Rolfe Winkler

New flower for North Korea may be succession ploy (Lim, Bloomberg)

Greece’s Goldman Sachs swaps spawn EU dispute on disclosure (Martinuzzi/Finch, Bloomberg) Greece was rebuked as early as 2004 by the EU for “deficit inaccuracies,” and again last month for under-reporting deficit figures for the past decade. The latest disclosure about swaps used to hide debt may make a bailout more distasteful, but won’t stop it. Too much is at stake.

The Greek derivatives aren’t Goldman’s fault (Felix, Reuters) Risk magazine was talking about this long before the NYT…

Why Greece should default (Kemp, Reuters)

Investors recruit terminally ill to outwit insurance cos on annuities (Maremont/Scism, WSJ) An underhanded variant of the life settlement business…

Japan eclipses China as top holder of Treasurys (AFP) China’s holdings dropped while Japan’s grew.

Leaving Ireland (Capell, BusinessWeek) Unemployment is driving a generation away.

Roger Ebert: The essential man (Jones, Esquire) “It has been nearly four years since Roger Ebert lost his lower jaw and his ability to speak. Now television’s most famous movie critic is rarely seen and never heard, but his words have never stopped.”

Tortoise vs. cat (pogpog)

Rubik’s cube solver (built entirely from “Lego elements”)

Funny how the market is just waking up to the Euro debt problem. Many have argued that debt levels are unsustainable, yet the IMF has adopted the neo-Keynesian line that governments can spend with impunity so long as unemployment is high. If there are unemployed workers in the economy, then conventional wage-push inflation — i.e. workers negotiating higher wages, which in turn drives up consumer prices — can’t happen. Or so the argument goes.

But this ignores bond market realities. The PIIGS on Europe’s periphery — Portugal, Ireland, Italy, Greece and Spain — have huge budget deficits as a percent of GDP, but don’t have the power to print money to pay it back. So bond markets are bidding up the cost to insure their debt:

Readers should offer their own view, but seems to me there are three options here, two bad and one nuclear.

1) The PIIGS cut their budgets to pay back debt. Such austerity programs are typically very difficult to get done in democracies. Deficit spending stays high long past the point that it’s possible to work off debt over any reasonable period. To successfully dig out of the hole requires cuts so deep, voters never agree to them.

2) Europe bails them out, which is the easiest solution in the short-run. Richer European countries certainly have the wherewithal to bail out a small country like Greece or Portugal. But it’s a dangerous precedent to set. What about Spain? It’s 14% of the Euro economy compared to 6% for Portugal/Ireland/Greece combined. If economies keep spending with an eye towards a bailout from the ECB, eventually you get #3.

3) The monetary union breaks apart. The customary way out of a debt crisis is to devalue one’s currency, see Argentina in 2001. It couldn’t maintain it’s dollar peg and still service its debt, so it devalued its currency and defaulted on debt. But this locked the country out of the international capital markets and drove them into a deep, though brief, Depression. For Greece to devalue, it would have to pull out of the Euro, pass a law that it’s debts are payable in new local currency and then devalue.

Some combination of #2 and #1 is probably the only sustainable solution. And that’s what the market appears to expect, what with Greek 5-yr CDS falling back to $389,000 from $425,000 yesterday.

But any help must come with tough conditions. Cuts must be deep enough that further rounds of bailouts won’t be needed.

UPDATE: Nick Gogerty points out that the IMF is another potential source of rescue funds. But whether bailout cash originates from the Germans or the IMF doesn’t change the fundamental problem, which is that Greek state is living well beyond its means…