Greece conks out...

[max_tranmere]

According to the BBC News today, Greece is 2 or 3 weeks away from running out of money. These are worrying times. Ireland will be next.

[BRFOT]

The Germans will not even need to use panzers this time.

[David Johnson]

Hiya Max,

What we appear to be seeing at the moment is Merkel and Sarkozy rearranging the deckchairs on the Euro Titanic.

The problem with the euro is that it is an idiotic concept. A one size fits all for a group of countries with completely different economies. There were some Maastricht criteria which apparently were used to test whether potential additions to Euroland met certain economic criteria. However the tests were not particularly tough and anyway some countries e.g. Greece either fudged or plain manufactured the data in order to get in.

Typically, if a country is really struggling economically, it can devalue its currency and try and export its way out of trouble. So for example, the pound has had a big devaluation in recent years against a number of other currencies. The euro countries cannot do that because the currency is controlled centrally by the European Bank. So you have countries like Germany which has experienced substantial growth using the same currency as Greece who's economy has bombed and where paying taxes is viewed in a similar way to charities by many - paying them is optional.

The only way the euro made any sense whatsoever is if it just included a group of core countries with very, very similar economies. However, I suspect the real motive was that of political union e.g. a federal state like the USA was expected to follow so that the EU central government could then enforce standard ways of running federal states like Greece.

Why does it matter to Britain? Well surprise, surprise, if Greece defaults and refuses to pay its debts, the Greek banks go kaput and then the European banks who have lent money to Greece to fuel its spending boom over previous years then start worrying about their loans.

Which countries' banks are most exposed? First, France, second, Germany and ....yes, you have got it in one, the UK banks come next. And then the investors start thinking, well if Greece can default, why not Ireland, Portugal, Spain etc etc.

At which point British banks produce their begging bowl, highly polished from the last time round.

Cheers
D

[max_tranmere]

Hi David, I'm impressed with what you know about this subject. I think we would have been in the Euro by now had it not been for Rupert Murdoch, and I don't know if he wanted us to stay out because he thought it would be good for us or because he just wanted to show he was powerful enough to hold sway over something like that. It is terrible that he had any input into the decision, the guy isn't even British. He said that his media empire would back Tony Blair if he promised not to take us in. I am trying to imagine how differnt things would have been for us economically if we had have joined.

[David Johnson]

Hi,

If our esteemed Deputy Prime Minister, Cleggie had been in charge of running the country we would have been in the euro by now. It was part of the Lib Dem manifesto for yonks and Cleggie argued even after the start of the global recession that being a member of the euro would help the UK. Err, I don't think so.

I don't think that the views of Murdoch were a deciding factor in Labour's decision to stay out of the euro, but thankfully they made the right decision.

To give you an idea as to why the EU are shuffling the deckchairs on the Euro Titanic.

1. At face value it seems insane just throwing bad money after good. That is Boris Johnson's view, but I suspect Boris is better sticking to playing table tennis. In the last year, since the previous bailout, the Greek economy has lost 10% of its industrial output, 400,000 people have lost their jobs and youth unemployment is between 40 and 45% so the idea that Greece will grow its economy enough to get out of this mess, with yet another austerity package starting from this week, is daft. It won't.

2. So the question is why are the EU doing this. I suspect they realise something that Cameron, Boris and Osborne don't understand i.e. this could be a complete disaster for all concerned if Greece defaults in a "disorderly" way. If the Greek government, pressured by the population, think fuck it we are not going to take another austerity package, then the Greek banks go kaput as investors get their money out. The Uk's exposure to Greece apparently is about ?14 bn made up of government loans made via the IMF and British bank lendings to Greece. So Cameron and Osborne appear to have taken the line with the EU, "Greece is nowt to do with us, pal, let us know how you get on".

3. So why are the EU about to bail Greece out if the government gets a vote of confidence? The exposure of the UK banking system is not just the loans it is our favourite friends, the credit default swaps which are insurances that UK banks will have taken out to cover them if the Greek banks default. The companies who provide those insurances then sell them on to other companies and so on and so on. The price that indvidual insurers sell these CDSs on depends on how people perceive the reliability of Greece in honouring its debts.

3. It was the credit default swap scenario that brought Lehmans down, because with credit default swaps you get a vast spider web of transactions with individual hedge funds, banks not necessarily knowing the full extent of their exposure and when the borrower goes belly up, you may find that no-one has the dosh to pay out on this complex web of transactions. It is debatable if the UK banks are on top of the real level of exposure to Greek debt.

So in short, the EU are bailing out Greece, I suspect, possibly because they need to work out what is the real level of exposure within their own banking system first with CDSs etc. Secondly from their point of view, it is probably best to keep the Titanic afloat if poss while we try to get an "orderly" default in which the credit default swap is not paid out on.

So what the plan appears to be is to let the Greek Joe Public take another kicking in order that the EU banks and the various EU countries' taxpayers don't!!!!

4. Why then are Cameron and Osborne not getting involved in EU meetings? I suspect because they dont have a grasp of what the fuck is going on. If Greece does default, I doubt if it will stop there. The cost of insuring debt in both Ireland and Portugal has been shooting up of late. Given that Euroland represents 40% of UK exports, you can kiss goodbye to any hopes of recovery if Greece falls in an uncoordinated heap.

Best for them to attend the meetings, I would have thought.

Interesting times eh? If the shit does hit the fan, it will be riveting to see how Batman and Robin cope.

Cheers
D

[frankthring]

In its end-of-year 2010 issue "The Economist" predicted that Greece
would have to leave the euro zone by end 2011. Their prediction seems
on course.
The Euro is not going to die. It is not going away. I suspect, once the
world recession ends, it will bounce back renewed. Why ? Because, as
David Johnson suggests, if some of the dead wood countries return to
their own weak currencies the euro zone itself will stabilise within a
hardcore of pretty strong currencies led by Germany, France, Austria
and others.
I even know one businessman who is buying euros now in the belief that
this will happen and he will make a fat profit !

[max_tranmere]

Impressive. I read all of that. You know a lot more about this than I do. It will be interesting to see how things proceed..

[max_tranmere]

I wonder if the Euro will even exist in a few years. Countries that presently have it might be back with their own currencies in a few years time.

[Lizard]

I'm not so sure Frank, here is a picture taken at the main bank in Athens this morning of customers trying to get thier money out..note that the bank teller is not wearing body armour..

[IMG]http://i54.tinypic.com/352oqyc.jpg[/IMG]