Tag: Greece

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Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International

The main problem of a Greek exit from the euro zone is not necessarily the direct impact on banks. I believe our government when they say that they would be able to get that under control. The real problem is the next domino. The crisis will spread unchecked to Italy. If Greece leaves the euro zone, then owners of Greek bonds will lose their entire investment. At best, the Greeks would pay them back a small part of their investment — in almost worthless drachmas.

So what kind of investor in his or her right mind would purchase Portuguese, Spanish or Italian sovereign bonds in this kind of situation? Not even a yield of 7 percent can make up for all the risk that Italy won’t be able to pay back its debt. As things now stand, Italy’s debt accounts for 120 percent of its annual GDP, growth is close to zero and the country is currently slipping into a deep recession. In fact, it’s a matter of mathematical inevitability that Italy won’t be able to service its loans if interest rates on its sovereign debt don’t fall. Granted, there have to be reforms. But reforms don’t resolve an acute debt crisis. We’ve already learned that lesson from other crises.

via Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International.

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The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate

Mohamed A. El-Erian, CEO of PIMCO, describes four key dynamics that will shape the future of the global economy:

  1. Many economies have built up excessive debt that is now causing market instability. They have three options for de-leveraging: default, like Greece; austerity, like the UK; or “financial repression” like the US — where “interest rates are forced down so that creditors, including those on modest fixed incomes, subsidize debtors”.
  2. Economic growth would reduce the ratio of debt to incomes: “Many countries, including Italy and Spain, must overcome structural barriers to competitiveness, growth, and job creation through multi-year reforms of labor markets, pensions, housing, and economic governance. Some, like the US, can combine structural reforms with short-term demand stimulus. A few, led by Germany, are reaping the benefits of years of steadfast (and underappreciated) reforms.”
  3. It is also important that the benefits of economic growth be shared across the entire community,  reducing income inequality and related social instability.
  4. Political systems in Western democracies, designed to support the status quo, are ill-equipped to deal with these “structural and secular changes”. Failure to adjust is the greatest risk.

“Those on the receiving end of these four dynamics – the vast majority of us – need not be paralyzed by uncertainty and anxiety. Instead, we can use this simple framework to monitor developments, learn from them, and adapt. Yes, there will still be volatility, unusual strains, and historically odd outcomes. But, remember, a global paradigm shift implies a significant change in opportunities, and not just risks.”

via The Anatomy of Global Economic Uncertainty – Mohamed A. El-Erian – Project Syndicate.

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Europe’s Economy Shows Weakness – WSJ.com

Italy was forced to pay its highest interest rate since the euro’s creation to sell five-year bonds—a sign of skepticism that new governments in Italy and Greece will be able to simultaneously boost economic growth and reduce high public-debt levels……Industrial production in the euro zone plunged 2% in September from August, the steepest slide since February 2009, according to the European Union’s statistics agency. The decline stretched from the weak periphery of Spain, Italy and Portugal to powerhouses such as Germany, France and the Netherlands. Compared with a year ago, output rose just 2.2%—the weakest gain in nearly two years. The data suggest “the euro-zone will soon fall back into another fairly deep recession,” said Ben May, economist at consultancy Capital Economics.

via Europe’s Economy Shows Weakness – WSJ.com.

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New Greek Premier Steps Into Spotlight – Bloomberg

Lucas Papademos, named today to be interim prime minister of Greece, steered the country into the euro region as central bank governor more than a decade ago. Now the former European Central Bank vice president will have to secure the country’s euro membership for a second time.

Papademos, who has never held elected office, helped foster economic growth rates that surpassed Germany’s and France’s in his eight years at Greece’s central bank before moving to the ECB in 2002.

via New Greek Premier Steps Into Spotlight – Bloomberg.

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Watch Europe’s Bank Deposits, Not Its Political Moves – James Wood

People are now moving euro-denominated deposits out of Greece, Portugal and even Italy in protection against a possible exit of these countries from the European Monetary Union…….What is the effect of the movement of deposits? The banks losing their deposits will soon be facing a liquidity crisis. A publicly understood liquidity crisis leads to bank failures. In short, the focus on political considerations misses the looming problem of a liquidity crisis and bank failures.

via Watch Europe’s Bank Deposits, Not Its Political Moves – Seeking Alpha.

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Top German Economist: ‘It’s in Greece’s Interest to Reintroduce the Drachma’ – SPIEGEL ONLINE – News – International

[Economist Hans-Werner Sinn, president of the Institute for Economic Research, in Munich]: What politicians refer to as a “rescue” will not actually save Greece. The Greeks won’t ever return to health under the euro. The country just isn’t competitive. Wages and prices are far too high, and the bailout plan will only freeze this situation in place. So it’s in Greece’s interest to leave the euro and reintroduce the drachma.

via Top German Economist: ‘It’s in Greece’s Interest to Reintroduce the Drachma’ – SPIEGEL ONLINE – News – International.

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Greek Parties Agree to Form Unity Government – WSJ.com

ATHENS—Greece’s major political parties on Sunday agreed to form a national unity government that will lead the country to new elections after putting in place a debt-slashing deal, in the hope of averting financial catastrophe for the country and winning back the trust of its European partners. The deal was made possible after Prime Minister George Papandreou agreed to step down to make way for a new prime minister under a commonly accepted government.

via Greek Parties Agree to Form Unity Government – WSJ.com.

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The World from Berlin: ‘The Common Currency Endgame Has Begun’ – SPIEGEL ONLINE – News – International

Conservative daily Die Welt writes:

“At the end of the eventful day, the redemptive message came: Papandreou would withdraw his referendum because conservative Greek opposition leader Antonis Samaras declared he was ready to vote for the aid package with the government and take part in an interim national unity government……”

“But the reasons behind this welcome development did not lie in Athens, but in Cannes. There, Merkel and Sarkozy bet the house when they took the Greek prime minister to task. They didn’t just say that payments to Greece would stop until the Greeks made it clear they would hold up their end of the bargain. They also insisted that the Greek referendum would essentially be a vote on Greece’s membership in the euro zone — the really big question. The politicians in Athens decided they’d rather not take the risk.”

via The World from Berlin: ‘The Common Currency Endgame Has Begun’ – SPIEGEL ONLINE – News – International.

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Papademos Favored to Lead Greek Transition – WSJ.com

A former vice president of the European Central Bank has emerged as an early favorite to lead what could become a new Greek caretaker government of technical experts that would finalize aid talks and stabilize the country’s fractured politics. The interim government would oversee the transition until possible new elections next year.

Officials from the country’s two leading political parties said Lucas Papademos keeps coming up as political insiders consider candidates for a prime minister of a transitional national unity government, if Prime Minister George Papandreou resigns, a possibility that is now widely expected.

via Papademos Favored to Lead Greek Transition – WSJ.com.

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Worried Eyes on Greece Ahead of Confidence – NYTimes.com

[Greek Prime Minister] Mr. Papandreou was under intense pressure from his own Socialist party and the center-right opposition to step aside if his government survived the confidence vote [early Saturday], to pave the way for a unity government or early elections.

…….. New Democracy [the opposition] has refused to consider talks on a transitional government unless Mr. Papandreou resigns.

via Worried Eyes on Greece Ahead of Confidence – NYTimes.com.

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