Greek Yields Soar
Greek 10-year bonds tumbled for a third consecutive day; yield jumped 58 bips 10.34% according to Bloomberg.
The EU revised Greek budget deficit above 15% of GDP. In a leading contender for understatement of the year, Finance Minister George Papaconstantinou said the nation had serious tax compliance issues.
Thus, the ongoing European drama between Greek tax scofflaws, German Industrial financiers, England/Ireland recession continues to play out — pressuring futures, widening spreads, and to leading towards the eventual denouement. Its hard to see how Greece avoids a Restructuring — which, truth be told, is merely a polite word for Default.
The most efficient productive player in Europe is Germany; they benefited the most from the dropping of trade barriers and the replacement of the strong Deutsche Mark with the Euro. (Plus, they absorbed all the cheap labor they needed when they were reunified with East Germany). Selling into the rest of Europe without the drag of a strong currency or any trade barriers has been a boon for Germany.
The calculus about any Greek default restructuring is the Moral Hazard threat. If the terms are too easy, it may encourage the remaining PIIGS — Portugal, Italy Ireland Spain — towards default restructuring their debts.
I place the survival of the EU in its current form at 50/50 . . .
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October 27th, 2010 at 7:33 am
still bullish BR?….no QE 2 next week…..fed is on ropes….besides they will take position, why not do it with words instead of action…moral suasion worked so far…but the reality is not for much longer…..put ur helmet on and get ur clients back to overweight cash…this is going to get bumpy
October 27th, 2010 at 8:30 am
Although I would agree that there is a significant probability that the EU in its current form will cease to exist at some point, I believe that there are steps that will be taken to prevent major changes in the near term….ultimately, however, the ‘soft landing’ scenario I believe to be the likely outcome now, could be jeapordized if the current Greek government were to fall or not receive a clear mandate in the next election.
1. The Greek problem is really an EU banking problem:
The short term and likely solution is for the ECB to retain the loose monetary policies necessary to recapitalize the banks (low interest rates so banks make money + loose repo policies so they can fund)… so that when the day comes for the banks to take a haircut on their Greek debt they can do so without serious harm to their equity bases or competitive positions.
2. Greece & its debt are small relative to the Euro area as a whole….say euro 500 billion which I believe is not more than 2% of the total euro area….(google “greek gross external debt” to pull up the spreadsheet from the bank of greece)…If monetary polocies cushion the effects of writedowns of Greek debt, then ultimately there will be much less fear of contagion….
3. The EU is a political construct which Germany and France most likely will not allow to fail, however, with anything political, there are risks — part of the reason for the Greek bond selloff is recent political posturing by the Greek Socialist government (and unfavorable economic data), who need more of a mandate to continue their current policies.
If the Greek Socialist government were to fall, this would probably force Germany and France into an as yet undefined “Plan B” – the uncertainty of which could cause a second panic selling of Euro bonds…..
As long as the Greek government is stable, the risk of contagion is reduced significantly…..
October 27th, 2010 at 8:36 am
Hey Barry, maybe someone should ask why all those Greeks not paying taxes hasn’t resulted in a dramatic turnaround in their situation, cuz, as Jomentum stated on behalf of his Bridgeport/Greenwich constituency, “the more money we leave in private hands, the quicker our economic recovery will be.”
October 27th, 2010 at 8:46 am
Denouement – first I’ve seen that term used in a financial blog/pub congrats on raising the level of discourse here.
If they impose tough terms on Greek restructuring that will just lead to additional restructurings in the future – which is a variation of kick the can. Lots of cans clattering down the road the past two years.
US banking/mortgage can, Euro can, various China bubble cans, just a question of which can hits a landmine first.
October 27th, 2010 at 8:52 am
Someone, will cry uncle first – My bet is on the Greeks first, then the Italians and Portuguese. When that happens, the Eurozone as we know it is toast. Where do we place the over/under? I’m with Barry on this one. No way that a union can continue to exist, when there is such massive economic disparity between member states….bring back the Drachma.
October 27th, 2010 at 9:02 am
In a similar scenario, I wonder if the US Federal government is going to bailout the PIGS of the US like California, New York, New Jersey, Illinois… If it does, it encourages the states to spend like drunken sailors, if it doesn’t the states will be put in finance jail and they won’t be able to affordably borrow on needed expenditures.
October 27th, 2010 at 9:08 am
My question of course, is the magical one….When does this EuroZone death occur? I know it won’t occur all at once, as I expect one of the PIIGS starts toward default, then rumor of another, then we have an unraveling that plays out over 8-12 months, followed by 18 months of Euro-arguing over how to do things next.
So, the over under on the event is 50/50…What’s the timing? That’s how the money is made or lost, after all.
October 27th, 2010 at 9:11 am
stonedwino:
Ireland will default at some point. Talk about a corrupt group of politicians. For all the problems with out bank bailouts, theres was 10 times worse.
October 27th, 2010 at 9:12 am
Hardly surprising development…all eurozone countries had done so far is buy time, kick can of worms down the road. Just cannot see Greece, for instance, being able to reduce its debt burden sufficiently to be given access to market debt on a long term basis. Spain , Portugal, Irelands problems will only get worse too. As Stiglitz, amongst other economistcited here http://www.mindfulmoney.co.uk/1767/economic-impact/all-eyes-on-germany-as-eurozone-crisis-rumbles-on.html
it is probably best if Germany exits eurozone let the runts sort themselves out on terms that are more sensible and realistic. I seem to recall many economists warning of precisely such dislocations/shocks for eurozone countries, forcing catastrophic failure of the whole ridiculous project.
October 27th, 2010 at 10:28 am
Sign Greece up for a HAMP mod?
Collect the incentives from the ECB, then we kick them out later and charge them interest and fees.
October 27th, 2010 at 10:48 am
You might find this funny. I do.
I left the UK, part of the EU, many years ago and became a non-resident for tax purposes, although having paid multo-taxes before I left.
I then had no access to UK rates for University education for my kids (About one third of the USD 30K per yaer per kid that I paid, plus accommodation and travel costs to Asia 3X yearly). No problem with that because I can provide.
The funny part is that, as explained to me, despite the fact that I am a UK citizen, I cannot get access for my kids but, and this the interesting part, had I been Greek, my kids would have been subsidised to attend UK Universities because ” All EU citizens pay EU Taxes” Yeah right!!!
SO the G8 is paying to educate others, essentially.
Now, yes, whilst I understand the counters, does this truly make any sense actually?
It’s (Almost) enough to drive me to the UK Cup-of Tea Party?!!
October 27th, 2010 at 11:24 am
Survival of the EU depends on Germany. And the Political situation therein. The German people, unlike Americans and Greeks, are very thrifty and safe, It;s in the best interests of the average German to let Greec go down the flusher. Then holidays in Greece will go back to the (Low) cost they were before, which was Greece’s USP. Moral of the story: Governments stay away and don”t meddle?
October 27th, 2010 at 11:45 am
philipat –
I agree with you that ultimately this is a political issue, however, Germany will not let Greece back out of the Euro if it means that German banks will take too much of a hit to their capital as a result of holding Greek debt…..
October 27th, 2010 at 12:12 pm
Quite funny how he left out the problem with spending and focused on “serious tax compliance issues”. Seems that Greek citizens are paying more in taxes compared to 3 years prior… no idea how the tax base for the population has changed in that time. I couldn’t imagine that the falloff in receipts over the past year might have something to do with unemployment.
[http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-EK-10-001/EN/KS-EK-10-001-EN.PDF]
% change 2009/2006 Revenue (euros) = 87,546/82,730 = 105.8%
% change 2009/2006 Expenditure (euros) = 119,654/90,816 = 131.8%
October 27th, 2010 at 12:14 pm
All this financial , drama in the west EU/USA (greece/QE 2) …. makes me wonder when something else is going to drop .. war/police action to keep EU together or maybe even here
jschmid -
“In a similar scenario, I wonder if the US Federal government is going to bailout the PIGS of the US like California, New York, New Jersey, Illinoin”
its a bit more complicated
I dont think its a fair comparison to the EU PIGS.
While those states budgets are most underwater, what they put in to our Federal Governments coffers is more than there share. I do agree those states are very irresponsible , financially.
http://www.taxfoundation.org/research/show/22685.html
October 27th, 2010 at 12:18 pm
BTW, Ireland’s “austerity” is, in aggregate, a farce. (Same link as above) Their social programs by themselves account for approximately half of the annual expenditure increases.
2009 Expenditures (euros) = 79,166
2008 Expenditures (euros) = 76,369
2007 Expenditures (euros) = 69,359
2006 Expenditures (euros) = 60,861
October 27th, 2010 at 1:36 pm
[...] Greek crisis moves back to the front burner. (Big Picture, Money [...]
October 27th, 2010 at 1:47 pm
The EU countries have the same problem as US. Regular people worked hard and paid their high taxes with the promise that when they needed social programs (got old or sick) those programs would be there for them. Now they are told “sorry no can do” (have to give the rich another tax-brake).
In the US this transfer of wealth from the middle class to the rich is a little more obvious because we have two tax-systems. One regressive system for social security which is helping the sick and poor old folks survive, but also exclude high earned income and all investment/inheritance income from paying for this government function. This system (taxed out of middle class peoples income) is in great shape, with a huge trust fund ready to cover its deficits for the next 3 decades. The other tax system pays for all other government functions and is levied on all types of incomes with a progressive rate system (making sure that the biggest shoulders carry the bigger loads). That system has for decades been underfunded (= undertaxed) resulting in huge deficits, that were covered by loans from the regressive social security tax-system.
Now when the regressive tax-system is no longer producing big surpluses that can cover the extreme under-taxing of the rich in the progressive tax-system, we have calls for reducing spending in this healthy solvent social security system so the rich a$$es can once again rape the progressive tax-system with a tax-cut for themselves. In Greece (where the wealth transfer was covered up better) they understood it and had riots in the streets. Here in the US the party that most is strongly pushing for this blatant transfer of money from the middle class to the rich is amazingly enough about to win an election.
October 27th, 2010 at 2:12 pm
I paid a lot of social security taxes all my life and now [GOPster name] want to cut my future benefits, to cover a tax-cut for the Wall Street millionaires!!!
Hell no [GOPster name]
Sincerely,
DeDude [Pissed off middle class taxpayer]
October 27th, 2010 at 2:56 pm
Ah to return to the simple days when Greek yields meant how much olive oil came out of the press!
October 27th, 2010 at 3:04 pm
How is the Social Security tax regressive when there is a maximum benefit? If the cap on taxable income is raised will benefits also be raised?
October 27th, 2010 at 6:47 pm
It is regressive because it leaves the really rich rent-seekers (who’s income is not pay, but capital gains) completely off the hook for paying anything into the program that keeps over 90% of the poor housed and feed. Yes you are right that the middle class 110K/year person has a worse “pay-to-benefit” ratio than a 30K/year person. But that 110K/year person also pays a substantially higher % of his/her income to subsidize survival income for the poor than a 550K/year person because in spite of the 5 fold higher income he/she pays the same amount of social security tax (the more you earn the less your relative contribution even if your income is of the highly taxed type that we slap on income from real work).
October 27th, 2010 at 7:29 pm
DeDude I agree that letting hedge fund managers get capital gains treatment on their fees is obscene but I also suspect there are very few people whose income is only capital gains and thus escape FICA taxes. You still have not answered my second question. Social Security was setup to have benefits proportional to payments so it would not be a “welfare” program. Changing that is just the same as changing anything else. If you don’t like it, I suggest you hike up to Hyde Park and complain to the creator. He will give you all the time you want, he’s not goin’ anywhere.
October 28th, 2010 at 2:24 am
Tax Shortfalls Spur New Fear on Europe’s Recovery Bid
The mathematics of austerity are getting harder.
With economic conditions weaker than expected, tax revenue is coming up short of projections in parts of Europe. As a result, countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year by impatient bond investors.
Greece, for one, looks as if it will run a budget deficit for 2010 greater than the 8.1 percent of gross domestic product it agreed to as part of a rescue package from the International Monetary Fund and the European Union that amounted to more than $150 billion, according to a person briefed on the matter but not authorized to speak about it.
The adjustment, at worst, would result in a deficit of 8.9 percent of Greece’s output, this person said. Normally, such a small difference would not be cause for alarm.
But after the latest upward revision in Greece’s 2009 deficit — to about 15.5 percent from 13.5 percent of output — the miss has spurred investor fears that the Greek government will be unable to close the gap and that Greece may ultimately be forced to restructure its mountain of debt with foreign investors.
As word seeped into the market on Wednesday, Greek 10-year bond yields jumped to 10.3 percent, from 9.3 percent. That more or less reversed what had been an impressive bond market rally, when yields fell from more than 11 percent to just under 9 percent over the last month. The cost of insuring Greek bonds against a possible default also rose.
October 28th, 2010 at 10:25 am
Regarding your second question about effects of raising income caps on benefits.
The current formula gives a smaller “return” in benefits to the last dollar contributed by people with high income than on the “return” in benefits of the last dollar contributed by people with low income. Unless that rule is changed then an increased contribution from the people with above current cap income would give those same people a somewhat higher benefit.
October 28th, 2010 at 10:40 am
Social security is in many different ways a “welfare” program where some people get a lot more out than they paid in and others get a lot less out than they paid in. Think about disability benefits to people after a short period of paying into the system (and if they are kids even without ever paying anything into the system). But the cost of this “welfare” (I prefer to call it a social unrest prevention program) is proportionally carried a lot more by the middle class than the rich.
October 28th, 2010 at 12:06 pm
1) Social Security is based on wages. FICA taxes are collected on wages and benefits are based on them. Other income is not taxed nor are benefits accrued to them. If your entire lifetime income is capital gains then you will pay no FICA taxes but you will also, because there is no minimum benefit, not recieve any payments.
2) Social Security was built to fail. The trust fund should have been privately invested from day one. Not in stocks but in corporate bonds. This would have kept the funds safe from Congress and produced real profits rather than the phoney IOUs it now holds.
3) You may excommunicated from the church of the left for admitting the program is a form of welfare!