Tag Archive | "Populace"

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Greece Government Receives Threats


The leader of New Democracy, Greece’s conservative party, won Sunday’s election and was immediately charged to align a functional parliament that would support the party’s pro-bailout stance. The vote was interpreted as support from the populace for Greece remaining in the euro zone and operating under the single currency.

All the euro zone nations offered plenty of support prior to the election. The tone was conciliatory and suggested that the 17-member euro zone would work with Greece to ease the tight austerity and extend the terms of the bailout that has fueled Greece’s 5th recession and 22.5 percent unemployment.

Germany went as far as taking out a full page add in the nation’s most well read newspaper.  The ad was a plea to voters to support the New Democracy.  The voters were not pleased with the tone of the article but pushed New Democracy over the top.  The party expects to announce a controlling alliance with the Socialist Party, PASOK.  This is the same coalition that has controlled Greece for decades.

On Tuesday, New Democracy’s top gun, Antonis Samaras, is expected to announce the creation of a government that will be able to carry necessary parliamentary rule to support the bailout. World markets opened on the up and the euro had a short rally before the nations that had seemed amenable to modifying terms of the bailout began to renege on their pre-election overtures.  Germany’s Chancellor, Angela Merkel was quick to stress the need for Greece to strictly follow the terms of the original agreement. Jean-Claude Juncker, former head of the European Central Bank and current leader of Eurogroup, backed Merkel’s puzzling policy reversal.  Juncker said that some conditions might be eased but that there could be no major changes to the bailout package.

The euro zone and Germany in particular has been criticized for austerity cuts that make it impossible for Greece’s 219 billion GDP to grow. Unemployment for young workers exceeds 30 percent.  Pensions and wages have been trimmed significantly.  If the euro zone and Germany do no offer some easing, Greece is doomed.

Combining this bitter reality to the crisis in Spain turned global markets into a late day tailspin. The euro touched briefly at $1.2601, fell to $1.2580 before closing at $1.2591. US analysts were quick to note that Spanish 10-year bonds crossed the 7.00 percent yield mark. There is a lack of confidence in the economies of Spain, Greece and Italy and investors are finally sensing the dysfunctional theater of operations. At the G20 in Mexico City, President Obama is pressing Germany to develop a long-term solution for the region. Whatever appetite international investors may have had for euro zone investment is stalled. Several forex experts have predicted the euro will fall to par against the USD before the end of 2013. Most of these investors also believe the euro zone will continue to shed members very quickly if Spain does not stabilize. This is bad news for the USA whose biggest importer is Europe.

In addition to PASOK’s cooperation, a smaller, left wing party known as Democratic Left has thrown its support behind New Democracy. It appears that the euro zone is prepared to let Greece kick the can down the road until the economic powers in the region set a course that benefits them. This is not the long-term arrangement international investors hoped to see. Once again, the political instability in the region is playing against the welfare of the troubled economies. Without pressure from the international community, Disaster looms.

In a race that went down to the wire, the conservative New Democracy party finished just ahead of SYRIZA and has begun talks on a new government. It is expected to form a coalition with the Socialist PASOK party, meaning that Greece would continue to be governed by the two parties that have ruled for decades and led the country to economic disaster.

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Euro Nears Breaking Point


It’s deja vu all over again in the forex markets as another twist in the sovereign debt crisis has sent the euro tumbling by the greatest margin in nearly a year. It was only last month that I posted “The Euro (Still) has a Greek Problem,” and yet, forex markets are once again reacting to the possibility of a Greek default as thought it were a new development. At the very least, investors finally seem to be acknowledging the inevitable.

There have been several factors at work in this latest episode. On Monday, S&P downgraded its credit rating for Greece to CCC, following on a similar move by Moody’s. That means that Greece’s sovereign credit rating is now the lowest in the world, behind such eminent economies as Grenada and Ecuador. While the move was hardly noteworthy in itself, it represents one more straw on the camel’s back.

Meanwhile, Greece’s government is increasingly unstable, and Prime Minister George Papandreou has become so desperate that he has suggested forming an alliance with Greece’s most powerful opposition party. Meanwhile, violent riots outside Greek Parliament have reportedly become a daily occurrence, as the Greek populace has proven unwilling to accept wage cuts and tax increases.

As if that weren’t enough, there is tremendous uncertainty surrounding the next stage of the Greek bailout. No one can agree on what amount to give and what should be stipulated in return. Some parties think that private investors should be involved in the bailout by taking a “haircut” on the bonds that they own. Some members of the eurozone are balking about contributing any funds at all, wary of justifying it their own citizens and that it is merely forestalling the inevitable.

I think the NYTimes offered the best summary: “Funding fatigue is growing in the north European creditor countries, especially Germany, the Netherlands, Finland and Austria, just as austerity fatigue is mounting in Greece.” When you consider finally that Greek interest rates and credit default swap spreads have surged to record highs, it seems that default is really inevitable. If the IMF and European Union are so determined, they can push off default until 2013. Still, default now or default then is still default.

At this point, then, the only real question is what happens after Greece defaults. Will it be forced to leave the Eurozone? Will that push the rest of the Eurozone fringe closer towards default? Will the Euro collapse and cease to exist as a currency? What will happen then?

Unfortunately, I think the answer to all of those questions is yes. At the very least, Greece will be forced out of the eurozone. Bondholders will push interest rates in Ireland, Spain, and Portugal up to double-digit levels, trapping them in the same cycle in which Greece is currently ensnared. Given the exposure of French and German banks to the sovereign debt of financially troubled eurozone members, they will also require state bailouts, and so on.

In a recent op-ed published in The Financial Times, celebrity economies Nouriel Roubini argued that the only way to avoid a complete eurozone meltdown is if the euro depreciates rapidly “to restore competitiveness to the periphery” or if the European Union is able to rapidly achieve complete fiscal and economic union. Roubini argues that the former is difficult because of the ECB’s hawkishness, while the latter is precluded by political hurdles that remain too formidable to overcome.

As Greece inches ever closer to default, the markets will increasingly become gripped by utter uncertainty over the questions that I posed above. Central Banks will stop accumulating euro-denominated assets, and investment funds will similarly shun Europe. (In fact, there is already evidence that this is happening). While European interest rates are attractive relative to the rest of the G4, they are hardly enough to compensate investors for this uncertainty. And when the markets come to terms with this, the euro might finally reach its breaking point.

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A Break-Up of the Euro?


Lest you accuse me of doomsday predictions and excessive fear-mongering, consider that I have only broached this topic on one previous occasion. In 2005, it was suggested that the Euro would dissolve since a handful of member countries (France and the Netherlands) rejected the new EU Treaty. [Alas, the tragedy was averted when both countries’ Parliaments ratified the Treaty against the wishes of their respective electorates]. This time around, however, the problems are deeper, and are economic rather than political.
 
Last week [EU Debt Crisis: Perception is Reality], I wrote that Greece only has three possible choices in dealing with its fiscal problems: clean up its finances, pray for a bailout, or (partially) default on its debt. Here I overlooked a fourth possibility: leaving the Euro and devaluing its debt. That this was originally omitted was not an oversight, but proof that this is considered a last resort of last resorts. Most analysts believe that Greece would sooner default on its debt than leave the Euro.
euro dollar 1 year chart march 2010
 
I’m inclined to agree. The Greek economy benefited from inclusion in the Euro zone in the form of lower interest rates and increased credibility. Sure, it took advantage of these perks by running up record budget deficits, but one can hardly blame the Euro since Greece binged voluntarily. The responsible move might be for the EU to kick Greece out, akin to the bartender cutting off the alcoholic; you wouldn’t expect the alcoholic to voluntarily stop drinking.
 
For now, Greece is saying and doing all of the right things to placate both EU officials and its own lenders. On the other hand, it faces increasing pressure from its populace. Fiscal austerity during an economic recession is a recipe for political disaster: “Greek workers disrupted transportation services and tried to storm parliament on March 5 as lawmakers passed 4.8 billion euros ($6.6 billion) of extra deficit reductions, including lower wages for public employees. Such cutbacks will continue to run into resistance as unemployment is propelled above December’s 10.2 percent.” Since both of these extremes (fiscal crisis on the one hand and civil unrest on the other) are equally untenable, some analysts think the only solution will be for Greece to leave the Euro.
 
Given that Greece’s economy only accounts for 2% of EU GDP, it won’t make too many waves regardless of what happens. The bigger problem, looming on the horizon, is Spain. Spain accounts for close to 15% of EU GDP, and the economic slowdown hit the nation hard. Low interest rates fomented a massive property and infrastructure boom, and the subsequent easing of monetary policy (to soften the collapse), succeeded only in stoking inflation. The concerns are twofold: that the economic crisis can’t resolve itself without deflation, and/or that economic crisis will trigger a fiscal crisis. While Spain is still far from fiscal crisis, it’s worth pointing out that fiscal austerity will be difficult (because of the economic downturn) and that an EU bailout would impossible because of its size.
 
The situations in Spain and Greece (Ireland and Portugal could also be included) have underscored concerns harbored by many economists since the creation of the Euro. They argue, namely, that the common currency has allowed poor countries to borrow more than they otherwise would have been able to, and that the common monetary policy has resulted in harmful gaps between countries in inflation and economic growth. “They have a single monetary policy and yet every country can set its own fiscal and tax policy. There’s too much incentive for countries to run up big deficits as there’s no feedback until a crisis,” summarized Harvard economist Martin Feldstein.
 
Feldstein and a chorus of others are now openly predicting the breakup of the Euro. Former U.K. Treasury adviser Roger Bootlehas asserted that, “As countries in the euro area are ‘forced to cut back on fiscal deficits, they’re going to face many years of depression and deflation. It’s doubtful politically they can hold that line.” Naturally, most still dismiss this as an outside possibility, with ECB President Jean-Claude Trichet going so far as to call it “absurd.”
 
Given that the crisis countries (Greece, Spain, etc.) will probably fight the hardest for the Euro’s preservation, Trichet is probably right. “Support for monetary union was highest in Spain, ‘much higher than in Germany, where a lot of people were reluctant because they already had a strong currency…So Spain is very pro-European.’ As a result, the chances of Spain pulling out of the euro are ‘just unthinkable.’ ” Still, even the outside possibility is enough to make investors nervous.

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