Greece-the gathering financial storm

[temujin]

I`ve seen no mention of the Greek crisis on this forum despite it being the single biggest threat to the global economy currently. S & P recently cut Greece's credit ratings to the LOWEST IN THE WORLD, below those of Pakistan and Jamaica, an action which followed similar moves by other credit rating agencies in recent weeks.

The Greek government is hoping to push through tough austerity measures to tackle the ballooning budget deficit but the Greek public, long used to evading taxes and living beyond their means, is having none of it.

In his report from Athens on Newsnight on 15/06/2011, Paul Mason describes a distinct change in the nature of the protests in Greece in recent weeks, with even the middle classes coming out to join the usual suspects i.e. extreme left wing/anarchist groups to demand the government default on its debt obligations. He views this mainstreaming of protests as putting further pressure on the government and making a default much more likely..In fact the markets are already preparing for such an eventuality and we are already seeing yields and credit default swaps for Spanish, Irish and Portuguese debt soar to record highs today along with those of Greece and if they, particularly Spain, go the way of the latter, it will mean financial Armageddon for the rest of the world.

Watch Paul Mason's report from Athens

BBC NEWS | Programmes | Newsnight

and blog

BBC News - Greeks versus the world in Athens austerity protests


Greeks versus the world in Athens austerity protests

"Tramps, police informers, journalists!" That's the chant of the front line of the protest and since my cameraman and I are the only journalists here it is aimed at us.

The protestors are taking a break from insulting the riot cops lined up in front; a woman tugs my arm and says, "Get out of here".

The media is the target here in Syntagma Square for two reasons. First, because the people here believe the Greek media have sided totally with what they call "Big Capital".

Second, because quite simply we are a proxy. The men making the decisions on this country's future in Brussels and Frankfurt could not show their faces here. Indeed, I suspect the European Union decision makers have very little sense of the depth of social anger here in Greece.

Right now the communist trade union federation PAME is marching into the square - my estimate is about 200,000 people in this contingent alone. They are flanked by tough looking men carrying red flags with super-sized flag poles. This of course is to fend off anarchists, who so far have not turned up.

The square itself has been occupied for 22 days by so-called "indignados" - thousands of young people organised along the Spanish model.

Front line

The woman still tugging at my arm says, "We're not interested in media coverage. We've been here 22 days and this is the end of it. We've had enough".

An old man, aged 67, a sailor, says, "We don't want any more bailouts from the EU, we'd rather be poor and broke".

For all the leftist iconography plus the presence of that, by now familiar demographic, the Facebook youth - or "graduates with no future" - this thing has gone beyond left and right, it's no longer even a class thing. As the crowd around me erupts with the chant, "Greece, Greece, Greece!" it's clear that for many people it is the Hellenic republic versus the rest of the world.

Standing here amid a crowd that is frustrated, but not yet tense, which is hurling abuse and the occasional plastic bottle at the cops defending parliament it is strange to think this is the front line of the world's financial system. For if Greece defaults, the world leaders fear a second Lehman.

Paul Mason









In any case, I don`t think the ECB has the wherewithal nor do the EU nations have the resources or the political will to organise yet another expensive bail out for Greece in the future and a technical default therefore looks more and more likely by July. If and when that happens, the financial consequences, including the potential fall out for the Euro and the question mark this would raise over not just the common currency but the future of the EU itself, would make Lehmann Brothers and the financial crisis of 2008 feel like a walk in the park in comparison..

I don`t think Asian economies are autonomous enough to withstand the consequences of such a sequence of events so I would expect economies in the area to take a huge hit if Greece sinks..

Watch this space!

 

[temujin]

Greece crisis: Not Europe's Lehman (it could be worse)

Eurozone finance ministers' overnight decision to withhold payment of 12bn euros (£10bn) of emergency loans to Greece, pending agreement by the Greek parliament on austerity measures and privatisations, would be rational and credible on the basis that Greece has more to lose from a disorderly Greek default than the eurozone itself.

Or to put it another way, threats are only worth making if those making the threats could actually carry them out.

But if, as is not impossible, the Greek prime minister George Papandreou - under extreme pressure from popular and parliamentary opposition - were unable in the coming few days to win backing for his reshaped cabinet and the deficit reduction programme demanded by Germany, France and the rest, would other eurozone governments sit idly by as Greece told its creditors they couldn't have their money back?

The point is that such an event would have potentially catastrophic consequences for holders not only of 340bn euros (£300bn) of Greek sovereign debt, but also for holders of hundreds of billions of euros of Greek commercial debt and tens of billions of euros of derivative contracts linked to Greek debts.

At a stroke, such a default would also increase the perceived risk of lending to Ireland and Portugal, triggering vast additional losses on hundreds of billions of euros of loans to those states and their respective banks.

And with the jury out about the long term sustainability of Spanish and Italian debts, the governments of those countries would find themselves having to pay a painful bigger premium over what Germany pays to borrow.

In itself, such an event of default would blow up the balance sheets of banks all over Europe: the banks in Greece, Portugal and Ireland itself could survive (probably) only as nationalised entities; and some banks in France, Germany and even the US would suffer losses that would take their capital resources to dangerously low levels.

As for the European Central Bank, as the holder of more Greek, Portuguese and Irish sovereign debt than any other institution on the planet, it too would be bust, requiring a massive injection of financial support from eurozone countries - which would be the kind of public humiliation from which the ECB would take years, in a reputational sense, to recover.

In September 2008, the US government allowed Lehman Bros, America's fourth largest investment bank, to collapse. The consequences were huge losses for creditors and - perhaps more importantly - panic in markets, as banks and financial institutions withdrew credit from any substantial borrower perceived to be weak. This evaporation of lending triggered the worst global recession since the 1930s.

Nor, of course, would that be the end of the potential catastrophe. As my colleague Chris Morris has been pointing out in compelling and chilling reports from Athens, there is a growing popular movement in Greece for the country to pull out of the euro altogether - with the likes of London's mayor, Boris Johnson, demonstrating in the streets (in a metaphorical sense) with the revolting Greek populace.

Here's the thing. If any eurozone member were to leave the euro, if Greece or anyone else were to adopt its own independent currency, the cost of borrowing for pretty much every other eurozone member - with the exception of Germany, Luxembourg and the Netherlands - would rise.

The reason is that euro membership would no longer be forever. So anyone lending to Spain, Italy or even France would have to be compensated for the risk - however remote - that their euro-denominated debt would one day convert into something tied more directly to the health of their respective economies and the strength of their respective public-sector balance sheets.

In the current fragile state of the eurozone's economic recovery, a rise in borrowing costs for eurozone member states would be profoundly unhelpful.

Oh, and let's not waste time considering the minefield of international litigation that would be created by a unilateral decision by Greece to turn hard euro debts into soft drachma debts - or to dwell on whether the conversion could in practice apply only to government borrowings, or whether it would also extend to government-guaranteed debts or pure commercial debts.

So, putting all this together leads to two inescapable conclusions.

First, that when people talk about Greece as Europe's Lehman moment, they are wrong. Letting Greece default in a disorderly, uncontrolled way would probably be a good deal worse for the global economy than Lehman's collapse - for all that banks in general have more capital to absorb losses than was the case in the autumn of 2008, and are less dangerously inter-connected with each other.

Second, the eurozone ministers' decision to postpone the definitive decision on a further 12bn euros of bridging loans for Greece is not likely to scare Greece's austerity objectors into submission.

It could well persuade the Greek opponents of fiscal retrenchment that eurozone ministers are all talk and no trousers, that they are so disunited on how to fashion a fundamental solution to Greece's excessive debts that Greece is better off taking direct control of its own economic destiny.

However, if this eurozone brinkmanship nudges the Greek parliament to reject the further budget squeeze, we'll be closer than is remotely prudent or sensible to a 1930s-style financial and economic disaster.

BBC News - Greece crisis: Not Europe's Lehman (it could be worse)

This is getting interesting..Forget the WOT or the Taliban, this is the biggest threat to the global order, financial or otherwise, in my opinion. If Greece goes down, it could be the first of many EU economies, including Portugal, Ireland and even Spain and Italy, that might be facing a similar fate. This would consequently lead to ECB going bankrupt, spell doom for the modern financial system based on fractional reserve banking and the beginning of the end of Capitalism (let's hope lol)

 

[lonelyone]

Wherever there are socialist and communist influences, there are bound to be economic problems.

 

[temujin]

Wherever there are socialist and communist influences, there are bound to be economic problems.

Can you please explain what socialism and communism has to do with much of the Western world living beyond it means for far too long, thus causing the current economic crisis??

PS: I am not a socialist/communist

 

[roadrunner]

I`ve seen no mention of the Greek crisis on this forum despite it being the single biggest threat to the global economy currently. S & P recently cut Greece's credit ratings to the LOWEST IN THE WORLD, below those of Pakistan and Jamaica, an action which followed similar moves by other credit rating agencies in recent weeks.

what a silly comment.

it's not only wrong, it's another example of the superduper delusions Indians hold about their economy.

First off, Jamaica is at SD level. Pakistan is around B-. Greece is around CCC. Greece still is just above Jamaica and just below Pakistan. India is not much ahead at BBB and only avoided a recent downgrade because it made some changes. Pakistan is not doing too badly. That too with the instability by wot.

 

[Meengla]

It is important to closely watch what's happening in Greece--the implications are beyond Greece.
I have a Greek lady friend here. Very charming. But is utterly dejected by 'corruption' inside Greece. According to her, Greece does not have much of economy except tourism.
No, she is not my girlfriend. I am married. But she is the girlfriend of one of my best friends here.

OP: Thanks.

 

[Meengla]

the beginning of the end of Capitalism (let's hope lol)

Ahh, a rare breed you are!

 

[casual]

trust me, there's no way germany would let greece default. not yet at least.

 

[roadrunner]

It is important to closely watch what's happening in Greece--the implications are beyond Greece.
I have a Greek lady friend here. Very charming. But is utterly dejected by 'corruption' inside Greece. According to her, Greece does not have much of economy except tourism.
No, she is not my girlfriend. I am married. But she is the girlfriend of one of my best friends here.

OP: Thanks.

I dont think that's quite right. Greece has quite quite a few industries, tourism accounts for about 20% of GDP. It's problems are non payment of tax and spending money on wage rises instead of debt payments.

 

[Anonymous user]

I dont think that's quite right. Greece has quite quite a few industries, tourism accounts for about 20% of GDP. It's problems are non payment of tax and spending money on wage rises instead of debt payments.

I thought it was the welfare and the unions doing Greece in, that and the non tax payment etc etc

 

[roadrunner]

trust me, there's no way germany would let greece default. not yet at least.

it'll default or devalue. More or less the same thing. Germany will control which is does probably.

 

[roadrunner]

I thought it was the welfare and the unions doing Greece in, that and the non tax payment etc etc

Greece does have a high paying pension scheme. Its debt is too high though. Even with austerity it is running an account deficit.

 

[Anonymous user]

Greece does have a high paying pension scheme. Its debt is too high though. Even with austerity it is running an account deficit.

Some of the plans are ridiculous, seems to pay to get into greece and live off the pensions. Not sure if Germans are happy to bail them out again though unless some serious cuts are made which the Greece citizens are up in arms about

http://www.economist.com/blogs/charlemagne/2010/02/greeces_generous_pensions

 

[roadrunner]

that's really the problem for the greek government. the citizens dont want austerity (i dont blame them), but Greece will default without it.

Then the other problem is that even if austerity measures are taken, they'll still probably be running a deficit. They're too far off a surplus.

i dont see why greece cannot bring about a surplus though. I think there's too many people unwilling to give up the good life there. Which they need to do. They've sold their soverignty.

 

[secularbuster]

trust me, there's no way germany would let greece default. not yet at least.

Greece's debt is $380 billion and it's population is only 11 million, so the Greeks have a per-head debt of $44000. I don't think Germany can save Greece from economic disintegration.