Markets are pricing greek debt as defaulted because it's the most rational thing for the greeks to do, and the most rational outcome. Greece holds power over the EU to the degree that its financial insolvency can bring the whole system down. (Technically, it's a power transfer from the EU to US as the fed has already bailed out the EU banks in anticipation of the Greek default)
When you owe the bank $1 million the bank owns you, when you owe the bank $469 billion, you own the bank. The average greek is smart enough to know this and knows that the closer they get to default the better the deal they will get. The banks have two options, get nothing, or get something.
Also, if the Greeks' can't pay at a AAA rating they certainly can't pay at AA rating, nor A, not BB, so the end game for rational thinkers is default because as the rating drops the inability to pay increases. Since Greeks hold EU notes and EU denominated assets they can't even be screwed via an exchange rate mechanism. If Greece defaults Europe basically has to eat it, and it puts Europe in a much worse negotiating position with Spain and Portugal.
Furthermore, with regard to bond pricing there is no such thing as a bad bond, only a bad price, hence they are quickly being priced to zero. It's similar to the whole subprime thing, guys who bought subprime post Aug 2008 actually did alright because the prices were so low that you'd be somewhat likely to get your money back.
Inflation in Greece is currently sitting at 4.5%, so the T-bills are essentially offering a real 8.5%/year ROI. How on Earth is that affordable to them? I get that they need money now, but they can't expect to be in a better position to repay in 2 years.
Also, what happens if (when) Greece defaults? Do the T-bills become worthless, or are they considered a different kind of debt than other national debts?
How on Earth is that affordable to them? I get that they need money now, but they can't expect to be in a better position to repay in 2 years.
They aren't actually paying that. Since the EU/ECB/IMF gave them all that money they have a nest egg and don't have to go to the market and sell more bonds.
AFAIK the 26% is from secondary sales, people who bought a bond before and now, in order to sell it on, have to offer a high rate.
However if the EU/ECB/IMF money runs dry, and they need to go back to the bond market, then this is the rate they would pay. As you said, that's impossible. So if the EU/ECB/IMF money runs dry, they'll default.
Keep in mind that there is no chance in hell that a 2 year bond will actually pay that, they'll default before then, but if you really want to, get one from a primary dealer.
To retaliate against this, can't the EU threaten to kick Greece out of its system while force-converting all their EU-denominated assets into a newly setup Greek currency. (We can view this as the default of their agreement to support Greece--in response to the Greek refusal to pay off its debt.) The new currency will immediately weaken significantly, basically forcing austerity measures onto the whole economy. When the Greeks are on their own, without having EU as their sugar daddy, they will have to absorb (or receive) the direct consequences of their actions--whichever fiscal/monetary path they choose to follow.
The technical issues of force-conversion of currency their assets are denominated in are probably quite immense, but it is better than losing hundreds of billions of dollars. Moreover, if it can be done, all other troubled economies in Europe will have much greater incentives to follow any rules set up by the EU.
That would not solve the problem. Greek would still not pay they money back to the French and German banks they took it from.
The EU has to get Greece on track, and this is a good moment to do it. Greece has lied (falsified financial data) to get into the euro, and their internal economic system is not sustainable. These will be tough year for Greece but at the end they will be better off.
Can their sovereignty be weakened? As in the French and Germans slowly just taking over Greek institutions. (As in since you can't get the taxes yourself, let the Germans run the police and the tax office?).
There were snide remarks and suggestions a while back of them selling off islands? That might work.
Then I wonder how would the Greeks pay the money back anyway. How much feta-cheese and tourism can they sell? At some point the interest rates are just to high for them to even touch the principle when paying back, even if they start to double their feta cheese production and start actually diligently paying taxes ...
Nobody in France or Germany will be remotely interested in "taking over" Greece. Its like saying "hey, I got here a bucked of problems, want them?" Well, no, thanks!
The sovereignty of all European countries is "weakened", that's the whole idea of the euro. There is another level of supervision, and that is really good. Not only in Greece, also e.g. Germany constantly gets told from EU institutions or the EU supreme court to change laws and regulations or to watch the deficit, etc. That's a good thing. Of course the politicians don't like it, takes away some of their power.
Greece has vast opportunities, if they would get their stuff together. Solar power alone could be a great industry in Greece. There is a plan called "DeserTec", with several large EU corporation planing to install a hundred billion in solar cells in Northern Africa. If Greece was smart, they would jump on that train. But they are not, apparently. Its easier to borrow money and whine on payback time.
> Nobody in France or Germany will be remotely interested in "taking over" Greece. Its like saying "hey, I got here a bucked of problems, want them?" Well, no, thanks!
Well if they have islands that can be used for military bases, or agricultural lands that French farmers can use and so on. Setting a German company in charge of collecting taxes for example and making a profit. These are all draconian measures that basically are one stop short of invading the country, but I am thinking more if this is what is left as a solution. Lending them more money implies having faith that they will be able to pay it back, if that faith is gone, and they cannot be expected to pay back, the the lenders would probably like to get something else back at least, so have them sell their assets (land, control, power) ?
Half of the farm land in Europe is unused because of over production, dude. And if they wanted to use "Greek islands for farmland" (LOLOLOL) they could just buy it. That's not a matter of sovereignty. "A company in charge of collecting taxes"? Herpderp! This is not the US with private prisons and such stupidities. You are writing a real heap of nonsense here.
Lending them more money is giving them a chance to get their stuff on track. Better checks and balances. A greater awareness of civil responsibility of each individual, etc. Basically, the stuff that made Northern Europe (and the US/Canada) economically strong. Look up "Social Capital" if you are interested in development policy.
Yes, we have. Germany took over Eastern Germany just 2 decades ago and paid huge amounts of money to get the East to a more or less equal level. The result is that the old communists that had destroyed Eastern Germany, today still get over 30% of the votes by people without memory.
Its no use to help people from the outside. People must learn to run their own countries themselves.
In the case of Greece, they have to learn to not cheat to get money from Europe (like they did to get into the Euro Zone) and to pay taxes if they want that the government does stuff. Especially the wealthier people in Greece seem to be extremely selfish in that regard.
As far as I know, Germany did some nasty things while overrunning East Germany: Like, they replaced the staff of East Germany universities with West professors, throwing East professors out. Also, when choosing whether to bankrupt some East factory or refit it, they almost always chose to bankrupt (think Trabant)
And concerning "old communists that had destroyed Eastern Germany" - Eastern Germany was, like, the richest communist state. It wasn't politically free, sure, but it was fine economically.
Now, why would you expect people "without money" who did have the money (and job, and their life) before reunification, not vote for who they vote for?
They kicked communists (usually agents of the Stasi, the secret police) out of government jobs, most of those had gotten the job because they were party members. That is hardly "nasty". The other way around would have been nasty.
Would you want Gaddhafi's son to keep his military pay after the regime has been overthrown?
If you deprive reasonably successful people of their jobs (and therefore self-respect, identity and lifestyle) - surely they would be bitter and revisionistic. The fact that you-ve tossed them a bone and they aren't starving won't help much.
Disgruntling teachers and workers would not get you much popularity. People would vote for anyone who is not responsible for that. You insisting that anyone who suffered was a putrid Stasi agent would certainly make matters worse.
If two Koreas one day would unite, this would be their second severe problem after economy.
And by the way I don't understand why you assume I support the invasion of sovereign country that is Libya and installing some puppet government there. Of course I don't.
Tell that to the people who vote "wrong".
And we'll see what they'll tell you.
Of course when we see an intervention of a country, it's a total and complete responsibility of interventor to preserve any economic and industrial infrastructure.
Trabant wasn't bankrupt in East Germany.
It was bankrupt in Germany.
Who do you think is responsible for that?
Trabant went away because their product had exactly zero chance of competing in the market. A trabant was barely even a car in comparison to, say, a honda or VW. Trabants had more in common with lawnmowers, both in terms of mechanics and in terms of production conditions.
And your assumption that trabant's factories could be refitted in any way is quite a stretch. Would it really be cheaper to modernize a factory that's 30+ years out of date, rather than start over with a new building? And what would be the point anyway? Just jobs? Would not the investment be better targeted at infrastructure, mass transit, job training, etc?
I didn't say that this question has a determined answer.
What I did say: People are rightfully angry because their life was screwed by something not in their control.
It's been twenty years since the Germany reunited; Whatever problems still remaining at the former East Germany, probably aren't caused by communists anymore.
That's probably exactly what the greeks would want, except they would add one step to this: default on foreign debt. With a weaker currency they would be very competitive and with 0 debt even more so.
It's pretty risky though:
1 - the EU and others could erect trade barriers after such a default
2 - the rest of the EU could collapse with them, which means they won't be buying much stuff either
I don't think the Greeks would like to have their currency badly weakened. Any imported goods will become much more expensive and their exports will earn them much less income. Everyone, the rich, the poor, the politicians, will be affected. Basically most of them will need to be more frugal, something they are protesting against.
Also, in 2010 their import is 44.9 billion dollars twice the amount they export, 21.1 billion. Even if their exports go up because of weaker currency, the pain from higher import prices will be much worse than the rises of income in the short run.
Your consequence number 1: trade barrier is an interesting possibility, but 2: the collapse of EU is unlikely to happen given that the Greek economy is only 3% of EU, and this strong measure will have threatened other troubled economies enough they will be much less likely to default and cause more issues. The measure might in fact prevent the collapse of EU at least in the short- to medium- term.
Weak currencies have worked great for countries like China. It creates a lot of employment for export. It's a way to trick people into working at lower salaries I guess, a way to lower minimum wage yet give people the impression that it goes up (inflation has a similar effect).
More jobs has a strong political effect too; people will probably tolerate more austerity if it's not combined with unemployment.
The article explains pretty well in my opinion why that 3% is very capable of collapsing the rest of the EU. If Greece defaults, investors lose their money. That's not too bad (although there could be a domino effect with banks), however investors will also start worrying more about a default of Ireland and Portugal, followed by Spain and Italy. Such worry translates to higher interest rates leading to the horror scenario of Spain needing a bailout (which noone can afford to give them).
Anything that amounts to Greece not repaying their debts, will be considered a default by the market, likely leading to what I described in the above paragraph.
Greece, for all its issues, is a much richer country than China w.r.t its population, you cannot compare those countries. For greece, devaluation would mean that imports would become much more expensive, a state almost unable to borrow any money, etc... It would be even worse than it is now. China does not need to borrow much money on foreign markets, and it is not democratic (the Chinese gvt would never tolerate the strikes in Greece, most likely would have sent the army).
Default is the only realistic option, but Germany and France refuse it for political reasons. The other reason is that a lot of Greek debt is owned by banks from those countries: selling banks bail-out in France or Germany is not that much more popular than in the US nowadays.
Germany is also doing well with a devalued currency. If Germany still had the Mark, instead of the Euro (which is being devalued by all these crisies) it would be higher than the Swiss Franc right now.
By which measure is Germany doing well ? Its gdp increase has been anemic for years, and is for example not significantly different from France, which is rarely given as an example of growth rate those days: http://www.google.com/publicdata?ds=wb-wdi&met_y=ny_gdp_... (the numbers stop around 2009 unfortunately, but the effectively devaluation policy of Germany started with Schroeder coming in power long before the crisis).
What is true is that Germany has put in place a devaluation strategy (by reducing wages instead of devaluating its money), but this has been a catastrophy for Europe as a whole. "Real" gdp growth comes from increase of productivity: devaluation helps hiding this for some time, but not that long.
It's only a good sign if the government is not a big employer (directly or indirectly though subsidies, trade barriers, etc). I don't know enough about the German economy to know if that's the case here.
There's no mechanism, so it would probably need some sort of vote. This would take too long, and the plan would probably leak, so the Greeks would have time to cash out all their EU assets.
If the EU coordinates with the US, Japan, and all larger economies (perhaps via IMF), couldn't they still force Greek out of any currency their assets are cashed out into? The incentives of other countries to go along is the prevention of contagion economic depression.
Of course, Greece could still convert them into a currency not controlled by this coalition (Zimbabwean dollar? ;-)), but small currencies in this role cannot support Greek economic downfall and will be significantly affected by Greek economic results. This will still accomplish the goal of getting Greece to take responsibility for their economic decisions. (If the only choices are smaller currencies, Greece will probably choose to set up their own currency instead.)
If Greece could go out of the euro without a spillover effect, i would support it. Unfortunately, the decision is to keep greece in a zombie state, barely paying its debt for 2 more years. I don't even think there's a plan after that.
If Greece defaults, it will go down the drain badly. They will not get out of this as good as Argentina did. With no significant exports (that the EU doesn't pay for with subsidies) and living from subsidies and dept over the years, there is no chance for progress. With real riots in Greece, Spain and Portugal will think twice. This will get Spain and Portugal get their job done, not giving Greece more money.
That said, the best would be to inject more money beside the debt into Greece to start some recovery. Given, Greece did cheat on the EU in the past concerning EU money, nevertheless this should get out Greece faster.
When you owe the bank $1 million the bank owns you, when you owe the bank $469 billion, you own the bank. The average greek is smart enough to know this and knows that the closer they get to default the better the deal they will get. The banks have two options, get nothing, or get something.
Also, if the Greeks' can't pay at a AAA rating they certainly can't pay at AA rating, nor A, not BB, so the end game for rational thinkers is default because as the rating drops the inability to pay increases. Since Greeks hold EU notes and EU denominated assets they can't even be screwed via an exchange rate mechanism. If Greece defaults Europe basically has to eat it, and it puts Europe in a much worse negotiating position with Spain and Portugal.
Furthermore, with regard to bond pricing there is no such thing as a bad bond, only a bad price, hence they are quickly being priced to zero. It's similar to the whole subprime thing, guys who bought subprime post Aug 2008 actually did alright because the prices were so low that you'd be somewhat likely to get your money back.