Bailing out Greece

[cantab]

For the past couple of weeks, I've known that the EU and IMF were considering bailing out Greece, to prevent it defaulting on its debts. The amounts being talked about were 30-40 billion Euros.

Now I read that a 110 billion Euro bailout has been agreed.

How has it come to this, that money is needing to be thrown away to prop up an entire country? And how much more might the figure rise? How much are our nations going to end up contributing? (I live in the UK, and don't know what if any we're contributing. The USA probably contributes something indirectly through the IMF).

Does this event vindicate the UK's decision to not join the Euro? Does it call into question the wisdom of the single currency in the first place?

 

[LoveDensity]

I think it is cool that Europeans are helping each other out because it shows the strong union between the European nations. Compared to the numerous wars Europe would have with each other in the past, this shows that the past is being left behind in hopes for a greater future for all people. Nevertheless, I dont know the situation in Europe, but at least it shows good moral intentions.

I don't know the situation with UK or US to Europe. but I think US shouldn't contribute much because they need to help out their own country first instead of trying to always get into other international affairs. Internally, the U.S. is undergoing some serious problems.

 

[Eraddd]

Just a question, was this debt just because of the recession or are there any other reasons as to why Greece got into this big of a debt?

 

[cantab]

Too much spending and borrowing in the boom times. Some corruption and falsifying of statistics too. The recession has compounded matters by reducing tax income. Greece suffers a combination of a high budget deficit - difference between government spending and tax revenues per year - and a high overall debt in proportion to GDP. The UK has nearly as big a deficit percentage, but less overall debt; Italy has similar overall debt but a much smaller deficit (so that debt, while high, increases less rapidly). The exact nature of the debt also matters - a lot of Greece's matures soon, requiring new loans to be taken out to pay off old ones ('refinancing'), and those new loans are being offered at much higher rates. (I don't know, but I presume those rates remain constant for the duration of the loan - meaning Greece could have massive debt repayments like a millstone round its neck for years to come)

The big hit is perhaps the downgrading of credit status. Which brings me to another matter - the role played by the big credit ratings agencies. Standard and Poor, Moody's, Fitch seem to be the big three. They are all US-based. They give ratings, which then affect the market - consequently, they can have a big impact. Greece's problems are being compounded by the reduction in credit status - had that reduction not happened, we might not be having to bail them out so much. In extremis, the fear is a country getting driven into a death spiral - downgraded credit results in more expensive borrowing, resulting in worse deficit, resulting in further credit downgrading, etc etc ultimately ending in bankruptcy. Are these agencies sufficiently accountable, and given the economic crises perhaps stemmed from their mistakes (rating as very safe products that turned out to default), should they still be held in as high regard as they were?

My real concern is, when are the bailouts going to end? First we bailed out the banks, then the US bailed out General Motors, now the EU and IMF are bailing out a whole country. It seems like we're propping up an economy that wants to fall. The UK may have returned to growth, but is it sustainable?

Of course the consequences of a Greek bankruptcy would be far reaching. It wouldn't just hit Greece - investors and ratings agencies would start to feel uneasy about other national debt also. Portugal is already of concern. The UK's high deficit could make investors uneasy, especially if the expected hung Parliament results in a weak government that doesn't take action to reduce it and then Parliament is dissolved in autumn or winter. (And of course another election could just produce another hung Parliament).

Also, I believe it was an Ancient Greek (forgot who) who said that democracy is doomed to fall, since citizens will realise they can vote themselves gifts from the state purse, and will in due course squander all the gold and be left in poverty. Overborrowing and deficit spending would seem to be a modern variant on this.

 

[McGrrr]

The Greek bailout is the worst thing that could have happened for the long term health of the European economy and the single currency. Firstly, the money being used to finance it is taken from the same pool of money that could have been used to create capital and investment. Secondly, it sets a bad precedent by creating moral hazard. Why should Spain, Italy (and even France) etc care about their deficit spending if Germany is willing to bail them out? Thirdly, it makes it that much more difficult for the Greek economy to restructure, because this new money will inevitably be used to entrench the status quo.

The terms of the bailout demand fiscal responsibility, but this is not enforceable. Moreover, the public sector cuts do not go far enough, so all that this 110bn injection will achieve is to put off the inevitable (and now greater) pain for tomorrow.

How much are our nations going to end up contributing?

Anything is too much, but the UK government has a political stake in the ability of Greece to make good its debt. Their liability to British banks totals £100bn so we will fight tooth and nail in favour of the bail out because if these loans are written down/off, our banks tank and take the British economy with them. Politicians do not care about (opportunity) cost, otherwise we would never have been in this mess. They only care that the shit does not hit the fan on their watch.

Does this event vindicate the UK's decision to not join the Euro?

If we had joined the Euro, maybe Germany would be kind enough to bail us out too; because we are next in the debt food chain.

Does it call into question the wisdom of the single currency in the first place?

It was never a good idea. Every economist worth his salt had their reservations. Of course, the politicians and government employed economists loved it.

Just a question, was this debt just because of the recession or are there any other reasons as to why Greece got into this big of a debt?

The debt was due to inflationary fiscal policy. Simply put, the Greek public sector and government spending outgrew the private sector that supported it. The recession was a final nail in the coffin.

 

[Broth3r]

So what would be the solution? Let Greece go bankrupt?

Greece, in case you haven't realized it, is a country, not a bank.
People, and not bank executives, live there.
A decision not to bail it out would have catastrophic consequences. And I'm not just talking about the economy. It would probably tear up the political system and send the country into anarchy (anarchists are widespread in Greece, an issue few countries have).
Now is the time to act. The responsibles will be found later. Yes, 110Bil is an enormous amount, but it's the only thing that can be done to save Greece.
National bankrupcy is the apocalypse of any country. I, as a member of the EU (from a country also in difficulties), could not live knowing we let that happened to them.

(and that is also why David Cameron cannot win the UK elections)


About the credit rating agencies, they are just making it worse. Let's be honest, those agencies are nothing more than giant speculator conglomerates, who downgrade (or upgrade) credit ratings to manipulate the markets at their own will.

Even earlier this week, when S&P downgraded Portugal's credit rating by two levels, the stock market lost 6% in less than two hours after opening, while it had been stable for the past weeks! (it ended up recovering to -1.5%, and gaining 4.5% the next day. under other circumstances, i'd be tempted to say "take that, bitches")
Those agencies should awnser to the market conditions. But, with the suspicious timing of their reevaluations, they are shaping the market.

 

[cantab]

Anything is too much, but the UK government has a political stake in the ability of Greece to make good its debt. Their liability to British banks totals £100bn so we will fight tooth and nail in favour of the bail out because if these loans are written down/off, our banks tank and take the British economy with them.

Hmmm...I know we lost a fair bit in the Icelandic banking collapses, but I don't think it was anything like a hundred billion. That really showed how just a few relatively small banking failures could have a very wide impact though - it wasn't just UK banks, it was local councils, universities, all sorts. The figures were generally millions rather than billions, but indeed the prospect of any entity with a lot of debt going bankrupt is not a good one.

Were Greece to go bankrupt, it would be large, but not unprecedented in terms of value of debt. Probably smaller than Lehman Brothers. But of course Lehman Brothers did have substantial assets, which were broken up and sold; I'm not sure how much creditors got.

 

[McGrrr]

So what would be the solution? Let Greece go bankrupt?

Kind of. Not bankruptcy, but insolvency. When an entity is insolvent, it sits down with its creditors and negotiates a restructuring of the debt and a plan of action. Maybe now the liability will be repaid over a longer period, and maybe now the sum will be written down to e.g. only 70 cents on the Euro (the creditors were dumb enough to lend the money, so they should shoulder some of the loss). Life for ordinary Greeks would be harder, and certainly those on the public payroll would be hit, but this would be a fresh start.

Look at the UK. We became insolvent in 1976 and we certainly lived through a subsequent era of austerity, but the legacy of that economic restructuring was the boom during the 90s.

 

[McGrrr]

But of course Lehman Brothers did have substantial assets, which were broken up and sold; I'm not sure how much creditors got.

What assets? Lehman Brothers was just people and their balance sheet was junk xD

The creditors have received nothing yet. A friend of mine at PwC reckons the process could take up to 10 years.

I think you are confusing administration with liquidation. Nobody has any intention of liquidating Greece!!

 

[Shroomisaur]

So what would be the solution? Let Greece go bankrupt?

Well, this really is the crux of the matter, isn't it?

This is the primary issue regarding bailouts: Is it more correct to artificially save a failing economy with bailout money, and protect the people who work and live there? Or is it more correct to allow their economy to fail, because it is more better to avoid the "moral hazard" McGrue mentioned (why strive for success if I'll just get a bailout if I fail)?

Personally, I agree with McGrue's arguement. But I'm still not entirely sure... this is an even tougher issue than GM or Lehman Bros because of all the Greek people whose livlihoods are in danger.

 

[cantab]

What assets? Lehman Brothers was just people and their balance sheet was junk xD

In New York, shortly before 1 a.m. the next morning, Lehman Brothers Holdings announced it would file for Chapter 11 bankruptcy protection[56] citing bank debt of $613 billion, $155 billion in bond debt, and assets worth $639 billion.[57]

Of course maybe Wikipedia is wrong, or maybe those assets didn't really exist or weren't worth their stated value. (Probably these financial thingumajigs that turned out to be backed by mortgages to banrkupt people now that I think about it). I haven't checked the details.

The creditors have received nothing yet. A friend of mine at PwC reckons the process could take up to 10 years.

Fair enough.

I think you are confusing administration with liquidation.

Probably.

Given the austerity measures are so deeply unpopular in Greece, I think we'll probably see it default sooner or later. Unless we start throwing such amounts of money around as to not only bail Greece out of its debts now but render such measures unnecessary. And that really would involve too great a sum I think.
And of course the country's not the most politically stable. As mentioned, there's a fairly strong Anarchist movement. Couple that with criticism of the previous government, and if there was a change of government whether by revolution or normal election, might the new government refuse to pay off the old debts? What do the Greeks actually think about defaulting?

 

[sbc]

If you let Greece go bankrupt, then the creditors of Portugal, Italy, Ireland and Spain also in high levels of debt may not be so forthcoming with lending and they may too face the same problems as Greece and compromise the euro. Another reason not to join the single currency for the UK.

Greece is kinda screwed. Not so much financially as the impact on Greeks. Retirement age raised from 53 to 67. lol. 30 Bn euros worth of tax hikes in two years. This is the result of a lack of govt prudence, tax evasion and general corruption and a global recession.