Tag Archives: default

10.13.2012 | Luxembourg Yogurt?

For this Greece update, some past and current information…

Soon after the euro was launched on January 1, 2002, a €76,000 bank heist near Athens became the first major euro robbery. Near Athens also, with the new currency launch, it took 3 staff members to figure out how a customer could pay for a cheese pie. And everywhere in Greece, the transition was slow because the Greek Economic Ministry had supplied only one sixth of all Greek businesses–50,000 out of 300,000–with euros.

Looking back further, since its independence in 1829 to 2006, Greece has had 5 defaults or debt re-schedulings that occupied a total of 50.6 years. In This Time It’s Different, economists Kenneth Rogoff and Carmen Reinhart say that few nations break out of a serial default pattern.

Fast forward to 2012.

Greek yogurt maker Fage is moving its headquarters from Greece to Luxembourg. Coke’s second largest bottler, Hellenic Coca-Cola (EEEK on the Greek Stock Exchange) is relocating its Greek headquarters to Switzerland and switching its primary stock listing to London. Both wanted a lower and more stable tax environment, greater access to financing, and less exposure to a Greek financial calamity. Predictably, other firms located in Greece have responded to the ongoing crisis with modified business behavior and contingency planning.

Meanwhile, overall Greek unemployment remains near 25%, close to 50% for youth aged 15-24, its debt is still more than 150% of GDP, and unless Greece gets its next bailout transfusion, its government will soon run out of money. Still the WSJ reports the odds of Greece leaving the euro zone are down.

Your prediction?

A final economic thought: In the euro zone, countries with different economic conditions lack the flexibility to respond to their own special needs. They share monetary policy and cannot target their fiscal policy (government spending, taxing and borrowing) to high or low unemployment and inflation.

Sources and Resources: Illustrating the extent of Greece’s dysfunction, this 2002 BBC article that specifically describes the introduction of the euro in every country was fascinating and if you do not have the Rogoff/Reinhart book, This Time It’s Different, this paper provides an excellent summary. For current information on Greece and the corporate exits, here and here are Greek newspaper articles, here is a European perspective, and here, the WSJ talks about how Citi analysts have lowered the chance of a “Grexit” from 90% to 60%.

Posted by: adminEcon
Tags: Carmen Reinhart, default, euro zone, euro zone bailout, Fage yogurt, Greece, Greek debt, Greek unemployment, Hellenic Coca-Cola, Kenneth Rogoff
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08.24.2012 | Some Greek Math

With a euro zone update on Greece unfolding (they might lease some islands but we’ll get to that in a moment), here is some Greek math that Michael Lewis presents in Boomerang.

Referring to the deficit, during October 2009, the Greek government thought it was 3.7% of GDP. A closer look from a new finance minister soon resulted in a revision to 14%. How could they have been so wrong (assuming the new figure is valid)? They actually had no independent group gathering statistics. Instead, the political party in charge managed the math.

The 2009 Greek deficit (spending minus revenue for one year) was close to 14% of GDP. The Greek debt (the total amount they owed) might have been 114% of GDP. Why could the Greeks borrow so much?

Comparing Greece’s GDP to its deficit is sort of like comparing your income to your mortgage and then having a wealthy uncle who would guarantee what you borrowed. After the Greeks joined the euro zone, their borrowing costs plunged because lenders assumed the Germans would be there to support the loans. Even though the German economy was much healthier than Greece’s, their governments could borrow at similar rates–and those rates were low. As a result, Greece could go on a borrowing spree and use the money to run unprofitable government businesses like the national railway, to pay generous pensions to retired government employees and to ignore nationwide tax evasion.

Now, Greece knows it has to cut the public payroll. A recent Bloomberg article tells us that they are using incentives to encourage retirement and also placing people on 75% pay if they receive a poor evaluation or disciplinary action. However, as one IMF official told Michael Lewis, “I’m all for reducing the number of public-sector employees. But how do you do that if you don’t know how many there are to start with?” (from Boomerang, p. 79).

And finally–why do the Germans and French care about Greek math? Here we have reality. German and French banks hold Greek debt.

For an excellent video from the St. Louis Fed on “The Greek Tragedy,” I recommend this YouTube video and all others from the series. And this Washington Post book review tells more about Michael Lewis’s financial disaster tourism in Boomerang.

Posted by: adminEcon
Tags: Angela Merkel, default, early retirement, eurozone, France, French banks, German banks, Germany, Greece, Michael Lewis, pensions, PIIGs, President Hollande, selling islands, sovereign debt, tax evasion
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05.24.2012 | Exit Plans

A British charitable trust has offered a hefty reward for the best eurozone break-up plan. Their goal? Improve and influence policy though a 250,000 pound ($393,430) incentive prize.

As I read through the finalists’ plans, the unfathomable complexity of unraveling the euro became increasingly apparent because each proposal had a different but crucial focus:

One plan emphasized reconfiguration through which stronger and weaker economies formed separate groups.
A second said we should “unscramble the euro eggs” by establishing 2 new currencies, a stronger “new euro white” and a weaker “new euro yolk,” each with predetermined values to avoid currency flight.
A third approach was most concerned with legal jurisdiction over assets and obligations. With 17 sovereign nations, who would have the final say?
For another proposal, timing and the details that would be implemented after a sudden German/French declaration were described. This plan said secrecy would be paramount, then the announcement, and then a weekly time table.
Finally, a fifth finalist said the key was focusing on how the weaker nations should “default” and “devalue.”

The winner will be announced on July 5.*
Fascinating but lengthy, the plans can be read from the links in this Guardian article. Also, if you are interested in other incentive prizes, here is a chart from The Economist.

An update: Here is information about the winning entry:

Submitted by Capital Economics, the plan focused on the exit of a weaker country. Quoted from the Wolfson website, here are some specifics:

“The team’s submission, Leaving the euro: A practical guide, centres on the departure of a single weak member such as Greece. It suggests that:-

A new currency is introduced at parity with the Euro on day 1 of an exit.

All wages, prices, loans and deposits are redenominated into it 1 for 1.

Euro notes and coins would remain in use for small transactions for up to six months.

The exiting country would immediately announce a regime of inflation targeting, adopt a set of tough fiscal rules, monitored by a body of independent experts, outlaw wage indexation, and announce the issue of inflation-linked government bonds.”

Posted by: adminEcon
Tags: austerity, Belgium, break-up, default, devaluation, eurozone, Finland, France, Germany, Greece, incentive prizes, Netherlands, Wolfson Prize
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01.26.2012 | Greek (Debt) Myths

Maybe sell some islands and an ancient ruin or two?

In Boomerang, Blind Side author Michael Lewis repeats what German politicians were suggesting in 2009 when they heard that the Greek debt was much larger than previous estimates. How much bigger? No one was really sure.

In a wonderful podcast, NPR’s This American Life explains that once Greece joined the European Monetary Union, it enjoyed a new world of credit. With fellow euro zone member Germany perceived as “the rich uncle” to (theoretically) back all loans, Greece’s interest rates plunged. Borrowing more cheaply meant the Greek government could borrow much more. Consumers who never had car loans or home mortgages suddenly found bankers welcoming them with rates that declined from 18% to 4%.

Lewis explains that Greek statisticians had to eliminate the high-priced tomatoes from their CPI to take their inflation rate within euro zone parameters. NPR’s reporters tell how Germany, hoping to expand the market for their goods, initially supported Greece’s euro zone entry. Getting what they wished for, more Greeks were buying Mercedes.

Our bottom line? Incentives. Isn’t everyone responding predictably? You might want to read This Times It’s Different for an academic explanation.

The Economic Lesson

In his America and the New Global Economy Teaching Company course, Professor Timothy Taylor explains why the Europeans wanted a common market. Assume for a moment that you own a factory and start exporting goods to a nearby country. You have to wait at the border and have your trucks approved by customs. You have to be sure that you comply with their product safety laws. You need to use their currency.

Dr. Taylor says that with a common market you could enjoy the benefits of the 4 freedoms: 1) People, 2) Goods and services, 3) Labor, 4) Capital. The benefits of a European common market included one set of regulations instead of 15, labor that could move more freely, and capital that was more accessible.

An Econmic Question: How does the United States enjoy the common market benefits listed by Dr. Taylor?

Posted by: adminEcon
Tags: credit markets, debt, default, deficit, euro zone, Germany, Greece, Michael Lewis
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11.28.2011 | The First Credit Default Swap

Some of the euro zone’s problems actually started with the Exxon Valdez oil spill.

After the 1989 Exxon Valdez calamity, when an Alaska jury said that Exxon owed $5 billion in damages, they asked J.P. Morgan for a $4.8 billion line of credit. Concerned about so large a loan, J.P. Morgan wanted to protect itself.

So, they invented the credit default swap in 1994 at a J.P. Morgan “team-building” weekend in Boca Raton, Florida. A new kind of insurance, the credit default swap (CDS), was sort of like fire insurance that you could buy for a house you do or do not own. Instead though, the J.P. Morgan product insured different kinds loans that included money borrowed by businesses and by countries.

Let’s fast forward to today. The CDS market has grown to more than $15 trillion. In the euro zone, the CDS has become a complement to bond buying. Does a bank want to purchase an Italian bond? To minimize its risk, it needs a corresponding CDS. How did we get from Alaska to Italy? That is another story.

Here is a more technical description of a CDS.

The Economic Lesson

Selling bonds called sovereign debt, Country A is the borrower and a bank could be the lender. However, like J.P. Morgan and the Exxon line of credit, the bank then enters Country A’s CDS market to reduce its risk. If Country A defaults, the CDS seller pays the bank that bought the insurance.

When investors buy Greek, Portuguese and Italian bonds can they buy the corresponding credit default swaps and “eliminate” their risk? It all depends on what “default” means.

An Economic Question: Explain how credit default swaps might be good and bad for a nation with a history of loan defaults.

Posted by: adminEcon
Tags: credit default swap, default, euro zone, Exxon Valdez, Greece, J.P. Morgan, loans, Portugal
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