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Who says sovereign bonds need to be risk free anyway?

Absolutely! Default, and we'll just charge more next time. Whatever. Move on.

The motivation for this extremely anti-default push has not been clearly enough laid out, methinks. Bonds, government or not, are an investment. You think I am 100% the stocks I bought in a Ukrainian egg farm will not go bust? Hell no. All who invested in Greek government bonds should have done their homework.

Imagine if we used the word "investments" instead of "loans" for these government bonds. One word change and everyone's perceptions would drastically change.

Well to the layman like myself, bonds and investments sound different. With a bond I expect there to be some security or asset backing it that I could potentially recoup if you default.

I don't know like say, Greece loses some it's territory in equal worth to it's debts?

Precisely! This sort of mentality that the system has a duty to protect investors from being burned is completely upside-down in my eyes. It's the investors that must take the fall when the entity they invested in goes bust, definitely not the gov'ts at the expense of the taxpayers.

This was the problem in 2010 and as far as I understood it a lot of e.g. German banks would say: We are done if they default... that's why they shifted the debt to the IMF/European countries.

> All who invested in Greek government bonds should have done their homework.

In the end and unfortunately, I think we'll have to admit that they did. Nice interest rates and the "whole world" making sure it's paid back.

> First, is that taking away national currency is taking away the ability to print and devalue your way out of trouble,

This is only true for the United States and, partially, for the UK, any other nation on this planet cannot just print their own paper-money and convince lots of foreign investors to buy local-currency-denominated debt. It pains me whenever I see this opinion posted whenever the Greek crisis is mentioned, because I grew up in a country where inflation was running in the high-double-digits for an entire decade, and trust me, there were lots of "trouble" for the Government and for us, normal citizens.

Nevertheless, I think you're spot on with the rest of your comment, I never quite understood how come the Governments are so enamored with the banking system (to this day I think that the 2008 financial crisis could have been a lot less worse had Bear Stearns been allowed to go bust with no strings attached in the early spring of 2008, and its creditors to accept the haircuts). I also believe that no-one knows where this is all going.

Its a bit tricky but thing is that "money printing" can be used to buy domestic goods and services, that in turn help pay down business and personal debt.

This while also devaluing the currency vs foreign ones, benefiting exporters while giving the population a incentive to spend domestically.

But it has to be performed while there is otherwise a slump in the overall economy. I think term is countercyclical spending.

And it has to be used on domestically produced goods and services. Otherwise one is just asking for trouble.

This might be a newbie question. But why can some countries simply "print money" while others can't and have to earn it?

Any country can do it. It comes down to an issue of investor trust, which you only earn through a good track record.

I think the parent is referring to the ability to sell bonds (borrow money) in their own currency. If Zimbabwe wants to borrow money, nobody will agree to be repaid in Zimbabwean currency. So, they need to borrow in foreign currency, which they can't print.

But, I think he overstated that point quite a bit. First, most countries do sell bonds in their own currency, so they can print and devalue to pay it back if necessary. They use a combination of their own bonds and foreign denominated bonds.

More importantly (especially in Greece's case), most government's obligations are not bonds. They're salaries, pensions and other things denominated in local currency. If Greece had its own currency, they would print more of it and use that money to pay government salaries and pensions.

It is true though that the US has an advantage. (A) they have very little foreign currency obligations and (B) inflation is like a cost to everyone that holds a currency. When the US prints money, the cost is spread out among anyone who holds dollars. Lots of them are not american.

>>If Greece had its own currency, they would print more of it and use that money to pay government salaries and pensions.

Doesn't this lead to hyper inflation situations. Basically money is what you trade for effort. When you freely "print money" you are simply supplying a lot of cash for the same effort. In return you simply pay a higher price for the same things.

There fore only way to increase the supply of money is to increase trade able effort in some way.

How will simply printing money solve anything? And how are few countries exempt from this rule?

It causes inflation. A lot of it causes hyperinflation. With lots of extra caveats and clauses, naturally.

You can think of it as a tax on everyone who holds the currency (or other assets directly tied to it, like bonds). If the government prints money, they have it and they can spend it on (for example) salaries. That solves the problem of not being able to pay salaries.

No country is exempt, but if a lot of foreigners hold reserves in your currency, they have to share in the cost of inflating it. Al lot or a little is relative to the total stock of money in circulation. Lots of countries hold US Dollars, so the US can print with milder domestic consequences.

I agree with a lot of what you're saying here. Greece should never have joined the Euro. There needs to be a procedure for an orderly default within the Euro. A lot of the bailout conditions were counterproductive.

But I disagree with the "strings" argument. If Greece defaults, the troika is threatening to do nothing more than stop loaning money to Greece and its banks. That's it. No leg-breaking.

The issue that Greece's banks are utterly dependent on constant and increasing loans from the ECB in order to stay in business. This has been especially clear in the last few days: the ECB stopped increasing the amount of money Greek banks are allowed to borrow, and in response, all of the country's banks are closed and the ATMs have been limited.

I think you also have the wrong impression about banks. I agree that people overreact to something like the collapse of Lehman Brothers (an investment bank). But this is something different. The Greek banks aren't just sitting on a hoard of their own money that they're afraid of losing. The money in those banks are deposits from the Greek people. When people say they are worried about the banks failing, they aren't concerned for rich people who run the banks, they're worried for the regular people whose life savings are deposited in those banks.

Who keeps their life savings in currency accounts in the bank ? Isn't most wealth / life savings in hard assets like land and businesses ?

The only reason you have this opinion is because perhaps you have mentally disconnected from the basic idea of money. Imagine we were all still using salt to trade for goods and services. Then things might start to make sense.

If a country produces nothing (or not enough) and counts on borrowed salt to survive, failure is guaranteed. If a country gives away salt to people who do nothing in exchange for it, failure is guaranteed. If a country does not develop financial discipline, failure is guaranteed. If a country elects people to government who are only there to enrich themselves and don't do what's right, failure is guaranteed. If a country manufactures starts to use devalued sand that no other country will accept instead of salt, failure is guaranteed.

etc.

On a global market a country IS a business. In order to be successful it has to operate at a profit. Period. This understanding is what seems to be lacking in many electorates. They vote with emotion and out of selfish positions at the cost of completely ignoring that the national balance sheet is, perhaps, the single most important determinant of how well they, their children and future generations will live.

Banks have nothing to do with it. They can't force you to consume or produce salt. How responsible you are with salt is what determines the outcome. Banks just hold it and loan it.

Yes, brutally oversimplified. Yet sometimes oversimplification can sometimes help someone think and understand something. Yes, reality is far more complex than you and I walking around with little sacks of salt. And yet sometimes it isn't much more complex than just that.

> On a global market a country IS a business. In order to be successful it has to operate at a profit. Period. This understanding is what seems to be lacking in many electorates.

So if countries are businesses, and they all have to operate at a profit, and one country's revenue is another country's expenditure, where are all the deficits that balance out all the surpluses? The fact of the matter is that it is impossible, like squaring the circle is impossible, for every country in the world to be surplus country as you propose.

Also, as an aside, using a barter metaphor to describe a global, industrialized economy is overly simplistic to the point of being useless, as you pointed out. It's useless the point of being misleading and leading to no more of an understanding of a very complex system.

> where are all the deficits that balance out all the surpluses?

Where did I say that the system would balance out?

There are countries that will under-perform for a myriad of factors. That's a fact. These countries will require the charity of those doing well (with rules as to how that assistance is to be used).

It's also a dynamic system. Today I make a profit and tomorrow you do. It's a pendulum that achieves some degree of balance at the right time scale.

Also, resources and economies change over time. Compare the world 1,000 years ago to today. It's not a static playground.

Greece will not leave the EU over this, and doesn't have to. Really nobody wants this. The Greek don't want that, and no EU country wants that. This is not going to happen.

I'm a EU citizen - from a rich country, without much corruption, and I don't see how we can change the Greek society within a reasonable period. I don't know what will happen, but I hope the EU will help Greece with many billions to help local people to survive.

This is a hard lesson for the Euro countries. They shouldn't have Greece let in, as well as several other countries. That's hindsite, but as we let them in, it's our responsibility as well. If you invite a country in which has a corrupt system, where not paying taxes is allowed on a massive scale, then you invite problems.

You seem to be confusing the eurozone with the European Union.

Government debt is a smokescreen.

the origin of the crisis was private debt, as in loans issued to businesses and individuals.

That debt, while boosting consumption in the short term, end up restricting consumption in the long term.

What then happens, depending on government action, is either a deflationary depression, or a increase in government debt.

The latter by having the government buy domestic products and services that would otherwise be laid fallow as the private sector instead focus on managing their debt.

This is what is happening not only in Greece, but also Ireland, Spain and Italy.

In all of those places euro-zone banks were offering cheap loans. This could be observed by way of building booms and similar.

So in effect what the ECB, IMF and others are doing are bailing out French, German and other private banks, and that is where the majority of the payments to Greece etc end up.

This while Greece etc are burdened by a domestic recession/depression as local industry etc go bankrupt from debt burdens. This in turn lead to masses of unemployed that the government is pledged to take care off via various support systems.

My impression is that Germany and the Eurogroup are obsessed with punishing Greece for exposing this weakness in the Eurozone. They explicitly say they want to make an example of Greece to discourage other countries from voting for left-wing parties like Syriza with economic ideas that don't fit into the destructive "austerity" dogma.

The Greek economy has never been very strong, but the austerity measures imposed on it by Germany and the Eurogroup are really running it into the ground. Greece has paid off part of the debt, and yet the debt has grown in relation to the GDP, because the GDP has gone down that much.

Ruining an economy is not a good way to save that economy, and certainly not a good way to get it to pay back the debt. But they're not interested in helping, they're interested in punishing. To keep the voters of other countries in line and supporting their destructive neo-liberal policies.

I like the somewhat glib cliche, "If i owe you a thousand dollars, I have a problem. If i owe you a billion dollars, you have a problem"

It captures so much of the essence of the relationship. With small debt, a person or a corporation or a government can generally work something out. Skip some unnecessary spending, scale back a bit, and things all work out.

But debt chokes off options. Too much debt, and growth stalls. It's a really vicious circle. If we upgrade the factory machines, we can sell more, but we can't afford to. If we move closer to work, we'd save some expenses, but we can't afford to. Opportunity becomes rare, and it's demoralizing.

I totally understand creditors need their money back. Presumably there was something magical about Greece, some golden egg it was producing that enticed the lenders. I don't see how they can get their money back without killing the goose though.

> I totally understand creditors need their money back.

No they don't. They took a risk and lost. Other times, they get paid handsomely for taking the same risk. That's how it's supposed to work.

Thing is, Germany took over the debt from the banks, and Merkel promised the (understandably skeptical) German voters that she would get all the money back.

So what happens when I borrow money from a bank to buy a house and I default on my loan? "They took a risk and lost"? Hooray. I get to keep my home.

Well, your house is used as collateral for the loan, otherwise the bank would never lend you that money.

I'm not an economist, but I don't think that, in the case of Greece, the "house" (whatever it stands for) was used as collateral.

I don't think there really was any collateral. I guess lenders just hoped that Greece would pay back, or would be pressured into paying back.

Countries are not owned by banks in the way a mortgaged house is.

At least, I hope not.

Exactly what I'm thinking. But when banks get in trouble, politics bail them out. They should have let them go bust, because now everyone is paying to keep them alive.

Letting banks go bust will be though at first, but it's the only thing that will let the economy work properly in the long run.

> I don't see how they can get their money back without killing the goose though.

And that's the problem. They seem to be willing to kill the goose, uncaring that this involves real lives of real people.

If the Eurogroup really doesn't want a deal that Greece can live with, then Greece has no option but to default. And as far as I'm concerned, they may as well default on their entire national debt. Start with a clean slate. Reform the economy, and convince investors that this time you will be able to pay all the new loans back. And try to avoid getting so deep in debt this time.

Greek banks bought about 15B of this Greek debt, which is over half of Greek GDP. This is likely the savings and pensions of a lot of Greek people. There will be bank runs (much worse than now). There would be looting, burning, and massive chaos.

It would be like destroying 8 trillion in people's savings in the US and just hoping it all works out. It would be a catastrophe.

Then, once this destroys the economy, getting any outside investment to help will be impossible, because no one would want to invest or loan to a place that so willingly shrugs off repayment.

This is why the situation is such a problem. Just unilaterally ignoring repayment destroys the Greek economy much worse than it is now.

They could create their own bankruptcy scheme with seniority.

Go the Iceland route. Didn't they create new banks for the savings of the people, and let the old ones go bankrupt? That did set a lot of bad blood with foreign savers who'd just been lured in with high interest rates, but whose savings were not guaranteed by the Icelandic government. But in the end, that turned out alright.

> I totally understand creditors need their money back.

You wouldn't invest if you really needed the money. At least, you wouldn't invest in high risk investment options.

>>First, is that taking away national currency is taking away the ability to print and devalue your way out of trouble, which really increases the risk of government insolvency.

You basically summarized why the entire concept of Euro has been fundamentally flawed to begin with.

I was wondering the same thing. One of the original challenges to the shared currency question was its implicit subjugating of sovereignty to the currency oversite committee. Back during the voting I recall an editorial asking people if they would let their neighbors balance their checkbook, why would they let Brussels run their currency. And of course if you can make the government do what ever you want to its people in order to keep it solvent, is it really in charge?

Europe went for a much looser union than the union of the United States. It has never been clear to me how you could have an economic federal government but not a military nor social federal government. Greece is putting that question to the test and the outcome will have a big impact on the future of the EU.

I don't think a central currency necessarily means no sovereignty. Does using gold make a country lose their sovereignty?

It just means you can't print money.

What is violating greek sovereignty is debt, in this case. The EU is basically saying that until they get paid, they write the Greek budget.

I don't think your gold analogy is correct because nobody can create gold out of nothing (mining requires a ton of work). Fiat currencies however can be create from nothing by central banks and normal banks (multiplicative effect due to fractional reserve lending). What violates the Greek sovereignty is the fact that a bank they don't control can create their money out of nothing.

There have been a number of great write ups on the challenges Greece faces, although two combined in a hugely negative way, one is that tax compliance (which is to say the number of people who pay their taxes as they should) is quite low, and the other is that government sinecures (jobs that don't require any work but get you paid anyway) were handed out like candy in exchange for support or other political favors leading to a lot of people (often highly paid) that were consuming government funds and producing no value.

If a government has no money, no taxes and nobody willing to loan it some money, then it can't pay its workers. And while it is easy to get someone a job that has pay but no work, it is hard to get them to work with no pay.

If someone could start a social media campaign, "Pay your taxes, its the Greek thing to do." and the people were able to get individuals out of government positions who were not adding value, the crisis would resolve nicely I expect.

Who holds Greek debt? Private banks, governments, individuals?

Isn't part of the problem that some creditors went chasing after yield and hoped there wasn't much risk to these bonds?

> Third, banks run the world. Governments were already very cosy with banks.

That is nothing new. For centuries, European monarchs were beholden to their banks to finance their wars against each other.

The Greek people are responsible.

Greeks overspent and did not want to stop. So they kept spending. It's their own fault.

They can default, start printing their own money and go the way of Argentina.

Ask Argentines how that went.

Or ... they can cut spending and live within their means.

The narrative of "Greeks as victims" is "okay" as long as you point out that they are also the victimizers.

Evil outsiders did not force them to not collect taxes.

People can get public pensions before age 50, for heaven's sake. [ source : http://greece.greekreporter.com/2014/12/04/75-of-greek-pensi... ]

They overspent. Their economy is dysfunctional. They share a big part of the blame.

But they have been following the Troika's plan for over 7 years now, they have reduced spending, they have done a huge effort, and still their GDP has collapsed. It seems that the Troika's plan is not working.

That is what Tsipras is saying: we can not continue doing this, and the rest of Europe/Troika has to recognize part of the blame. Not only that: it seems it has the support of his people (we'll see on Sunday)

If Greece had defaulted (or restructured the debt) at the beginning of this crisis, as Iceland did, the situation would be much better. But nobody was interested, since big banks where holding big chunks of high-paying Greek debt, and they needed some time to unload it.

I still remember how the Iceland success story was completely ignored by European media - and still is.

Iceland (Island) is 300,000 people and did NOT join the EU.

Iceland collects their taxes.

Iceland dealt with problem promptly.

Greece needs to bite the bullet. Harder.

Stop blaming others.

> On October 6, the Icelandic legislature instituted an emergency law which enabled the Financial Supervisory Authority to take control over financial institutions and made domestic deposits in the banks priority claims. In the following days, new banks were founded to take over the domestic operations of Kaupthing, Landsbanki and Glitnir. The old banks were put into receivership and liquidation, resulting in losses for their shareholders and foreign creditors. Outside Iceland, more than half a million depositors lost access to their accounts in foreign branches of Icelandic banks. This led to the 2008-2013 Icesave dispute, that ended with a ESA ruling that Iceland was not obliged to repay Dutch and British depositors minimum deposit guarantees.

So, what you're saying is default and fuck over foreign investors.

> So, what you're saying is default and fuck over foreign investors.

Yes. A government should have its own people as it's primary concern.

Ah, "Bite the Bullet" in this context sounds more like you're saying, "MORE AUSTERITY!" and that you weren't aware of what Iceland actually did.

Exactly. Default and fuck over foreign investors, because that's what investors are for. They take risk. If they win, they get profit. If they lose, they carry the loss.

This entire mess is getting out of hand because Germany wants to shield the investors from that risk.

>But they have been following the Troika's plan for over 7 years now

Except they aren't. They aren't fixing their tax fraud - no one is paying enough taxes. They didn't fix their retirement age, there are easy loopholes around it, etc and a million other things.

Greek fraud predated this plan and worked during this plan. The EU cant fix Greece's corrupt governments and leaders. That's why we're where we're at right now.

Also Iceland is a edge case. It has one tenth the amount of people of the city I live in. Its like a small suburb going broke. Greece has 12 million people. More than likely you're looking at an Argentina-like situation.

> They aren't fixing their tax fraud - no one is paying enough taxes.

This is something that takes a long time. It is unrealistic to expect Greeks can fix something like this in the time-frame needed to solve this crisis. Worse, during a crisis there is pressure to escape taxation making the job a lot more difficult.

I'm from Portugal. Portugal had Greek levels of tax fraud in the 80s. It took twenty years, from the late 90s onward, to get to decent levels of fraud. I rate the work done here as excellent. And even then, it took two decades!

If Europe were serious about helping Greece, they'd be assisting with setting up an efficient finance ministry, not jacking up VAT levels and pushing more of the economy outside legality.

Ok we got it, you don't like Greeks even though you are one. No need to reiterate a thousand times. We judge the austerity program and theoretically, with your assertions on the volume of flaws in the Greek economy, it should be easy to demonstrate improvements in 6-7 years. The opposite happened, therefore something was wrong with the imported wisdom and despite the moral integrity of the troika (the troika is not Greeks, that should give you some confidence.)

do you mean Iceland?

[edit] did not know that. thx (I could not reply to the replies)

It's "Island" in the local, Viking dialect.

If we're going to act as if we're using the local name, it should probably be Ísland. :)

Sure, thx. (in Spanish it is "Islandia")

Austerity plans always fail to produce results. They never work. They never worked in any of the dozens of countries the IMF and World Bank forced them on in the developing world, they didn't work in Ireland, and they aren't working in Greece.

Austerity isn't just faith in the absence of evidence, its face in spite of overwhelming evidence.

"Austerity" worked in Britain and Ireland.

Fiscal responsibility is good policy ... for individual, households, companies and governments!

http://www.tradingeconomics.com/ireland/gdp-growth-annual

http://www.tradingeconomics.com/united-kingdom/gdp-growth-an...

[ set start year to 2008 ]

The UK GDP actually performed better during the Great Depression of the 1930s, and that was despite deflation due to the gold standard in the early years - doesn't sound like a success story to me.

http://www.economicshelp.org/blog/7209/economics/comparing-d...

I've always wondered about Ireland - it seems they have a strategy for the last decade or so of positioning their country as a tax haven, so that multi-national corporations tend to incorporate in Ireland and move their profits that are actually made in other countries there by creative accounting (like Intellectual Property licensing deals between subsidiaries). What effect does that have on GDP? Has anybody investigated this?

I wouldn't say it never works: containing spending is good policy. It worked, for example, in Spain. But Spain had going for it that the economy (although badly performing) was doing much better than Greece at the start of the crisis, and specially that the markets had somebody else to bet against, namely Greece. The Spanish bond risk premium (compared to German bonds) was widening rapidly, but the Greece one was humongous. So, the market pressure was a huge problem for Greece.

While the market was betting against Greece (and making handsome profits with big interests and, as we now know, zero risk), Spain was quietly improving.

I am sure that, if Greece had been brought to its knees by the market, the next to fall would have been Spain (well, the next in line was probably Portugal).

In that situation, austerity measures are actually counter-productive. This is what we have in Greece. Europe needs to face the markets here.

And the problem is that, once Greece defaults in the following weeks (if Europe decides to let it fall, that is), Portugal will be the next to feel the pressure. Spain is probably out of the woods by now - by luck, so to speak.

This is nonsensical slogan talk. Austerity means spending less. Every government that ever balances its finances is practices austerity. You can make an argument that Greece cannot pay back its debt, austerity or not.

But, the argument is thrown around in this crazy way that suggests the only rational choice is to keep borrowing and spending. There is some keynsian-like explanations that might support this but, at some point (greece has crossed it) no one will lend you any more money so its moot.

Germans were pretty happy lending them more and more money.

I'm not sure if this is accurate or not, but didn't Argentina get fucked by the IMF? I know a lot of those South American countries were essentially hollowed out by IMF and forced to privatize a lot of their natural resources resulting in tremendous amounts of wealth inequality and a shrinking of their middle classes.

Of course, this is along with US Military backed coups happening left and right to any country which didn't privatize their countries resources so that American and Western European corporations could get "their share" (i.e. Nestle which still controls something like 90% of the bottled water market in South and Central America).

Gotta love Friedman and his Chicago boys! "If no one will elect us to power, we'll just support dictators! Free market principles at their finest!" - My made up quote for Milton Friedman, Jack Lew, and all the rest of those cronies.

Anyways, I'm at work, so I can't look up sources, but "Shock Doctrine" by Naomi Klein is a great read about this sort of thing.

How's Chile faring compared with Cuba?

2 points: #1 Do you have a link for "Nestle owns 90% of the Central and South American bottled water market" ? #2 How hard is it to compete in the bottled water market?

They are to blame for the mistakes committed up until the bailout. The destructive IMF/ECB mandated policies, that held down Greece's economy from any possibility of meaningful recovery all the while making the citizens poorer and poorer, all so that the big banks could effectively have the risk from their investments offloaded to the taxpayers, is totally not Greece's fault.

Do you believe the banks share any responsibility for lending so much to such a dysfunctional country?

Some.

Banks need to bite the bullet, too. Private banks were apparently smart enough to dump this on the IMF.

I don't have a problem with the IMF going bankrupt. Private lenders can better deal with these kinds of shenanigans anyway. The threat of bankruptcy forces them to spread out their risks better.

No need for IMF to compete with them.

Lending is not the only problem. If you drive like crazy you are the problem, but if all policemen in the city see your dysfunctional driving for many years and just smile and do nothing to stop you and finally somebody died, the police is also part of the problem.

How many surveying organisms in Europe related with economy failed to see this coming? All? What is the statistic probability of this happening just by chance in Ireland, and then in Portugal, and also in Spain, and again in Greece, and...? All at the same time...

I agree and I said as much.

The question is what now. They have cut spending. They still can't pay on their loans. They can run their government, but not pay back the debt.

If you care mostly about just dues or moral hazards, there are two sides to a bad loan: borrowers and lenders. When things go bad, the borrower suffers bankruptcy and the lender suffers a default. The lenders need to get their dues too. The German government decided to bail them out (with the EU & IMF), so they won't. That part isn't Greece's fault.

EU needs a way to press debtors into paying their debts. Like, aerial mining of ports will be a nice first steps for a country so dependent on shipping. After all, the problem is solvable, they CAN pay - by simply taking away part of their national territory and annexing it to say, Germany, with Germany then repaying other creditors.