Thursday, Aug 19, 2010
A country struggles to pay its 'reparations' - how did that end last time?
Der Spiegel: Tensions Rise in Greece as Austerity Measures Backfire
The austerity measures that were supposed to fix Greece's problems are dragging down the country's economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70% in some places. Frustrated workers are threatening to strike back. A mixture of fear, hopelessness and anger is brewing in Greek society. Kostas, the man who ran the pastry shop, can no longer afford the rent. No one wants to rent the store. Neither are there any takers for an empty butcher's shop a few meters further on. Fully a quarter of the store windows [in central Athens] are for rent. "Things are starting to simmer here," he says. "And at some point they're going to explode."
Posted by drewster @ 10:57 AM (1476 views) Add Comment
11 Comments
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1. tyrellcorporation said...
Ahhh, but I bet the Maserati dealership in the Athens CBD is doing a roaring trade!
2. Stevie Dee said...
Mmmm "after previous governments had squandered tax money and falsified statistics for years." Oh well, at least it doesn't happen here.
3. uncle tom said...
How bad does it have to get before the Greeks realise that staying in the eurozone is the principal stumbling block?
The Greeks need to break out of the euro and de-value their currency dramatically. They can't afford to service their national debt, so they need to print their way out of trouble. That in turn will make Greece a cheap holiday destination, so their tourism will boom; and those who are unemployed will find it lucrative to work abroad and send money home, even if they are only making the minimum wage.
There is a solution, there is a way out of the mess; but it needs one big decision..
4. stillthinking said...
I think its more likely how long before banks and governments supporting those banks realise that there is no chance of getting the money back, and cut the Greeks loose to default. For the Greeks, there is no way that they can come out of the euro without a banking collapse, after all, who will want the new currency. So really their whole financial situation would reset, like Iceland, for the average guy in the street the best outcome. They would be like the former (and current state of) Yugoslavia, running on physically held German paper marks without any banking system.
At some point I doubt that transfers from the Greek banks will be able to go forward, I am surprised that this hasn't happened already. At which point the Greek economy will go forward running on the amount of euro coins and paper euros currently there. A huge deflationary shock, offset only by their counterparty debt losses of the european banks.
I don't think this makes for a good holiday destination because at some level of poverty the place won't be safe to visit, quite aside from the political consequences.
5. Stevie Dee said...
Could Greece be the equivalent in the financial sphere as a small off shore oil well in the Gulf of Mexico was for BPAmoco. An Achilles heel perhaps? Time will tell!
6. uncle tom said...
stillthinking,
There are still elements in Brussels who cling to the delusion that Greece and the other PIIGS can deflate their way out of trouble.
This misses the critical issue that millions of ordinary citizens in these countries, not to mention the countries themselves; are so loaded with debt that this isn't an option. If 90% of your pay is spoken for to cover debt repayments and essential living costs; you can't tolerate a hefty fall in wages.
Leaving the euro would not in itself provoke a domestic banking crash in these countries, but overseas lenders to these nations would find themselves taking a heavy haircut. It would be far more damaging to the foreign banks, than to the domestic ones; as the legislation for exiting the euro would re-denominate all the domestic banks overseas euro liabilities into the new currency.
7. drewster said...
uncle tom,
The solution is for debt-holders to take a massive hair-cut; basically for Greece to default on the debt. They don't necessarily need to leave the Eurozone. There's a chance that people would continue to use the Euro anyway, in the same way that countries such as Panama, Ecuador, and El Salvador use the US dollar. After all who would want to hold fast-devaluing drachmas issued by a country with a bad reputation?
8. uncle tom said...
Drewster,
A sovereign default, while remaining part of the eurozone, will tend to cause as many problems as it solves; and won't address the core issue of Greece being a fundamentally uneconomic state.
If Greece broke with the euro, there would be no new Drachma overnight - it would simply mean that Greek euros and other euros no longer had the same value, and the Greek central bank would then busy itself creating new money (mostly electronically) to pay the nation's bills.
All wages, loans, savings, debts, benefits and euro liabilities to foreign creditors would be denominated in the new Greek euro. Some exchange controls would probably be necessary for a limited period, to prevent capital flight.
In time, the Greek government might vote to replace the Greek euro with a new Drachma, probably on a one for one basis; but this would not happen until there was time to produce new notes and coin.
I think it very unlikely that the population would utilise a foreign currency - Greece may have serious problems, but it's not a banana republic..!
9. nod2glod said...
stillthinking - The problem is that german and french banks hold significant amounts of greek debt as tier 1 capital, the self same capital which underpins their tier 1 required ratios. If the greeks default, many of the largest german and french banks may be insolvent, or rather it will be hard to make believe they are solvent.
if so that would cause a waterfall of collapse throughout the banking industry which will make lehmans and 2008 look like a pantomime. This is the real reason we bailed out the greeks. Euro, Pound, dollar, doesn't matter our banking systems are holding so much toxic debt we can't afford anyone to default.
10. capitalist said...
Actually the one advantage the Greeks have is the Euro, because it means that the money supply is more or less exogenous and can't be devalued by continuous money printing. In other words it's doing for the Greeks exactly what a (non-bastardized) gold standard would do, although with a gold standard this over-leverage could never have come into existence in the first place.
Fixing the money supply forces asset prices to crash, borrowers to go bankrupt, lenders to take a haircut, and all of the assets get new and unleveraged owners. Great. Exactly what ought to happen here but won't because we have a so-called independent Bank of England which keeps bailing everyone out.
11. Johnny B. Good said...
I'm browsing through news, and see Reuters says Connecticut has just one (1) week of cash left, and needs to raise 520 million$ in a hurry. http://www.reuters.com/article/idUSTRE67G50A20100817
This isn't because Connecticut can't print dollars, or devalue its currency. Connecticut printing its own money wouldn't solve the problem. Connecticut leaving the US would make matters worse. The same goes for Greece and the euro.