Comparable risk

by on April 28, 2010 at 7:24 am in Current Affairs, Economics | Permalink

The yield on Greece’s benchmark 10-year bonds soared 1.4 percentage points to 11.1 percent – more than three times that of benchmark German bonds and just below those issued by Pakistan.

There is more here.  The assessment seems to be this:

What a growing number of investors suggest is really needed is a “shock and awe” figure, enough to convince the markets that peripheral European economies will not be left to fail.

For better or worse, I do not expect such a figure is forthcoming.  I also do not see how such a figure would do more than postpone the basic problem, which is that several European economies have been pretending to be much wealthier than they really are and to make financial plans on that basis.

E. Barandiaran April 28, 2010 at 8:23 am

Tyler, in a comment to the latest Simon Johnson’s post on Greece
(see http://baselinescenario.com/2010/04/28/wake-the-president/ )
I wrote:

Simon, without any logical argument from your first paragraphs you jump to the “conclusion†:
“This is about the fundamental structure of the eurozone, about the ability and willingness of the international community to restructure government debt in an orderly manner, about the need for currency depreciation within (or across) the eurozone. It is presumably also about shared fiscal authority within the eurozone – i.e., who will support whom and on what basis?†

I think you’re wrong. Investors never expect anything good from politicians –they pray to God for them to be quiet. They start to worry when they see that politicians are going to do something –as they can see now and therefore they take a break to decide what to do with their money. They hope that the Obamas of this world stay quiet –but they know that bad people don’t stay quiet forever. They hope that the Obamas sleep at 3.30 am and no Hillary wakes up. They are afraid of politicians –and indeed they are afraid of those advising politicians to do more stupid things.

Commenterlein April 28, 2010 at 9:11 am

Barandarian,

Your hypothesis would suggest that people should favor politicians who promise to do less, and that people should re-elect politicians who have in fact done less. Given the almost complete absence of even nominally libertarian politicians in elected office, this seems strongly rejected by the data.

Liam3851 April 28, 2010 at 10:17 am

E. Barandiaran:

I don’t know if you’re in the financial industry or not– but I can certainly tell you that your view that “investors… pray to god for them to be quiet” in re: bailouts of large debt-issuing institutions is not even particularly common. For example, the view that the Fed should have saved Lehman is virtually unanimous within the professional investor class.

E. Barandiaran April 28, 2010 at 10:29 am

Liam3851,
Don’t worry. I have had enough experience with the financial industry in several countries, including China, and especially with financial crises and reforms of financial systems.

You should remember what gentlemen did when the Titanic started to sink. I hope you are inventive enough to create this sort of game about investors instead of Titanic’s gentlemen:
http://toucharcade.com/2009/10/08/titanic-rescue-save-gentlemen-from-a-sinking-ship/

angus April 28, 2010 at 11:26 am

“Shock and Awe” won’t work. With apologies to Walter Wriston, Greece is essentially insolvent, not illiquid.

Daran April 28, 2010 at 1:20 pm

Bailing out Greece would be like helping a drug addict by giving him a job in a pharmacy. Northern European countries are better of by spending the money on propping up their local banks that are too exposed to risk from the PIGS countries.

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