The story continues

The fact that the EFSF was forced to delay its own bond issue on Wednesday has also hurt sentiment, as it calls into question not only its ability to fund Ireland and Portugal but also its value as a guarantor.

The Italian ten-year yield is now at 6.399, unsustainable territory, there is more here and here.  France and Germany have jointly “demanded an answer” from Greece, about continued eurozone membership, but it’s not clear who will be around to (non-credibly) answer that question.  Twitter is awash with rumors that Papendreou will be gone very, very soon.  They just dismissed all of the military leadership.  I believe it is now understood in Germany and France that they will be cutting Greece loose.

Here is one way to put it:

Italy is borrowing at 6.4% to lend to Greece at 3.5%. this will end well.

Meanwhile in Greece, via several loyal MR readers, there are more registered Porsche Cayennes than people reporting incomes over 50,000 euros a year.  You may recall my earlier prediction:

“Enter democracy, stage right” is the next act in the play.


Hm. A hairdresser's sort of a car, a Porsche Cayenne.

I fear you are thinking of the Boxster or the Cayman, not the SUVish Cayenne, which is more of a Chelsea Tractor.

No, it's the Cayenne I mean. I gotta a data point too.

A reserve fund that has to fund itself by issuing debt? These people are idiots who need to be removed from power. They are no different than the schlep in the credit card doom loop.

Also from Greece:

Papandreou fires military chiefs.

Hmm - I wonder if there will be a run of Cayennes out of the country, because of a lack of confidence in the banking system.

Or more realistically - Greece is a massive case of fraud and manipulation, and finally, that is becoming clear to Americans (it isn't as if Europeans are surprised - just look at how Luxemburg used to make a lot of money in the past).

What may become even more clear to Americans is that the current Greek political system is determined to ensure that the fraud and manipulation will continue to benefit those who expect to benefit from it - that is, the entire political system.

Democracy isn't really the term used for replacing an entire governmental structure.

Isn't it a bit strange to call tax evasion fraud and manipulation, as an American? It seems the very fiber of independent America is based on these precepts. The Germans have more respect for government though..

Um, no - America at its founding came up with the catchy 'no taxation without representation.' As for manipulation - well, sure, 'isn't worth a continental' is another, not so catchy phrase, but that is one of the reasons the American Constitution was written. Greece ratcheted it up a bit - 'no taxation, but we'll just keep lying so we can sell more bonds.' Though I'm not sure what the Greek word for 'suckers' is, I'm willing to that Goldman Sachs has a dictionary definition handy, though (and no surprise if Goldman Sachs just happens to pick up some really nicely priced down financial instruments while picking over the carcass of a recently bankrupt company that also seems to have been practicing a bit of its fraud - no reason to assume that GS's dictionary isn't multilingual).

What was going on in Greece is outright fraud - this was pointed out before Greece joined the euro (most certainly in the German media), it was clear it was going on while Greece was in the eurozone (ditto), and now that it looks like Greece will leave/be pushed out of the eurozone, it will be undeniable to anyone holding any financial obligation of that fraudulent system. Which is one reason this was such a giant 'crisis' - an unraveling fraud tends to uncover more fraud.

Just ask MF Global - though I bet their shredders are working with all due diligence as I type.

Are you arguing the Continental Congress was committing outright fraud from 1776 to 1792 when it replaced itself?

The EU governance is a bit more honest than the Continental Congress, and more willing to struggle to make it work than the Continental Congress who wrote a new pact to tax and borrow, and then coerced every State to agree or face trade barriers.

Not quite as they carried over their debts.

But, Greece takes evasion to a higher level.
And, the Romans learned from the Greeks. So let's see what happens in Italy re tax collection and enforcement.

Well, I left Italy out, because it was an open secret that the required numbers were also well seasoned. However, there are a couple of almost trivial differences between Italy and Greece, and not just the fact that Italy is a founding member of the EU -
'According to the International Monetary Fund, the World Bank and the CIA World Factbook, in 2010 Italy was the eighth-largest economy in the world and the fourth-largest in Europe in terms of nominal GDP, and the tenth-largest economy in the world and fifth-largest in Europe in terms of purchasing power parity (PPP) GDP. Italy is member of the Group of Eight (G8) industrialized nations, the European Union and the OECD.'

And though not paying taxes is an Italian passion, the government also has a passion for collecting them. To give a tiny example (I have a bunch, actually - our ERP software also deals with Italian tax regulations, which are unbelievably strict compared to Germany's, as are the penalties for not having immaculate paperwork) - never leave a restaurant in Italy without a receipt, as doing so can lead to a friendly financial encounter with Italian tax authorities right on the sidewalk.

Italy has any number of problems - its entire governmental financial structure being based on fraud and manipulation isn't really one of them. (That its government, as typified by Berlusconi, is a joke hasn't exactly been a secret for decades.)

I recall reading in the 1990s that the estimated rate of American tax fraud was one of the lowest in the OECD. I think only Japan was lower.

Of course, reliable estimates are always difficult for this sort of thing.

Um, in Japan tax fraud is a way of life. There is a reason its an almost completely cash economy.

But the shame of being caught is supposed to be a huge deterrent.

I'd never heard they were a cash economy.

> Italy is borrowing at 6.4% to lend to Greece at 3.5%. this will end well.

Well, this will end.

I've always assumed that France is a book-keeping fraud. Are we any nearer learning whether I'm right?

Well, how about this situation:

The USG runs an annual deficit of $1T+. Of course, every USG check gets paid instead of getting stamped "NSF" and returned.

Does the USG actually sell over $1T of debt per year at 1 - 2% interest?

Nobody has to print money to buy it?

How long does that ride last?

I like how the media is trying to trump up MF Global’s collapse as the canary in the coal mine for the US domino. So they are big, they made risky bets and failed. Kind of like Bernie Madoff ripping off other millionaire investors who believed in guaranteed 20% returns.

The contagion will eventually spread, we can’t be so confident like 2008 where EU was basking in schadenfreude and bragging about the decoupling hype. But obviously Europe will bear the brunt of this problem. At least Europe can't brag about only the US having the Chinese holding debt over our heads anymore. Making political concessions to China will not be a problem for the EU2.

'MF Global’s collapse as the canary in the coal mine for the US domino'
Nope - MF Global assumed that its bets would be covered, in the typical fashion of Wall Street, the City, etc. who have been given a few trillion to help them recover from the Lehman shock. And MF Global isn't the only financial firm that is likely basing its future on the prospect of governments being able to force taxpayers to continue to pay banker bonuses, while perhaps not so coincidentally stealing client money to keep appearances up.

MF Global is a bird of another sort - it is a dead duck, after all. Odds are, the stink from the corpse won't go away that quickly. MF Global isn't about the U.S., really - it is about the entire global edifice. And it provides a convenient reason for such massive American interest in making sure the Greeks, or Greece's putative backers, did anything but default. Mainly, because defaulting could prove to be really contagious - and then where would the bankers get their bonuses, if they can't count on governments ensuring them by going deeper into debt?

I think you mean "orifice."

The solution is to break the banks into pieces that are small enough to fail, and that should have been done as a requirement of the bailouts. If CDSs are causing institutions to become too interlinked, then such should be disallowed -- this is the gov't's anti-monopoly responsibility. The taxpayers cannot become the backstop for massive institutional failures, there's too much moral hazard.

Let's make sure we define which 'Americans' do not want to Greeks to default. Yes, Democrats like Corzine and Krugman and Obama and their fellow-travellers do not want to see the Greeks to default. And the fact that MF Global made large bets on continuing taxpayer funded stimulus is but the surface of this. All of them are really, truly, deep believers that more borrowing, more government control and higher income transfers are *good* and will in the end *solve* this, both in Europe and in the US.

There are many other Americans that are fine with the Greeks and the Italians and California, etc., defaulting, and next year we will probably see how many there are.

"Italy is borrowing at 6.4% to lend to Greece at 3.5%. this will end well.

Interesting claim on Bloomberg this am that the ECB is buying Italian debt to keep the rates that low. Absent such buying, there would be margin calls on Italian debt and forced selling, sending that rate even higher.

"I believe it is now understood in Germany and France that they will be cutting Greece loose"

What happens when Greece decides not to go? As I understand it, there is no legal mechanism for doing that, nor mechanism for changing the relevant law without Greece's consent - short of the extreme measure of creating the Euro 2.0 and not inviting Greece, which would invite many other sorts of trouble.

Greece has banks, including the Bank of Greece, which maintain accounts in Euros. They have printing presses that make new batches of Euro banknotes on a regular basis. They have both the legal authority and the physical capability to keep doing these things indefinitely. What happens when they decide to do exactly that?

Greek default = Greek departure from the Eurozone is, I believe, wishful thinking by the rest of the Eurozone.

That's a good point. If Greece chooses to not follow EU rules, but stay in the EU, what then? Is a Tactical Assault team from Belgium going to attack the Bank of Greece to destroy the Euro presses?

I agree with your point -- I've made it several times myself in past posts -- but it's interesting to think further: what could Euroland and Greece do if Euroland wanted Greece out and Greece didn't want to go? Let's take military solutions off the table.

Cash-wise, it's very difficult for Euroland to force Greece out. Greece has the mints and printing presses, the cash and coins are widely circulated and well-mixed. It would take a long time for Euroland to change its own currency so as not to look like Greece's.

Bank-wise, Euroland is in a better, but still not clearly dominant position. The ECB and other Euroland banks can stop interacting with Greek banks, hindering international transfers. But trade partners could get around this using intermediary banks in the Caribbean or elsewhere, as long as a Greek currency board would guarantee a fixed exchange rate. There are plenty of small countries which have effectively dollar-ized or euro-ized without the cooperation and even against the wishes of of US or Euroland monetary institutions.

Euroland might impose additional trade, aid, and free-movement sanctions to up the pressure on Greece. In the end, I think Euroland could make life hard enough for Greece that it would relent, but if Greece were really willing to endure all hardships, it could stay euro-ized even against Euroland's wishes.

I'm not surprise The Telegraph published this study. However, the numbers do not match, someone else actually did the math and is contesting this study:

"The only way to break out of this cycle is to do something radical to change market expectations"

Magical thinking. Italy's real problems are demographics and sclerosis.

They are going to have to cut. If borrowing rates rise, they need to cut more. If that leads to contraction, they need to cut even more.

Yes, it was very bad for them to get into a position where government is so large that cuts in gov't spending to achieve solvency run the risk of becoming a death spiral, but that doesn't make more of the same a good idea. This is what happens when the parasitic gov't and the host economy become too interdependent, and there is no magic ECB wand we can wave to fix this.

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