Greece: the next Argentina?

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machinehead's picture
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Greece: the next Argentina?

In a Bloomberg article today, a fund manager is quoted, comparing Greece's current dilemma to that of Argentina a decade ago:

April 7 (Bloomberg) -- Greece may default on its debt as early as this year without “extraordinary” financial assistance from the European Union and International Monetary Fund, said Stephen Jen at BlueGold Capital Management LLP.

The challenges facing Greece are similar to those that confronted Argentina, which defaulted on $95 billion of debt in 2001, as the government enacts austerity measures to narrow the European Union’s biggest budget deficit, Jen, managing director at the hedge fund, said today in an interview in London. That may drive the Mediterranean nation into a recession, he said.

“A default may be ultimately unavoidable,” Jen said. “That eventuality may only be postponed by aid many times bigger than the 25 billion euros ($33 billion) people have in mind.” Any assistance needs to “impress the market,” he said.

http://www.bloomberg.com/apps/news?pid=20601087&sid=avRBqpfKf4lA&pos=3

Jen's analogy potentially is a good one. During the 1990s, Argentina linked its peso to the U.S. dollar, at a one-to-one exchange rate which the government promised was fixed forever. Like Greece in the pre-euro days, Argentina had been a chronic devaluer, compensating for domestic iinflation by weakening its currency in order to retain a semblance of international competitiveness.

Suddenly changing its character to a 'hard currency' country brought several changes to Argentina. For one thing, foreign capital poured in, impressed by the 'one-to-one' guarantee. International credit was readily available. However, in a nation where consumers traditionally had resigned themselves to inferior-quality domestic goods -- since the old, unlinked peso had little external buying power -- the new dollar-linked currency produced a surge of imports, financed by international, dollar-denominated debt.

Meanwhile, the domestic economy stagnated: it was only globally competitive in agricultural exports, such as meat and grains. The manufacturing sector wasn't even on a par with the neighboring regional giant, Brazil. With the added handicap of a strong currency, it continued to contract.

As a result of its overvalued currency, the booming Nineties were largely a lost decade in Argentina. Debt-fueled consumption maintained the illusion of economic health, but there was little indigenous growth. When the Argentine economy slid into recession at the end of the 1990s, the authorities found themselves in a hopeless vice. They could not slash interest rates or devalue the currency to boost the economy, because it was tied to the U.S. dollar. But the debt load quickly became crushing if the economy couldn't grow its way out of it. When lenders caught on to Argentina's debt trap and shut off the taps, the economy wilted and the weakest links had to give: the debt servicing and the dollar peg both went by the wayside, in an epic default which ended up slashing the peso's value by two-thirds.

Like Argentina then, Greece now is trapped within a hard currency regime which suits the needs of a globally competitive exporter, Germany. In most respects, the small Greek economy is not internationally competitive. But having a strong currency has encouraged taking on debt to buy imports. Now the debt load has become crushing; lenders are demanding penalty rates; and austerity measures are cooling the Greek economy.

The EU, in concert with IMF, has the financial capacity to bail out Greece if it so chooses. But when excessive debt is the problem, piling on more debt is no long-term solution.

If a bailout doesn't happen, or fails, then in Greece as in Argentina, the weakest links must give: the debt servicing and the currency peg. Once more in the azure-walled ouzo parlours, they'll be serving drams for drachmas. Oupa!

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Re: Greece: the next Argentina?

MachineHead-----thanks for the fix, please stick around some more...

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Re: Greece: the next Argentina?

William Watts at Marketwatch has some further enlightening commentary on the Greek crisis:

LONDON (MarketWatch) -- With the European Central Bank virtually certain to leave interest rates unchanged for months to come, the onus Thursday will be on Jean-Claude Trichet to use his monthly news conference to reassure investors that Greece can survive its chronic debt woes.

The ECB Governing Council is widely expected to leave its key lending rate unchanged at a record low 1% for the 11th consecutive month on Thursday. Trichet is likely to repeat that Greece has taken courageous steps to bring down its budget deficit and that the prospect of a default or of a country ever leaving the euro zone remain unthinkable, James Nixon of Societe Generale said.

At the same time, "I think we're beyond the point where mere words will actually do any good," Nixon said.

http://www.marketwatch.com/story/greek-crisis-to-leave-ecb-on-sidelines-...

Here is a sad example of the effects of politicised currency and centrally-planned interest rates: namely, the tail wags the dog. Both in the U.S. and Europe, policy rates are being held abnormally low as a crutch for badly wounded borrowers. Absent Greece, the ECB might well be raising rates by now. But monetary policy has become an equal opportunity bicycle tour in which the slowest pedaler sets the pace for the whole group.

Poised to take advantage of this lending-rate distortion (which rhymes with Mad Maestro Greenspan's zero-percent fiasco of 2003-4) is the leveraged speculating community. Thanks to the jakeleg, dark-of-the-moon registration of Goldman Sachs and Morgan Stanley as 'commercial banks' after the Lehman crisis, these securities swindlers now have a direct pipeline to the Fed's 'free money.' And through broker loans, they can not only make a fat markup, but also pass it on to all the punters, playahs and poobahs from Milwaukee to Marrakesh.

I can't speak for this rum lot, but if I were them, I'd be using my wad of interest-free loot to lock up all the farmland, natural resources and gold I could get my hands on. It costs nothing to hold it, but the action in crude oil and copper already suggests that when the global economic slack gets taken up, food, fuel and materials are going to spike our tender patooties like a booby trap made of sharpened bamboo stakes. Watch your back!

But that's not all. The late Bubble II was all about using financial alchemy to turn dodgy securities confected from housing bubble liar loans into real spending money. Well, in yet another tail-wagging-the-dog riff, the ECB will be happy to accommodate the next verse of the old junk-to-jewels swan song:

In a move widely seen as a bid to help take pressure of Greece's banks, Trichet last month told the European Parliament that the central bank won't revert to tougher credit-rating requirements in 2011 on collateral pledged for loans from the ECB.

The minimum collateral requirement was dropped from A- to BBB- in October 2008 as the financial crisis took hold. The requirement had been set to revert to A- at the end of this year.

The decision to maintain the looser collateral requirements was "quite a U-turn" by Trichet, who had previously insisted the ECB wouldn't change its plan to bring relief to a single country, Marco Annunziata at UniCredit Group said. The move came amid fears that further downgrades of Greek government debt would eventually make it impossible for Greek banks, which hold large chunks of government debt, to access ECB loans -- potentially laying the ground for a future financial crisis.

Lovely -- save Greece, at the cost of peculating the speculators. If I were a world-destroying hedge fund honcho, I'd fudgepack the ECB with crap debt until it exploded in an almighty chocolate mess. Then I'd cash in my credit default swaps and look for a new planet to despoil.

GOT GOLD? Laughing

 

 

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Re: Greece: the next Argentina?
Davos wrote:

MachineHead-----thanks for the fix, please stick around some more...

You'll be sorry! Tongue out

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Re: Greece: the next Argentina?

MachineHead-----thanks for the fix, please stick around some more...

+1.....let us be sorry LOL.

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Re: Greece: the next Argentina?

I second the 'keep it coming' remark.

Jim Sinclair seems to think that Greece is very important as well. He believes we will be seeing $200 gyrations in gold if Greece debt collapses.

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Re: Greece: the next Argentina?

You've been sorely missed Machinehead.

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Re: Greece: the next Argentina?

I heard rumours you were somewhere in Mozambique living on a coffee plantation, Machinehead.  Weird. The internets--gotta love it.Tongue out

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Re: Greece: the next Argentina?

"“The impact of it is enormous, because it means any central bank assets anywhere can be seized by our clients,” said David W. Rivkin, a lawyer for EM, which has a judgment against Argentina for defaulting on bonds.

The freeze was sought by bondholders who won hundreds of millions of dollars in judgments against Argentina stemming from a 2001 default. EM is owed about $800 million, Rivkin said. "

machinehead's "Got gold?" comment says it perfectly.

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Re: Greece: the next Argentina? - Thoughts from "ground zero"

I have lived in Greece for 40 years and I can tell that the last 10 were full of the "prosperity" offered by the strong Euro currency.

It is true that the situation of Greece in 2000s resembles Argentina of the 90s; I have discussed it  with people from Argentina and the similarities are striking. As I am old enough to remember the life here before Greece joined the EU in 1981, I will flashback to late 70s to describe reality of growing up in a small town at the poorest continent of Greece (and possibly of all EU) at the time, named Epirus:

- No supermarket in my hometown until early 80s. No serious need for fridge either, as fresh groceries, dairy, meat and fish were available at open market daily - within 500m of everyone's home.

- Few people had cars or color TVs at the time. They were considered luxuries and were very expensive relative to average income.

- Everybody that would like to travel abroad was allowed up to 300 USD per person (!)

- No locked doors and no violence - police people were making a very easy living back then.

- Monopolies of the state still existed for some goods (matches and lamp oil !) and import of bananas was forbidden. I swear that the black-market bananas that we were rarely eating back then had a better taste than nowadays :-)

- Watching the american TV series of that time, all kids were aspiring to the big city life (Athens), with the skateboards, walkmans, cameras and, later on, disco clubs.

- My father was a school teacher then and his salary alone was enough to support a family of five.

Right after Greece joined the EU at 1981, I noticed something that could not explain at the time: miles-long line of trucks, dumping the local orange crop to bury them and actually get paid subsidies from EU for that. The explanation I got from the adults at the time was that this action was taken to prevent price collapse of oranges at other EU countries. Later in my life I read the "Grapes of Wrath" by Steinbeck and there was a same story there: burying peaches to counter the great depression effect on prices. As one local reporter recently argued: the game ended when Greece, with the best climate in south Europe,  had tomatoes imported from ...Belgium.

It is now clear that EU had provided Greece with a "life support" mechanism for the last 3 decades. We once were a poor country that could sustain a decent living. Then came  EU funding for development projects, that was unfortunately redirected to few select pockets.

If an Argentina-like collapse is coming our way, I hope it sends us back to the "poor" 70s. I still have some drachmas handy.

-=dchrys=-

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Re: Greece: the next Argentina?

Thanks, dchrys. You describe a situation which applied to pre-euro Greece, and applies to parts of the developing world today -- that is, a relatively attractive standard of living on a PPP (purchasing power parity) basis. This can be so, even if international, hard-currency statistics indicate a relatively poor economy. Fresh, locally-sourced food is one of the healthy indicators of a relatively self-sufficient, non-globalised economy.

Limits on imports, and on the amounts taken abroad for tourism, were aspects of capital controls. These once were widespread in postwar Europe. Under the Bretton Woods fixed exchange rate system which prevailed until 1971, countries had to balance their trade, unless they could borrow the shortfall. If they couldn't export much, then they couldn't import much, either. Britain exported MGs and Austin Healeys to the US in the 1950s to earn desperately needed foreign exchange. British citizens, limited to risible sums of pounds sterling on trips to the continent, became expert raconteurs in order to cadge dinner from charmed locals. Thus the burden of balancing trade was democratised.

Globalisation is getting a bad reputation because the fiat currency regime which underlies it is fundamentally unsound. In the run-up to the introduction of the euro currency, tremendous speculative profits were made in the 'convergence trade.' It consisted of buying sovereign bonds of the southern European countries, denominated in drachmas, lire, pesetas, and escudos. As these minor-league currencies converted into safe, liquid euros, the formerly high interest-rate premiums on southern European bonds shrank to the vanishing point. Those who had the capital to put on this government-sponsored trade in size made a mint.

Now, there could be a 'deconvergence trade.' But since governments will be fighting it, it's both far more uncertain, and yet far more profitable if governments throw in the towel. After all, Soros made a fortune by 'breaking the Bank of England' when it devalued.

The ugly aspect, as compared to former times, is that the numeraire -- the unit of counting -- is not a timeless asset such as gold, but a precarious debt derivative called currency. Unredeemable currencies are 'backed' mostly by sovereign debt, which in turn is to be extracted from the blood, sweat and tears of the hapless people -- that is, if they don't revolt against their hopeless debt enslavement. This system is called neofeudalism. Technology can't save us: the same high-speed internet which frees our minds, empowers our overlords to efficaciously extract payment on their metastasizing intergenerational blood debt. Not a pretty picture, overall. Astral travel is looking like a good option at this point.

 

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Re: Greece: the next Argentina?

 

Thursday morning -- this is getting seriously ugly:

April 8 (Bloomberg) -- Greek bonds dropped, sending the yield premium over German debt to the widest since the euro’s inception, and stocks tumbled on speculation that the bailout of Europe’s most indebted nation will unravel. The yen rallied.

The Greek 10-year spread to benchmark German bunds widened to 440 basis points at 11:52 a.m. in London. Greece’s ASE Index of stocks slid as much as 5 percent, the most in four months, and the cost of insuring against a default by the nation climbed to a record.

Declines in Greek bonds pushed the yield on the government’s two-year note up by as much as 136 basis points, driving the cost of funds to 8.3 percent from 5.2 percent at the end of last week, while the 10-year yield added 32 basis points. Credit-default swaps on Greece’s government debt increased 32 basis points to a record 445.5, according to CMA DataVision prices.

Greek banks slumped, with EFG Eurobank Ergasias SA, the country’s second-largest lender, tumbling 7.9 percent for the biggest decline on the Stoxx 600.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aSLLk5gPa3AY&pos=1

A sovereign bond market whose yield pops from 5.2 to 8.3 percent in a week, is in a panic-driven meltdown. The unfolding of events has slid beyond the control of policy makers.

Weekend leave is cancelled for the Treasury team -- line up some late-night food caterers -- AH-OO-GAH!!!

 

 

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Re: Greece: the next Argentina?

Another parallel between Argentina and Greece: bank runs.

According to Swedish newspapers, 4.5% of all deposits in Greek banks was withdrawn the first two months this year (no word on how much was withdrawn in March). Yesterday it was reported that four Greek banks wanted to get access to emergency funds from their goverment to handle a resulting liquidity crisis:

http://www.ft.com/cms/s/0/edbfc18c-4268-11df-8c60-00144feabdc0.html

Comment on the Greek banks' deposits diminishing:

http://ftalphaville.ft.com/blog/2010/04/08/198731/chart-du-jour-the-gree...

Looks like Greece is going down.

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Re: Greece: the next Argentina?

The problem roosting today in Greece is the result of an insane government policy of renting currency from the international banking cartel.  Here's the deal:

  • Rent a perishable currency, every year much of it disappears, so every year you must rent more
  • You must rent the money to pay the rental fees - oops, a perpetual loop spinning to unavoidable bankruptcy
  • Give away your national sovereignty and the right to do any real financial planning; you do as you're told (which always means austerity measures and loss of retirement benefits and decent health care) in order to be able to rent the money for your next rental fee (at least with heroin you catch a buzz)

A national debt is a national fraud but if no one sees the fraud....does it actually occur? 

If Greece were the first nation to fall for this carnival scheme that makes marks of nations it might be understandable.  But that's not the case.  The international banking cartel with it's relatively new flagships the IMF and BIS have been snookering nations for over 100 years. 

The sad reality is that while many rubber neck to see the dreadful crash, they can't figure out their crash too is inevitable and just around the bend.

Good to see you back machinehead!

Larry

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Re: Greece: the next Argentina?

What if they announced a rescue party and nobody showed up to celebrate? Oops!

The cost of protecting against a default in Greek debt for five years surged 56 basis points to 436 basis points yesterday (Weds. Apr. 14th), credit-default swaps showed, compared with a record closing price of 443.5 on April 8. It was at 433.5 basis points today.

http://www.bloomberg.com/apps/news?pid=20601087&sid=apGz8o99KTPE

So a $50 billion rescue plan bought a 10-point improvement in the credit default swaps? ARRGGHHHH!

Let's try a $500 billion bazooka -- that'll teach them speculators! Yell

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Re: Greece: the next Argentina?

Who would've thought an Icelandic volcano could pound sovereign bonds on the shores of the blue Aegean?

April 19 (Bloomberg) -- The cost of insuring Greek sovereign debt against default surged to the highest-ever based on closing prices after the travel disruption caused by Iceland’s volcano delayed talks to help resolve the country’s debt crisis.

Credit-default swaps on Greece’s borrowings jumped 30.5 basis points to 468.5, according to CMA DataVision. The contracts peaked at 470 intraday on April 8. The premium investors demand to buy 10-year Greek government debt over benchmark German bunds rose to the most since before the euro’s debut.

European Union and International Monetary Fund officials are scheduled to travel to Athens on April 21 to start negotiating conditions for a 45 billion-euro ($61 billion) bailout package for the country. The meetings, originally scheduled for today, were postponed after airspace across northern Europe was closed on concern that volcanic ash from Iceland would damage airplanes.

The difference in yield, or spread, between Greek and German 10-year government debt widened 37 basis points to 467 basis points 1:08 p.m. in London, the most since October 1998, according to Bloomberg generic prices.

http://www.bloomberg.com/apps/news?pid=20601087&sid=axcbmEyqWEEg&pos=4

The 10-year German benchmark bond yields 3.08%, so at the spread cited by Bloomberg, the Greek bond would be yielding 7.75%.

In principle, a country's financing cost should be in line with its nominal growth rate to avoid a debt trap. Greek nominal GDP is growing nowhere near 7.75%. It could even go negative, if austerity measures bite too hard.

Athens, we've a got a problem ... Surprised

 

 

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Re: Greece: the next Argentina?
DrKrbyLuv wrote:

The problem roosting today in Greece is the result of an insane government policy of renting currency from the international banking cartel.

It sounds like this modern Greek tragedy is actually the policy of the international banking cartel. I wouldn't blame the Greek government completely. The cartel probably knew of certain weaknesses in the Greek government which they could exploit.

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Re: Greece: the next Argentina?

Greece's situation is becoming critical, as the bond market rebels. It is treating Greek sovereign debt as junk bonds:

April 22 (Bloomberg) -- Greek bond yields surged to the highest since 1998 as the country’s worsening budget outlook put pressure on the government to accept a European Union bailout and ignore street protests against its austerity measures.

Greece’s benchmark 10-year bond yield rose to 8.564 percent, more than twice the rate on [German] bunds. As a civil servant strike closed hospitals and shut the 2,500-year-old Parthenon temple, the EU said today that Greece’s deficit in 2009 was worse than previously forecast. EU officials lifted their estimate to 13.6 percent of gross domestic product from 12.7 percent and said it could top 14 percent.

As Greek lawmakers meet EU and International Monetary Fund officials to negotiate loan conditions, the premium investors demand to hold Greek debt over German bonds reached 522 basis points.

Greece’s two-year bonds now yield more than the 10-year debt, indicating investors don’t believe the EU bailout plan will be enough to sustain Greece. Credit- default swaps to insure against a default in the coming year leaped 104 basis points to a record 744.7.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUi3XLUwIIVA&pos=1

Greece's severely inverted yield curve -- in radical distinction to most of the world, where short-term rates are flat on the floor -- is a scream of distress. This situation is coming to a head in a matter of days or weeks -- something is going to snap.

And as for what happens afterward -- markets often pop after a financial crisis, on the fresh flood of liquidity. That's assuming it's resolved by bailout, not by outright Argentina-style default. In the latter case, Greek markets would rally, but confidence in the euro would take a severe hit.

 

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Re: Greece: the next Argentina?

Here's a late-day (Thursday) update, with some stunning numbers:

The yield on Greek 10-year bonds surpassed 9 percent today, driving the premium, or spread, over bunds to 577 basis points as of 4 p.m. in London, the most since Bloomberg began collecting the data in March 1998. The spread averaged about 62 basis points during the past decade.

The 10-year Greek bond yield climbed 86 basis points to 9.02 percent, with the two-year note yield jumped 270 basis points to 10.86 percent.

http://www.bloomberg.com/apps/news?pid=20601010&sid=aoREBqBx9mYo

Even as Goldman Sachs predicts a 'voluntary debt restructuring' (meaning that some bondholders are going to get paid later instead of sooner), the Bloomberg article adds this complacent-sounding note about the 577-point credit spread:

That’s little more than half the 1,000-level that typically signals a default may be imminent. Credit default swaps on Iceland rose to 1,473 in October 2008 before it was rescued by the IMF, according to CMA DataVision closing prices.

Oh, so we're not in the danger zone yet, with 2-year Greek T-notes at an eye-popping 10.86 percent? No imminent risk of default till we hit 15 percent? Okay, then party on! We'll see what the irascible Ms. Market has to say about this tomorrow. Y'all deal with her -- I don't wanna be around for this confrontation! Surprised

 

 

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Re: Greece: the next Argentina?

What?  We know what the "typical" amount is for a CDS to signal an imminent default?

That's cool.

I would have thought that without a single sovereign default in the period during in which CDS use was prevalent would have prevented us from knowing what the 'typical' level was, but that's just my science background rearing up and making things difficult for my brain.

Glad the journalists are able to circumvent such trickiness.

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Re: Greece: the next Argentina?

Spoke to my cousin from GR last night. Hes a business owner in a small town. Says business is horrible. Gasoline at 1.55 Eur per liter.

Says hes been watching documentaries on countries that have taken IMF loans and says that every country that has gone to IMF for assistance has suffered hardship. He tells me that people are saying that greece should default and get out of the euro and back to the drachma. Im surprised that the media out there is showing the reality of post IMF austerity.

I hope GR outright defaults. Better to have a quick amputation as opposed to death with a thousand needles.

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Re: Greece: the next Argentina?

Incredibly stupid question,  but what are the odds Greece will just go the path of Iceland and refuse to pay?  

This entire fiasco looks like economic terrorism and the Greek people should refuse to play along.

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Re: Greece: the next Argentina?

but what are the odds Greece will just go the path of Iceland and refuse to pay?

 

I dont know the odds of default but i do know that over 60% of the country is opposed to IMF money. And thats a gov sponsored poll so I wouldnt be surprised that over 70% of the country is opposed to it. Greeks are watching documentaties on post IMF nations and they are scared to death. My parents have 4 gr channels from sattelite and we watch constantly. The other day commentators were saying "we need to default, the IMF will turn us into slaves".

I would say that they begin to draw on some EU/IMF money and then get freaked out by IMF controls and quit the game. Could take up to 24 months.

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Re: Greece: the next Argentina?

but what are the odds Greece will just go the path of Iceland and refuse to pay?

 

I dont know the odds of default but i do know that over 60% of the country is opposed to IMF money. And thats a gov sponsored poll so I wouldnt be surprised that over 70% of the country is opposed to it. Greeks are watching documentaties on post IMF nations and they are scared to death. My parents have 4 gr channels from sattelite and we watch constantly. The other day commentators were saying "we need to default, the IMF will turn us into slaves".

I would say that they begin to draw on some EU/IMF money and then get freaked out by IMF controls and quit the game. Could take up to 24 months.

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Re: Greece: the next Argentina?
bearmarkettrader wrote:

"we need to default, the IMF will turn us into slaves".

Bearmarkettrader-

I would say that they are fucked up completely and lost much of their sovereignty already. If they ‘choose’ not to pay, they’ll plummet their fellow GIPSI nations into the abyss as well.
The EU cannot agree with this choice.

The regular options to improve unaffordable state debt service levels are sufficient economic growth and/or sufficient currency devaluation. Betwixt and between are unavailable for Greece.

I do agree, they’ll have to get out of the Euro unavoidably. However, subsequently people, banks, and state are distraint and seized by old bills outstanding nominated in unaffordable Euros.

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Re: Greece: the next Argentina?

Yes,  I know that the failure of the big banks would throw much of the world into chaos.  But,  what if everyone just said no?  What if we all recognized the illegitimacy of all of this debt and stopped playing along?  The banks are mostly hanging on through creative accounting.  Their profits are either bogus or fraudulent.  And they ARE vulnerable.  They are like the many parasites who end up killing the host and then themselves....

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Re: Greece: the next Argentina?

I was talking to my aunt today from the village in Gr. I was telling her that its a bunch of digits on a computer screen. Just say NO. Default, get back to drachmas, suffer through severe inflation for a few years and then move on.

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Re: Greece: the next Argentina?

can’t edit my last comment?!

Baywork wrote:

If they ‘choose’ not to pay, they’ll plummet their fellow GIPSI* nations into the abyss as well.

Thus, I’d aver that Greece isn’t in the position make its own decisions currently.

__

*Greece, Ireland, Portugal, Spain, Italy

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Re: Greece: the next Argentina?
Baywork wrote:

can’t edit my last comment?!

Baywork wrote:

If they ‘choose’ not to pay, they’ll plummet their fellow GIPSI* nations into the abyss as well.

Thus, I’d aver that Greece isn’t in the position make its own decisions currently.

__

*Greece, Ireland, Portugal, Spain, Italy

Not while remaining a member in good standing of the European Community. Probably Greece would like to take the EU funding which has been offered, but not the IMF loans which (history shows) tend to produce severe economic contractions, and often riots in the streets.

The standard IMF restructuring recipe used to involve devaluation, but that's not an option under the euro currency. An austerity program alone will only drive the debt burden higher, even if some short-term debt can be swapped for longer-term debt.

Greece is the canary in the coal mine, warning that all of the developed economies have made promises (both debt, and unfunded retirement and health programs) which they really don't have the means to deliver on. Default, soft (disguised) or hard, is inevitable a decade or two down the road, if not sooner.

The global 'paper over old debt with new debt' routine has been underway ever since the first oil shock in 1973. The U.S. price level is up by a factor of five times since then. That's one form of 'soft default' -- pay off old debt with currency that has only 20% of the purchasing power as when the debt was incurred.

But even with the ongoing, incremental 'soft default' of inflation, we're still in deep trouble. In fact, the disinflationary effect of the recent recession helped to magnify the problem -- the debt keeps compounding, but inflation is not devaluing the debt as rapidly as before. Obviously, if you're a desperate government, more inflation looks like an appealing option here. And 'the people' will love it, because inflation will make their houses go up in price. That is, if food and energy prices don't climb even faster. (That's why we have the 'core CPI,' heh heh!)

Inflation tolerance is the fundamental fault line in the euro currency -- Germany had a searing experience with hyperinflation in 1923, which it doesn't want to repeat. Whereas the GIPSI nations, before joining the euro, were quite tolerant of mild inflation and incremental devaluation. Backs to the wall, they likely will revert to type.

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: Greece: the next Argentina?

As of Tuesday, S&P has downgraded Greek debt to junk rating, and downgraded Portugal as well:

April 27 (Bloomberg) -- Greece’s credit rating was cut three steps to junk by Standard and Poor’s, the first time that’s happened to a euro member since the currency started, as contagion from the nation’s debt crisis spread through the bloc.

Greece was lowered to BB+ from BBB+ by S&P, which also warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt. The Greek move came minutes after the rating company reduced Portugal by two steps to A- from A+.

The spread on Greek 10-year bonds over German counterparts widened to 682 basis points, the highest since at least 1998, from 652 basis points yesterday.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aibv546ON.7A&pos=1

With the German 10-year bund yielding 2.93%, the cited spread puts the Greek 10-year yield at a crushing 9.75%. Meanwhile, the lack of decisive action by the EU is allowing the crisis to fester, multiply and spread to Portugal.

It's sobering that the euro currency is already in crisis, in only its second decade of existence. Fiat currencies, with their discretionary characteristics, are inherently flimsy constructs. A multinational fiat currency, managed by members with quite different levels of debt, competitiveness, and inflation tolerance, may be a hopeless project.

If S&P is right that Greek bondholders may receive as little as 30 cents on the dollar, this outcome would be quite similar to Argentina's default. But this time, we're talking about an EU country. Welcome to the era of rich-country sovereign default. A Greek or Portuguese sovereign default can be papered over, if larger nations are willing. But there isn't enough wealth in the world to bail out the UK, much less the US.

How do you spell relief? D-E-F-A-U-L-T !!!

'Can't pay, won't pay!'

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: Greece: the next Argentina?

Meanwhile, the German export market gets stronger and stronger as the Euro gets weaker. The Germans are not the dumb money in this equation.

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