work despite strong reasons to believe that it wasn’t ready.

Greek Street

The Times has a pretty good rundown on Wall Street’s complicity in Greece’s current budget woes. The European Union has rather strict rules on the size of the deficit its member countries are allowed to have; but Greece, it turns out, has been under-reporting its deficit for nearly a decade. I wonder where they learned to cook their books?

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Oh.

We’re going to hear a lot in the coming weeks about Greece’s irresponsibility and how Wall Street callously enabled them like a heroin dealer that profits from a junkie’s weakness. And while these accusations are no doubt true, they miss the real point of the Greek debt story, which has to do with the paradox on which the European Union is founded. In fact, a crisis like this was bound to happen. Greece’s and Wall Street’s malfeasance are inexcusable, and certainly no one should try to absolve them from blame on this, but we have to ask ourselves: how long did Europe expect this partnership to last?

At the heart of the EU’s troubles lie the fundamental disparities between its member economies. Germany, as we all know, is an economic powerhouse, and produces the lion’s share of the EU’s GDP. France does well for itself, as do Austria, Sweden, Switzerland and a host of other countries. But the countries that aren’t doing so well: Greece, yes, but also Italy, Portugal, Ireland, and Spain are all  in a difficult and ultimately insoluble position.

Their economic fortunes entwined with that of the rest of Europe, they find themselves under enormous pressure to report spectacular economic growth. If unable to do so, their troubles extend to the other member countries, and, most importantly, cast aspersions upon the value of their shared currency – the Euro. So the incentive to fudge the numbers is tremendous.

The paradox of “Eurozone” (zone of countries that use the Euro) directly stems from this. Put simply, no country can leave the Eurozone after it joins, and at the same time, every Eurozone member has to post annual growth without fail. The Greek situation is a perfect illustration of this, but the point is that it could have happened (in fact, probably will happen) to several EU countries. Greece just happened to be the scapegoat because it had the biggest debt.

This handy chart from Der Spiegel should nicely demonstrate this point.

Even Germany and France, the so-called “EU powerhouses”, are technically breaking their own debt rules. But why doesn’t Greece just divest itself from the Euro, say it was too hasty in joining, and maybe re-apply for admission in a few years once it gets its economy under control? Well, it could do this  – and likely would, if France and Germany had their say – but such a move would precipitate a run on Greece’s banks, sink its economy, and leave it a European pariah for at least a generation. Think about it: if you had a bank account in a Greek bank in Euros, and the Greek Premier announces one day that your account will be transformed into Greek Drachmas on such-and-such a date, what would you do? Obviously you would liquidate your holdings and invest in some more stable Eurozone country. Germany, perhaps?

But at the same time, Greece’s economic situation is causing near-panic among investors and ravaging the Euro. The Euro’s value has dropped more than 9% in just two months. And therein lies the paradox. By staying in the Eurozone, Greece threatens the whole enterprise. By leaving, it dooms itself to economic collapse.

A recent interview with the EU Central Bank chief economist Jurgen Stark displays the confusion now embroiling the EU. It’s clear that no one knows what to do about this. For the time being, I suppose, Germany or France will have to pony up the cash to bail Greece out, but this does nothing but delay the central problem described above.

Perspective on Greece

(c/o George Washington)

Barry Ritholz over at The Big Picture has an excellent post on Greece’s debt woes vs. those of the United States:

All by itself, the insolvent nation-state of California is the 8th largest economy in the world. Its the size of France. According to the CIA Factbook, Greece is number 34. That is a lot of hyperventilating about a relatively small impact to global GDP. Italy is 11, Spain is 13, Portugal is 50, and Ireland is 56.

Additionally, in the US, we have 43 of the 50 states in some form of financial distress.

Perhaps the solution to California’s woes is for Arnold (who is from Austria) to have California join the EU. Then, they might qualify for a bailout from Germany . . .

Greek Debt

Greece is in a lot of trouble, and as a member of the “eurozone”, its troubles have now become Europe’s. In a sense, we’re getting a grim preview of the sort of future we might have in America with the case of Greece. Like us, Greece spent heavily over the past decade and accumulated a lot of “sovereign debt”. Unlike us, however, Greece is not a military bully – and thus cannot simply print money and force the rest of the world to accept it. Further complicating the issue is Greece’s membership in the European Union. No Euro-using country has ever declared bankruptcy, and analysts are busy falling over themselves to predict what a Greek government default would imply. Some of the most grim predictions entail the break-up of the EU, while the more moderate voices still predict havoc within the eurozone.

If Greece defaults, it seems likely there would be some sort of run on the European banking system, and almost certainly the Greek banking system. But more significantly, this crisis highlights the impossibility of leaving the Eurozone, once you become a full-fledged member. For many countries (notably, the PIIGS – Portugal, Italy, Ireland, Greece and Spain – the slowly growing Eurozone countries) this leads to a catch-22.

One one hand, adopting the Euro means a country can’t combat deflation via the traditional methods. Usually this would be done by revaulating its currency, but since no individual country has control over the Euro (well, maybe Germany does) – this ceases to be an option.

On the other hand, an announcement to leave the Euro (As Tyler notes) would trigger an immediate run on that country’s banks. Nobody wants their bank account in Euros to suddenly transform into a bank account in a less prestigious currency (lira, drachmas, etc.) Once a country gets into the EU, it pretty much has no choice but to stay.

So leaving the Eurozone would doom Greece – and staying in might doom the rest of the EU. What are they doing about it? Well, the Times splashed on its front page today that after weeks of nail-biting vacillation, the EU has finally pledged a “bailout” to Greece. (Under that article, in tiny letters, the headline: “Greek Civil Servants Strike Over Austerity Measures – giving us a taste, I guess, of what that bailout will cost.) But the point is that no one knows how this bailout will actually work.

At the root of Greece’s problems, and the EU’s, lies the vast difference in economic output between members. Though Greece and Germany use the same currency, their economies are vastly different. This naturally leads to over-valuation of the Greek economy, and, I suppose, under-valuation of the German economy.

It looks like Britain made a smart move after all, not adopting the Euro.