Monday 27 June 2011

What is worse: Greek Default or EU management?

The markets are very jittery this week already. Notwithstanding China's support yesterday for the eurozone, all eyes are still on Greece.

The choice facing the Greeks is a default on its debts or the bitter medicine of accepting a European Bailout of e100 billion, with some horribly stringent requirements.

However, as bad as these are (massive sell off of virtually all state owned assets, tax rises and social benefits reduced), we should consider the default scenario.

Argentina is the best comparator, as it came of its dollar peg - but even Argentina did not have to print an emergency currency overnight as Greece would have to do. Nor did it in the end default on a large amount of its debt. Yet over the next 3 years the Argentinian peso lost 80% of its real value. That is quite a haircut - Greece, if falling our of the euro altogether, could do worse.

As bas the the Eu bailout is, those on the streets of Athens saying 'let's default' have perhaps not thought through its costs. Imagine the price of a computer going from £400 to £1600 in a short period - too much for many businesses to cope with.

Argentina had at least a decent export market of grains and soft commodities to help bring in foreign cash - Greece has some but nothing like so much.

Instead, my vision of a bankrupt Greece is that state assets get sold anyway, only now the wealthy shipping owners, money safely in dollars in London banks, come back to their home country as 'saviours'; picking it up for a few drachma along the way.


Old BE said...

Also, the Argentine government basically stole its citizens dollar savings by replacing dollar holdings with pesos at 1:1 and then nationalising private pension funds. Greece could not do that because of a small thing called human rights and private property.

CityUnslicker said...

yes, BE I shoul dhave mentioned the stealing of the public pension fund - greece like the UK does not have one of those though, relying on future tax income instead....Already thoguht Greek bansk are stuffed full of Greek treasuries - so they would all be immidieately bankrupt and would close on defualt - literally leaving Greek people penniless.

Anonymous said...

"What is worse: Greek Default or EU management? "
I think it goes without saying that if the EU had properly managed the Euro from the start and all the other things that go with creating a new currency, Greece, Ireland, Italy, Spain would probably not be in the mess its in. They should have created a standardised accounting system, rules on countries borrowing, an overall financial control otherwise it is not worth going into a single currency with such diverse nations and practices. I always wondered how small nations were able to buy well established companies and yet their populations were small and of course their economies were small, just not ring true.

Tena Lady said...

its interesting and well judged analysis is reflecting in this writing.

andrew said...

The Irish govt is in the process of stealing / taxing it's Pension Funds.
(usually exempt on contributions / investment returns, but you pay tax on the pension you get).

0.6% pa every year for the next 5 years. IIRC.

A little harsh, but then as the reduction in the fund is passed on to the member, and it is not a big %, no one is too outraged.

sample article from

I do not think that the Greeks are really facing up to their problems until they start doing the same.

James Higham said...

No brainer - EU management, of course.

Anonymous said...

Once upon a time debts could be re-negotiated.

Longer terms, lower interest rates, small haircuts well dispersed/ balanced to avoid ego damage.

Now it's different.

GS involvement in fudging Greek debt, for the last decade almost, means they have an inside track on the true poition. Other Wall Street entities were/are involved in other "nations".

Derivatives are unregulated globally, originally at Greenscums/US admin insistance, now through political cowardice/bought politicians.

The web of derivatives globally, created by banks, has increased to 1.4$ quadrillion, and I use gross, not net as the BIS does, because in failure, as they will, gross is the figure applied. (remember AIG !)

Effectively the lessons from the 2008 gifts to banks has been learned by banks. They have now doubled the size of the gun held at the head of the taxpayer...bail us out or we collapse the system, now to the tune of 1.4$ quadrillion. Try printing that much!

The CDS, interest rates swaps, etc revolving around Greece ultimately go via Europe and heavily involve Wall Street.

There are around 30 global banks creating this toxic shiite. All of them heavy beneficiaries of Bennyboy and the US taxpayers generosity during TARP and other nonsense. It is now far more profitable for them for Greece to default, allowing them to screw minor banks and taxpayers again. This also hold true for other marginal nations.

At some point politicians must grow balls to resist these cries from casino banks, and let them/ force them, to fail, and prosecute the walking shiites who created this mess deliberately. Failure to grow balls will likely lead to civil wars in the not too distant future...ermm, they're happening now.

Has it never occurred to anyone why Switz is always neutral...that's where BIS sits. Don't fight wars, just create them...and so create more and more debt and destroy economic value!

Anonymous said...

Yet over the next 3 years the Argentinian peso lost 80% of its real value. That is quite a haircut - Greece, if falling our of the euro altogether, could do worse.

Surely this is default by another name. If I understand this correctly the repayments of debt were made in a currency that was rapildy losing its value so, in real terms, the holders of the debt lost out as surely as they would have done had Argentina defaulted.