The Euro: Greece and Spain

**Kathianne** · 06-13-2012, 12:24 AM

One wonders just how 'interesting' these times will get:

http://online.wsj.com/article/SB1000...368089854.html

June 12, 2012, 7:10 p.m. ET

Gerald O'Driscoll: How the Euro Will End

Greece will simply run out of cash. Then Spain's real-estate bubble will ruin an economy that really matters

By GERALD P. O'DRISCOLL JR.

The euro is the world's first currency invented out of whole cloth. It is a currency without a country. The European Union is not a federal state, like the United States, but an agglomeration of sovereign states. European countries are plagued by rigidities, including those in labor markets—where language differences and the protection of trades and professions in many countries impede labor mobility. That makes it difficult for their economies to adjust to cyclical and structural economic shifts.

For such reasons, when the euro was created in 1999, Milton Friedman famously predicted its demise within a decade. He was wrong about the timing, but he may yet be proven right about the fact.

Greece is the epicenter of a currency and fiscal crisis in the euro zone. Markets fear a "Grexit," or Greek exit from the euro. That exit is almost a foregone conclusion. The endgame for the euro will be played out in Spain.

But first to Greece, which is devolving from a money-using economy. Firms, households and even the government are short on cash. The government isn't paying its suppliers and workers in a timely fashion, so households cannot pay their bills to businesses with whom they transact.

Businesses, in turn, cannot pay their suppliers. There is a cascade of cash constraints...

Absent a truly dramatic event, Greece will exit the euro not by choice but by necessity. It will do so not because the drachma (its old currency) is superior to the euro, but because the drachma is superior to barter. Greek standards of living, which have already fallen substantially, will fall further in the short- to medium-term. It will then be up to the Greek people to forge a new future.

While a Greek exit from the euro zone will have substantial repercussions, it won't unleash the doomsday scenario painted by some. A Spanish exit would be an entirely different matter.

Unlike Greece, Spain is a major economy. According to the International Monetary Fund, at official exchange rates in 2011 the Spanish economy was more than five times the size of Greece's. And unlike Greece, Spain has numerous banks, some large and global.

The Greek tragedy began with a fiscal crisis—brought on by the government spending more money than it took in—that became a banking crisis. In Spain, there is a fiscal crisis that exacerbates a banking crisis...

Spanish banks are impaired not only because the Spanish government is running large fiscal deficits, but also because of bad loans to the private sector. Many Spanish banks lent heavily to property developers and to individuals who wanted to purchase homes built by the developers. Spain's construction sector is substantially larger relative to the rest of its economy than is the construction sector in other euro-zone countries or the U.S. And bank debt to finance that sector grew much faster than elsewhere.

Spanish banks have taken huge write downs on their loans, but not enough. Only the exact size of the future write downs is in doubt, not that they will be very large. The Spanish government has effectively nationalized one bank, Bankia—due to threatened insolvency—but will very likely be faced with more takeovers.

The Spanish government has finally admitted that it does not have the funds to recapitalize its banks. EU finance ministers have reportedly committed up to 100 billion euros ($125 billion) for that effort. Experience with banking crises in general suggests that early estimates of losses will prove to be too low. Political leaders start with denial and then offer only belated recognition of the size of banking problems. That was true in the U.S. savings and loan crisis of the 1980s and the 2007-08 bust in housing finance, the banking crisis in Ireland, so far in Spain...

Spanish banking problems are not the end, but only the beginning, of European banking problems. Banks in France, the U.K. and Germany also hold large amounts of the sovereign and private debt of Portugal, Italy, Ireland, Greece and Spain. The government of Cyprus has already made an "exceptionally urgent" request for funds to recapitalize its banks, and markets are now worried about Italy's debt, which limits Rome's ability to deal with banking problems.

The euro zone is in a crisis, in the correct sense of the word, a turning point from which it will either recover or enter a terminal phase. One important factor that may determine the outcome is the degree of leadership in Europe.

By and large, political leaders in Europe are a feckless lot. There are exceptions, particularly in some of the Nordic countries (e.g., Estonia), but the absence of leadership may be the decisive factor leading to the euro's demise. In Spain and elsewhere, leaders have been willing to apply temporary fixes to their banking problems rather than to recognize the true size of the problem. The banks, not fiscal deficits, will be the undoing of the euro.

In the end, I side with Milton Friedman. If Europe had made the political decision for a federal state, a single currency would have been a natural outcome. When 17 states decided to adopt the euro first without political union, they got it backward.

Greece is the epicenter of a currency and fiscal crisis in the euro zone. Markets fear a "Grexit," or Greek exit from the euro. That exit is almost a foregone conclusion. The endgame for the euro will be played out in Spain. [/QUOTE]

**DragonStryk72** · 06-13-2012, 12:32 AM

And meanwhile, Russia is stabilizing. How? Cutting their budget down, putting in a flat tax rate, and hunkering down to let things play out as opposed to doing a bunch of stuff that could bite them in the ass

**Kathianne** · 06-13-2012, 12:44 AM

Originally Posted by DragonStryk72

And meanwhile, Russia is stabilizing. How? Cutting their budget down, putting in a flat tax rate, and hunkering down to let things play out as opposed to doing a bunch of stuff that could bite them in the ass

Perhaps. From what I can tell, they are still dealing with a house of cards. Putin is once again officially head of state, as he has been unofficially since the beginning for the new Russia. Many satellites are still within his orbit, and he wishes to reclaim some that are 'out.' The tendency to act as a superpower hasn't gone away; see Syria news today.

Yet, they've failed to clean water, provide incentives for market economies-that aren't crime syndicates.

**DragonStryk72** · 06-13-2012, 12:50 AM

Originally Posted by Kathianne

Perhaps. From what I can tell, they are still dealing with a house of cards. Putin is once again officially head of state, as he has been unofficially since the beginning for the new Russia. Many satellites are still within his orbit, and he wishes to reclaim some that are 'out.' The tendency to act as a superpower hasn't gone away; see Syria news today.

Yet, they've failed to clean water, provide incentives for market economies-that aren't crime syndicates.

Well, yeah, I mean if we lost Texas, Arizona, and Hawaii, don't you think we'd try to get them back? As well, Russia NEEDS satellites because of it's geographical location. This time, however, I think they'll try to entice them back in, as opposed to previous tactics. The situation with Europe gives them sort of a perfect set up to walk in as "the savior".

**Kathianne** · 06-13-2012, 01:07 AM

Originally Posted by DragonStryk72

Well, yeah, I mean if we lost Texas, Arizona, and Hawaii, don't you think we'd try to get them back? As well, Russia NEEDS satellites because of it's geographical location. This time, however, I think they'll try to entice them back in, as opposed to previous tactics. The situation with Europe gives them sort of a perfect set up to walk in as "the savior".

Putin? You're joshing, no?

**mundame** · 06-13-2012, 07:44 AM

I'm glad Kathianne started this thread. I think the European situation is extremely dangerous and important, and it really blew up about 2 1/2 weeks ago. Americans are normally not at all interested in Europe, but with the entire world economy sagging suddenly because of their wildly serious troubles, it might be time to start being interested.

Our stock market has gone UP several times lately, but also down in the wild swings that characterized its behavior during the crisis in late 2008 and 2009.

Yesterday: the "yield," the interest rate charged for Spanish bonds, went up to the highest level ever, close to the 7% they fear. Cyprus suddenly said they need desperately, urgently, now, $4 billion to recapitalize their banks. That is not the $125 billion Spain is getting, but it shows how contagion is spreading. Yesterday Italy was generally reported to be the next in line for trouble. Greeks took $1 billion in Euros out of their banks every day this week to send to Germany and the U.S., and are buying large amounts of staples for storage: pasta and canned goods.

Sunday is the big day of the Greek vote and most financial writers expect trouble on the Monday following.

Will the Euro collapse, like the U.S.S.R., like the Berlin Wall, like East Germany's separation? When big things happen, they happen fast.

**Thunderknuckles** · 06-13-2012, 10:03 AM

I smell a war coming...

**avatar4321** · 06-13-2012, 08:07 PM

Originally Posted by Thunderknuckles

I smell a war coming...

At the rate we are going, it will be here before we know it.

**DragonStryk72** · 06-13-2012, 08:19 PM

Originally Posted by Kathianne

Putin? You're joshing, no?

How best to say this "He may be a bastard, but he's the bastard with a lifeline"

**Kathianne** · 06-13-2012, 10:47 PM

Some interesting reading at Foreign Policy and it's not wonkish:

http://www.foreignpolicy.com/article...ypse?page=full

12 Signs of the Europocalypse

From the Chinese buying spree to the rise of extremism, here's what to watch for as the continent teeters on the brink of disaster.

BY DOUGLAS REDIKER, DAVID GORDON | JUNE 12, 2012

Notice #1 & 2:

Here are 12 key trends to watch over the next few weeks for help in projecting what the new Europe will look like if it finally emerges from the mire.

1. Continuing Greek dysfunction. Pundits and analysts are waiting with bated breath for the results of Greece's elections on June 17, with many declaring it as a virtual referendum on whether the country will remain in the eurozone. But here's the truth: The possible outcomes are narrower than people think, ranging only from pretty bad to worse.

If the Coalition of the Radical Left (Syriza) gets the most votes, even with the 50-vote bonus for finishing first, a fractured electorate and lack of suitable coalition partners make its prospects of forming a workable government slim. But even if an ostensibly "pro-bailout" combination of New Democracy and former ruling party PASOK was to squeak through with a collective majority, the effectiveness of their coalition will be severely limited and Greece's future far from clarified. These two parties are once and future rivals, and in actuality they agree on very little. Expecting that they can quickly reach consensus on the specifics of some 15 billion euros in austerity measures over the next two years is highly doubtful.

Any renegotiation of the terms of Greece's bailout, moreover, will be merely a matter of spreading the pain over an additional year or two, ensuring continued political deadlock and a disgruntled electorate. Besides, the math doesn't work, and every day the country remains politically paralyzed, the costs to the country and its creditors increase. The upshot is that regardless of the election's outcome, Greece and its European partners are in for an almost unimaginable set of politically unpalatable choices. The likelihood of an election that definitively ensures that Greece remains in the eurozone is very low.

2. Spanish banks as catalyst. Some in Greece think that Athens can successfully blackmail its European partners into caving and lightening conditions on the country, lest Greece blow up and take the rest of the eurozone with it. They are probably miscalculating. Greece is, in the grand scheme of things, too small to sink the European experiment. But Spain (in part because it is too grande to fail) actually does hold some pretty daunting cards, as demonstrated by the rescue package it received over the weekend. The dynamics to watch now are how Europe's official sector lenders proceed. Although the basics of the Spanish rescue were announced, the plan is far from fleshed out, with crucial details -- like where's the money coming from and on what terms will it be disbursed -- remaining unresolved. When providing Spain its lifeline, policymakers are acutely conscious of the precedent that this rescue will set.

This "conditionality-lite" Spanish program (with the Germans emphasizing the "conditionality" and Spanish Prime Minister Mariano Rajoy the "lite") might conceivably provide political cover for the Spanish government while maintaining the "no money without strings attached" restrictions required by the Germans. It could also, however, catalyze a more far-reaching process of reform: federalizing banking supervision and regulation within the eurozone, the possible migration of bank deposit guarantee schemes from the auspices of national governments to a pan-European one, some form of Eurobonds, and, in the end, fiscal union. Recall that the U.S. Constitutional Convention was held in part because the Articles of Confederation weren't sufficient to resolve conflicts between those states that had repaid their Revolutionary War debts and those that couldn't or wouldn't. The Articles of Confederation's drafters did not envisage a federalized entity any more than the crafters of the Maastricht Treaty foresaw a "United States of Europe." The Spanish banking crisis won't trigger a formal constitutional convention, but it could have much the same effect, setting in motion a more dramatic shift in how Europe operates for decades to come. ...

**avatar4321** · 06-13-2012, 10:50 PM

Good read Kathi

**Kathianne** · 06-13-2012, 10:58 PM

Awaiting the elections, don't you always hoard canned goods?

http://m.heraldsun.com.au/election-a...-1226395368597

NERVOUS Greeks are withdrawing up to 800 million euros ($1.01 billion) a day and stocking up on canned food as they fear the country will be forced to leave the eurozone after this Sunday's election.

Greek citizens fear the ramifications of a return to the country’s previous currency, the drachma, if the radical left-wing party and strong election contender SYRIZA wins this weekend.
Bankers said daily withdrawals from the major banks were hitting €500-€800 million ($631.8 million-$1.01 billion), Reuters reported.

Meanwhile, retailers say consumers are stocking up on non-perishable foods like pasta and canned goods.

Analysis: What the Greek elections mean for all of us

Latest polls showed the conservative New Democracy party, which supports a €130 billion international bailout, is running neck-and-neck with the leftist SYRIZA party.

**mundame** · 06-14-2012, 09:47 AM

Greeks are hoarding canned goods and pasta....and pulling all their money out of the banks and burying it in their back yards or hiding it in houses; already burglary rates have gone way up, with thugs trying to steal this hidden money, I read.

The leaders of the G-20 nations will be the day after the Greek election, in.....Mexico? Is this a good idea? Put them all in the country where they normally behead 40 or 50 people a week and leave the heads piled in the back of a pickup truck? I would question the security of all of them going to Mexico.

**fj1200** · 06-14-2012, 10:08 AM

Originally Posted by mundame

I would question the security of all of them going to Mexico.

It's the easiest country in which to buy off the locals and house your secret army that will be able to fend off any disorganized, anarchist attack force so that your one-world, Bilderberg inspired government can take root and force the rest of the world to submit to the new-world slavery that is just over the horizon.

amirite rev?

**Toro** · 06-18-2012, 07:17 PM

Originally Posted by DragonStryk72

And meanwhile, Russia is stabilizing. How? Cutting their budget down, putting in a flat tax rate, and hunkering down to let things play out as opposed to doing a bunch of stuff that could bite them in the ass

Russia is funded by oil and natural gas. It is a petro-state that does not abide by the rule of law.

I wouldn't put a dime into Russia no matter what the tax rate.

Thread: The Euro: Greece and Spain

Thread Tools

Display

The Euro: Greece and Spain

Posting Permissions