The Great Debate UK
Having just got back from a couple of days in Hannover, I couldn’t help but be struck by the dominance of the local news agenda by two topics – and the almost complete absence of a third. Taking the British media at face value, I might have expected a city in near-panic, with people nervously scanning menus for safe dishes to order and maybe antiseptic handwashing facilities being hurriedly installed in public places. In fact, the town looked exactly as I remembered it from my last visit a few years ago, with E.coli rarely mentioned either in conversation or on the 24-hour TV news channels.
In fact, apart from endless replays of the goals from Tuesday night’s football (Germany versus Azerbaijan, a real clash of the Titans that must have been!), the news was all about the remote risk of a meltdown in the country’s nuclear power plants, and the anything-but-remote risk of meltdown in what is left of the Greek economy.
As far as the first is concerned, it seems that the sight of one of the reactors at Fukushima succumbing to a tsunami generated by the second biggest earthquake ever recorded has convinced Germans that they are better off counting on their neighbours in France and Czechoslovakia for their nuclear power than on generating their own. As the Americans say: go figure.
If there were ever any doubt, Frau Merkel has made it clear that, after all the tough talk, Germany is going to cough up for Greece. The arguments are simply about how to package the donation so as to make it look as penny-pinching as possible, and accompanied by the maximum pain that can be inflicted on the recipients – after all, the Bundeskanzlerin is elected by Germans, not Greeks. But there are clearly limits to how much austerity can be imposed on a country where standards of governance have been sliding for 2,500 years, and when Greece’s debts are finally restructured/reprofiled/rolled over or whatever euphemism for default is finally chosen, German voters are bound to overestimate the cost to themselves and underestimate the pain for the Greeks.
Another week another round of EU officials proposing solutions to the Greek insolvency problem.
First there was the President of the European Council Jean Claude Juncker who suggested that bond holders could be tempted into rolling over their maturing debt and buying more Greek bonds as long as a few sweeteners like higher coupon or interest rates were thrown in.
from Felix Salmon:
Martin Feldstein reckons that the market is pricing in a "massive" Greek default:
Even though the additional loans that Greece will soon receive from the European Union and the IMF carry low interest rates, the level of Greek debt will rise rapidly to unsustainable levels. That’s why market interest rates on privately held Greek bonds and prices for credit-default swaps indicate that a massive default is coming.
from Felix Salmon:
To get an idea of the job facing the new head of the IMF, check out Patrick Wintour's interview with Vince Cable, a UK cabinet minister who, perfectly sensibly, says that Greece is going to have to restructure its debts. Cable puts a positive spin on the idea: a "soft restructuring", he says, with Greece staying in the euro zone, could lead to a closer political union.
Then, read the story of what happens when you so much as suggest such a thing to Jean-Claude Trichet, eurocrat-in-chief. Even if you're from Luxembourg:
from Felix Salmon:
According to Christopher Whittall, "a consensus has grown among market participants that authorities will look to avoid triggering CDS when restructuring Greek bonds". Recall the inimitable language of Lee Buchheit, in his latest paper on how Greece might restructure:
The EU’s post-Deauville assurance that there will never be a restructuring of an existing Eurozone sovereign debt instrument (at least until 2013) presents something of an obstacle to any pre-2013 restructuring of Eurozone sovereign debt instruments. The face-saving solution may be linguistic. A voluntary liability management transaction undertaken by the debtor country before 2013, the argument goes, is not a “restructuring” as that term was used in the post-Deauville assurance. Restructuring, it may be claimed, connotes a degree of coercion on the affected creditors. But if the creditors themselves elect voluntarily to participate in a liability management transaction to improve the creditworthiness of their debtor, who in the official sector can or should gainsay that decision?
from The Great Debate:
Not a day goes by without a flood of comments on Greece and its debt problems. They seem to come from everywhere. Some are later denied while others are left to stand, accompanied by a continuous string of worrisome data. In the process, even greater disorder is gaining hold of the country’s debt markets, with credit spreads exploding in an ever more alarming fashion.
from Felix Salmon:
Greece is going to restructure its debts -- and it's going to do so before mid-2013. That's the clear message sent by the latest Reuters poll of 55 economists from across Europe: 46 of them saw a restructuring in the next two years, with four saying it would happen in the next three months.
This is a major development. The markets haven't believed Greece for a while -- but now they don't believe the European Union, either. Remember that back in November, the EU put out a statement laying out a mechanism for restructuring a member's debt "in the unexpected event that a country would appear to be insolvent". It clearly says that "any private sector involvement based on these terms and conditions would not be effective before mid-2013".
-Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own.-
The Governor of the ECB, Jean-Claude Trichet has raised interest rates by 0.25 percentage points – and quite right too. For us in the UK, blaming rising prices on temporary disturbances in the world’s commodity markets is a figleaf to hide the fact that we are actually embarking on a partial default-by-inflation. For Europe, it is a different story. For one thing, the Germany-Austria-Netherlands bloc is, if not booming, at least chugging along at a highly respectable rate, and as the ECB Governor said today in response to a question about the impact of the rate rise on Portugal, his job is to set interest rates for the Eurozone as a whole, not just for the benefit of one of its smallest and weakest members.
–Laurence Copeland is a professor of finance at Cardiff University Business School . The opinions expressed are his own–
The title says it all: “This Time is Different” by Reinhart and Rogoff tells how, for centuries, monarchs and, later, nation states have persuaded lenders to forget their chequered credit record and trust them yet again with loans on relatively easy terms. Although, by the nineteenth century, Western European countries had mostly reached a stage where their reputation seemed worth preserving at some cost, more or less from the moment they achieved their independence the South American countries established a tradition of default which they have guarded jealously to the present day, and as Reinhart and Rogoff make clear, Greece has defaulted at regular intervals ever since it became an independent nation in 1832.
– John Keilthy is Managing Partner of ReputationInc Ireland and is a former business journalist and director and chief operating officer of NCB Group. Andrew Hammond is a Director in ReputationInc’s London office and was formerly a UK Government Special Adviser. The opinions expressed are their own. –
In recent weeks, the focus for Ireland and indeed the world’s financial markets has been on devising a plan to remedy the country’s precarious banking and fiscal affairs.