What will happen with Greece?

Here is my latest NYT column, excerpt:

If you are a euro optimist, you might believe that the day of reckoning for Greece will be stalled long enough for Portugal, Ireland, Spain and possibly Italy and Belgium to recapitalize their banks and trim their government budgets. You might believe that of the Greeks will eventually default, but that by the time the contagion effects are checked, the Greeks will have pulled in some aid, and the global impact will be a mere hiccup instead of a new financial crisis. But that still will leave Greece with no clear economic path forward. For a best-case scenario, that’s not very good.

If you are a pessimist, you might see such a response as an unworkable plan of naïve technocrats. Here’s your line of reasoning: At some point along the way, democracy is likely to intervene: either Greek voters will refuse further austerity and foreign domination, or voters from northern Europe will send a clear electoral message that they don’t support bailouts. And there’s a good chance one or both of those events will happen before a broader European bank recapitalization can be achieved. In the meantime, who wants to put extra capital into those ailing Irish, Portuguese, and Spanish banks anyway?

In an even bleaker scenario, bank recapitalization won’t be realized anytime soon and those same economies will show few signs of growing out of their debts. A broader financial crash will result, and it won’t be contained by an easily affordable bailout.

In case you don’t know by now, I see the pessimistic scenario as more likely.

Comments

The remarkable inflation in google+ invites in the last day or two leads me to believe that we should switch the Greeks over to google+ invites on a basis of 10 euros:1 invite.
They can still abbreviate it as G+.

Perhaps china will bail them out.

the money that's been used to bail-out greece banks could have been recapitalized many times over. why would investors wait until greece defaults to cause a spike in periphery yields?

I'm more of an apocalyst. My scenario:

1. The Greek crisis will protracted.
2. Portugal and Ireland will turn into Greece.
3. Italy and Spain will need to renew their bonds at crushing rates.
4. One by one they will default, dragging in French and German banks. At this point the eurozone will break apart.
5. The crisis will spread overseas. Japan and USA will be in big trouble.
6. The Chinese will establish the yuan as an international reserve currency.
7. China will use cheap borrowing to spend on defense.

I have an even more interesting euro scenario - after the U.S. debt ceiling carwreck actually causes the U.S. government to not pay various debt obligations for an indefinite (though likely short) duration, no one will much care about the euro. A currency, say whatever you wish about the project and its shortcomings and flaws, no one is actively attempting to destroy the full faith and credit of within its zone.

I consider this something along the eyes of a dust mote in someone else's eye situation, at least when tilting pessimistic.

See the ECB raising its interest rates for another example of trying to play a longer hand than ZIRP - at least one central bank seems to be worried about a Japanese scenario developing through repeating the same mistakes. Whether they are making their own, new ones is certainly open to debate - but I still have this strange feeling that Americans have no idea just how many concrete benefits the euro brings within the eurozone. Though of course, if the dollar is destroyed as an effective currency (imagine how insane that sentence would have sounded before the 2010 congressional elections in the U.S.), Americans just might have the chance to experience the challenge of attempting to do business between a place like Texas and California where exchange rate fluctuations are part of day to day business, with banks taking a couple of percent off the top of every transaction.

It's the U.S., stupid! And remember that you are stuck with your fraudulent clown for 18 months.

At least some American economists are willing to deal with the problem. Read this
http://www.econbrowser.com/archives/2011/07/debt_ceiling_op.html
Hamilton, however, is wrong to assume that Bartlett has defined the core issue correctly. The core issue is --as it is always the case with everything we do-- the future as conditioned by the past (not just the past as Bartlett argues). If government does not control future revenues and expenditures, it will never be able to deal with the bad consequences of past decisions (in addition, Bartlett is wrong because he blames Congress but he should have read Executive Unbound by Eric Posner and A. Vermeule).

Best case scenario: financial system collapses and nobody is willing to 'recapitalize it' - it becomes detached from 'real trade' for a time and then gets reset, perhaps in a severely modified form, at a scale that is more appropriate and does not support hundreds of thousands of hedge fund bosses, government bureaucrats, lawyers, and gamblers.

Well, let's see the big bright spot - people are not sitting ducks. In dynamic terms, Greece is very helpful for Europe.
Because of the Greek crisis all EU countries are so afraid that they are starting reforms that used to seem politically impossible just months ago. The political appeal of deficits is almost entirely lost, debt brakes and fiscal rules are spreading. Pension reforms are progressing, retirement age of close or even above 70 is approved in many countries. Labour market flexibility is increasing because of the unemployment problems.
Greece itself is an example of dramatic change - more than 100 professions were deregulated, competition is allowed in many more sectors. Talking about debt and default might be fancy, but the important story is the structural change.
http://ec.europa.eu/economy_finance/publications/occasional_paper/2011/pdf/ocp82_en.pdf

Exactly. Same is happening here in the US: for all the doom and gloom talk about default what we are ultimately seeing is the reform of a completely distorted system in a magnitude that would be considered unreal until 2008. Btw, that is why capitalism works. There is no way to go through reforms like these if one is not forced to do it.

Tyler - Default is already priced into bond and CDS markets, it's merely a question of magnitude and timing.

So it would be helpful if you made explicit the transmission mechanism whereby realizing these losses, or a finding of default by a credit rating agency, could trigger "a Lehman-Brothers style financial panic."

Financial markets are not stupid. A finding of default carries no information, and about as much weight as a AAA rating on a subprime CDO-squared tranche. (even in the heyday of regulatory arbitrage those ratings were heavily discounted, and those bonds yielded far more than comparable corporate AAAs.)

Presumably, the mechanism is that a restructuring or rating downgrade carries with it accounting treatment that imperils bank solvency or capital ratios. Or possibly there are banks out there with massive exposure to a CDS trigger.

My initial position was that the least expensive way to solve the Greek problem was for Germany to buy the country in a hostile LBO takeover and this suggestion is becoming very close to reality.

http://dismalpoliticaleconomist.blogspot.com/2011/07/ownership-of-greece-is-changing.html

I now think a better solution would be for the U. S. to swap our own Greece, the state of Illinois, to Europe for their Greece. The advantages for both Europe and the U. s. are many

http://dismalpoliticaleconomist.blogspot.com/2011/07/u-s-to-europe-we-will-trade-you.html

This is real thinking outside the box.

An equal driver of Greek debt is tax cheating, something that they are at least making a start on attacking. In the US the sport is tax avoidance through purchase of legislators, which though technically legal has the same pernicious effect but does employ any number of economists, accountants and lawyers.

Call it a supply side problem that has to be fixed to get deficits and debt under control.

You might believe that of the Greeks will eventually default

I consider it rude to point out grammatical errors in blog posts, but this one got into a NY Times piece, and whichever editor was assigned to it didn't even note it.

(Or is there a correct way to parse that sentence?)

Warren Mosler always has interesting perspectives on these sorts of things.

http://moslereconomics.com/2011/06/29/the-mosler-plan-for-greece/comment-page-1/#comment-56949

Hi Tyler. Love the blog. This post is very well written, but I'm not really sure what my take away is. As all internet users must if they are to stay sane and happy, my filter is very aggressive. Ordinarily I would filter an article like this for a very practical reason: it literally has no influence on my life.

Well, except for one thing.

At some level I care about people, all people. And this article points to an event that could negatively impact lots of people. And it's (presumably) a kind of event which could be affected by the actions of a small few (the voters in various European nations).

But where do I fit in? I'm American, not Greek or German or Swedish. I can't vote on Euro measures. Heck, I'm not even that clear on the macro-economic issues behind the Greek problems. I'm willing to let this article through my filter, but I'd like to know more clearly how this item can connect usefully with the rest of the information in my brain, apart from satisfying some strange need for more generalized anxiety.

Thanks.

It can have an impact on some people's life =)

Last Friday friend of mine was talking to me about equities investment, now I understand him way better thanks to Tyler's post. Future can be like this for me: work like a dog before this happens, sell equities before this happens, wait atop a pile of cash while this happens, buy equities once again when everybody is scared to death. That's the plan, buy/sell timing surely is not gonna be perfect this time but it wasn't either in 2008 and worked reaaaaal fine. Why not a second time?

Ps. I'm not teen since a few years ago, so I don't want to change the world, but at least I can change my life and the one's I love.

Why doesn't the EU just kick Greece out and take the loss? As pointed out, the Greek economy makes up 2% of the total EU's economy. A Greek default is not about to crash the Euro and, in fact, would actually benefit the Euro because there would be less dead-weight on it.

The problem here is that the current economy of Greece is so bad to be able to make any reasonable lift .
Yes, the money sought might help some, but default is imminent.
The debt ratio to productivity and GNP of Greece is so high. Yes, Greece might be able to sustain itself for some few more months, assuming here no shut downs resulting from public anger over austerity measures.
But the more other European countries like Portugal,Irland, and Spain going thru this, the harder it becomes on Greece in particular and all of them in general.
As a result the Euro will suffer. Optimism is needed here...but reality speaks otherwise.
If due to anger Greek people take it to the streets, that will hinder any hope aimed for by the government.

Why do you describe an outcome as "pessimistic"?

The sooner, the better, I say.

"Better"="Optimistic".

A political and there country's individual's thinking decided the future for the country.
Moreover thinking could be change by the situation or time.

Tyler,

Given your pessimistic view of the broad economic future, where do you invest surplus dollars?

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