Spanish Debt - an alternative solution

Given the overwhelming consensus view that Spain will have to go cap-in-hand to the ECB/EU/Troika and ask for a bailout one has to ask if there really is no alternative for EU member states that find themselves in a tight spot. Is it really necessary to impose the costs of any restructuring on the weakest members of society? Why not just impose a unilateral debt restructuring and let the creditors - domestic and foreign - carry a much larger burden of any restructuring? There is no reason why a country choosing to go down that route could not remain in the Eurozone, if anything such a radical measure would make it easier to remain in the Eurozone. Capital flight would be reduced as there would be less fear that an exit from the Eurozone would be imposed in order to solve the debt crisis.

Panic in the markets - a gift for Greece

The massive gift that taxpayers and investors in many countries are forced to hand to the Greek citizens is unprecedented in recent history. While many commentators argue that the accumulated debt of the Greek state simply was too high a burden and had to be reduced we think that the origins of this crisis lie in the panic that gripped the bond markets during the past two years. For a long time the interest rate that Greece had to pay on its bond issues was artificially depressed due to carelessness by the investor and banking community. Starting in late 2009 the markets switched from overoptimism to pessimism. Increasingly a debt load that could have been restructured became unsustainable as market rates on Greek debt reached astronomical and unaffordable levels. Therefore one could say that Mister Bondmarket has made it possible for Greece to have its debt load cut by substantial amounts - with more to come in the future. Or does anyone really think that Greece would have gotten away with such a blatant renunciation of its obligations if interest rates on its bonds would have remained at, say, 4 or even 5 percent? For a more amusing take on this watch Panos the Greek

Fiscal Union - only precursor to an even bigger crisis

We want to keep this post short and to the point: those members of the Commentariat who think that Fiscal Union will solve the current Euro Crisis will be in for a rude awakening - in a few years time, but maybe much earlier. A chain is only as strong as its weakest link, and there are quite a few weak links in the Euro-Chain. Even mighty Germany (as those on One Euro jobs there know already) is not as strong as it might appear. Its performance is strong only because the other countries are weak, bit like the conundrum in the currency markets where a strong currency means that the other side of the trade is by definition weak). Debts in Germany are also sky-high, especially if you include all private and bank debt and - most importantly - unfunded pension promises etc. How the poor German taxpayer, squeezed that he is by a relatively efficient (and merciless) tax collecting system, is supposed to carry the burden of all the freeloaders in the Euro Gravy train remains to be seen. I would not put my money on it except in very short term trades.

Deadly Debt Spiral - Phoney War before the Storm?

The only people concerned about the economy seem to be analysts and commentators - and the unfortunate minority of those who have lost their jobs. The working majority seems to be oblivious of the fact that the ship of state is continuously getting closer to the rocky cliffs of insolvency. A recent report in the UK warned that total public debt may actually be as high a £4.84 trillion! How many ordinary people can deal with that type of number? It took even me longer than expected to figure out that this is around £80,000 per man, woman and child in the realm. Or put another way: total debt may be as high as £4,840, 000, 000, 000!! Shopkeepers in the UK and elsewhere report that customers have returned....we wonder how long this phoney economic war can continue

US Debt Service and Defense Budget out of control

When Niall Ferguson warns about the level of US debt service surpassing the defense budget in 6 years time he fails to account for the fact that the US defense budget is out of proportion with what any reasonable government would spend on defense. Not only is it grotesquely over-sized but the spending is also woefully misdirected and a gift to the military-industrial complex that produces ever-more sophisticated (and expensive) toys for the generals. In any case, it does not need the 'hottest deficit hawk' to make us aware that the US budget spending needs a severe pruning and that gloating about real or perceived problems in the Eurozone is no substitute for proper housekeeping in the USA.

Orderly reduction of debt levels is feasible

Irwin Stelzer should gloat a bit less (Wall Street Journal), there is no reason why the debt mountain cannot be reduced in an orderly fashion. Of course, what has been built over several decades can only be reduced in a slow and systematic way. This means that the 'freebies' distributed by the politicians will have to be withdrawn. But people survived without them in the past and with leadership and good will they will survive perfectly well. The army of 'invalids' living on state benefits in Britain for example has swollen dramatically since the early 1980s (yes, it started under the 'Iron' Lady!).

Unfortunately the economic debate is dominated by those seeking to profit from the implosion of the economies in (Southern) Europe and those trying to make their living by serving them. This unhealthy symbiotic relationship between Investors (especially Hedge Funds) and their 'advisors' in sell-side investment banks means that they are only happy if there is 'volatility' in the markets, the more the better for their business (and out-sized profits at the expense of the wider investment public and the taxpayers in general).

A few numbers to illustrate the feasibility of an orderly return to stable fiscal regimes: Greece with about Euro 300 billion in debt has to pay around 15 billion in interest with an interest rate around 5 per cent. To bring debt down to a more reasonable 150 billion over a period of 30 years would mean a net repayment of 5 billion. This total of 20 billion Euros distributed over a population of 11 million may appear to be a heavy burden but it is only 6 per cent of GDP. Now we all know that spending is more fun than saving but to say that this is not possible is not a statement of fact.

The will may be lacking but like in personal life, is it really too much to cut spending by 6 per cent? At least some part of this money goes to internal creditors who will spend the money and thus stimulate the economy. Money does not disappear in a black hole! Repayment will also mean that interest rates will be on a downward trajectory or remain low. And repayment of foreign creditors will allow them to spend more and stimulate the whole European Economy.

Controlled inflation - solution to debt overhang?

We try to keep economics out of our blog but sometimes we just cannot resist the temptation. The reason why there is a slowly-rising tide of calls for allowing a 'controlled' rise in inflation seems to be that politicians and technocrats seem to see no chance in reversing - or even stopping - the tendency for public (and private) debt to grow. Naturally, reversing a trend that has been going on for the better part of nearly four decades is not achievable in a year or two. So the only way to reduce total indebtedness would be a painful adjustment process lasting many years - much longer than the election cycle in any western democracy. But this is not to say that it would be impossible and it is doubtful whether relying on inflation would mean that the adjustment burden is shared more equally between all groups of the population. One should also not forget that in a closed economy the citizens owe the debt to themselves in aggregate. The problem is that the debtors and the creditors are different people and therefore repayment of the debt means that the debtors carry the adjustment burden.