Archive for April 2010
From The Daily Bell
Originally posted Friday, April 30, 2010
Greek minister says pension reform part of a package of austerity measures to clinch a three-year, multi- billion-euro aid deal, a Greek minister told the FT on Thursday. Andreas Loverdos, social affairs minister told the Financial Times the measures included dropping the seasonal bonus for pensioners in a bid to slash Greece’s bloated budget deficit. “The timetable for the pension measures is still being debated, but there isn’t much room for manoeuvre – this is about saving the country from collapse,” Loverdos told the FT. Union officials told Reuters on Thursday the International Monetary Fund had asked Athens to raise sales taxes, scrap bonuses amounting to two extra months of pay in the public sector, and accept a three-year pay freeze. Other measures in the 24 billion euro package include raising the retirement age from an average of 53 to 67, the FT said in its Friday edition. – Financial Times
All kidding aside (and it is truly a sad situation), we think the way that the European and Greek elites are handling the crisis proves our points not only about power-elite manipulations generally but also about how the free-market simply cannot be ignored. It will always have its way sooner or later – and people will suffer as a result, financially from the thwarting of its will, usually innocent people.
In this case, it is average Greeks that are going to suffer. But we sure do wonder how the elite organizing the Greek fiscal retrenchment believes that those who are going to pay for it are going to submit without a murmur. The Greeks are not in any case a quiet people, culturally speaking. We’ve pointed out on numerous occasions that the Greeks are not necessarily profligate; that they have not “had their fun” (and now must pay for it) as an anonymous German recently put it in an article reporting on the mess.
No … what happened was something else entirely. Investors, especially, who are trying to figure out what the heck is going on in Greece, and in the larger European Union, will need to be aware of what is taking place in the important subterranean cultural conversation that is not being reported in the mainstream media. They will need to understand what is being written on the Internet’s blogosphere and what is being muttered over ouzo on the porches of people’s houses where they gather to discuss the reality of what is being demanded.
The perceptive readers of the Bell (and other alternative publications) know that the entrance of the Greeks into the EU, and the largess that flowed as a result, did not reach the pockets of the average Greek. In fact, the EU exercise was likely one of legalized bribery. Money that was given to the EU to supposedly close budget gaps went to furnish numerous unnecessary private projects. The money was wasted, in a sense, as the projects weren’t completed and wouldn’t have helped generate a profit if they had been. The EU leaders providing the money knew this. But they didn’t care so long as Greece joined the union.
How much is needed to bail out Greece? $159 Billion? $794 Billion? Estimates vary wildly as Greece turns Viral
by Mike Shedlock
Originally published April 28, 2010
PRESSURE IS ON GERMAN CHANCELLOR ANGELA MERKEL TO DO SOMETHING. European Central Bank President Jean-Claude Trichet is in Berlin along with the IMF to arm-twist Merkel. Meanwhile, German citizens want no part of a Greece bail. European Central Bank President Jean-Claude Trichet is on a diplomatic mission to Berlin as Germany’s reluctance to bail out Greece helps fan a fiscal crisis now burning around the euro region’s periphery.
Jean-Claude Trichet and International Monetary Fund Managing Director Dominique Strauss-Kahn will brief German parliamentary leaders in Berlin around noon today about the $60 billion aid package for Greece, which has met with opposition in Europe’s biggest economy. The joint European Union-IMF package would require Germany to stump up the biggest individual loan to Greece.
“It’s a sales pitch in front of an audience that needs it,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The lawmakers probably need it spelled out that this is not about financing luxury pensions in Greece. Not helping Greece will unfortunately have a direct impact on the euro-area economy and German jobs.”
“Why do we have to pay for Greece’s luxury pensions?” Germany’s biggest-selling tabloid newspaper, Bild Zeitung, asked on its front page yesterday. Almost 60 percent of Germans don’t want to help Greece, Die Welt newspaper reported, citing a survey of 1,009 people. German Finance Minister Wolfgang Schaeuble asked Trichet and Strauss-Kahn to speak with lawmakers to “facilitate direct insight into the actions as they stand.”
From The Daily Bell
Originally posted Thursday, April 29, 2010
“GREECE HAS LONG LIVED BEYOND ITS MEANS AND SPENT MUCH of the last two centuries defaulting on its debts. Joining the euro was meant to put an end to all that. However, it merely seems to have exacerbated its problems. It was no surprise to any economist that the European Union, at first, refused to allow the country to join the euro when the new currency started in 1999. Quite simply, its debts were too high and inflation was out of control. By 2000, the EU finally allowed it to join, though there were suspicions at the time that Greece was operating a “limbo dance” – squeezing its figures to hit the stringent euro criteria, only for them to flip back to dangerous levels once it had entered.
“Indeed many believe Greece simply lied about its figures to gain entry. At the time its inflation was 4 percent, much higher than the European average, and was suffering from one in ten people out of work – a higher figure than currently in recession-hit Britain. By joining the euro, however, it suddenly enjoyed substantially lower interest rates, because it was able to borrow in euros.” – UK Telegraph
Free-Market Analysis: The Daily Bell covers dominant social themes, and one of the biggest such is the presentation of nation states as people. Of course, we’re guilty of this too because it’s hard to cover world events without ending up writing “The U.S. did this … France did that … the EU did the other thing.” It’s a kind of short-hand. But where it gets you into trouble is when you start to speculate on motives and offer up analyses that feature national behavior.
Of course, this particular power elite dominant social theme demands such nomenclature. Writing that nation-states make decisions, rather than individuals, is a mild form of brainwashing in our opinion. One soon gets the idea that the nation-states represents its people, and that those at the top of the state are entitled to speak – and make decisions – for everyone else. Thus it is that artificial geographical regions somehow become anthropomorphicized.
The article excerpted above falls into this pattern, in the sense that it attempts treat an economic problem as a national one when – from our point of view – the analysis, while cogent, ought to be applied more narrowly. We’re not sure that Greece, anymore than Spain or Portugal, etc., spent beyond its means as a whole. What we are inclined to suggest is that the elites running Greece did so, and had a reason to do so. Here’s some more from the article:
“Whereas during the 1990s, Greece frequently had to pay out 10 percent or more (18 percent in 1994) to borrow money, its rate fell dramatically to 3 percent or 2 percent. Ben May, Greek economist at think tank Capital Economics, said: “Their mistake was to go out, borrow money and use it to fund huge wage growth, rather than pay down its already substantial debts.”
“Greece went on a spending spree, allowing public sector workers’ wages to nearly double over the last decade, while it continued to fund one of the most generous pension systems in the world. Workers when they come to retire usually receive a pension equating to 92 percent of their pre-retirement salary. As Greece has one of the fastest ageing populations in Europe, the bill to fund these pensions kept on mounting. …
“Tax evasion, endemic among Greece’s wealthy middle classes, meant that the Government’s tax revenues were not coming in fast enough to fund its outgoings. Hosting the Olympics in 2004, which cost double the original estimate of €4.5 billion, only made matters worse.”
by Ambrose Evans-Pritchard
Originally published 25 Apr 2010
IF THE CHIEF PURPOSE BEHIND THE EU-IMF bail-out for Greece – or for banks exposed to Greece – is to prevent a “full-blown and contagious sovereign debt crisis”, the market verdict must be a sobering surprise. The relief rally fizzled shortly after Greece folded its bad poker hand and invoked aid. Bond risk as measured by Markit’s 5-year credit default swaps jumped to fresh records of 280 for Portugal and 177 for Spain. Irish CDS contracts rose 13 points to 185.
This was an entirely logical response to the twisted events that are unfolding. The rescue obliges countries in trouble to go deeper into trouble. Portugal must come up with €774m as its share of the EU’s initial €30bn package. Ireland must find €491m, Spain €3.7bn. Yields on 10-year Portuguese bonds hit 4.94pc, a whisker shy of the 5pc rate that Lisbon must relend to Greece. Meanwhile, safe-haven Germany can borrow at just over 3pc. The bail-out cost falls hardest on those that can least afford it. It deepens the North-South divide that lies at the root of Europe’s crisis.
In a rational world, Brussels would tap the EU’s AAA rating to issue cheap “Barroso Bunds” to cover rescue costs. But we are not in a such a world. We are in the Maastricht madhouse, a currency union without a treasury, ruled by the “no bail-out” clause of Article 125 of the EU Treaties. Europe is at last paying the price for fudging the true implications of EMU 19 years ago in that Medieval city on the Maas, gambling that it would one day be able to lead Germany by the nose into a debt union. Chancellor Angela Merkel continues to equivocate, demanding “very strict conditions”. Dissent is growing louder in her coalition ranks. Both Free Democrats and Bavarian Social Christians have said it is time to break the taboo and ask whether Greece should “step outside” EMU. Werner Langen, the leader of Christian Democrat MEPs, said the bail-out appears to breach Germany’s constitution.
If so, we will find out soon. Four professors will launch a legal challenge in early May at the Verfassungsgericht (high court). Should they secure an injunction, EMU may fly apart. The Court ruled in 1993 that Maastricht was constitutional only as long as EMU remains an area of monetary order. “A ‘transfer union’ is a bottomless pit and is bound to threaten currency stability. That is what we are going file,” said Tübingen Professor Joachim Starbatty.
When accused of consigning Greece to ruin, he told the Frankfurter Allgemeine that EMU exit and default is Greece’s only salvation. “The truth has to come out into the open. Greece is in no position to pay it debts,” he said. The EU-IMF “therapy” of deflation for Greece repeats the catastrophic errors of Chancellor Heinrich Bruning in the early 1930s and must lead to a depression, he said.
Yet that is what IMF chief Dominique Strauss-Kahn is preparing for Greece, against the better judgment of his own experts. “Greek citizens shouldn’t fear the IMF; we are there to try to help them,” he said over the weekend. Yet a week ago he told Greece that devaluation and default are non-starters. “The only effective remedy that remains is deflation. That will be painful. That means falling wages, and falling prices. There is no other way.” Actually, the IMF pursues other ways often, last year in Jamaica. What Mr Strauss-Kahn means is that the EU will not tolerate any other way. The Greek people must be sacrificed for the Project and to hold the EMU line, like the Spartans of Thermopylae who perished to gain time for the Alliance.
They are to squeeze fiscal policy by 6pc of GDP this year in a slump – a “death spiral”, warns George Soros. They are to do this without the IMF’s devaluation cure. If they do stabilise the debt – to hit 130pc of GDP this year after Eurostat’s revelations – they will be left paying 6pc to 8pc of GDP to foreign creditors for ever. Will Greeks comply meekly, or turn their Spartan blades on Europe?
No country in Western Europe has defaulted since the Second World War. More than €7 trillion has been lent to Club Med states, banks and homeowners in the belief that it cannot happen. EMU shut the warning signals, disguising risk. What investors overlooked is that currency risk mutates into default risk in a monetary union. It makes default more likely, not less. The bond markets have suddenly twigged.
In barely two weeks, the City mood has shifted from ruling out a Greek default as absurd, to accepting that it could happen, to now fearing that restructuring is highly likely. A country such as Portugal with total debt of 300pc of GDP, a current account deficit of 11.2pc, and a budget deficit of 9.4pc should not think it has the luxury to trim spending at a leisurely pace. Portugal has an ugly choice. If it tightens hard to soothe bond markets, it too risks depression. EMU’s Faustian Pact is closing in.