Wednesday, April 27, 2011

Bye-Bye Euro Bye-Bye

Calculated Risk mentioned yesterday (via a quote from Little Rupert's 'Wall Street Journal' that the Greek government forecasted it's 2011 budget deficit to be 10% of its GDP.
Greece's budget deficit in 2010 was 10.5% of gross domestic product, significantly larger than forecast ... Lower-than-expected government revenue was the main culprit behind the higher deficit number. ... The Greek government was targeting a 2010 deficit of 9.4% of GDP ...

The missed target was "mainly the result of the deeper-than-anticipated recession of the Greek economy that affected tax revenue and social security contributions," the Greek government said in a statement after the Eurostat announcement.
CR went on to remark, "More austerity coming - the beatings will continue until morale improves!"

The yield on Greece's ten-year bonds increased to 15.3%, and on 24-month bonds up to 24%. "It seems like the markets expect a credit event soon", CR commented, adding that "the ten year yields for [Irish government bonds] at 10.5%, Portugal['s] up to a record 9.6%, and Spain['s] at 5.5%."

In Europe and America, governments had the choice to say to the banks and financial houses which created this massive crisis of real-estate-fueled securities, You made this mess, now suffer the Penalty Of The Market for your bad judgment: Eat your pie, every bite.

Arguably, the banks and investment houses could have been allowed to fail -- following the 'General Motors model' here in the U.S., they could have received a government loan to continue operation (as GM did), declare bankruptcy, and reorganize.

That would have cost their stockholders, true; they would have been paid pennies on the dollar. But it would have been nothing less than Caveat Emptor, and a general principle that effects of risk in business are assumed by the parties responsible for creating it, and the legal principle that other parties harmed by the effects of that risk may seek relief or compensation.

For a time, the entire American banking structure would have been effectively nationalized -- but like the GM 'bailout', the focus of such a plan would have been to put some financial groups back on their feet. Those (like Lehman Brothers) with falsified balance sheets and debt-rotted to the core would be allowed to go into the black hole of receivership. The survivors would have had to work to pay the government loans back, and move forward.

This plan would very probably have resulted in a sharper Recession, but just in one Dog's opinion would have resulted in a stronger financial sector -- and one which had been taught a lesson that would have lasted for at least a couple of decades. The debt they had created would have, at least, been acknowledged and handled.

But, it didn't happen that way -- not in America, and not in Europe. The Free Market is founded on a wonderful principle: In Business, only risk other people's money. So, because the Banksters were unhappy and threw tantrums and claimed The World Will End If We Go Down, governments the world over gave them money -- lots and lots of it, essentially for free, so they wouldn't Fail.

And, all that private debt (created by Banksters) became public debt (owned by The Peasantry in each country, here and abroad). Our Banks did more than keep their doors open; they used the TARP and Bailout cash not to clear debt, but to do other deals and put a band-aid over their losses. The Banksters made even more obscene profits, and paid themselves even bigger bonuses.

All the debt that was created during The Bubble is still out there, unaddressed, like an unexploded Mustard Gas shell in some farmer's field in Flanders, just waiting for the touch of a plow to go off.

However, in places like Greece, Ireland, Portugal, Spain -- it was worse. With smaller economies, less diverse, their governments were faced with a simple choice: To avoid defaulting on national obligations and to maintain the viability of the Euro, these governments had to accept loan packages from the EU's European Central Bank, just to 'keep the doors open', and so their citizens wouldn't run through the streets, burning banks and the homes of billionaires and voting Communist governments back into power. Pas du tout.

As a condition of these loans, these governments had to accept "Austerity" measures. To pay for all the debt created by their banks, the Greek and Spanish and Irish people will have to do more with less. Fewer jobs, fewer teachers, firefighters and police; public services are reduced or 'outcourced' -- sold to private companies, who will run them for a profit. Reduced medical care, pensions, caps on wages and salaries. All this has resulted in serious demonstrations in these countries (particularly Greece, Portugal, and Ireland), with people running through the streets, setting fire to banks and considering that perhaps voting Communist wasn't a bad idea after all.

CR noted that a "credit event" is expected, and that term is defined as a "general default related to a legal entity's previously agreed financial obligation." That means in this case that one of these European governments "fails to meet its obligation on any significant financial transaction (coupon on a bond it issued or interest rate payment on a swap for example). The marketplace will recognize this as an event related to the legal entity's credit worthiness."

Europe's return to a multiple-currency structure would be very bad (you can view a brief BBC news report on this here), and not just for Europeans. Our own "recovery" -- which daily is becoming more of a weak joke -- would be kicked to the curb.

Thought the 'Great Recession' was bad? Reminds me of a post on the Financial Times' website, 'Alphaville': "Invest in gold? No; I'm diversifying my portfolio into canned goods."