Posts Tagged ‘debt’

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Don’t believe the hype – this is a bubble, not a boom

August 15, 2013

This originally appeared on the NEF blog at http://www.neweconomics.org/blog/entry/dont-believe-the-economic-hype-this-is-a-bubble-not-a-boom

I think it was one of the first pieces to express some cynicism about the brave talk of a “boom” that suddenly appeared everywhere last summer. Subsequent events tend to confirm the analysis given here. 

Happy days are here again, if you read the right papers. UK output grew by a mighty 0.6% between April and June this year, on top of 0.2% growth in the three months before that. “BOOMING BRITAIN HAS WOW FACTOR” boasted London’s Evening Standard.

Don’t believe the hype. This isn’t a boom. It’s barely even a convincing recovery. Only after years of stagnation, aided and abetted by George Osborne’s austerity policies, is it possible to present these feeble growth figures as something to boast about. The IMF now forecasts 0.9% growth for the year. That’s a third of the rate of the early 2000s. The economy is limping when we would normally expect it to be sprinting.

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Greek austerity: the end of the line

May 16, 2012

This was originally published on the NEF blog at: http://www.neweconomics.org/blog/entry/greek-austerity-the-end-of-the-line

This is not a Greek crisis. It is a European crisis, in two parts. First, the financial crash of 2008 provoked a global recession of exceptional severity. Combined with bailouts for the banks, this led to sharply increased debts and deficits for most large economies – including those in the Eurozone.

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Unexploded mines

February 10, 2010

Goldman Sachs have been helping the Greek government massage its debt figures – at no little reward to themselves, of course.

From 2002 onwards, Greece’s public finance officials arranged a neat little deal with the US megabank to hide additional debt through financial derivatives known as cross currency swaps. These involve swapping debt issued in one currency for another, for a certain, limited period of time.

There’s nothing greatly unusual in this – the market for these kinds of swaps is now huge. Goldman Sachs and the Greek government, however, did something a little more creative, as it were. Der Spiegel takes up the story (via Alexis):

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.

This lax accounting means it’s not, as result, quite clear how many other derivatives UXBs are now littering the Mediterranean. Only Goldman Sachs will benefit when they explode:

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

…and guess, by-the-by, which major investment bank is now apparently lead advisor the Greek government on handling the debt crisis? You couldn’t make it up, as they say.

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European contagion

February 9, 2010

It took them a surprisingly long time to move, but as of this morning the speculators have seriously latched onto the Euro:

Traders and hedge funds have bet nearly $8bn (€5.9bn) against the euro, amassing the biggest ever short position in the single currency on fears of a eurozone debt crisis.

As the FT suggests, they’re betting on both the Greek government’s inability to avoid default – or at least devaluation and exit from the Euro – and the subsequent inability of other Euro currencies to withstand ‘contagion’: financial instability spreading from one economy to the next, with country after country pulled into the maelstrom.

Other Euro economies are exposed to Greek upsets through the substantial investments various European financial institutions now hold there. French investors are the biggest, holding $58bn worth of Greek debt at the end of 2008 (on the IMF’s most recent figures), with German investors next on $32.3bn.

UK holdings are more modest, but still very substantial, covering $14.4bn worth of loans. Around a third of Greek government debt, meanwhile, is held by Greek investors. All will take a hit from substantial fiscal turmoil in Greece. And all the big exposures are in Europe.

Major financial institutions can try to get rid of some of this risk by adjusting their portfolio of assets. The real danger is that, in doing so, they will look to dispose of debt securities held in other, smaller Euro economies with weak fiscal positions – Portugal, Ireland and Spain, in particular.

It’s these three that are now causing additional grief for the Euro. A quick glance at the combination of high public debt, and wobbly governments, tells you why the short-sellers are licking their chops. The betting is on one of the PIGS, so-called – Portugal, Ireland, Greece, Spain – going belly-up some time soon.

But it’s Greece that remains the biggest single risk. Revisions to the public debt figures have rattled markets, while the deep spending cuts offered in sacrifice by the newly-elected PASOK government have failed to calm jangled nerves.

If the big banks and the institutional investors pull out of Greece, they can spread financial instability elsewhere – with speculators adding to the chaos, moving colossal volumes of hot money at fantastic speed across national borders. The whole Eurozone – potentially even the Euro project itself – could suddenly appear unstable.

The decade has been generous to the Euro. A benign economic environment, floating atop a giant property-and-finance bubble, kept the show on the road. Those days are long gone.

The deciding factor here, however, is political. Either the Greek government can keep the markets reaonably sweet, holding firm to bigger and bigger promises attacks public services and wages; or the markets will be unconvinced, dragging Greece out of the Euro.

That’s where the EU steps in. The risks of contagion, and the damage to the Euro’s credibility, will no doubt concentrate European finance ministers minds on arranging a bailout. It’s the prospect of a rescue package, rather than some sudden belief in the Greek government’s firm grasp of the axe-handle, that has led to some improvement in the Euro’s position.

The planned cuts are already meeting resistance. Farmers are blockading roads, and thousands of public sector workers are expected to strike tomorrow against the wage freeze.

Serious opposition in Greece to the EU’s austerity package could open the path for resistance across Europe. But successfully fighting off the cuts will also mean building a credible, political opposition to the rule of finance.

(hat-tip to Eugenia for the figures)