SwordoftheVistula
05-18-2010, 11:58 PM
http://money.cnn.com/2010/05/17/news/international/greece_sovereign_default.fortune/index.htm
Greece must be feeling a little like Sisyphus these days. Saddled with mountains of debt and a 14% budget deficit, its path to recovery seems arduously steep, slippery and out of reach. But like Sisyphus, the king in Greek mythology who ends up getting to the summit only to see his cumbersome load slide back down again, Greece seems mired in problems even with a $145 billion bailout package.
Despite initial market giddiness over the bailout and displays of confidence from the IMF and Greek government officials that Greece, albeit bloodied, will manage the painful journey back to economic health just fine, fears that the country won't be able to push the boulder back up the hill are back with a vengeance.
The key concern: the measures Greece has been forced to impose are so severe and wildly unpopular that observers fret the government won't have the political will to see them through. Economists also worry that the very medicine prescribed by the IMF and Greece's Euro-partners -deep budget cuts, sharp wage reductions and tax increases- will push the economy into a recessionary spiral that will spin downward faster than Sisyphus' lost boulder.
Walking away
So what's in store for the Greeks? If the loan conditions will bring in as much agony as is predicted, why not walk away from their obligations-the same way so many thousands of debt-saddled Americans have-instead of taking on even more debt to pay them off?
Of course, it's not that simple. Americans who don't pay up end up with bad credit. And when a company goes bankrupt, it risks having to shut down forever. But what happens when a country defaults? Obviously, Greece won't melt away into the Aegean Sea. The Parthenon won't vanish.
"A company can go bankrupt. Individuals go bankrupt. But sovereigns don't," explains Jan Randolph, head of the sovereign risk group at IHS Global Insight. "They stop paying and don't service their debt obligations like they're supposed to. But people still grow carrots, people go to school, traffic lights work."
That doesn't sound so bad, but don't be fooled. A 2008 IMF working paper, titled "The Costs of Sovereign Default," found that post-default, most economies, on average, tend to shrink by 1.2 percentage points a year during restructuring. Often, more severe political, social and financial consequences follow.
Take Argentina, which defaulted in December 2001 after struggling with IMF-imposed austerity measures for several years. Unemployment hit 20%, GDP declined by 15% and nearly half its population ended up living below the poverty line.
To boot, the Argentines have been locked out of financial markets and the government has been embroiled in hundreds of investor lawsuits ever since. (Read more about the impact of Argentina's default.) For nine years, Argentina has been deprived of the "oxygen credit markets can provide," as IHS's Randolph puts it, and is only starting to tip-toe back in now with a debt swap offering.
But is a default, or a partial one, always as deadly a sentence as we've been led to believe? Not exactly.
"There are defaults and there are defaults," says University of Maryland international economics professor Carmen Reinhart, who co-wrote the recent book, This Time is Different, an analysis of eight centuries of financial crises.
According to Reinhart, defaults are more common than we think. But some defaults are ugly and messy like Argentina's, she explains, and others are kinder and gentler, like Uruguay's, which came to a cordial agreement with its creditors to restructure its debt in 2003 and recovered quickly, growing nearly 4% the following year.
Turning it around
But defaults, even ugly ones, don't always spell disaster either. After its debt debacle, and the eventual devaluation of the peso, which made its agricultural exports cheaper, Argentina recovered too, growing 9% in 2004. Despite the years of negative publicity, it also became a tourist hotspot-the cheap cost of living and a favorable exchange rate made it a favorite for American tourists and it experienced double-digit increases in incoming visitors. After Russia defaulted on its foreign debt in 1998 and devalued the ruble, it grew 6.4% a year later.
For Greece to pull off a default-driven revival, it will have to be ready to anger a lot of folks, most importantly its bondholders. The country could also be forced to abandon the euro and return to the to the drachma, or some version of it. The fireworks over Europe, should Greece go that route, would be something to see.
But the gain may be worth the pain. University of Maryland economics professor Theodore Kariotis points out that dropping the euro would put monetary policy muscle, control and flexibility back into the hands of the Greek government. It might even help Greece keep Sisyphus' boulder at the top of the hill where it belongs
http://www.humanevents.com/article.php?id=37054
Among the mega-forces moving the tectonic plates and imperiling the nation-states of the world from above and below are these:
First, ethno-nationalism, which threatens nations with secession and break-up. We see it in the Uighurs of China, the Naga of India, the Baluch of Iran and Pakistan, the Kurds of Iran, Syria, Iraq and Turkey, the Chechens of the Russian Caucasus and the Walloons of Belgium.
Second, transnationalism. This is the project of global elites who seek to reduce nations to ethno-cultural enclaves in a new world order run by these same bloodless bureaucrats whose loyalty is neither to the land nor people whence they came.
Their work in progress, the European Union, however, is imperiled.
For the EU just took a great leap forward to force Europe's most indebted nations to surrender their economic independence or be expelled from the European Monetary Union. The PIGS -- Portugal, Ireland, Italy, Greece and Spain -- may rebel.
Indeed, we may see cascading rebellions across Europe recalling 1848, but with a different outcome.
What brought the EU to this day of reckoning is its decision to go for a trillion-dollar bailout of Greece, Portugal and Spain rather than let them default or restructure their debts. These nations are now being directed by the EU and International Monetary Fund to slash public spending and raise taxes, though all suffer from high unemployment, with Spain's at 20 percent.
If Berlin gets its way, these nations may also be forced to submit their budgets in advance to Brussels and accept EU-dictated limits on the deficits they will be permitted to run. This would entail a sweeping surrender of sovereignty, independence and economic freedom.
Moreover, as the pain of this "rescue" is to be borne by the debtors, while the beneficiaries are the French and German banks that hold tens of billions in PIG paper, this question arises: Why should Athens make Greeks suffer and risk political ruin at the polls, rather than default and let the banks and bondholders of Europe share in the pain?
Why not quit the EMU, default, repudiate the euro, restore the drachma and devalue? That would make Greek exports more competitive and make Greece a more desirable place in which to site one's next factory. And with its currency devalued, Greece would also become a more attractive destination for Western tourists.
But a Greek default is not the only threat to the EU.
The European Central Bank has been buying Greek debt from the banks both to relieve them of the risk of a default and to restore market confidence in Greek, Portuguese and Spanish bonds. Only when such confidence returns will investors buy new debt from the Club Med countries, all of which must issue new bonds to finance deficits and roll over maturing debt.
A problem, however, has also arisen here. As the ECB is buying up the debt of the PIGS, holders of Greek, Spanish and Portuguese bonds are unloading them, getting out of Club Med paper while the getting is good.
The ECB seems to be substituting itself for the banks as the chump to be left holding the bag when the defaults begin.
The plunging euro is a sure sign the markets are coming to see that the only way the bonds of indebted European nations are going to be paid off is with a huge infusion of euros, which may end that currency's status as a reliable store of value.
However, "if the euro fails, it is not only the currency that fails," says German Chancellor Angela Merkel. "Then Europe fails. The idea of European unity fails."
Especially enraged are the Germans. To show that they were good Europeans, they gave up their beloved mark. Now, in recent elections in North-Rhine Westphalia, the Christian Democratic Union of Merkel took a thrashing, falling 10 points below the CDU's 2005 vote, and losing the upper chamber of the German parliament.
Germans may be ready to shed the sackcloth and ashes they have worn for 65 years and start looking out for Deutschland uber alles.
Given the strains on the European Monetary Union and EU, neither of which enjoys the love or loyalty that people render to the countries of their birth, the great unraveling may be about to begin. Why, after all, should the indebted nations of Europe impose suffering upon their peoples to pay off old debts now held by distant banks?
How does imposing austerity on Portugal, Spain and Greece enable them to grow their way out of indebtedness? How does it help the EU grow if a large slice of the union is forced into austerity?
And why should Germans who pay themselves modest pensions and hold off retirement put their savings at risk to bail out the Club Med?
Many have predicted that economic nationalism would one day tear apart the European Union. The hour may be at hand.
Greece must be feeling a little like Sisyphus these days. Saddled with mountains of debt and a 14% budget deficit, its path to recovery seems arduously steep, slippery and out of reach. But like Sisyphus, the king in Greek mythology who ends up getting to the summit only to see his cumbersome load slide back down again, Greece seems mired in problems even with a $145 billion bailout package.
Despite initial market giddiness over the bailout and displays of confidence from the IMF and Greek government officials that Greece, albeit bloodied, will manage the painful journey back to economic health just fine, fears that the country won't be able to push the boulder back up the hill are back with a vengeance.
The key concern: the measures Greece has been forced to impose are so severe and wildly unpopular that observers fret the government won't have the political will to see them through. Economists also worry that the very medicine prescribed by the IMF and Greece's Euro-partners -deep budget cuts, sharp wage reductions and tax increases- will push the economy into a recessionary spiral that will spin downward faster than Sisyphus' lost boulder.
Walking away
So what's in store for the Greeks? If the loan conditions will bring in as much agony as is predicted, why not walk away from their obligations-the same way so many thousands of debt-saddled Americans have-instead of taking on even more debt to pay them off?
Of course, it's not that simple. Americans who don't pay up end up with bad credit. And when a company goes bankrupt, it risks having to shut down forever. But what happens when a country defaults? Obviously, Greece won't melt away into the Aegean Sea. The Parthenon won't vanish.
"A company can go bankrupt. Individuals go bankrupt. But sovereigns don't," explains Jan Randolph, head of the sovereign risk group at IHS Global Insight. "They stop paying and don't service their debt obligations like they're supposed to. But people still grow carrots, people go to school, traffic lights work."
That doesn't sound so bad, but don't be fooled. A 2008 IMF working paper, titled "The Costs of Sovereign Default," found that post-default, most economies, on average, tend to shrink by 1.2 percentage points a year during restructuring. Often, more severe political, social and financial consequences follow.
Take Argentina, which defaulted in December 2001 after struggling with IMF-imposed austerity measures for several years. Unemployment hit 20%, GDP declined by 15% and nearly half its population ended up living below the poverty line.
To boot, the Argentines have been locked out of financial markets and the government has been embroiled in hundreds of investor lawsuits ever since. (Read more about the impact of Argentina's default.) For nine years, Argentina has been deprived of the "oxygen credit markets can provide," as IHS's Randolph puts it, and is only starting to tip-toe back in now with a debt swap offering.
But is a default, or a partial one, always as deadly a sentence as we've been led to believe? Not exactly.
"There are defaults and there are defaults," says University of Maryland international economics professor Carmen Reinhart, who co-wrote the recent book, This Time is Different, an analysis of eight centuries of financial crises.
According to Reinhart, defaults are more common than we think. But some defaults are ugly and messy like Argentina's, she explains, and others are kinder and gentler, like Uruguay's, which came to a cordial agreement with its creditors to restructure its debt in 2003 and recovered quickly, growing nearly 4% the following year.
Turning it around
But defaults, even ugly ones, don't always spell disaster either. After its debt debacle, and the eventual devaluation of the peso, which made its agricultural exports cheaper, Argentina recovered too, growing 9% in 2004. Despite the years of negative publicity, it also became a tourist hotspot-the cheap cost of living and a favorable exchange rate made it a favorite for American tourists and it experienced double-digit increases in incoming visitors. After Russia defaulted on its foreign debt in 1998 and devalued the ruble, it grew 6.4% a year later.
For Greece to pull off a default-driven revival, it will have to be ready to anger a lot of folks, most importantly its bondholders. The country could also be forced to abandon the euro and return to the to the drachma, or some version of it. The fireworks over Europe, should Greece go that route, would be something to see.
But the gain may be worth the pain. University of Maryland economics professor Theodore Kariotis points out that dropping the euro would put monetary policy muscle, control and flexibility back into the hands of the Greek government. It might even help Greece keep Sisyphus' boulder at the top of the hill where it belongs
http://www.humanevents.com/article.php?id=37054
Among the mega-forces moving the tectonic plates and imperiling the nation-states of the world from above and below are these:
First, ethno-nationalism, which threatens nations with secession and break-up. We see it in the Uighurs of China, the Naga of India, the Baluch of Iran and Pakistan, the Kurds of Iran, Syria, Iraq and Turkey, the Chechens of the Russian Caucasus and the Walloons of Belgium.
Second, transnationalism. This is the project of global elites who seek to reduce nations to ethno-cultural enclaves in a new world order run by these same bloodless bureaucrats whose loyalty is neither to the land nor people whence they came.
Their work in progress, the European Union, however, is imperiled.
For the EU just took a great leap forward to force Europe's most indebted nations to surrender their economic independence or be expelled from the European Monetary Union. The PIGS -- Portugal, Ireland, Italy, Greece and Spain -- may rebel.
Indeed, we may see cascading rebellions across Europe recalling 1848, but with a different outcome.
What brought the EU to this day of reckoning is its decision to go for a trillion-dollar bailout of Greece, Portugal and Spain rather than let them default or restructure their debts. These nations are now being directed by the EU and International Monetary Fund to slash public spending and raise taxes, though all suffer from high unemployment, with Spain's at 20 percent.
If Berlin gets its way, these nations may also be forced to submit their budgets in advance to Brussels and accept EU-dictated limits on the deficits they will be permitted to run. This would entail a sweeping surrender of sovereignty, independence and economic freedom.
Moreover, as the pain of this "rescue" is to be borne by the debtors, while the beneficiaries are the French and German banks that hold tens of billions in PIG paper, this question arises: Why should Athens make Greeks suffer and risk political ruin at the polls, rather than default and let the banks and bondholders of Europe share in the pain?
Why not quit the EMU, default, repudiate the euro, restore the drachma and devalue? That would make Greek exports more competitive and make Greece a more desirable place in which to site one's next factory. And with its currency devalued, Greece would also become a more attractive destination for Western tourists.
But a Greek default is not the only threat to the EU.
The European Central Bank has been buying Greek debt from the banks both to relieve them of the risk of a default and to restore market confidence in Greek, Portuguese and Spanish bonds. Only when such confidence returns will investors buy new debt from the Club Med countries, all of which must issue new bonds to finance deficits and roll over maturing debt.
A problem, however, has also arisen here. As the ECB is buying up the debt of the PIGS, holders of Greek, Spanish and Portuguese bonds are unloading them, getting out of Club Med paper while the getting is good.
The ECB seems to be substituting itself for the banks as the chump to be left holding the bag when the defaults begin.
The plunging euro is a sure sign the markets are coming to see that the only way the bonds of indebted European nations are going to be paid off is with a huge infusion of euros, which may end that currency's status as a reliable store of value.
However, "if the euro fails, it is not only the currency that fails," says German Chancellor Angela Merkel. "Then Europe fails. The idea of European unity fails."
Especially enraged are the Germans. To show that they were good Europeans, they gave up their beloved mark. Now, in recent elections in North-Rhine Westphalia, the Christian Democratic Union of Merkel took a thrashing, falling 10 points below the CDU's 2005 vote, and losing the upper chamber of the German parliament.
Germans may be ready to shed the sackcloth and ashes they have worn for 65 years and start looking out for Deutschland uber alles.
Given the strains on the European Monetary Union and EU, neither of which enjoys the love or loyalty that people render to the countries of their birth, the great unraveling may be about to begin. Why, after all, should the indebted nations of Europe impose suffering upon their peoples to pay off old debts now held by distant banks?
How does imposing austerity on Portugal, Spain and Greece enable them to grow their way out of indebtedness? How does it help the EU grow if a large slice of the union is forced into austerity?
And why should Germans who pay themselves modest pensions and hold off retirement put their savings at risk to bail out the Club Med?
Many have predicted that economic nationalism would one day tear apart the European Union. The hour may be at hand.