by Domingo Cavallo and Miranda Xafa © VoxEU.org
Thursday's EU summit in Brussels announced new plans for tackling the Eurozone crisis. This column says that restructuring of Greece's debt will reduce Greece's access to external financing without reducing its debt burden to sustainable levels. It suggests additional financial support contingent on larger haircuts.
European officials have struggled for weeks to reconcile the competing priorities of Germany and other surplus countries with those of Greece. Until Thursday's summit, the EU treated the debt crisis as a liquidity problem rather than a solvency problem. This contributed to the market turbulence and allowed the crisis to spread to Italy. This undermined confidence and threatened the stability of the euro itself.
Recognising that “re-profiling” of the debt by pushing maturities into the future is no longer sufficient, EU leaders reached an agreement that tries to address medium-term debt sustainability concerns while keeping the resulting losses for banks manageable.
The Deal is Probably Not Enough
The deal implies a 21% reduction in the net present value of debt owed to bondholders, which constitutes about 70% of Greece’s total public debt. This implies a reduction of 15% in total public debt, which would bring it down from 156% to 132% of GDP. With most analysts estimating the needed debt reduction closer to 50%, this deal is unlikely to ensure debt sustainability even if Greece fully implements the medium-term fiscal plan it has just voted into law.
Since it is impossible to have a fully voluntary scheme that shifts part of the financing burden to bondholders while keeping Greece’s funding costs at sustainable levels, Greece will almost certainly get a “selective default” rating. Such a rating would complicate Greece’s access to ECB financing without ensuring that Greece will emerge from default with a sustainable debt burden.
Analogies with Argentina
The situation confronting Greece today is similar to Argentina’s situation in the summer of 2001. The economy was in recession and credit spreads had widened as market participants realised that fiscal tightening was becoming less palatable economically and politically.
At the request of the Argentine government, which still wanted to avoid what would have been considered a selective default by the rating agencies, the IMF proceeded with a substantial augmentation of the financial support already committed under the existing three-year stand-by agreement. Argentina thus missed the opportunity to restructure its debt while it still had ample reserves and bank deposits remained near peak levels.
With the benefit of hindsight, the financial resources of the international community used to bail out private creditors should instead have been used to deal with the consequences of an orderly debt restructuring, including the provision of ample liquidity and capital to the banking system.
Greek Choices
Greece is facing the same choices now. With Greece’s dim prospects for market re-access in 2012-13, the EU/IMF-supported programme has been augmented with new EU resources, with more to come from the IMF, to make up for the shortfall in private financing.
But this additional financial support is likely to be wasted on what is a lost cause. The sustainability of public finances remains in doubt, as evidenced by the still-wide credit spreads (wider than in Argentina a month before it defaulted) and the large withdrawals of bank deposits, which continue even after the approval of the medium-term fiscal plan by parliament in early July. In view of the above, IMF participation in the financing of a new programme for Greece should be conditioned on a debt restructuring involving a significant haircut.
A Lasting Solution: Debt Buyback at Market Prices
A lasting solution to the Eurozone’s debt crisis would call for the European Financial Stability Facility (EFSF) to issue AAA-rated bonds in exchange for the outstanding bonds of the countries that need to restructure their debt, taking as collateral their assets under privatisation. Greece, Ireland, and Portugal could capture the discount on the debt that the markets have already reflected. The mechanism would be a massive repurchase of the old bonds at the current market price. The cost for European taxpayers will be much lower than that associated with continuation of the ongoing bailout. The most costly scenario is that of a disorderly Greek default that would have spillover effects on other countries, very similar to the contagion generated by the collapse of Lehman Brothers in the US.
The EU and the IMF should help Greece ensure that the debt restructuring will not destabilise the banking system and will not force conversion of financial assets and obligations into a new Greek currency. Otherwise a run on the banks with large holdings of Greek debt will force “de-euroisation” in Greece in the same traumatic way that it forced “de-dollarisation” in Argentina in 2002.
The latest IMF staff report on Greece shows that public and external debt sustainability “hinges critically on full and timely implementation of fiscal, privatisation, and structural reforms... and the restoration of market access at reasonable terms in the post-programme period.” In cases where restoration of market access within the programme period is judged to be unrealistic, IMF rules encourage “comprehensive debt restructuring, to provide for an adequately financed programme and a viable medium-term payments profile.” It’s an idea whose time has come.
Republished with Permission of VoxEU.org
Showing posts sorted by relevance for query greece. Sort by date Show all posts
Showing posts sorted by relevance for query greece. Sort by date Show all posts
Saturday, July 23, 2011
Sunday, May 02, 2010
Greece: What Economic Austerity Looks Like
Recent events in Greece provide a glimpse of what economic austerity looks like. In exchange for up to 120 billion Euros ($160 billion) from the European Union (EU) and International Monetary Fund (IMF) over the next three years, Greece has committed to reducing its budget deficit to under the EU limit of 3% of GDP by 2014 (the US budget deficit as a percentage of GDP for 2009 was 9.1%). To fulfill this promise, Greece is planning dramatic tax increases and spending reductions, including:
Rioting continues in Greece as workers protest austerity measures...
Sources:
Barkin, N & Papadimas, L (2010, May 2), Greece Pledges More Budget Cuts, Gets More Time, Reuters.
Morley, N (2010, February 10), Public Service Workers in Greece on Nationwide Strike, VOANews.
US Federal Deficit as Percent of GDP (2010), USGovernmentSpending.com.
Related Posts:
How Would Californians React to Economic Austerity...?
How Would New Yorkers React to Economic Austerity...?
- Reducing effective annual wages for public sector workers (which in Greece includes teachers, doctors, nurses, train workers, air-traffic controllers, and many others) by 5-15% per employee
- Banning increases in public sector salaries and pensions for at least three years
- Increasing the Value-Added Tax (VAT) from 21% to 23%
- Raising taxes on fuel, alcohol, and tobacco by 10%
Rioting continues in Greece as workers protest austerity measures...
Sources:
Barkin, N & Papadimas, L (2010, May 2), Greece Pledges More Budget Cuts, Gets More Time, Reuters.
Morley, N (2010, February 10), Public Service Workers in Greece on Nationwide Strike, VOANews.
US Federal Deficit as Percent of GDP (2010), USGovernmentSpending.com.
Related Posts:
How Would Californians React to Economic Austerity...?
How Would New Yorkers React to Economic Austerity...?
Tuesday, November 08, 2011
Why Italy Matters More Than Greece
The economic disaster in Greece has reached a crescendo in recent weeks, and the Greek tragedy is indeed worrisome. However, the real problem that Europe must confront is not Greece, but Italy, which represents 16.9% of Europe's total GDP. As the chart below makes clear, the GDP's of Greece, Spain, and Portugal are essentially sideshows to that of Italy and the Eurozone as a whole.
Europe simply does not have the resources to act as lender of last resort to Italy. Certainly, Greece is a major issue for Europe, but if Italy defaults, then the Eurozone will disintegrate.
Related Posts
Europe simply does not have the resources to act as lender of last resort to Italy. Certainly, Greece is a major issue for Europe, but if Italy defaults, then the Eurozone will disintegrate.
Related Posts
Saturday, November 13, 2010
How to Save the Euro? Lessons from the US
by Jacques Melitz © VoxEU.org
Earlier this year, the fiscal situation in Greece caused turmoil across Europe. This column examines why the financial difficulties of several state governments in the US are not having similar impacts on its economy.
The problems of the Eurozone this year brought to light some failures of the system. Nevertheless, the resulting drop in confidence in the system has gone further than we might have expected. Questions have even arisen about the survival of the system (see Baldwin 2010 and Blejer and Levy-Yeyati 2010 for discussions). Yet monetary systems do not tend to dissolve simply because of faulty performance. On the contrary, as a rule they endure even when they function very badly. It takes a political force majeure to bring about the break-up of a single currency area, typically without connection to monetary performance. Why, then, has the possible default of a country engaged in irresponsible fiscal policy and accounting for only 3% of the Eurozone’s GDP raised questions about ‘saving the euro’ and the survival of the Eurozone?
The issue has not received the attention it deserves. It is often simply taken for granted that the departures from the Stability and Growth Pact provide a sufficient reason for the earthquake that has shaken the whole currency area. Yet if we look around the world past and present, the mismanagement of finances by regional governments has no particular tendency to bring down entire monetary systems, far from it. In line with the usual – I think superficial – diagnosis of the ailment, proposed remedies for the Eurozone centre on strengthening the Pact, increasing joint political control over fiscal policy, and providing joint insurance against government default, or some mixture of the three. But what if a vital element of the problem is really the official doctrine that sovereign default is incompatible with the euro? What if the scale of the crisis that took place this year has resulted from financial markets’ conviction, based on this doctrine, that the future of the euro was at stake? What if assuring the long-run sustainability of the euro means convincing those markets, quite differently, that nothing as manageable as a Greek default can upset the Eurozone?
Lessons from the US
That is precisely what the US example would suggest and what I will defend. With this idea governing beliefs, the right road ahead looks quite different. It means shifting the emphasis away from avoiding government defaults toward assuring the stability and the solvency of the banking system at all times, regardless of the financial difficulties of some member governments.
In the US, default on state and municipal contractual obligations is very much a possibility whenever lower-level governments are in financial trouble; bailout cannot be taken for granted. New York City defaulted in 1975, the biggest default of all by a lower-level government unit since World War II took place in 1983 when the Washington Public Power Supply System went into bankruptcy, and Orange County defaulted in 1995. Various municipal governments have been on the verge of default at times in the last few decades, including Philadelphia and Cleveland. There is also no Stability and Growth Pact in the US. Yet financial discipline is considerably higher in the US at the state government level than in the Eurozone at the national level. All states except Vermont have balanced-budget rules; but these rules are self-imposed. It is easy to argue that this difference in fiscal discipline on the two sides of the Atlantic is related to the fact that when push comes to shove in the US and a lower-level government unit cannot or will not meet its debt obligations, the lenders can expect to take a big part of the hit.
Some rudimentary analysis is relevant. Consider any government unit unable to print money and without any prospect of a bailout. Theory tells us that credit rationing is very much a possibility. As the interest rate that such a government offers on its debt goes up, extra lending dries up completely at some point as the expected rate of return on the government debt falls. This must happen because higher nominal interest rates impair the government’s solvability and bring default nearer. Risk aversion simply lowers the interest rate at which credit rationing begins.
Suppose we compare the situation in the US and the Eurozone since the 2007-2009 financial crisis in this light. The crisis brought about dire financing problems for many lower-level government units in the US and some national governments in the Eurozone. According to the spreads on credit default swaps, California and Illinois now have a higher probability of non-performance on public debt than Portugal and Spain. This has been true for months. Consider next the difference in response in the States and Europe. Recently Illinois simply stopped paying $5 billion of bills. In June of last year California issued vouchers for wage payments. In addition, savage cuts in public services have begun and are now threatened in various states in difficulty, not only these two. Nevada has made startling reductions in spending on higher education and welfare. In the case of Portugal and Spain, nothing so drastic has happened thus far. There have been occasional spikes in interest rate spreads over German bunds of 100 to 200 percentage-points above usual levels. Both Spanish and Portuguese governments have also been forced to plan greater austerity and reduced government deficit spending. Meanwhile, they have been able and willing to keep borrowing.
Why the difference between the Eurozone and the US?
Part of the explanation may be that Portugal and Spain are more able to raise tax revenues than US states. But another part is the higher probability of a bailout in Europe. The example of Greece is to the point. Greece has been able to continue borrowing this year at interest rates typically around 200 percentage-points above Portugal and Spain on 10-year government bonds (and since May more than 500 percentage-points higher than German bunds). If you do the math, it is clear that this could never have happened without a high probability of a bailout. In fact, you do not need to do the math: there have been occasions in February/March and particularly May when some Greek issues would clearly have failed without the assurance of public lending and ECB support. If Greece can borrow on the probability of a bailout, so could Portugal and Spain.
Based on this evidence, the current Eurozone strategy of treating government default as anathema permits member governments to sink into deeper waters, weakens the forces that would otherwise exist toward self-imposed budget restraints, and thereby raises the probability of a bailout. But an actual bailout is perhaps the most likely setting for the breakdown of the Eurozone. If taxes ever need to rise all over the Eurozone in order to bail out a member government, one can easily imagine a pullout by Germany, followed by the Netherlands and Austria (if no others), in order to form a separate monetary union.[1]
What are the dangers of the opposite strategy of mimicking the US instead and moving toward heavier reliance on markets to discipline member governments and to price sovereign risk? The answer lies in the external effects of government default on the payment system and the banks, and this problem would be aggravated by contagion. But those dangers exist in the US as well. If the US federal government were to allow Illinois or California to default on state government debt in today’s circumstances of widespread financial difficulties across the states, there is a serious threat that interest premia would go up on the debt of most state governments and a wave of state defaults would follow. For this reason, the federal government might well step in. But if we look at the institutional manner in which the US deals with the problem, we find the answer to lie in country-wide prudential rules for banks and central bank powers of lender of last resort. There is no general announcement that state government default is incompatible with the dollar. Instead there is a strict separation of the issue of joint support of the financial system and joint support of financing by the sub-government units in the country. Would Europe not be wise to adopt the same strategy and to cease to conflate the two issues?
Tweaking the Pact
What this would mean, of course, is adopting Eurozone-wide prudential rules on banks, providing the ECB full powers of lender of last resort, and, very significantly, dismissing the idea that the Stability and Growth Pact is the pillar on which the whole Eurozone project stands. This idea is highly perilous.[2] Markets believe it, and at times of financial precariousness, what markets believe is extremely important. According to my proposal, the Pact could still be upheld as a code of good behaviour which improves public finances in Europe and facilitates the task of the ECB. But the basic philosophy would be that if any individual member government in the Eurozone engages in irresponsible fiscal conduct, contrary to the Pact, the creditors and its taxpayers would bear the brunt of the consequences. Everything would be done to assure the stability of the financial sector in the Eurozone and the lack of repercussions on the risk premiums that the more financially responsible member governments need to pay. Banks might be bailed out but not governments. Any aid to member governments, if it came, would not concern the euro system but the IMF or if any aid did come from the EU it would be part of a programme that could as well have existed had the euro never appeared and would be clearly sealed off.
VoxEU Editors' note: This article will appear as a roundtable discussion in Miroslav Beblavy, David Cobham and Ludovit Odor, eds., The euro area and the financial crisis, Cambridge University Press, forthcoming.
References:
Baldwin, R (2010), A re-cap of Vox columns on the Eurozone crisis” VoxEU.org, 13 May.
Blejer, M and Levy-Yeyati, E (2010), Leaving the euro: What’s in the box, VoxEU.org, 21 July.
Economist (2010), Can pay, won’t pay, June 19.
Poterba, J (1996), Do budget rules work? NBER Working Paper 5550, April.
Public Bonds (2010), Municipal bonds and defaults, downloaded 23 August.
Reinhart, C M and Rogoff, K (2009), This time is different: eight centuries of financial folly, Princeton: Princeton University Press.
Sinn, H-W (2010), Rescuing Europe, CESifo Forum, special issue, August.
Notes:
[1] Many would say that Greece has already been bailed out. But so far no holder of Greek debt has yet suffered a credit event. Further, no one outside of Greece has yet paid any taxes to fulfil a claim on Greek debt. Thus, according to my usage, no bailout has happened. However, none of the argument hinges on this choice of words.
[2] If we really think that a government default would bring the euro under, we must conclude that the euro has no long-run future ahead – that it is doomed. A reading of Reinhart and Rogoff (2009) should convince anyone.
Republished with permission of VoxEU.org
Earlier this year, the fiscal situation in Greece caused turmoil across Europe. This column examines why the financial difficulties of several state governments in the US are not having similar impacts on its economy.
The problems of the Eurozone this year brought to light some failures of the system. Nevertheless, the resulting drop in confidence in the system has gone further than we might have expected. Questions have even arisen about the survival of the system (see Baldwin 2010 and Blejer and Levy-Yeyati 2010 for discussions). Yet monetary systems do not tend to dissolve simply because of faulty performance. On the contrary, as a rule they endure even when they function very badly. It takes a political force majeure to bring about the break-up of a single currency area, typically without connection to monetary performance. Why, then, has the possible default of a country engaged in irresponsible fiscal policy and accounting for only 3% of the Eurozone’s GDP raised questions about ‘saving the euro’ and the survival of the Eurozone?
The issue has not received the attention it deserves. It is often simply taken for granted that the departures from the Stability and Growth Pact provide a sufficient reason for the earthquake that has shaken the whole currency area. Yet if we look around the world past and present, the mismanagement of finances by regional governments has no particular tendency to bring down entire monetary systems, far from it. In line with the usual – I think superficial – diagnosis of the ailment, proposed remedies for the Eurozone centre on strengthening the Pact, increasing joint political control over fiscal policy, and providing joint insurance against government default, or some mixture of the three. But what if a vital element of the problem is really the official doctrine that sovereign default is incompatible with the euro? What if the scale of the crisis that took place this year has resulted from financial markets’ conviction, based on this doctrine, that the future of the euro was at stake? What if assuring the long-run sustainability of the euro means convincing those markets, quite differently, that nothing as manageable as a Greek default can upset the Eurozone?
Lessons from the US
That is precisely what the US example would suggest and what I will defend. With this idea governing beliefs, the right road ahead looks quite different. It means shifting the emphasis away from avoiding government defaults toward assuring the stability and the solvency of the banking system at all times, regardless of the financial difficulties of some member governments.
In the US, default on state and municipal contractual obligations is very much a possibility whenever lower-level governments are in financial trouble; bailout cannot be taken for granted. New York City defaulted in 1975, the biggest default of all by a lower-level government unit since World War II took place in 1983 when the Washington Public Power Supply System went into bankruptcy, and Orange County defaulted in 1995. Various municipal governments have been on the verge of default at times in the last few decades, including Philadelphia and Cleveland. There is also no Stability and Growth Pact in the US. Yet financial discipline is considerably higher in the US at the state government level than in the Eurozone at the national level. All states except Vermont have balanced-budget rules; but these rules are self-imposed. It is easy to argue that this difference in fiscal discipline on the two sides of the Atlantic is related to the fact that when push comes to shove in the US and a lower-level government unit cannot or will not meet its debt obligations, the lenders can expect to take a big part of the hit.
Some rudimentary analysis is relevant. Consider any government unit unable to print money and without any prospect of a bailout. Theory tells us that credit rationing is very much a possibility. As the interest rate that such a government offers on its debt goes up, extra lending dries up completely at some point as the expected rate of return on the government debt falls. This must happen because higher nominal interest rates impair the government’s solvability and bring default nearer. Risk aversion simply lowers the interest rate at which credit rationing begins.
Suppose we compare the situation in the US and the Eurozone since the 2007-2009 financial crisis in this light. The crisis brought about dire financing problems for many lower-level government units in the US and some national governments in the Eurozone. According to the spreads on credit default swaps, California and Illinois now have a higher probability of non-performance on public debt than Portugal and Spain. This has been true for months. Consider next the difference in response in the States and Europe. Recently Illinois simply stopped paying $5 billion of bills. In June of last year California issued vouchers for wage payments. In addition, savage cuts in public services have begun and are now threatened in various states in difficulty, not only these two. Nevada has made startling reductions in spending on higher education and welfare. In the case of Portugal and Spain, nothing so drastic has happened thus far. There have been occasional spikes in interest rate spreads over German bunds of 100 to 200 percentage-points above usual levels. Both Spanish and Portuguese governments have also been forced to plan greater austerity and reduced government deficit spending. Meanwhile, they have been able and willing to keep borrowing.
Why the difference between the Eurozone and the US?
Part of the explanation may be that Portugal and Spain are more able to raise tax revenues than US states. But another part is the higher probability of a bailout in Europe. The example of Greece is to the point. Greece has been able to continue borrowing this year at interest rates typically around 200 percentage-points above Portugal and Spain on 10-year government bonds (and since May more than 500 percentage-points higher than German bunds). If you do the math, it is clear that this could never have happened without a high probability of a bailout. In fact, you do not need to do the math: there have been occasions in February/March and particularly May when some Greek issues would clearly have failed without the assurance of public lending and ECB support. If Greece can borrow on the probability of a bailout, so could Portugal and Spain.
Based on this evidence, the current Eurozone strategy of treating government default as anathema permits member governments to sink into deeper waters, weakens the forces that would otherwise exist toward self-imposed budget restraints, and thereby raises the probability of a bailout. But an actual bailout is perhaps the most likely setting for the breakdown of the Eurozone. If taxes ever need to rise all over the Eurozone in order to bail out a member government, one can easily imagine a pullout by Germany, followed by the Netherlands and Austria (if no others), in order to form a separate monetary union.[1]
What are the dangers of the opposite strategy of mimicking the US instead and moving toward heavier reliance on markets to discipline member governments and to price sovereign risk? The answer lies in the external effects of government default on the payment system and the banks, and this problem would be aggravated by contagion. But those dangers exist in the US as well. If the US federal government were to allow Illinois or California to default on state government debt in today’s circumstances of widespread financial difficulties across the states, there is a serious threat that interest premia would go up on the debt of most state governments and a wave of state defaults would follow. For this reason, the federal government might well step in. But if we look at the institutional manner in which the US deals with the problem, we find the answer to lie in country-wide prudential rules for banks and central bank powers of lender of last resort. There is no general announcement that state government default is incompatible with the dollar. Instead there is a strict separation of the issue of joint support of the financial system and joint support of financing by the sub-government units in the country. Would Europe not be wise to adopt the same strategy and to cease to conflate the two issues?
Tweaking the Pact
What this would mean, of course, is adopting Eurozone-wide prudential rules on banks, providing the ECB full powers of lender of last resort, and, very significantly, dismissing the idea that the Stability and Growth Pact is the pillar on which the whole Eurozone project stands. This idea is highly perilous.[2] Markets believe it, and at times of financial precariousness, what markets believe is extremely important. According to my proposal, the Pact could still be upheld as a code of good behaviour which improves public finances in Europe and facilitates the task of the ECB. But the basic philosophy would be that if any individual member government in the Eurozone engages in irresponsible fiscal conduct, contrary to the Pact, the creditors and its taxpayers would bear the brunt of the consequences. Everything would be done to assure the stability of the financial sector in the Eurozone and the lack of repercussions on the risk premiums that the more financially responsible member governments need to pay. Banks might be bailed out but not governments. Any aid to member governments, if it came, would not concern the euro system but the IMF or if any aid did come from the EU it would be part of a programme that could as well have existed had the euro never appeared and would be clearly sealed off.
VoxEU Editors' note: This article will appear as a roundtable discussion in Miroslav Beblavy, David Cobham and Ludovit Odor, eds., The euro area and the financial crisis, Cambridge University Press, forthcoming.
References:
Baldwin, R (2010), A re-cap of Vox columns on the Eurozone crisis” VoxEU.org, 13 May.
Blejer, M and Levy-Yeyati, E (2010), Leaving the euro: What’s in the box, VoxEU.org, 21 July.
Economist (2010), Can pay, won’t pay, June 19.
Poterba, J (1996), Do budget rules work? NBER Working Paper 5550, April.
Public Bonds (2010), Municipal bonds and defaults, downloaded 23 August.
Reinhart, C M and Rogoff, K (2009), This time is different: eight centuries of financial folly, Princeton: Princeton University Press.
Sinn, H-W (2010), Rescuing Europe, CESifo Forum, special issue, August.
Notes:
[1] Many would say that Greece has already been bailed out. But so far no holder of Greek debt has yet suffered a credit event. Further, no one outside of Greece has yet paid any taxes to fulfil a claim on Greek debt. Thus, according to my usage, no bailout has happened. However, none of the argument hinges on this choice of words.
[2] If we really think that a government default would bring the euro under, we must conclude that the euro has no long-run future ahead – that it is doomed. A reading of Reinhart and Rogoff (2009) should convince anyone.
Republished with permission of VoxEU.org
Thursday, June 24, 2010
The European Union is not the United States
German Chancellor Angela Merkel's recent agitations for global austerity measures should be kept in perspective by the deficit hawks in the US. For example, it is quite easy to imagine Germany turning its back on Greece in her hour of need. However, I doubt seriously that the US would be able to turn its back on California or New York should these states fall into default. The European Union is not the United States.
Germany (green) and Greece (orange)
Related Posts:
Greece: What Economic Austerity Looks Like
How Would Californians React to Economic Austerity...?
How Would New Yorkers React to Economic Austerity...?
Germany (green) and Greece (orange)
Related Posts:
Greece: What Economic Austerity Looks Like
How Would Californians React to Economic Austerity...?
How Would New Yorkers React to Economic Austerity...?
Sunday, May 23, 2010
How Would New Yorkers React to Economic Austerity...?
My previous posts entitled Greece: What Economic Austerity Looks Like and How Would Californians React to Economic Austerity...? have generated pointed reactions from readers. However, one reader sent me an interesting note saying that the fiscal situation in New York is far worse than in California. Thus, I am now asking New Yorkers to respond to the same question I asked Californians: Assuming the US had to bailout the State of New York, how would New Yorkers react to a bailout plan that included the same economic austerities that the EU/IMF forced upon Greece...?
State Seal of New York
Keep in mind that the "Greek plan" would transpose into the following specific austerity measures for New York:
State Seal of New York
Keep in mind that the "Greek plan" would transpose into the following specific austerity measures for New York:
- Reducing effective wages for state workers by 5-15%.
- Banning pay increases for state workers for at least 3 years.
- Raising the state sales tax by 2%.
- Raising taxes on fuel, alcohol, and tobacco by 10%.
Friday, June 25, 2010
The Coming Inflation
As reported by Bloomberg:
Source: Robinson, E (2010, June 25), States of Crisis for 46 Governments Facing Greek-Style Deficits, Bloomberg.
Related Posts:
The United States is not the European Union
Greece: What Economic Austerity Looks Like
How Would Californians React to Economic Austerity...?
How Would New Yorkers React to Economic Austerity...?
Forty-six states face budget shortfalls that add up to $112 billion for the fiscal year ending next June, according to the Center on Budget and Policy Priorities, a Washington research institution. State spending is 12 percent of US GDP. “States are going to have to cut back spending and raise taxes the same way Greece and Spain are,” says Dean Baker, co-director of the Center for Economic and Policy Research in Washington.... State leaders won’t be able to ride out this cycle the way they have in the past. The budget holes are too large. For the first time since 1962, sales and income tax revenue fell for five straight quarters, through December 2009, according to the Nelson A Rockefeller Institute of Government at the State University of New York at Albany.... If they fail to act, state fiscal positions will steadily erode and hurt the US economy through 2060, according to a March 2010 report prepared for Congress by the US Government Accountability Office.Of course, the US cannot turn its back on its states the way that the EU can turn its back on its members. Assuming budget cuts fail at the state level (as I predict they will), the US will have no recourse but to rout government spending and indebtedness through monetary expansion and inflation. In my opinion, an inflationary economic surge is a foregone conclusion regardless of which political party is in power.
Source: Robinson, E (2010, June 25), States of Crisis for 46 Governments Facing Greek-Style Deficits, Bloomberg.
Related Posts:
The United States is not the European Union
Greece: What Economic Austerity Looks Like
How Would Californians React to Economic Austerity...?
How Would New Yorkers React to Economic Austerity...?
Monday, May 03, 2010
How Would Californians React to Economic Austerity...?
My previous post entitled Greece: What Economic Austerity Looks Like, has inspired a new question: How would Californians react if the same economic austerities were imposed upon them by the US as part of a Federal bailout plan...?
State Flag of California
If the "Greek plan" was thrust upon California, the economic austerity measures would include:
Related Posts:
How Would New Yorkers React to Economic Austerity...?
State Flag of California
If the "Greek plan" was thrust upon California, the economic austerity measures would include:
- Reducing effective wages for state workers by 5-15%.
- Banning pay increases for state workers for at least 3 years.
- Raising the state sales tax by 2%.
- Raising taxes on fuel, alcohol, and tobacco by 10%.
Related Posts:
How Would New Yorkers React to Economic Austerity...?
Wednesday, January 11, 2012
Teutonic versus Latin Banking Regimes
Prof Walter Russell Mead wrote the following today in The American Interest:
Insignia of the Teutonic Order by Arnaud Bunel
The ongoing struggle between northern and southern Europe reaches back to biblical times. I doubt that the Germans can convert France and Italy, let alone Spain, Portugal, and Greece, to its monetary banking regimes in the near-term. Dark times may be descending upon much of Europe.
Source: Mead, Walter Russell, (2012, January 11), Europe: The New German Nightmare Begins, The American Interest.
Related Posts
Germany is in big trouble in Europe, and the Franco-Italian coalition is going to make things much tougher. Germany’s ultimate choice may well lie between submitting to a fundamentally Latin currency regime with a few Teutonic decorations and the division of Europe into two or more currency zones.Read More
Insignia of the Teutonic Order by Arnaud Bunel
The ongoing struggle between northern and southern Europe reaches back to biblical times. I doubt that the Germans can convert France and Italy, let alone Spain, Portugal, and Greece, to its monetary banking regimes in the near-term. Dark times may be descending upon much of Europe.
Source: Mead, Walter Russell, (2012, January 11), Europe: The New German Nightmare Begins, The American Interest.
Related Posts
Monday, June 28, 2010
The G20 Toronto Summit Legacy
The Europeans assume that the world is going to go along with their austerity planning. However, the US cannot turn its back on California and New York the way that Germany and France can shun Greece, Spain, and Portugal. Monetary expansion in the US is immiment, whether Europeans like it or not. The European Union is blundering and may very well force the world into a deeper recession, or even depression...
Related Posts:
Depression or Inflation...?
Related Posts:
Depression or Inflation...?
Thursday, December 08, 2011
Prospects for Europe (and the US)
I just finished listening to today's press conference by European Central Bank (ECB) Pres Dr Mario Draghi. According to Pres Draghi, the ECB will not be monetizing sovereign debt in the Eurozone regardless of the consequences. Moreover, Pres Draghi made clear that channeling external funds (e.g., US Federal funds) through the International Monetary Fund (IMF) would violate the "spirit" of the EU treaty, and so the ECB would block any such efforts. Pres Draghi stated that the ECB would not stand in the way of the European Financial Stability Facility (EFSF) dispersing emergency funding, though the current capacity of the EFSF is known to be limited. Also, Pres Draghi predicted that the ECB's current contractory monetary policies will result in economic contraction in the Eurozone as a consequence.
Dr Mario Draghi (1947- )
In summary, a) the ECB will not be monetizing sovereign debt in Europe; b) the ECB will block efforts to monetize the debt by the IMF; c) the ECB will use the EFSF as its sole emergency funding facility; and d) the ECB is prepared to accept economic contraction across the Eurozone as a consequence of its efforts toward monetary contraction in the Eurozone.
My tentative conclusion is that severe austerities are coming to Europe, and especially southern Europe, regardless of whether challenged countries such as Greece, Italy, Ireland, Spain, and Portugal agree to sovereign concessions under an amended EU treaty.
My best advice for the US -- take cover...
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Dr Mario Draghi (1947- )
In summary, a) the ECB will not be monetizing sovereign debt in Europe; b) the ECB will block efforts to monetize the debt by the IMF; c) the ECB will use the EFSF as its sole emergency funding facility; and d) the ECB is prepared to accept economic contraction across the Eurozone as a consequence of its efforts toward monetary contraction in the Eurozone.
My tentative conclusion is that severe austerities are coming to Europe, and especially southern Europe, regardless of whether challenged countries such as Greece, Italy, Ireland, Spain, and Portugal agree to sovereign concessions under an amended EU treaty.
My best advice for the US -- take cover...
Related Posts
Friday, August 19, 2011
Real Unemployment in the US
According to the Wall Street Journal (2011):
Real unemployment is measured in number of souls.
Source: Wessel, D (2011, August 19), The United States of Unemployment, Wall Street Journal Online.
Related Posts
- At least 13.9 million people are unemployed in the US today.
- More people are unemployed in the US today than there are people in any US state, with the exceptions of Florida, New York, Texas, and California.
- More people are unemployed in the US today than the combined populations of Wyoming, Vermont, North Dakota, Alaska, South Dakota, Delaware, Montana, Rhode Island, Hawaii, Maine, New Hampshire, Idaho, and the District of Columbia.
- More people are unemployed in the US today than there are people in either Greece or Portugal.
Real unemployment is measured in number of souls.
Source: Wessel, D (2011, August 19), The United States of Unemployment, Wall Street Journal Online.
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Thursday, December 29, 2011
US Economic Prospects for 2012...
Europe will blowup once everyone realizes that the degree of "restructuring" required in Portugal, Italy, Ireland, Greece, and Spain (PIIGS) is politically infeasible. Consequentially, public spending cuts and tax increases are imminent across the PIIGS, be they instituted by public policy or national defaults. Either way, economic depression is descending upon Southern Europe.
Protestors wearing "Guy Fawkes" masks in London
The US is also facing a blowup given that banks made a "seasonal" decision to hold off on new foreclosures until after the New Year. In 2012, the US will be confronted with the largest increase in new foreclosures since 2008.
Likewise, a budget blowup in California has been on tacit hold until after the holidays. Nevertheless, California revenues are trailing budget requirments by a significant margin. Moreover, Gov Jerry Brown appears determined to conduct "business as usual" in order to amplify the California budget crisis into a voter mandate for tax increases. Whatever happens, it's bad news for California where major cuts in government employment and/or tax increases will eventually force California into economic depression on a scale not seen on the West Coast since the Great Depression.
The combination of sharp increases in mortgage foreclosures and budget remedies in California means catastrophe along the US West Coast on a scale similar to what is about to unfold along the southern flank of Europe. Deflation and depression are already evident across America in home values, real wages, and the employment to population ratio.
The economic prospects for 2012 in the US and much of Europe are grim at best. Accredited investors are certainly in a "buy" window of opportunity at this point. However, much of America is in for hard times this coming year...
Related Posts
Protestors wearing "Guy Fawkes" masks in London
The US is also facing a blowup given that banks made a "seasonal" decision to hold off on new foreclosures until after the New Year. In 2012, the US will be confronted with the largest increase in new foreclosures since 2008.
Likewise, a budget blowup in California has been on tacit hold until after the holidays. Nevertheless, California revenues are trailing budget requirments by a significant margin. Moreover, Gov Jerry Brown appears determined to conduct "business as usual" in order to amplify the California budget crisis into a voter mandate for tax increases. Whatever happens, it's bad news for California where major cuts in government employment and/or tax increases will eventually force California into economic depression on a scale not seen on the West Coast since the Great Depression.
The combination of sharp increases in mortgage foreclosures and budget remedies in California means catastrophe along the US West Coast on a scale similar to what is about to unfold along the southern flank of Europe. Deflation and depression are already evident across America in home values, real wages, and the employment to population ratio.
The economic prospects for 2012 in the US and much of Europe are grim at best. Accredited investors are certainly in a "buy" window of opportunity at this point. However, much of America is in for hard times this coming year...
Related Posts
Tuesday, February 14, 2012
Greek Austerity Measures Hit Public Sector Hard
Elizabeth Palmer of CBS News reported that the $430 billion in spending cuts recently passed by the Greek parliament will have a significant impact on public sector wages and entitlements. For example, Greek teacher salaries will decline 38% from $1,450 to $900 per month, and the basic old age pension will drop by 23% from $600 to $460 per month. The unemployment rate for Greeks younger than age 24 is now almost 50%, and suicides in Greece have increased 22% since the fiscal crisis began.
Imagine what US public reaction might be if these same austerities were imposed upon a defaulting California or New York...
Source: Greek Citizens Bear Brunt of Massive Spending Cuts (2012, February 13), CBS News.
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Imagine what US public reaction might be if these same austerities were imposed upon a defaulting California or New York...
Source: Greek Citizens Bear Brunt of Massive Spending Cuts (2012, February 13), CBS News.
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Saturday, June 26, 2010
Threat of Another Economic Stumble Is Real
According to Dr Norman J Ornstein of the American Enterprise Institute for Public Policy Research, the global economy remains in a state of great uncertainty:
Read more
Protestors at the G20 Toronto Summit
Source: Ornstein, N J (2010, June 23), Threat of Another Economic Stumble Is Real, American Enterprise Institute.
We are nowhere near out of the woods. The danger of deflation is still there. The risk of another stumble in our economy is real, including the continuing fragility of community banks over commercial real estate loans. The global economy remains fragile, with Greece the leading edge of what could become a set of dominoes toppling in Europe as creditors become nervous and raise the premium on loans from several shaky countries, adding to their woes and endangering the euro zone and by extension the rest of us.In the mean time, the political debate over austerity measures versus monetary expansion remains as real today as it did during the 1930's...
Read more
Protestors at the G20 Toronto Summit
Source: Ornstein, N J (2010, June 23), Threat of Another Economic Stumble Is Real, American Enterprise Institute.
Monday, June 28, 2010
Capitalism or Federalism...?
California's financial crisis will be an interesting test for Washington and the future of Federalism. Here's my question: How can Washington deny California after saying yes to General Motors, AIG, and dozens of banks?
Comments welcome...
Related Posts:
Greece: What Economic Austerity Looks Like
How Would Californians React to Economic Austerity...?
How Would New Yorkers React to Economic Austerity...?
Comments welcome...
Related Posts:
Greece: What Economic Austerity Looks Like
How Would Californians React to Economic Austerity...?
How Would New Yorkers React to Economic Austerity...?
Wednesday, August 10, 2011
Austerity and Anarchy
A recent study by Prof Hans-Joachim Voth and Jacopo Ponticelli concludes that a positive correlation exists between budget cuts and social instability:
Source: Voth, H-J & Ponticelli, J (2011), Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009, Centre for Economic Policy Analysis.
Does fiscal consolidation lead to social unrest? From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble crosscountry evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability. We test if the relationship simply reflects economic downturns, and conclude that this is not the key factor. We also analyse interactions with various economic and political variables. While autocracies and democracies show a broadly similar responses to budget cuts, countries with more constraints on the executive are less likely to see unrest as a result of austerity measures. Growing media penetration does not lead to a stronger effect of cut-backs on the level of unrest.The US might take a lesson from the European experiences of the 20th century. Follow the link below to read the entire study.
Source: Voth, H-J & Ponticelli, J (2011), Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009, Centre for Economic Policy Analysis.
Sunday, April 07, 2013
US Insolvent
According to Rob Gordan of Sovereign Investor (2013, April 7):
Let's face it, the US is insolvent.
Source: Gordan, R (2013, April 7), "We're in Uncharted Economic Territory...", Sovereign Investor.
Related Posts
- America has not passed a budget since April of 2009 -- almost three and a half years.
- US annual income is $2 trillion, while US total debt obligations are $121 trillion (that’s a debt ratio of 60/1 -- typically anything over 1/1 is a significant red flag for investors, indicating that the entity of interest may not be able to pay its debts in 12 months’ time).
- Since 1900, US expenses have increased by an average of 24% a year, while revenues have risen only 15% year.
- The US has lost money 42 out of the last 47 years.
- The US expenses are 56% higher than its revenues.
- The US expects to double its debt within the next 10 years (the interest on that debt alone will equal $1 trillion a year).
- The US now owes 885% of its GDP, more than any other industrialized country.
- The US debt per capita is higher than Greece, Portugal, Italy and Spain.
Let's face it, the US is insolvent.
Source: Gordan, R (2013, April 7), "We're in Uncharted Economic Territory...", Sovereign Investor.
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Friday, June 17, 2011
Greek 2-Year Yields at 28.2%
Greek 2-year bond yields are at 28.2%.
Anyone still believe that austerity measures are working in Greece...?
Source: Bloomberg
Anyone still believe that austerity measures are working in Greece...?
Source: Bloomberg
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