"Five Minutes to Midnight" in Athens

Events are rapidly coming to a head in Greece, and the consequences could ripple through all of Europe.

Leading Greek economists and bankers yesterday warned George Papandreou, prime minister, that he had to announce bold initiatives to rescue the country's collapsing bond market and avert the possibility of defaulting on a rising public debt.
Yannis Stournaras, an Athens University economics professor and former chief adviser at the finance ministry, said: "Other countries in trouble have already taken measures. If we don't quickly follow suit the adjustment will be imposed by markets and it will be violent."

How violent? Maybe not as violent as the protests in the streets of Athens. Already there are student, pensioner, and public worker protests and strikes. Remember that the current government is only two-months old, after the old government nearly collapsed under the pressure from street riots.
This puts the current government in an extremely difficult situation. The public debt is set to rise next year to 124 per cent of GDP, with a fiscal deficit of over 12%. Meanwhile, the public pension fund is expected to go into the red as early as 2011. The fiscal squeeze requires draconian cuts, but the public workers of Greece are not a wealthy group. They will have no choice but to turn out into the streets en mass.
Premier George Papandreou recognizes that.

"Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state," he said.

On the other side are the foreign creditors, and they don't care about Greece's internal problems.

“It’s five minutes to midnight for Greece,” Buiter, who will join Citigroup Inc. as its chief economist next month, said in a Bloomberg Television interview today. “We could see our first EU 15 sovereign default since Germany had it in 1948.”

The bond markets are looking at a combination of spending cuts and higher taxes totaling at least 7% of GDP - an amount so high that it would cause Greece's recession to become a depression, and would ultimately lead to the collapse of the government.
What foreign creditors are expecting is Greece to go to the IMF and the European Commission for bailouts. Those bailouts are likely, but at a steep price. The IMF and EU would almost certainly require an austerity program much like Latvia recently was. However, those austerity programs frequently solve nothing. Latvia, for example, is poised to fall back into an economic crisis despite slashing public salaries and closing almost all of its hospitals. The Ukraine is another nation that the IMF bailouts have failed to fix.
For half a century, the IMF's solution has caused a deflationary spiral more often than not.

Greece's situation is compounded by being a European Monetary Union member. This prevents it from using a monetary solution to its debt problems, like quantitative easing or devaluing its currency. However, EMU membership doesn't have to be forever.

Greece and Ireland are among countries in an “intolerable” economic situation, which may lead to bailouts or even an exit from the euro area by the end of next year, according to Standard Bank Plc.
“Countries like Ireland and Greece may not be able to grow out of the current crisis,” Barrow said in a telephone interview today. “With interest-rate cuts, exchange-rate depreciation and significant fiscal support all off limits for these countries, bailouts or even pullouts from EMU may happen next year.”

A Greek exit from the EMU would be drastic, and would have serious risks for Greece. It would cause a drastic currency fall and price inflation. On the other hand, the risks would be shared.

Greek exit from EMU would be dangerous. Quite apart from the instant contagion effects across Club Med and Eastern Europe, it would puncture the aura of manifest destiny that has driven EU integration for half a century.
No doubt, EU institutions will rustle up a rescue. RBS says action by the European Central Bank may be "days away". While the ECB may not bail out states, it may buy Greek bonds in the open market. EU states may club together to keep Greece afloat with loans for a while. That solves nothing. It increases Greece's debt, drawing out the agony. What Greece needs – unless it leaves EMU – is a permanent subsidy from the North. Spain and Portugal will need help too.

Eventually the bond holders are going to have to suffer a haircut, just as they did when Argentina defaulted. While it caused immense short-term pain, it cleaned the bad debt out of the system and didn't cause the long-term Armageddon that was predicted by the bond market.



there for the grace of God go I

draconian cuts and tax increases. and what is all of this shit over? A few multinational corporations selling shacks bets that were super overinflated and built on people who could not pay?

Thanks for the post, helps elucidate what's going on globally a tad and when I put the subject title what I was thinking of, was this happening in the U.S.

Dean Baker had a post claiming the next thing to be attacked, with Obama's assistance, will be Medicare and Social Security with the claim we cannot afford it.

I put up the oil post because in spite of the absurdity of going to war in Iraq in the first place, the U.S. is out trillions and is anyone paying the U.S. taxpayer back for any of that....esp. it's clear their oil fields are privatized and up to the highest bidder?

Is the U.S. seriously out all of that money and doesn't even get the real prize, the spoils of war?

(BTW: war, in terms of the geopolitical economics of it, the global oil markets and private contracts, the Profits of war (and obvious losses) are fair game for EP topics).

I mean don't ignore the loss to humanity and so on, that would be plain crass, but the focus should be on the $$.

Yes, the US is out all that money

You act like you haven't seen this act before. I suggest reading about the history of American intervention in Latin America, and Smedley Butler.
The reason we send in the Marines is because nations default on their debts to American banks. Did the American public get the rewards for the inevitable loss of life? Of course not. The money then goes to the American banks, as Gawd intended.

At the risk of sounding like a douche & a cynic

don't be all too surprise if this was the plan of some elitists to remove the "riffraff" in the periphery of their union. There have been talks of how volatile the economies of these nations, be it Ireland on one side to the various Eastern European nations on the other. When times were "good," these nations were eating the lunch of the more calcified older economies like France. How many stories of have there been of countries like Slovakia or such getting plants or "brain work," from one of the EU-big guys like Germany?

When times were good, they either were a source of relatively cheap labor or stunning capital growth. But now they're out lived their usefulness to the bankers in Frankfurt to the "Eurocrats" in Brussels. Not to mention that this would also aid those who aren't particularly fond of the EU in places like Britain. If Greece were to leave the EU, this may prove to be a severe blow for those wishing to abandon the Sterling for their continental counterpart.

At the end of the day, as you two have noted, the help from the IMF will be shallow at best. The nations falling into these debt problems in the far Eastern European region also have tepid relations with the EU's largest heating utility company....Russia. Do you not think there are those within Paris or Berlin or the Benelux nations who would like something more..ahem..."manageable"?

at the risk of sounding like one of those doom & gloom

depressives who never cracked an econ text (shall this be our running joke?) One thing I note is how suddenly "country x" has "untapped geniuses" that "must be utilized" by "unlimited migration" and you hit upon a point that really needs to be closely watched. Are magically those whose great crime is having citizenship in a certain nation all going to be labeled lackeys, now that the cheap "investment" capital (read quick bubble) returns are no more?

We haven't seen an implosion yet on some of the U.S.'s "branded" offshore nations of opportunity" but I'm really curious to watch this one for a while new spin on the rhetoric to accompany the lack of returns.

Very perceptive of you JV. Anyone know EU's rules for staying in? I know they had a series of criteria for entry but what happens when one nation goes tumbling down, i.e. is that same set of criteria in place and thus enables the EU to revoke membership?

Industrial Output drops in Euro-Zone


Eurostat, industrial production in October declined 0.6% from September and was down 11.1% from a year earlier. The annual fall was the 18th straight year-to-year decline for this measure.

Greece to cut deficit

Prime Minister George Papandreou has proposed some austerity measures.

In a much-awaited speech to business and labor leaders, Papandreou said his government would cut the deficit to below an E.U.-mandated ceiling of 3% of gross domestic product within four years, from a forecast 12.7% of GDP this year.
"The deficit will be below the 3% limit of GDP before the end of the first four-year term for the [government], by 2013," he said, adding that Greece would cut the deficit through a series of "structural and permanent measures."
Beginning in 2012, Greece would take measures to start reducing its giant debt burden, expected to surpass 120% of GDP by next year, Papandreou said.
However, the speech was met with skepticism by economists and investors, who said it contained few surprises and fell short of the bold deficit-cutting goals announced this month by the Irish government.
In the bond market, the interest rate spread between the 10-year Greek government bond and its benchmark German counterpart--a measure of credit risk--widened to 222 basis points after the speech, compared with 207 basis points before Papandreou's remarks.

The markets don't believe the talk, and I don't see why they should.

that answers the question on EU criteria

They clearly have ongoing criteria to be a member.

Looks like more Public relations to try to stop Greece from getting kicked out.

There are

convergence criteria.

1. Inflation rates: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU.

2. Government finance:

Annual government deficit:

The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.

Government debt:

The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devaluated its currency during the period.

4. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.

So 3% annual deficit and 60% gross debt to GDP are the important numbers.

However, if you looks at the CIA numbers on public debt for 2008, you see that Italy, Belgium, France, Hungary, Portugal, Germany, and Austria all exceed the 60% debt/gdp criteria, and the UK and Ireland look to shoot up there as well in the next year.

The euro area plus the UK look to be in for a serious debt crisis. I have a feeling that what's happening in Greece is a dress rehearsal for applying the same sort of austerity programs (read the Shock Doctrine) that developing countries have experienced for decades.

Interestingly the Greek Socialists, who just took office this fall, look to make up much of the deficit through increasing taxes and targeting corruption. If the Greeks do this and pull it off, it would go a great way to defanging the threat to other countries with serious debt problems including the US.

Greece's problems get more extreme

In a repeat of last fall, there is a flight to perceived quality.

Rising concern over sovereign credit risks in Greece spurred global investors to sell riskier assets Thursday and sought the safety of highly liquid Treasury securities.
U.S. stocks and commodities tumbled. The euro was battered against the dollar and the yen as investors perceived the problems in Greece, a euro-zone member country, mirrored worsening public finances in the region. Bonds in Greece were dumped and the cost to buy financial instruments to insure against possible debt default by the Greek government shot up.