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#13263680
Spiegel online International wrote:Timebomb for the Euro
Greek Debt Poses a Danger to Common Currency
By Wolfgang Reuter


As economic indicators have improved, concern about the financial crisis has abated. But the next big problem could be approaching. Greece's public deficit is skyrocketing and the country may become insolvent. The effect on Europe's common currency could be dire.

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Josef Ackermann, the CEO of Deutsche Bank, has given the all-clear signal many times in the past. He has repeatedly said that the worst was over, only to see the financial crisis strengthen its grip on the world economy.

Last week, however, Ackermann was singing a completely different tune. Although many indicators are once again pointing skyward, he said at a Berlin summit on the economy, Chancellor Angela Merkel, the assembled cabinet ministers, corporate CEOs and union leaders should not to be deluded. He warned emphatically that the financial situation could deteriorate once again. "A few time bombs" are still ticking, Ackermann told his audience, noting that the growing problems of highly leveraged small countries could lead to new tremors. And then, almost casually, Ackermann mentioned the problem child of the European financial world by name: Greece.

Ackermann isn't alone in his opinion. Practically unnoticed by the public, an issue has returned to the forefront in recent weeks -- one that was a cause for great concern at the height of the financial crisis but then, as optimism about the economy began to grow, was eventually forgotten: the fear of a national bankruptcy in the euro zone. And the question as to whether such a bankruptcy, should it come about, could destroy the common European currency.

Greece was always at the very top of the list of countries at risk. But now the danger appears to be more acute than ever.

Insuring Against Default

The seismographs in the trading rooms at investment banks detected the initial tremors weeks ago. Today, when the code "Greece CDS 10Yr" appears on Bloomberg terminals, a curve at the bottom of the screen points sharply upward. It reflects the price that banks are now charging to insure 10-year Greek government bonds against default.

The price of these securities has jumped dramatically since Greek Finance Minister Giorgos Papakonstantinou announced three weeks ago that his country's budget deficit would reach 12.7 percent of gross domestic product this year, instead of the 6 percent originally forecast -- and well about the 3 percent limit foreseen by European Union rules.

A second curve is the mirror image of the first. It depicts the price of government bonds from the euro-zone country. It points sharply downward.

Greece already pays almost 2 percent more in interest on its debt than Germany. In other words, at a total debt of €270 billion ($402 billion), Greece will be paying €5 billion more in annual interest than it would if it were Germany. And, with rating agencies threatening to downgrade the country's already dismal credit rating, the situation is only likely to get worse.

The finance ministers and central bankers of the euro-zone member states are as alarmed as they are helpless. "The Greek problem," says a senior administration official in Berlin, "will be an acid test for the currency union."

No Buyers Can Be Found

Greece has already accumulated a mountain of debt that will be difficult if not impossible to pay off. The government has borrowed more than 110 percent of the country's economic output over the years, and if investors lose confidence in the bonds, a meltdown could happen as early as next year.

That's when the government borrowers in Athens will be required to refinance €25 billion worth of debt -- that is, repay what they owe using funds borrowed from the financial markets. But if no buyers can be found for its securities, Greece will have no choice but to declare insolvency -- just as Mexico, Ecuador, Russia and Argentina have done in past decades.

This puts Brussels in a predicament. European Union rules preclude the 27-member bloc from lending money to member states to plug holes in their budgets or bridge deficits.

And even if there were a way to circumvent this prohibition, the consequences could be disastrous. The lack of concern over budget discipline in countries like Spain, Italy and Ireland would spread like wildfire across the entire continent. The message would be clear: Why save, if others will eventually foot the bill?

A Domino Effect

On the other hand, if Brussels left the Greeks to their own devices, the consequences would also be dire. Confidence in the euro would be shattered, and the union would face a crucial test. What good is a common currency, many would ask, if some of the member states pay their debts while others do not?

Furthermore, there is a threat of a domino effect. If one euro member falls, speculators will test the stability of other potential bankruptcy candidates. This could destroy the currency union. Because of this systemic risk, say the economists at the Swiss bank UBS, "we believe that if a country is facing a problem with debt repayment or issuance, it will be supported.

A default of a euro-group country doesn't worry the monetary policy hawks at the Bundesbank, Germany's central bank. "So what if Greece stops paying its debts?" one of the executive board members asked at a recent banquet in Frankfurt. "The euro is strong enough to take it." The real threat, he says, is if Brussels comes to the Greeks' aid. "Then the currency union will turn into an inflation union."

But it remains to be seen whether politicians can maintain such an unbending approach. The prices for Greek government bonds plunged once in the past, until then German Finance Minister Peer Steinbrück, to the horror of the Bundesbank, publicly pledged to help the Greeks if necessary. There is much to be said for the government taking exactly the same position today.

Can Bankruptcy Be Prevented?

A national bankruptcy in Greece would have a serious impact on Germany, where many banks have invested heavily in the high-yield Greek treasury bonds -- after borrowing the money to buy the bonds from the European Central Bank (ECB) or other central banks at rates of 1-2 percent. Making money doesn't get much easier -- as long as the Greeks remain solvent.

But can a Greek bankruptcy even be prevented anymore? The answer, at least initially, depends heavily on the ECB. Will the custodian of the euro continue to accept Greek bonds as collateral for short-term liquidity assistance, or will it turn down the securities in the future? Another possibility is a compromise, under which the banks would pay additional interest when they submit Greek bonds.

The next meeting of the ECB takes place on Dec. 17. "The subject will be on the agenda," say officials in Frankfurt. Time is of the essence.

Central bankers in the euro zone are already speculating, behind closed doors, what would happen if the Greeks started printing euros without ECB approval. There is no answer to the question, and that makes central bankers from Lisbon to Dublin even more nervous than they are already.

Massaging Budget Figures

And more mistrustful. In 2004, it was discovered, completely by accident, that Greece had only managed to qualify for entry into the currency union by massaging its budget figures. The Greeks have only complied with the Maastricht criteria once since the introduction of the euro, in 2006.

Even those figures may have been doctored. At the time, the Greeks managed to increase their official gross national product by a hefty 25 percent, partly because they included the black market and prostitution in economic output. This brought down the deficit rate -- on paper, at any rate -- to 2.9 percent.

The figures representing Greece's budget deficit are constantly being revised upward. The most recent uptick, by close to 7 percent, is a record for Europe -- and it comes in a country that was relatively unaffected by the financial crisis. This year, the Greek economy will have shrunk by only 1.2 percent, say Greek economists. Next year they expect the economy to return to grown, albeit modest.

Particularly vexing to the remaining EU countries is the fact that Greece has profited from its EU membership for decades. Year after year, net transfers from Brussels have exceeded payments moving in the opposite direction by €3 billion to €6 billion. These numbers, too, have often been suspect. At times, the land area declared for agricultural subsidies was incorrect, and sometimes approval conditions were not met.

Resolute Words

Nevertheless, EU politicians find their hands tied. "The game is over," the chairman of the euro group, Jean-Claude Juncker, declared recently, only to turn around and assure the country of his solidarity. "I don't have the slightest suspicion that Greece could go bankrupt -- anyone speculating that this will happen is deluding himself," says Juncker.

His resolute words were directed at investment bankers in London, Frankfurt and New York. They know full well that Greece is indeed on the brink of bankruptcy, but they don't know whether the EU will, as Juncker insinuated, come to the aid of member state Greece. Juncker's message, in other words, was that those speculating on a bankruptcy could be left out in the cold.

The EU has now begun a tougher approach to Greece. Three weeks ago, the government in Athens received a rebuke from Brussels, followed by another one last week. So far, however, the Greek government has shown little inclination to take any significant steps. It does intend to reduce the deficit, but only to 9.1 percent next year. This is far too little for many European foreign ministers. As the new Greek finance minister, Giorgos Papakonstantinou, recently announced, the country will need at least four years to get its deficit under control "without jeopardizing the economic recovery."

But by then the government deficit will have reached about €400 billion, or about 150 percent of GDP. Servicing that amount of debt, even at current interest rates of about 5 percent, will make up at least one third of government spending.

A London investment banker is betting on the continued decline of prices for Greek bonds in the short term, while simultaneously waiting for the right time to start buying the securities again. He jokes: "If someone has €1,000 in debt, he has a problem. If someone has €10 million in debt, his bank has a problem. And the bank, in this case, is Europe."


Long article, but important. Tonight ECB's president Trichet called the situation in Greece a very very serious problem and alarming....
User avatar
By JohnRawls
#13263688
I doubt this will happen . There are simply to many institution which can prevent it just by a flick of few thingers .
User avatar
By Philby
#13263692
Which institutions? And what will happen if they snap their fingers, pull out their wallets?
User avatar
By JohnRawls
#13263699
The European bank for construction and development .

The World Bank .

The European Central Bank .

International monetary fund .
User avatar
By Philby
#13263705
OK thanks, nothing serious going on than. :eh: :?:
User avatar
By JohnRawls
#13263710
It is serious but don't be mistaken .

The whole point of the Eu is to prevent things like that .

The eu will use ALL of its means to pressure all internal and external institutions to save greece . The 27 countries together posses IMMENSE international power .
User avatar
By Philby
#13263718
It's all about money John! Will Estonia pull out the wallet and save Greece from bankrupcy?
User avatar
By JohnRawls
#13263728
You seemed to miss the point . We will all pull out the cash and it won't deppend on us , there are ways of doing without us noticing , througth inflation for example or througth the special drawing rights .
User avatar
By Dave
#13263731
It has begun. I predicted two years ago that the then impending financial crisis would result in heavy borrowing by several of the sloppy Mediterranean countries in the Euro zone, which would result in the monetary zone shrinking or breaking entirely.
User avatar
By JohnRawls
#13263737
DO you really think a 25 billion dollars is a large sum of money for the EU ?

If we prient 25 billion , considering 40% of the world money is Euro i don't think the inflation will be that severe .
User avatar
By Philby
#13263743
JohnRawls wrote:We will all pull out the cash


There is no fucking cash left John. I can assure you there are no new memberstates in the EU having any financial possibillities to even consider helping Greece. So it would be the "old" countries but they are having more than enough problems with their own economies.

Besides that you missed a more ethical and maybe more important point:

Spiegel article wrote:And even if there were a way to circumvent this prohibition, the consequences could be disastrous. The lack of concern over budget discipline in countries like Spain, Italy and Ireland would spread like wildfire across the entire continent. The message would be clear: Why save, if others will eventually foot the bill?


This says it all. Thinking about this I would advise my governement to stop looking at the EU monetary rules, Estonia will save us later on anyway.

@Dave

I agree with you, though you are even more pessimistic.
Last edited by Philby on 11 Dec 2009 01:06, edited 1 time in total.
User avatar
By JohnRawls
#13263746
HAve you heard about the printing press ? Have you heard about special drawing rights ? Have you heard about partially backed loans ?

All those things can help solve the debt .
User avatar
By Philby
#13263757
Come on John that are no solutions.

Now on television here: Greece has cheated with figures towards the EU.....

It will get worse.....
User avatar
By Philby
#13264130
Project Syndicate wrote:The Euro’s Greek Tragedy

AMSTERDAM – When the euro was introduced in 1999, European countries agreed that fiscal discipline was essential for its stability. While the common currency has benefited all countries that have adopted it – not least as an anchor in the current economic crisis – the failure of euro-zone members to abide by their agreement risk could yet turn the euro into a disaster.

Indeed, too many members simply behave as if there were no Stability and Growth Pact. The state of Greek public finances, for example, is “a concern for the whole euro zone,” according to European Commissioner for Monetary Affairs Joaquin Almunia. Greece’s fiscal deficit is expected to reach 12.7% of GDP this year, far exceeding the SGP’s 3%-of-GDP cap.

Of course, every euro-zone country is breaching the SGP’s deficit ceiling as a result of the current crisis. But consider the Netherlands, which will do so this year for only the second time since 1999. When the Netherlands first exceeded the SGP limit – by only 0.1% of GDP – the government immediately took tough measures to rein in the deficit. Germany and Austria behaved the same way. Those countries are already working to reduce their crisis-inflated deficits as soon as possible.

Down in southern Europe, things look very different. Exceeding the SGP’s deficit cap is the rule rather than the exception. Indeed, throughout the euro’s first decade, Greece managed to keep within the SGP limits only once, in 2006 (and by a very narrow margin).

Moreover, the Greek government turned out to be untrustworthy. In 2004, Greece admitted that it had lied about the size of its deficit ever since 2000 – precisely the years used to assess Greece’s application to join the euro zone. In other words, Greece qualified only by cheating. In November 2009, it appeared that the Greek government lied once again, this time about the deficit in 2008 and the projected deficit for 2009.

Italy also has a long history of neglecting European fiscal rules (as do Portugal and France). Like Greece, Italy was admitted to the euro zone despite being light-years away from meeting all the criteria. Public debt in both countries was well above 100% of GDP, compared to the SGP’s threshold of 60% of GDP. Italy did not fulfill another criterion as well, as its national currency, the lira, did not spend the mandatory two years inside the European Exchange Rate Mechanism.

Ten years later, it seems as if time has stood still down south. Both the Greek and Italian public debt remain almost unchanged, despite the fact that both countries have benefited the most from the euro, as their long-term interest rates declined to German levels following its adoption. That alone yielded a windfall of tens of billions of euros per year. But it barely made a dent in their national debts, which can mean only one thing: massive squandering.

That is evident from their credit ratings. Greece boasts by far the lowest credit rating in the euro zone. Standard & Poor’s has put the already low A- rating under review for a possible downgrade. Fitch Ratings has cut the Greek rating to BBB+, the third-lowest investment grade. Indeed, those scores mean that Greece is much less creditworthy than for example Botswana and Malaysia, which are rated A+ .

What if Greece gets into so much trouble that it cannot service its debt? That is not impossible. According to calculations by Morgan Stanley, with relatively low long-term interest rates, Greece needs a primary surplus of at least 2.4% of GDP each year just to stabilize its national debt at 118% of GDP.

Current European rules prohibit other European countries or the EU itself from helping Greece. But recent history teaches us that European rules are made to be broken. Already, many (former) politicians and economists (no prizes for guessing whence they mostly hail) are proposing that the EU issue its own sovereign debt, which would alleviate the problems of countries such as Greece and Italy.


But such schemes would come at a high cost. They would punish fiscally prudent governments, as interest rates would inevitably increase in countries like the Netherlands or Germany. Just a 0.1% increase in borrowing costs would mean hundreds of millions of euros in extra debt-service payments a year.

Moreover, even if the plan for EU sovereign debt never takes off, fiscally prudent euro-zone countries will face higher borrowing costs. As financial integration in Europe deepens, the lack of fiscal discipline in one or more euro-zone countries will push up interest rates throughout the currency area.

A member of the euro zone cannot be expelled under current rules, allowing countries like Greece to lie, manipulate, blackmail, and collect more and more EU funds. In the long term, this will be disastrous for greater European cooperation, because public support will whither.

Europe should therefore consider bearing the high short-term costs of changing the rules of the game. If expelling even one member could establish a more credible mechanism for guaranteeing fiscal discipline in the euro zone than the SGP and financial fines have proven to be, the price would be more than worth it.
By Kman
#13264156
HAve you heard about the printing press ? Have you heard about special drawing rights ? Have you heard about partially backed loans ?

All those things can help solve the debt .


Inflation is the same as taxing people, it just punishes savings also instead of just wages, and I would call 25 billion euro quite a significant amount of money, its the european people that would have to pay it in the end and the bill for that would be 50 euro for every single citizen in the EU, children and elderly included (25.000.000.000/500.000.000 = 50).

That means that each family in europe with a man and wife and lets say 2 children for example, would each have to pay 200 euro to the greek government in order to save their ass.
User avatar
By JohnRawls
#13264251
Yes exactly Kman , but the greeks are in debt with european banks so its a nice way to feed the banks in the time of crisses and get rid of the debt.

Although i am not sure who exactly owns the debt but i am pretty sure it is European banks .
By Kman
#13264254
JohnRawls wrote:Yes exactly Kman , but the greeks are in debt with european banks so its a nice way to feed the banks in the time of crisses and get rid of the debt.


Huh? I dont understand what you mean here with feeding the banks?
User avatar
By JohnRawls
#13264259
Greeks own 25 billion debt probably to the European banks and other institutions , if Europe 'helps' Greece repay the debt by inflation for example , the money will go to those banks which gave the debt to greece .

That is what i mean by 'feeding'.
User avatar
By Philby
#13264281
I think you don't see the problem John, please read the two articles again. There is not only the 25 bln but there is a fiscal deficit of 12,7% instead of the max. 3%. There is a BBB rating (S&P) which means Greece has to pay 2% extra interest and that is impossible because Greece is insolvent. The EU and all membercountries are prohibit to help Greece according to EU rules. Now we can break the rules of course, but that means we will help a cheating country!

Please notice; inflation could help Greece but all other countries will suffer from it.
User avatar
By JohnRawls
#13264284
Our inflation is very low compared to other currencies so having a bit more inflation will help all of our industries as a matter of fact .

As i said there are other ways to manipulate and pay the debt .

For example international pressure is not exactly prohibited by the Eu to help greece pay its debt while direct 'paying' for them is .
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