FT: Greece is Europe’s very own subprime crisis

This is going to be the most important week in the 11-year history of the euro-currency, according to Financial Times associate editor Wolfgang Munchau in the article below.

A Greek default on its debts now looks virtually inevitable, the only question being when.

The Irish Government has agreed to contribute €480 million to the joint EU/IMF bail-out for Greece aimed at staving off this default. The opposition Fine Gael and Labour parties promise to back the Government in this.

If Greece defaults, Irish taxpayers will never get all of this money back.

The 11 EU countries that have not adopted the euro – the UK, Sweden and Denmark amongst them – are being asked to contribute only to the IMF part of the loan to Greece, viz. 15 billion euros out of a promised total of 45 billion. The 16 eurozone members, including Ireland, promise to lend the other 30 billion.

A question: will Ireland be expected to contribute to both the IMF part and the EU part of this Greek loan, thus giving dollops of money from two sources to Greece, in contrast to the 11 EU Members States which have not adopted the euro?

Greece is Europe’s very own subprime crisis
Wolfgang Münchau
Financial Times
Monday 25 April 2010

[…] Some parliamentarians… argue that the best solution would be for Greece to leave the eurozone and rejoin later. On this point, they are supported by large parts of the country’s legal and economic establishment.

Their argument is full of legal hypocrisy. Those who make it pretend to care deeply about the strict fulfilment of the Maastricht Treaty’s “no bail-out” clause. Yet they see no problem in advocating a breach of European law by proposing a Greek exit from the eurozone. Under existing law Greece cannot be pushed out. In fact Greece cannot leave the eurozone voluntarily, without having to leave the EU as well. In any case, it is smarter for Greece to default inside the eurozone than outside. So what happens if the Bundestag blocks the aid? Greece will simply default, and this will put several German and French banks that hold large chunks of Greek sovereign and private debt at risk.


Just as unhappy families are unhappy in their own distinct ways, Portugal is different from Greece. But its problems are no less severe. The problem in Portugal is not the state sector. Portugal’s gross public sector debt is projected by the EU to be about 85 per cent of gross domestic product by the end of this year. This is high, but not exceptionally so. On my calculations, using data from the World Bank, Portugal’s external debt-to-GDP ratio, including public and private sectors, is a staggering 233 per cent – the government at 74 per cent and the private sector 159 per cent. The net international investment position is about minus 100 per cent of GDP – the amount by which Portugal’s financial assets abroad are outweighed by assets owned by foreigners in Portugal. The current account deficit is projected to remain at just under 10 per cent of GDP. This is an acute private sector crisis. And like Greece and Spain, Portugal has lost competitiveness against the eurozone average of some 15 to 25 per cent during its first decade in the eurozone…

⁂ Two important articles on the Banking crisis

Is America the new Russia?
The Financial Times
By Martin Wolf

Ruminations on banking
Professor Willem Buiter
The auto-da-fé of the unsecured creditors is coming to a US bank near you…
Too big to fail means too big…
The repatriation of cross-border banking…

The weakness of Euro membership for Ireland

Bloxham Morning Note
Wednesday, January 14, 2009
Company/Economic News
Strategy – Lex pointing out Ireland’s weakness

The weakness of Euro membership for Ireland is highlighted into today’s Lex column. With the UK doing what is needed to adjust to the new economic reality and devaluing its currency, Ireland is unable to devalue its currency to restore competitiveness. Therefore Lex points out that wages in Ireland will need to fall, something which is exceptionally difficult to achieve. While the Euro zone has provided us with the buffer of a central banking guarantee, the downside pain is in a loss of competitiveness against our nearest neighbour, the UK.

Published by Bloxham
Copyright © 2008 Bloxham. All rights reserved.

The Financial Times
Wednesday January 14 2009
Eurozones of pain

The Irish must be feeling green, and so too the Spanish, Greeks and Portuguese. Over the past week, all four countries’ debt ratings have been placed on review for downgrade.
Dublin, Madrid, Athens and Lisbon may bat away such warnings with reassuring noises about how they will put their financial houses in order – even if they, meanwhile, suffer higher borrowing costs. What they cannot dismiss so easily, however, is the solution to their troubles: deflation.
The potential downgrades are only a manifestation of a deeper problem: a loss of competitiveness. That is largely why the Irish, Greek, Spanish and Portuguese trade deficits are so large and their economies slowing so fast. It has been a long decline. Euro membership lowered borrowing costs, but unleashed a credit boom and a rise in prices – most obviously in housing but also in wages.
Ireland shows the problem writ large. Since 2000, its relative wage costs have risen by 20 percentage points versus Germany. (Greek wage costs have risen by about 5 points.) Export performance has been further hurt by the weakening currencies of two of its major trading partners, the
US and the UK. That is why Brian Lenihan, the Irish finance minister, lashed out at the UK, saying the pound’s fall had caused Ireland “immense problems”. The quick solution would be for Ireland to devalue too. As a euro member, it cannot. Instead it has to deflate.
Germany managed this at the start of the millennium. But as its trading partners were inflating at the time, German prices only had to rise at a slower rate for relative wages to fall. Today, with inflation falling everywhere, that path is not open to uncompetitive eurozone countries.
Instead, wages have to fall in absolute terms. That is immensely painful. It is also politically unpalatable; democracies generally don’t “do” wage deflation. Even East Asian countries, with their more flexible labour markets, did not manage it during the 1997 crisis – or at least not without political change.
The Irish referendum this autumn on the European Constitution may well be an explosive vote.

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