That’s the funny thing about austerity. When you cutting the budget destroys your cash flow, you can’t bail yourself out.
The problem in Greece (and more broadly, most of Europe) is one of expectations, not program costs. If the people weren’t planning on these programs, then sure you could cut them and save cash. But when half of Greece has spent through their savings counting on lucrative pensions beginning at 55…well then you have a real problem.
Now, please look at the situation; if they don’t cut spending they will have massive deficits for sure. If they do cut spending, then their people crumple and their revenues drop – and if recent history is any indication, they drop a hell of a lot more than potential savings.
An independent Greece would just print money to level everything out, without killing anybody off in the process. But what the EU is demanding is essentially that Greece crush a bunch of low income residents with ice cold austerity.
I’m sure that will be received warmly. And by warmly, I mean with Molotov cocktails.
The big joke here is that this deal is really for show. Their projections don’t account for the behavior change that will greet Greece making good on its end of the bailout deal. When they do…they will require another bailout.
Hahaha – it’s that stupid.
But as I’ve said before, the damage has been done. Euro depreciation or default. Those are your options if this horse and pony show doesn’t coax private money back to the bond markets in size, and willing to lend for decades.
No more of this one year junk. Greece, Italy, Spain, Portugal – they need 30 year loans at reasonable prices, and they need it quickly.
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Nice synopsis. I think the think that makes the whole deal even more poisonous is that it was a “voluntary” default which did not trigger the CDS. How much appetite will buyers have for new high yield sovereign Euro debt if they know they won’t have any insurance? My guess if higher rates for all but the very best credits.
I don’t know what they’re drinking in the EZ, but it sure makes them irrational. The best thing for Greece would be to leave, default and let their currency float. Iceland recovered nicely after default. There is just no way in hell that you can adjust for the lower productivity of the Greek economy without letting the currency float i.e. depreciate.
thing…
Yep.
Unfortunately, I fear that also means CDS contracts are no longer a good indicator of the state of bond markets.
Who pays for insurance that can be so easily ignored?
if my house burnt down, and all state refuse to pay me for my insurance, I will surely take my dig bick out and I will leave a gapping hole in them …
At least give the Greeks this: the poor there have the awareness, sense and balls to riot when they are thrown under the bus by the political class.
The American Sheeple could surely learn something from this no?
Meh. It’s not like rioting is going to help them any. They’re still owed more than they can deliver to themselves.
Completely agree with what you’re saying here Cain. The projections of this thing are just maddening. Imposing massive austerity on an economy shrinking by 7% and projecting that the economy will start growing within two years at over 2%, all in the name of getting debt down to a seemingly arbitrary 120% of GDP within 10 years. This is a recipe for disaster. I hate this whole ordeal as much as anyone, but if it’s going to get worse I can only hope their economy shrinks by another 5% this year and throws the whole thing off so maybe we can start to deal with it now instead of saying “whoops” five years from now.
I read an article recently about how the International Labor Organization used to go into really small countries, like Cyprus, back in the 60’s and teach them how to run a country. Might be a good idea in some capacity for a bunch of people that can’t seem to be able to put together 30 days worth of projections, let alone commit to a 10 year plan. A little adult supervision of some form. Not that they’d ever agree to it.
As for the CDS mumbo jumbo, this irks me to no end and it stinks of setting precedence for future defaults. Too bad the trade has been over for almost a year now and no one saw this coming. It would have been something to see a hedge fund with large enough resources and an activist bent to take this thing head on. Problem is, anyone that hedged themselves got out fine by just selling the CDS and if precedence is set here, it wont matter much elsewhere.