Is the end nigh for the Euro? [vol. 3]
Discussion
DeejRC said:
Er ED are you talking pre 2010? Back into the early 00s? If so, no offence, but that simply doesn’t count. It was a different currency. The peg changed everything. From then it bounced around 1.2 and then started to climb dramatically until Xmas 2015 or so peaking around 1.45 - I can’t remember if it touched 1.5 or not. In 2016 it slid back after the Ref was announced and during the debates.
There was a reason every Brit I know who worked in the EU with family back in the UK voted for Brexit!
This is why I always hark back to the peg, my personal view is that reset the system and since then it was shaking out from that. Unfortunately Brexit happened 5yrs later and threw another pebble in the pond. So, to my mind, those ripples are only now subsiding and the system and drivers that were in play during 2011-2015 are the same as now. I know Stongle has a different view on the underlying technical aspects of all this, but that is where I stake my hat. Not for any ideological purpose, just business.
My fear with all the above is that because the system got reset, then got another shock in the middle of it - now 10 yrs later we still don’t know where the system lies. Where Stongle and I do sort of align (I think) is in the context of the markets “pricing in” European political economic instability, ie the Euro keeps slipping because the markets thing more turmoil is heading its way due to the underlying fault cracks in the system. Stongle is a lot more hawkish on that than me though - I think.
Meh, it was still a Euro and I still exchanged the pound to get it so as much as your point is kind of valid it isn’t at the same time. I recall when they swopped from pint to Euro it got better value by about 10/15p There was a reason every Brit I know who worked in the EU with family back in the UK voted for Brexit!
This is why I always hark back to the peg, my personal view is that reset the system and since then it was shaking out from that. Unfortunately Brexit happened 5yrs later and threw another pebble in the pond. So, to my mind, those ripples are only now subsiding and the system and drivers that were in play during 2011-2015 are the same as now. I know Stongle has a different view on the underlying technical aspects of all this, but that is where I stake my hat. Not for any ideological purpose, just business.
My fear with all the above is that because the system got reset, then got another shock in the middle of it - now 10 yrs later we still don’t know where the system lies. Where Stongle and I do sort of align (I think) is in the context of the markets “pricing in” European political economic instability, ie the Euro keeps slipping because the markets thing more turmoil is heading its way due to the underlying fault cracks in the system. Stongle is a lot more hawkish on that than me though - I think.
OK I've been pro-Euro throughout but I'm entertaining switching corners to some extent.
Greece has continued to gorge on cheap debt:
That cheap debt ain't so cheap now rates are rising back to the level that triggered the 2010 crisis:
I don't know if Greece will be saved again or not. Italy may also end up in trouble but that's probably too big to bail out.
Defaults will start in poor countries. Sri Lanka was just first but Tunisia, Pakistan etc. are also using debt to subsidise fuel and food, they are now in trouble as those prices have risen. That could cascade through credit markets fairly rapidly.
Greece has continued to gorge on cheap debt:
That cheap debt ain't so cheap now rates are rising back to the level that triggered the 2010 crisis:
I don't know if Greece will be saved again or not. Italy may also end up in trouble but that's probably too big to bail out.
Defaults will start in poor countries. Sri Lanka was just first but Tunisia, Pakistan etc. are also using debt to subsidise fuel and food, they are now in trouble as those prices have risen. That could cascade through credit markets fairly rapidly.
Greece should have defaulted, as they had done previous times before when their currency made what they had to sell, uncompetitive. They weren't allowed to because it would have collapsed the French state as their banks were up to their neck in Greek debt.
All the bailout did was send money straight to the banks for the majors in Europe, especially the French. That policy collapsed the Greek economy by 30% and piled on a huge debt burden.
In the context of what we have seen in bailouts since, it was complete madness driven by the politics outside of Greece.
All the bailout did was send money straight to the banks for the majors in Europe, especially the French. That policy collapsed the Greek economy by 30% and piled on a huge debt burden.
In the context of what we have seen in bailouts since, it was complete madness driven by the politics outside of Greece.
I will keep to the tradition of this thread by avoiding rudeness. However, I would suggest your post is flawed.
The Greece can has been kicked long down the road. As for Italy you can see the maturity profile here.
https://www.dt.mef.gov.it/en/debito_pubblico/dati_...
I know as with most countries they where trying to lengthen average maturity. I leave other to comment as to the affect on Italy. I did glance at the maturity and did see they have issued a 2072 bond.
I would say I would not hold bonds at the moment all downside and minimal up side.
speedy_thrills said:
Greece has continued to gorge on cheap debt:
Except your graph does not show that but a very small increase until covid which did mean spending increased but more importantly gdp plunged. If you look at the forecast these show debt falling over the next few years. speedy_thrills said:
That cheap debt ain't so cheap now rates are rising back to the level that triggered the 2010 crisis:
The reorganisation of Greek debt was completed some time ago. With a very long maturity profile. The increase will only affect new debt or refinancing so will have minimal impact. speedy_thrills said:
I don't know if Greece will be saved again or not. Italy may also end up in trouble but that's probably too big to bail out.
The Greece can has been kicked long down the road. As for Italy you can see the maturity profile here.
https://www.dt.mef.gov.it/en/debito_pubblico/dati_...
I know as with most countries they where trying to lengthen average maturity. I leave other to comment as to the affect on Italy. I did glance at the maturity and did see they have issued a 2072 bond.
speedy_thrills said:
Defaults will start in poor countries. Sri Lanka was just first but Tunisia, Pakistan etc. are also using debt to subsidise fuel and food, they are now in trouble as those prices have risen. That could cascade through credit markets fairly rapidly.
The market for debt from the very poorest nations is very different to that for the richest. I would say I would not hold bonds at the moment all downside and minimal up side.
jsf said:
Greece should have defaulted, as they had done previous times before when their currency made what they had to sell, uncompetitive. They weren't allowed to because it would have collapsed the French state as their banks were up to their neck in Greek debt.
All the bailout did was send money straight to the banks for the majors in Europe, especially the French. That policy collapsed the Greek economy by 30% and piled on a huge debt burden.
In the context of what we have seen in bailouts since, it was complete madness driven by the politics outside of Greece.
Greece did default. If you mean Greece should have dropped out of the euro and defaulted this was widely debated in earlier volumes. I originally felt this was the best outcome. However, when you looked in detail the pain would have been far worse. All the bailout did was send money straight to the banks for the majors in Europe, especially the French. That policy collapsed the Greek economy by 30% and piled on a huge debt burden.
In the context of what we have seen in bailouts since, it was complete madness driven by the politics outside of Greece.
Mrr T said:
Greece did default. If you mean Greece should have dropped out of the euro and defaulted this was widely debated in earlier volumes. I originally felt this was the best outcome. However, when you looked in detail the pain would have been far worse.
The pain would have been short term and manageable for Greece. It would have cost fractions of what the bailout cost Greece. It likely would have killed the French banks and the Euro.
jsf said:
The pain would have been short term and manageable for Greece. It would have cost fractions of what the bailout cost Greece.
It likely would have killed the French banks and the Euro.
Apart from the small issue if Greece never being able to borrow again, of course.It likely would have killed the French banks and the Euro.
And it wouldn't have fixed the underlying problem of Greece spending more than it took in in receipts.
M.
Mortarboard said:
Apart from the small issue if Greece never being able to borrow again, of course.
And it wouldn't have fixed the underlying problem of Greece spending more than it took in in receipts.
M.
Which is nonsense. Countries default and then get back to lending quickly, Greece has done it multiple times, which is why pre the Euro thier bond rate was traditionally high, to reflect the risk.And it wouldn't have fixed the underlying problem of Greece spending more than it took in in receipts.
M.
When they joined the Euro their bond rates merged to the same as every other Euro member, it was only when the 2008 crisis hit that the markets realised the Euro wasn't backed by a central bank, just a currency board, and the bond rates diverged again, causing a massive panic.
It was Draghi illegally changing the status of the ECB and saying he will do whatever it takes that stopped the collapse of the Euro at that moment.
jsf said:
Which is nonsense. Countries default and then get back to lending quickly, Greece has done it multiple times, which is why pre the Euro thier bond rate was traditionally high, to reflect the risk.
Last time they defaulted was......1932.Bloody basket case financially, and without the ability to devalue their currency, no rational choice. Default would have turned them into a sunnier North Korea.
https://www.businessinsider.com/mind-blowing-facts...
But yeah, grrrr EU, amirite?!?!?!?
M.
Mortarboard said:
Last time they defaulted was......1932.
Bloody basket case financially, and without the ability to devalue their currency, no rational choice. Default would have turned them into a sunnier North Korea.
https://www.businessinsider.com/mind-blowing-facts...
But yeah, grrrr EU, amirite?!?!?!?
M.
Only you said grrrr.Bloody basket case financially, and without the ability to devalue their currency, no rational choice. Default would have turned them into a sunnier North Korea.
https://www.businessinsider.com/mind-blowing-facts...
But yeah, grrrr EU, amirite?!?!?!?
M.
The restructuring of Greek debt in 2012, reduced their interest costs from about 7%, down to 1.5% on an average maturity of 31 years. That's a god send for them. They've even raised EURO @ 0% in recent times (short term).
They have been taking a lot of aid from the various EU schemes to modernise their economy, and they have made progress. However, as they need longer term financing; the increase in the ECB rate and increased focus on country risk - means the reforms of their economy needs to be sustained. It is true they have relatively low rollover risk in the book, but additional borrrowing is going to be increasingly expensive.
If there are any more significant adverse events, the ECB has offered to open the book of wizardry. It's possible (although I'd have to think it fully through); that they magic up some form of maturity transformation mechanism to allow continued longer term borrowing - but the EU support mechanisms take the rate / duration risks (and using their AAA rating). It won't be the ECB eating the rate risk (more the issuing mechanism) - but the Bundesbank might throw up some flak. That's a guess, but Lagarde has suggested they will do innovation over bazookas and kitchen sinks.
Its more a race to get away from a semi-barter based economy to something a bit more modern.
jsf said:
The pain would have been short term and manageable for Greece. It would have cost fractions of what the bailout cost Greece.
It likely would have killed the French banks and the Euro.
As I said this was discussed in previous volumes and the pain was not manageable. It likely would have killed the French banks and the Euro.
Just some examples of the pain.
1. The Greek banking system would have failed so the government would have had to take over all the banks.
2. The Greek government would have needed IMF loans which come at a cost of immediate cuts in spending. Its unlikely the IMF conditions would have been any better than the EU.
3. The banking default and goverment default would have wiped out the saving of many pensioners who would be left destitute.
4. The new drachma would have opened at a significant discount. Greece relies on imports for many items most notable medicines. The devaluation would have meant the health service would not have been able to cope.
5. It would have been 10 to 15 years before Greece would have been able to borrow again.
There are other reasons but I would need to look them up again.
Almost the only winner from the default would have been tourism. However, Greek is already a major tourist resort its hard to see that there was room for significant growth. The only winner would have been the tourists.
The rescue was painful for Greece but a euro withdrawal and default might well have been terminal.
stongle said:
Only you said grrrr.
Point of order - JSF blames Draghi....But the Greece situation was much more untenable than the Irish scenario (I only mention it as a similar "scale" event). Ireland's "default" threat was mainly the banks/financial institutions, rather than the state. On the face of it, the Irish government could very justifiably have said "value of investments may go up as well as down, suck it biatches!"
But the fiscally smarter move was to underwrite and bail out those at risk of default. If the "let them fail" scenario was untenable for Ireland, can you imagine what it would have been like for Greece to have said "banks, empty LOL"
The controls put in place as part of the Greece bailout "deal" would have been the same controls needed anyway. How long would a modern economy with Greece's balance sheet have lasted without access to lending?
M.
Mrr T said:
I will keep to the tradition of this thread by avoiding rudeness. However, I would suggest your post is flawed.
I'd go further and suggest almost all my posts are flawed to some extent.
Restructuring 55% of Greek debt under the ESM/EFSF just painted them further into the same corner. Overall debt levels have not substantially declined despite extremely favourable prevailing economic conditions in recent years, the effective interest rate on Greek debt has been 1.5-2% since 2014. This argument that now it's all about budgetary flows and rollover risk is myopic. Greece had a rapidly declining working age population, they are running out of taxpayers to service that debt.
You can get right down into the weeds and talk about agreed pensions reform not being implemented and reducing current tax collection rates but it's actually not important to understanding that Greece is still living on the edge.
Edited by speedy_thrills on Thursday 2nd June 06:11
OzzyR1 said:
Wonder what happened to Steffan who started Vol 1 of this thread many years back and was a very frequent poster.
Recall he said he wasn't in the best of health at one point, then all went quiet.
No posts for years now, can only assume he didn't get better.
Hear hear.Recall he said he wasn't in the best of health at one point, then all went quiet.
No posts for years now, can only assume he didn't get better.
Was a very interesting and knowledgable poster. I miss his ideas and contributions.
I still come back to the circular model railway idea I had in early 2000’s discussing this with my Greek BIL.
- Big circular track, the Eurozone economy
- Handfull of trains with different sized motors and different numbers of carriages, the individual economies
- The ‘controller’, ECB interest rates; low power = high rates and vice versa
- Gradients on the track; uphill = recession
- Extra ballast; weight is equivalent to higher govt bond rate
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