Greece hammered by the markets

Constantin Gurdgiev interprets the 2 year Greek bond yields

This is it, folks. No where else to run. Greek interest on public debt would swallow over 19 percent of their GDP annually!

Ouch!

FWIW, that is almost half what a normal country would take in tax revenues, being used to meet unproductive interest payments..

In The Telegraph Ambrose Evans-Pritchard argues that the ECB will have to intervene soon and begin purchasing sovereign government debt.

The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy.

The issue of the ECB buying bonds is a political minefield. Any such action would inevitably be viewed in Germany as a form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”.

But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way.

Bloomberg quote an estimate of €600 billion to bailout Greece, Portugal, Spain and Ireland.

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  • Humanity never ceases to amaze me, it is the markets which got us into this sorry mess, who lived on the fat of the Greeks and countless other peoples when things were going well, but when things go pear shapes their off. With people like mack cheering them on and believing their every word, never a criticism. The ‘markets’ it seems are above all norms of debate.

    Instead of making the massive cuts appear as the only option and thus inevitable, why not tax these markets and those who have benefited from the boom years most, until the pips squeak, to use an old cliché, they may not be so keen on spreading misery then.

    If only you wrote more of the victims of these crooks I might regain some respect for you.

  • Mack

    Mick – the markets are just the sum total of human interactions. If there are more sellers of bonds (short or otherwise) than buyers, the price will fall and the yeild (interest payment as a per centage of the price) rises. That’s the situation the Greeks are in. They might be saved by the ECB, if the ECB buys bonds and generates inflation – the Greeks can dig their way out of a hole by increasing spending/ wages/ prices at a lower rate than the Germans. But given that the Germans are paranoid about inflation – I wouldn’t want to rely on it. If they don’t want to make cuts, the alternative is to exit the Euro and default. If they (or we) don’t have the fiscal discipline to share a currency with the prudent Germans why torture ourselves in this way?

    http://sluggerotoole.com/2010/04/24/then-and-now-the-argentine-economic-crisis/

    Sovereign defaults in the Eurzone now though could have big implications for European banks, and might set of a repeat of the Great Depression. We live in interesting times, although I’m sure you’d agree – we’d be better off if we didn’t..

  • Mack

    With people like mack cheering them on and believing their every word, never a criticism

    In fairness, Mick, a decent portion of my blog posts are about financial reform – including two in the last 10 days or so..

  • At the risk of exposing my, admitted, ignorance of the financial and economics area. Why are we blaming the bankers, any who actually broke the law should be prosecuted and hopefully will be.

    Surely the people we should hold responsible are the politicians we elected to make the rules and ensure they were kept?

    Serious questions:

    a) Can we throw Greece out of the Euro for flagrant breaches of rules fraud?

    b) Can we leave the Euro without too much pain?

  • Greenflag

    pippakin,

    ‘Surely the people we should hold responsible are the politicians we elected to make the rules and ensure they were kept?’

    In theory correct . In practice the ‘politicians’ changed /unmade/deregulated financial sector rules starting back in the 1980’s and the repeal of the Glass Steigal Act in the US Congress under President Clinton in 1998 finally let loose what Warren Buffet called the ‘weapons of mass economic destruction’ which finally culminated in the collapse of Lehman and the Wall St meltdown.

    Have a look at yesterdays CNN video with the Goldman Sachs executive being questioned by Senator Levin . If you ever needed to believe that Goldman Sachs need to be broken up and why that should happen you only have to listen to the answers given to the Senate committee by the Goldman Sachs exec .

    The truth is NONE of our western politicians and I include the Irish , British , German , USA etc knew what was happening in the financial markets until they all found out the hard way when it was too late.

    And even when the USA President is trying to enact the financial sector reforms that all countries agree are needed to prevent a re run of financial chaos the American neo Conservative right wing as represented in the USA Senate by the GOP (Republicans) have voted NOT to debate the issue . The banking and Wall St financial lobbyists are spending millions to hold up any reform . They would naturally prefer to keep stealing ;(

    If the Eurozone goes under present conditions of worldwide financial instability then we on these islands and elsewhere would find ourselves back in the 1930’s with political and social instability heaped on to the economic . Democracy as we know it could not cope and thus the call for extremist left or right ‘final ‘ solutions would take the stage .

    Meanwhile the developing world markets are being inundated by cheap dollars which are being used to create even more ‘bubbles’ in property and financial markets as of now .

    As for ‘pain’ ? . Don’t ever believe that the Goldman Sachs or Bank of Americas or the City hedge fund gangsters give an iota of a damn about the ‘pain’ they inflicted on the wider society in which they operate . And the same is probably true of the western and other politicians who are in the pockets of GS, BOA , etc etc .

  • Greenflag

    You paint a grim picture!

    I have heard a little about the debate on financial reform in the US, regrettably mostly from Fox News, which is like the Sun on amphetamines.

    The phrase of the moment is ‘too big too fail’ and that is something I think no government can afford.

  • Mack

    what do you think will happen? As an outsider, I agree about the possibilities for contagion at government level and the possible knock on effects for economies just outside the euro-zone make this worth keeping an eye on.

    The government here had the power to act quickly to provide morphine a couple of years back. The same may not be said of Eurozone members and the ECB?

  • Mack

    I am not sure. I know what most people say would happen, but I am not sure it would make much difference to most of us. At the risk of sounding even more ignorant, it is not as though anyone could send in the bailiffs.

    I hear Spains credit rating has just been downgraded, who are Standard and Pools anyway? it seems absurd a country, any country has a credit rating, more than absurd it is offensive that an entire country can be treated as if they are naughty debtor.

    I already admitted my ignorance, so no raised eyebrows and loud sighs please!

  • Mack

    St. Etienne –

    You are probably more semi-detached (even if that) than a proper outsider here. I think Greece will default, I’d guess the odds are higher of them remaining in the Euro (at least for now) than leaving. After Greece it looks like Portugal, then us. Compared with Argentina in the late 90’s all of us (and the UK, Spain, Italy) look to be in some degree of trouble.

    But they (and us), I think, have to face up to what being in a currency union with Germany really means – and hopefully the Germans can also face up to what being in a currency union with the Mediterranean countries means, and either take steps to rectify the imbalances, agree to allow the ECB to at least provide cover against speculators, or come up with an orderly mechanism that would allow struggling countries to leave the Euro. Actually getting all of those measures in place would be great.

  • Mack

    Large funds – like pension funds – use credit ratings to market their products. I.e. Your company might offer bond based fund as part of their pension provisions, and typically you’d choose bonds over share-based funds if you are looking for capital security (i.e. not to loose money). So as you approach retirement you transfer money from your share fund into your bond fund – to lock in the value of your pension to provide from your retirement.

    It’s the rating agencies that certify the investment grade of the pension fund (AAA etc), if that falls below a certain level, pension funds will sell. As the pension funds themselves are marketed as being safe only investing in A rated bonds and not junk bonds.

    At the risk of sounding even more ignorant, it is not as though anyone could send in the bailiffs.

    No not likely – although it’s in this area that Gun Boat Diplomacy developed. The interest rate you pay on any borrowings is related to your percieved risk of default (how likely it is the lender will be repaid). So while you can default / restructure – you’ve still got appear trustworthy (otherwise you end up like Zimbabwe)..

  • Mack

    It’s the rating agencies that certify the investment grade of the pension fund (AAA etc),

    I meant –

    It’s the rating agencies that certify the investment grade of the bonds (AAA etc) the pension fund holds ,

  • Thanks for this.

  • Greenflag

    pippakin,

    ‘it seems absurd a country, any country has a credit rating, more than absurd it is offensive that an entire country can be treated as if they are naughty debtor.’

    It may seem absurd but that’s the way the world works presently and to an extent always has at least in modern times . Take Zimbabwe a so called ‘sovereign ‘ country as an example . The only way you can buy food , clothing etc in the shops is by using US dollars , South African Rand or Botswana Pula . The Zimbabwe ‘dollar’ like the Weimar deutchmark and later the Third Reich currency is merely absorbent toilet tissue and useless for international transactions .

    In 1987 the Irish currency was under threat of being downgraded as a result of too high borrowing and too high public debt . The IMF was on it’s way when FF’s Finance Minister Ray Mc Sharry took his knife to public expenditure excess and laid the basis for later economic recovery .

    In 1987 it was just Ireland . In 2010 while it may seem to some like deja vu it’s the entire world financial system which is in a mess .

    Goldman Sachs were selling what they knew to be worthless investment products to their clients while telling them (the clients ) that they were fine . You only have to be a seven year old child to figure out the basic dishonesty that was widespread at the root of this economic mess . And it was’nt just Goldman Sachs who have now taken on the pin up media status of ‘evil’ personified . Six of the biggest financial institutions in the USA sold 90% of the sub prime mortgages among whom were GS ..

    You may have an inkling now of why I disagree with Alias’s oft stated rants on ‘national ‘ sovereignty ‘

    The real rulers of the world are not our elected politicians but the financiers who tell the politicians when and when not to jump at least during this present crisis .

    Where was the SEC (Securities Exchange Commission ) and the Federal Reserve during the build up to this crisis ? They were appointed by the politicians remember ?

    At least Gordon Brown and President Obama seem very aware that there cannot be a proper return to confidence until there is financial reform and it will have to be international in scope taking in probably the top 20 world economies . It won’t be easy .

  • I think there needs to be a cull of all the so called too big to fail corporations, including banks. No company should ever be bigger than its home country.

  • Greenflag

    No corporation (yet) is a s big as the USA but many have larger sales than many small or medium sized countries . I don’t know if the politicians in the USA or in the UK have the ‘bottle’ to cull those considered too big to fail . They will be looking at the emerging banking giants of East Asia and wondering whether such a move would disadvantage western banks .

    BTW .I’m not being ‘grim’ just telling it as I see it 😉

  • Thats the trouble…

  • Actually getting all of those measures in place would be great.

    I note you leave out an estimate of such an agreement occurring.

    The ‘Mediterranean’ economies of the eurozone (and I include the Republic in that) seem to be bobbing along plugging holes in their liferafts while their Franco-German rescue service argues with the local militia as to whether they really are worth saving.

    Hindsight is a great thing, but truthfully an awful lot of people said the same thing 11 years ago: You can’t square economic circles. The tut-tutting of populist Germany as it digests the Greek social economy is insightful.

  • Mack

    The architects of the Euro assumed that crises such as this one would act as the opportunity to further political and economic union.

    That’s one way of looking at the problem, I guess. The UK is in pretty much the same boat as the PIIGS – excepting it has it’s own currency.

    Of that group only Ireland has shown any real resolve in terms of making the fiscal adjustment required to live with a hard currency, albeit at great cost in terms of unemployment. My guess is though that those countries that do have the discipline to remain in the Euro would do better with the kind of economic policies that forces upon them – in the long run – than those who opt for a weak currency, attempt to inflate away their debts and improve competitiveness by devaluations..

  • Having it’s own currency means effectively it can control monetary easing at the flick of a switch. And it has done so to apparent good effect. Tactically speaking of course.

    I’m sure there are those regions within the Eurozone wanting a similar magic wand although obviously the South isn’t large enough to make it into this category – since removing the peg with sterling this is the only show in town.

    Maybe monetary union, long term, is inevitable. It’s a pity then the process is managed by those whose mandate still relies on economic and social nationalism, whether they care to admit it or not

  • aquifer

    AA Eh? That would be the Standard and Poor that told us Subprime was fab.

  • aquifer

    Believability is the scarce resource here.

    Why don’t the irish southerners of the north go and tell the Greeks to lay off the financial ouzo?

    A hangover shared is a hangover halved.

  • Mack

    The ECB can engage in quantitive easing too – and may well do so again to bailout the Greeks.

    The big issue would appear to be a loss of competitiveness vis-a-vis other European trading partners – German wages barely increased over the last 10 years while wages in other Eurozone countries sky-rocketed – in some cases without the required increase in productivity. I don’t think Ireland quite falls into this category – but the other PIIGS do. The way they’d normally restore competitiveness now would be to devalue.

    Living in the Eurzone means having the discipline not to agitate for or award pay rises above productivity growth.

    Ireland’s big European problem stems from lax regulation which allowed a credit bubble (fueled by low interest rates and a large pool of domestic (Eurozone) savings looking for a home).

    I don’t think size imposes limits on running your own currency effectively, by the way – Switzerland is not much bigger and Singapore about the same size. If we had the punt we could follow the same strategy as the UK.

  • madraj55

    It must annoy the hell out of DUP and TUV that Ireland wasn’t mentioned among the countries cited to follow greece into the financial doo dah. They would have been in seventh heaven if the South was declared bankrupt.

  • Greenflag

    The fact that Ireland was’nt mentioned is neither here nor there -it doesn’t change the facts of economic life . The Greeks can’t be expelled from the Eurozone . They can opt to leave . If they leave they would be back to the drachma and their ‘economic /public sector /debt problems would have to be resolved by themselves alone . As of now given the seeming unwillingness of the Greek people to contemplate even more public sector cuts and cuts in pensions and other spending -it would probably only be a matter of time before the Colonels stage a coup d’etat to bring order to probable widespread social unrest .

    The ‘drachma ‘ never a respect engendering currency at the best of times would no doubt come into the gunsights of international financial speculators who would milk whatever they could out of Greece before that country went into default .

    The Germans & French and the other Eurozone countries risk dragging the Euro temple down around themselves if they fail to shore up the Greeks . If the Greeks ‘go’ then Spain and Portugal will not be far behind nor will Ireland . The UK will not be exempt as they may indeed be the next best ‘plum’ target for international currency speculators given that they are not ‘Eurozone’ members and thus easier to take on . The Euro despite it’s recent slippage is still considerably above it’s value as against the pound and dollar since it’s inception.

    I suspect that the Greeks will be ‘saved’ and that the fact that the US Senate is now getting down to business to reform the gambling casino that was and is Wall St and the entire American financial sector that come September the world ‘crisis ‘ will have largely abated and confidence will be restored somewhat. The deep underlying economic issues facing western developed economies such as unemployment and lack of strong economic growth will still be there but light may appear at the end of a very long tunnel . But it will not be back to business as ‘normal’ as experienced during the latter days of the Clinton presidency or the entire period of the Bush presidency .

    The GOP (Republicans ) have caved in in their opposition to needed financial reforms . They have done so not because of any change in their ideological preference but because they know that the court of US public opinion is very much in favour of effective reform of the Wall St financial and banking sector which caused so much financial misery not just in the USA but around the world .

  • Greenflag

    aquifer ,

    ‘Why don’t the irish southerners of the north go and tell the Greeks to lay off the financial ouzo?’

    Irish southerners of the North ? Oh I see you mean Donegal? Alas the population of Donegal is only about 150,000 An.d even though I’m sure many Donegal folk would enjoy an extended sojourn in the land of ouzo methinks that have far too much common sense to even dream of thinking to persuade the Greeks or anybody else of changing their cultural norms 😉

  • Greenflag

    Thanks for some common sense and humanity, I personally would shoot a few of these so and so money merchants, but as that is unlikely, people like that smirking bastard who went before the Senate committee, should be put down the same chute as Noriaga was stuffed down and fitted up by the US judiciary so they never see the light of day again.

    Someone has to put some manners on this people and dam quick, they create unnecessarily victims and for no better reason than pure greed and do so without a backward glance. Or is it only the deranged and economically poor who get fitted up in the good old USA.

    Mack

    You mention the credit rating agencies, this letter was in todays Guardian, is it true?
    ——————

    Is this credit rating agency now rubbishing Greece’s financial position the same one that gave the sub-prime market a triple-A rating (Report, 28 April)?

    B Ramsbottom

    Beckermet, Cumbria

  • Mack

    Yes it’s true – and the same investment funds (including pension funds) that got burnt on sub-prime will take their word for it..

  • Mack

    Thanks.
    I realise I have been a bit harsh on you and Fealty of late, but you are both sharp lads who can set an agenda, my problem with you both is of late you concentrate on power and often overlook its victims. I do not for a minute believe you do this because you are insensitive to other peoples suffering, but do this because that is how the game is played.

    Take the UK leaders debate last night, Cameron began with an onslaught against the long term unemployed and said he intends to cut their benefits if they refuse to work/or attend so useless course. (This at a time when even young graduates cannot find work)

    The current job seekers allowance for people under 25 in the UK is a paltry £51.85 or £65.45 for those over that age. Cameron claimed £680 to repair his second home and plant some wisteria, which is 10 weeks unemployment benefit. Yet was he crucified and impoverished for plundering public funds? No, more likely he will be rewarded by being made PM and then impoverishing other less fortunate folks.

    It is this causal way they destroy other people lives which makes me mad as hell, and when|I see a decent chap also over looking it I feel I have a duty to remind them.

    This may not make me popular with either you or Mick F, whose defence of the Robinson’s some weeks back was outrageous and ill thought out. Finally I would have sent you this off list but i could not pull up your email address.

    Keep up the good work but please give a little more thought to the little people.

  • Mack

    The dole in the UK is shockingly low, they should probably restructure the whole thing – but I wouldn’t hold my breath.

    E.g. something like –

    A single welfare payment (which could be capped at a reasonable maximum and any money saved could be redistributed)

    The dole should be a percentage of your job’s salary (60-80%)

    Payments decrease every year to a minimum level (which should be lower than the minimum wage, it would be unfair to pay minimum wage workers less than non-workers, in some European countries payments drop to 0 after 5 years. That seems harsh, but you could possibly have such a system if payments were restored on condition of taking some action – e.g. a training course)

    Higher level of NI to fund higher dole payments (you could look at having different NI levels dependent on percieved job security too – so those who will never have to face loosing their jobs contribute more)

    Reform the labour laws to make it much easier for companies (& the state) to hire and fire workers (the quid pro quo for a higher dole, which should mean more jobs created & more opportunities for advancement). You could also look at having employer national insurance contributions fluctuate with the level of unemployment -i.e. they rise as unemployment falls (in good times, to fund payments in the next recession) and fall as unemployment rises (to make it cheaper to hire workers in a downturn).

    Job creation would be good too..

  • Greenflag

    mickhall,

    Goldman Sachs are now facing criminal charges . I would hope that CEO Blankenfein and some of his top executives would be found guilty and sentenced to 150 years in jail . Bernie Madoff got 150 years for ‘looting’ a mere 60 billion dollars and destroying the lives of thousands of ‘investors’ . Goldman Sachs plus the five or six other large financial institutions who instigated and brought about the near total collapse of the world financial system and ushered in a worldwide recession as well as adding an extra 8 million to the ranks of America’s unemployed and even more around the world -probably deserve to be put in front of an international tribunal at the Hague .

    Margaret Thatcher’s infamous ‘there is no such thing as society ‘ has obviously reached a new level of ‘destructive ‘destruction’ on the part of these financial gangsters . GS and others like them seem totally oblivious of everything bar their own personal gain . Even their clients investment funds can be cast aside as a ‘shitty deal’ while Goldman Sachs reaps more gold for itself .

    We should not be surprised . It’s the inevitable outcome of 25 years of giving almost free rein to the financial sector to do as it pleased assuming they at least possessed some basic business ethics ;(

  • mack

    You say ‘Reform the labour laws to make it much easier for companies (& the state) to hire and fire workers.’ I’m not up to speed on these laws in the South, but in the UK they are already amongst the most lax in northern Europe.

    When this occurred all that happened in the UK was an increase in the power of the employer to abuse their workforce and drive wages down. If they were any more in the employers favour it would take us back to the dark days when the boss was god.

    Ask almost anyone these days and they will tell you they hate their job, this is because profit is the employers only motivating force.

    There is nothing wrong with making a profit, but it must not be at the expense of the workforce. The salary gap between a senior manager or owner, and the average employee is horrendous these days.

    Even under capitalism it does not have to be like this, you have good employers and co-operatives which people actually enjoy working for (John Lewis etc)

    Relaxed Labour laws lead to the sweat shop of old, or the third world of today. It is really time people like yourself moved beyond the bottom line and carefully looked at work as an integral and important part of someones life and stop seeing humanity as merely a cart horse to create wealth for a minority of people, who in many cases have proved themselves to be some of the most greedy and obnoxious people on the planet.

    If some people are willing to exist on a very low income, yet perhaps spend their time in a productive way, by for example creating artistic endeavours, charity work, gardening for others, whatever, are we such a shallow society we cannot accommodate them. Do we really need to demonise them and drive them in to further poverty?

    Yes, we must do what we can to get the young into the workplace, but bullying and demonising is not the way. Thankfully I have not been in a job centre for decades, but yesterday out of interest I thought I would check out the local rag and job centre to see what work was available in an attempt to get an idea just how tough it is for people who want to work. In both were jobs for HGV drivers, yet when I asked in the job centre if an unemployed person were willing to train as an HVG driver, is there a government course, or some kind of help with funding. The nice lady said no, although we do have course which teach people how to fill in application forms, conduct themselves in an interview, etc.

    What good is that to an unemployed person who is keen to train to be an HGV driver but cannot find the £1000 plus needed to get them their HGV driving licence.

    £1000 is a small sum if it get someone into work, when I look back at the 1960s, you could enter a 6 months government training course to be re skilled, and whilst training you received a few pounds more than the dole, plus board and lodging as some of these training centres were in different parts of the country from where the unemployed person lived.

    I know countless carpenters, brickies, welders, fitters, landscape gardeners, typists, secretaries, etc, who first leant their craft this way, and 40 odd years later are still working at their trade.

    When politicians, as Cameron did last night, say they are going to cut benefits with no or very little mention of what help the government will give in retraining,etc, I see a spiteful individual and liar.

  • Mack

    You are right that training needs to be supplied to people on the dole. The purpose of the dole should be to keep people afloat and get them back to work as quickly as possible.

    Possbily a UK-style student loan type scheme for private training & qualifications mightn’t be a bad idea either. So if you want to get a HGV licence or sit an exam you can borrow the money at a rate linked to inflation and only pay it back once you are earning above a certain level. Getting people back to work and skilled up would mean all these initiatives should pay for themselves.

    The USA has even looser laws on hiring and firing – without the kind of social safety net we are talking about here – and neither does a social safety net of that quality exist in the UK.

    I’ve spent most of my adult life working for American multinationals – they are much more likely to hire and promote American workers (followed by Irish & UK) than contentental European workers. The reason for this is the cost of making a mistake is much greater in continental Europe than in the UK or Ireland never mind the USA. If we want an economy that is dynamic and innovative – where new companies can sprout up and render old businesses obsolete – we need some mechanism for enabling those companies to take risks on ventures hire people, and if they fail – let them go. While at the same time we have a responsibility to the workers in such an environment to ensure that their standard of living doesn’t suffer (I would maintain the more dynamic the economy is the higher it should be) and also that they have the tools & training to take up new jobs and respond.

  • Mack

    And by expensiveness of mistakes I mean both the employee not working out for whatever reason and the project the employees were hired to work on failing.