Thursday, 16 December 2010

Athens on Fire

The Greek state is bankrupt. Its debt to GDP ratio is well over 100 percent.  It cannot raise sufficient revenues to cover its expenditures. It is shut out of financial markets because it is no longer regarded as creditworthy.

The vast majority of Greeks fully understand the dire position of their country. There is, however, a minority who remain in denial. Today, they took to the streets, attacked the police, and terrorized their fellow citizens.

What do the demonstrators want their government to do? Print money to cover the massive fiscal deficit?


Hamish said...

Revolution is in the air.

Anonymous said...

No - they want the bad debt forced on the appropriate stakeholder - the bondholders.

Jim said...

@Anonymous: buts thats not going to stop the cuts in public spending though is it? The whole point of the Greek (and pretty much all the other PIGS + the UK and USA) tragedy is that spending outstrips current revenues by a large margin. Even if they got rid of ALL the debt and said 'Were defaulting, we're not paying a penny'they'd still have to make current spending = current revenue, because no-one is going to lend to a country thats just welshed on all its debt.

And if they just gave bondholders a haircut, 50% say, their financing costs would go through the roof, as those who were prepared to lend demanded a risk premium. And as a lot of their debt is short term, those extra costs would kick in pretty quickly. And the cuts would still be required.

Basically, as Alice said, when you've run out of money, you've run out of money. You can't spend what isn't there.

If Greece were a sovereign nation and not tied to the Euro they could let the currency drop and print money, but that wouldn't do much for living standards either.

Either way, the population have to accept that they've been living beyond their means.

Alice Cook said...


Yes, that is what I think.


Anonymous said...

I agree, we need both.

But just so we're absolutely clear on this, the first step NEEDS to be what I proposed.

We're not going away just because everyone's bored with the argument. (irrespective of what nonsense perma-bailout mechanisms the EU develops) Bondholders will or soon; but they will pay.

Have a good day!

Jim said...

@anonymous: Oh I agree, the bondholders will have to take a haircut at some point, its inevitable. The only thing keeping the whole ludicrous situation afloat is EU's desperate desire for the Euro not to collapse. Which it inevitably will.

But be under no illusions, bondholders haircuts are no panacea. They allow the pressure to be reduced immediately (less repayments to make), but replace them with longer term problems - higher interest rates on the debt you still need to issue. If you don't combine the bond haircut with spending cuts but try to continue as before you'll soon end up in a debt spiral again, as the rise in interest rates more than offsets your gain from the bond restructuring.

Imagine you have a large credit card debt and you get half of it written off, and a higher rate of interest on new purchases. If you don't quickly reduce your expenditure to meet your income, but continue to spend on the card, you will soon be in the same (if not worse situation) than before.

Hamish said...

Did they demonstrate when the bubble was blowing...?