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Ear to the Ground

Eurozone Gets a Boost, Finally

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Posted on Oct 27, 2011
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AP / Daniel Roland

This week’s European crisis summit in Brussels has produced an agreement in an effort to mitigate what was looking like an inevitable economic catastrophe, judging by the dire situation in Greece and elsewhere in the eurozone. By Thursday, international markets were registering the results.

BBC:

Leaders from all 27 European Union nations have finally thrashed out a deal to solve the crisis started by concern over how Greece would cope with its debts.

Greece, the Irish Republic and Portugal have all required bailouts and this last week of talks was prompted by fears the crisis would spread to the larger economies of Spain and Italy.

Late on Thursday morning, the EU leaders meeting in Brussels agreed to expand the eurozone’s main bailout fund to 1tn euros ($1.4tn; £880bn).

Banks also accepted a loss of 50% on Greek debt, and they must raise more capital to protect themselves against losses resulting from any future defaults.

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Lafayette's avatar

By Lafayette, October 28, 2011 at 8:13 pm Link to this comment

KEYNES HAD GOT IT RIGHT

From the NYT here:

...  while Europe has a unified currency, and independent central bank, it has no lender of last resort — like the Federal Reserve — that can supply unlimited emergency funds to governments and banks that need them. And Europe’s continued insistence on imposing punitive austerity in exchange for bailouts, which will make it impossible for weaker economies to generate enough growth to pay down debts.

I suggest that the above is the Real Problem, that we in the US and Europe are making the very same mistake that was made by Congress in 1930 and 1931 - which was to impose austerity measures upon country budgets.

This is the sort of conditional reaction that is made by households when they overspend (by binging on credit) and is one of the reasons that recessions occur. Households cut spending and reduced consumption forces companies to downsize, which produces even further reduced household spending.

But country economies are not like households. Country leadership has a larger policy objective responsibility and it is precisely to maintain employment levels at all costs.

It was in 1933 (or thereabouts) that Keynes first espoused the theory, in a seminal piece of work, that countries must not contract spending but just the opposite. That policy has worked throughout the postwar years in economic circumstances not quite a dire as the present one.

Now go tell that to the T-Party (T for Troglodyte) in Congress. Never mind, they are so dense they won’t be listening.

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Lafayette's avatar

By Lafayette, October 28, 2011 at 7:40 pm Link to this comment

MASTERS OF THE UNIVERSE

FRT: Their conclusion: the Banks and the Bond-holders, and Greece will need a further bailout some time in the not too distant future.

When National Debt takes a haircut of 50%, it is dead obvious that debt maintenance is lowered.

This is the element that has been strangling the Greek budget; which will give them a wee bit of financial room to maneuver. (The country does not have much in the way of industry beyond tourism and maritime services.)

Let’s not forget, the banks have a responsibility to understand the limits to which they should lend a given client. If they do not take precautions - as they have not with Greece - then they justly deserve the consequences.

As regards Greece, Goldman Sachs was loaning its government money that the bank knew full well was hidden off-the-books. This is what got Greece into a problem with the EU, when EU inspectors uncovered the loans.

Besides, none of the solution to the present crisis would have been found if a courageous Angela Merkel did not threaten the bankers on Thursday to let the banking seizure happen if they would not increase the haircut on the Greek debt from 20% to 50%. The banks had dug in their heels against the increase.

The banksters need to be put in their place. They are NOT the Masters of the Universe.

POST SCRIPTUM

Angela is a courageous lady. A shame we cannot elect her PotUS in the US ... she might kick some fat-asses on Wall St. - which American presidents seem incapable of doing.

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By FRTothus, October 28, 2011 at 8:57 am Link to this comment

@Layfayette

Odd that you are so certain of your analysis.  The Financial Times reporting on this same issue has to resort to “detective work” in order to determine who will receive what funds.  Their conclusion: the Banks and the Bond-holders, and Greece will need a further bailout some time in the not too distant future.

To quote that article:

The European Banking Authority’s country-by-country analysis of European banking needs says Greek banks will need €30bn in recapitalisation. The first €110bn Greek bail-out, agreed back in May 2010, included €10bn for bank recapitalisation, and thus far has only been used to help out Proton Bank, a small lender with just 31 branches. Proton got a €250m capital injection. So that means the new package must have about €20bn for bank recaps in it.

That leaves €80bn for running the Greek government. But that’s more than double the €34bn provided in the July deal, and raises some interesting questions that at this point may be unanswerable. Namely: why is so much more money needed?

One reason could be because Greece’s deeper-than-expected economic slowdown means their annual deficits will be bigger. But the recently-completed troika report – not a public document but obtained earlier this month by the FT – argues that because of all the new austerity measures Greece has put in place, the only additional money needed to finance Greece’s deficit will come this year, and that’s “only” about €2bn (see page 95 of troika report). For 2012, 2013 and 2014, the troika uses the same numbers as they did in July.”

“According to data provided by Re-Define, an economic consultancy, there are €88bn in bonds due between 2012 and 2014. Cut that in half (50 per cent haircut) and you get €44bn. Add that to the €32.7bn in deficits the troika estimates Greece will have over those same years, and the €2bn extra for 2011? You get €78.7bn. That’s pretty close to the €80bn in the bail-out, and that’s our best guess at where the money goes.”

http://blogs.ft.com/brusselsblog/2011/10/greece-is-getting-e130bn-more-what-for/#axzz1c5dOFUrS

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Lafayette's avatar

By Lafayette, October 27, 2011 at 2:50 pm Link to this comment

FRT: The Greeks and others will receive absolutely no benefit whatsoever from this.

Very wrong.

The fact that the Greek Debt has taken a “haircut”, by 50%, means that the government has less maintenance payments on the debt.

Which means that tax revenues, otherwise spent on debt maintenance, can be used to stimulate the economy, which will not only put people back to work but augment government tax revenues.

It’s a win-win situation for the Greeks and the Euro. For the banks, it is a just retribution for not refraining to sell previous Greek governments debt (which was hidden off the books).

But it does not mean that Greece is out of the woods. It does mean, however, that the Greeks have a better chance of finding their way out.

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By FRTothus, October 27, 2011 at 9:37 am Link to this comment

We must be clear about this:  The Greeks, the Irish, the Portuguese, and others are not the ones being bailed out— it is the foreign bond-holders that are being bailed out.  The Greeks and others will receive absolutely no benefit whatsoever from this.  The people are to be impoverished, the banks, meaning the bond-holders, made whole. This is grand larceny in which the victims pay, the crooks get rewards.

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