What's the Latest on Greece?
Responding to an assignment desk request, a short Q&A on Greece, the euro, and what it means to you. All these statements subject to change on very short notice, how fluid is the situation there.
Q: What's the latest news?
A. The Greek government voted, as expected, to raise taxes on property as a pre-condition for the next tranche of loans from the EU countries.
Q. Does that mean Greece will reduce its deficit? Does this help them?
A. In the short run, it probably helps their budget. They were expected to be out of money in mid-October. If the taxes are applied quickly -- no mean feat, given their tax collectors are threatening to strike -- it could tide them over for awhile. It was probably easier than trying to cut spending on public services and public employees further. And the government had a problem rounding up votes even for this step. So Prime Minister Papandreou has a small victory to show to his counterparts in the EU.
Q. What happens next?
A. The ball is now in the German parliament which has to vote on a bailout package later this week. It's anybody's guess there. I'm convinced Chancellor Merkel doesn't have the votes yet. Members of her cabinet keep trying to change the terms, they can't get clarity from the German Constitutional court whether the bailout is legal, and the tranche to Greece keeps being delayed due to German requests for more time. She loses by-elections about as often as my Red Sox lose games, and somehow is supposed to convince her coalition to vote for the thing that causes her to lose.
Q. But if she does, that's it?
A. No. All the euro-zone countries have to vote to put money into this stabilization fund or else the deal is in huge trouble. Estonia, Austria and the Netherlands all vote within a week too. Particularly if one of the latter two say no, the deal's in peril.
Q. I thought everything was good, and that's why the market went up. Was it that, Operation Twist, or what?
A. You never know what makes a market rise or fall, and it's almost certainly not one single thing. There was an announcement over the weekend that the stabilization fund was going to be increased to Eur 2 trillion, much larger than before. But details are not known, it will take 6 weeks for anyone to have them. So can the market go up on the announcement that there will be an announcement? Hard to believe. Conspiracists argue the banks and funds are dressing the window for Sept. 30 when reports to investors are due. I don't know about that.
Q. What's the impact on the US?
A. To hear the administration tell it, large. Geithner has been back and forth to Europe at least twice, usually greeted derisively by his European counterparts. ("Go home and fix your own mess," is the message he gets.) Yet the Europeans are at least thinking about a Euro TARP that Geithner has pushed, which requires them to take that funding from the various Euro treasuries and -- wait for it -- leverage it. 'Tis madness, you think. But the fear is that if you put a finger in the dike that is the Greek budget, what do you use for the Portuguese one? Or Italy? And if any of those fail, the banks in Spain are in big trouble, and ... You get the idea. The only way to hold them all off is to somehow stretch your reserves to cover several contingencies. And hope you don't need them all at once, because you don't have enough to cover them all.
And if any of them do fail, the impact on the US is quite large. You only need to see what has happened to exports in the last ten years to see that a collapse of European trade would badly damage U.S. interests. Not to mention to connections between U.S. and European banks. Some like Morgan Stanley are particularly intertwined. Given our current precarious state, it would not take that large a shock to Europe to tip the U.S. economy back into a recession (if you believe we're not already there), which would spell the end of the Obama Administration.
To John's original questions, then, one add: It's not really just what happens to Greece that matters. If you could assure that all the non-Greek banks get bailed out and no other country is subjected to speculative attack, it wouldn't matter greatly in the U.S. 2012 election. It is the reaction of the EU finance ministers, the European Central Bank, and investors to a Greek default that matters. And the Obama Administration is rightly nervous about that reaction.
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Comments :
Re: What's the Latest on Greece?
To quote the Emperor at the end of "I, Claudius," drunk and indifferent as his wife maneuvered her vain, crazy son to succeed him after his inevitable murder: let all the poisons that lurk in the mud hatch out.
Oct '10
Re: What's the Latest on Greece?
Is it true that in the roughly 18 months that Greece’s sovereign debt crisis has been ‘front and center’ in the news, essentially not one government employee has been let go? That the Greeks have more or less done nothing to solve this problem with internal reforms and belt tightening? Have the Eurozone countries essentially been told by Greece, “You’re stuck with us; get out your checkbook”?
Mar '11
Re: What's the Latest on Greece?
The Greek debt is only a few Solyndras (a new measurement of debt, about $0.5 billion). However, Greece is only the tip of the Iceberg that Capt Obama is trying to steer us into - there are also Italy, Spain, Portugal, Ireland...
Edited on Sep 27, 2011 at 11:36pmJul '11
Re: What's the Latest on Greece?
How are they doing collecting these taxes? From what I have read one of the main problems is the government has had a very hard time collecting taxes as most people are putting their energy to avoiding paying them.
Sep '10
Re: What's the Latest on Greece?
As you noted the details of the Euro crisis rapidly change and at least for me are murky at best. Often things are said for public consumption that do not match what is being said in private. One thing is clear European politicians are trying control the financial future of Europe. Generally speaking the market severely punishes such attempts. I don't know when and how this will happen, but have little doubt it will.
Jun '11
Re: What's the Latest on Greece?
One of the wonderful things about this situation is that it is an example of free markets at work.
The European Ponzi-schemers would not be scrambling around trying to pose as austere, fiscally prudent stewards of their economy if the markets had not started to take away their cheap money.
Imagine that - if the markets were allowing Greece to borrow at 5% right now, they would continue to borrow and spend like......Greeks.
It is a great example of markets dictating policy. Gotta love it.
Re: What's the Latest on Greece?
No, actually the Greek government laid off about 82k (net) workers. But the Greeks got money from German and French banks, and their governments are stuck with them.
Re: What's the Latest on Greece?
This is exactly right. The underground economy in Greece is about 30% according to most estimates (compared to ~10% in most Western European countries.) If they could get to the European level and maintain their tax rates, they'd cut their budget deficit in half. Wouldn't solve the whole problem, but would make it much more manageable.
Re: What's the Latest on Greece?
A short P.S. Now the opposition in Greece is saying the government was unable to process tax claims because they ran out of ink. Nobody in the government will confirm this. Have a good laugh all the same.
Sep '11
Re: What's the Latest on Greece?
King,
Thank you for your comments.
How leveraged are the European banks? My perception is that they are significantly leveraged already (I remember seeing worrying news about Societe Generale and Credit Agricole). If their balance sheets are shored up with government capital--but that capital is (at Geithner's recommendation) itself leveraged--aren't they in essence building a second house of cards on top of the first?
Sep '11
Re: What's the Latest on Greece?
King,
Thank you for your comments.
How leveraged are the European banks? My perception is that they are significantly leveraged already (I remember seeing worrying news about Societe Generale and Credit Agricole). If their balance sheets are shored up with government capital--but that capital is (at Geithner's recommendation) itself leveraged--aren't they in essence building a second house of cards on top of the first?
Sep '11
Re: What's the Latest on Greece?
King,
Thank you for your comments.
How leveraged are the European banks? My perception is that they are significantly leveraged already (I remember seeing worrying news about Societe Generale and Credit Agricole). If their balance sheets are shored up with government capital--but that capital is (at Geithner's recommendation) itself leveraged--aren't they in essence building a second house of cards on top of the first?
Re: What's the Latest on Greece?
John Murdoch:
How leveraged are the European banks? My perception is that they are significantly leveraged already (I remember seeing worrying news about Societe Generale and Credit Agricole). If their balance sheets are shored up with government capital--but that capital is (at Geithner's recommendation) itself leveraged--aren't they in essence building a second house of cards on top of the first?
John, meet Axel Weber.
"Central banks increasingly resorted to measures in the course of the financial crisis that fell in the gray area between monetary and fiscal policy. That is dangerous."
By this he means this leveraging that they are doing is monetizing government debt, at a greater level than imagined before. Any monetization is against the treaty that formed the European Central Bank. Mr. Weber resigned from the ECB board for this reason.
May '10
Re: What's the Latest on Greece?
The only questions re. Greece are a) what form the default will take b) will it be done well enough that it takes the problems off the table (except for bank recapitalization) c) What are the contagion impacts.
To date, none of the publicly discussed remedies solve the problem and many make it worse. The real problem is many times greater than is politically recognized, but the folks in Germany, Finland, Netherlands etc. are catching on.
The longer this goes on and the more smoke the political elite blows, the more chances grow by geometric proportions that this will end very badly. Interesting times.