European Troubles

[kent nickell]

http://baselinescenario.com/2010/02/07/europe-risks-another-global-depression/

The Baseline Scenario

What happened to the global economy and what we can do about it

Europe Risks Another Global Depression

with 266 comments

The entirely pointless G7 meeting this weekend only served to underline the fact that Europe is again entering a serious economic crisis.

At the end of the meeting yesterday, Treasury Secretary Tim Geithner told reporters, ?I just want to underscore they made it clear to us, they the European authorities, that they will manage this [the Greek debt crisis] with great care.?

But the Europeans are not being careful ? and it?s not just about Greece any more. Worries about government debt and associated public sector liabilities (e.g., because banking systems are in deep trouble) have spread through the eurozone to Spain and Portugal. Ireland and Italy are next up for hostile reconsideration by the markets, and the UK may not be far behind.

What are the stronger European countries, specifically Germany and France, doing to contain the self-fulfilling fear that weaker eurozone countries may not be able to pay their debt ? this panic that pushes up interest rates and makes it harder for beleaguered governments to actually pay?

The Europeans with deep-pockets are doing nothing ? except insist that all countries under pressure cut their budgets quickly and in ways that are probably politically infeasible. This kind of precipitate fiscal austerity contributed directly to the onset of the Great Depression in the 1930s.

The International Monetary Fund was created after World War II specifically to prevent such a situation from recurring. The Fund is supposed to lend to countries in trouble, to cushion the blow of crisis. The idea is not to prevent necessary adjustments ? for example, in the form of budget deficit reduction ? but to spread those out over time, to restore confidence, and to serve as an external seal of approval on a government?s credibility.

Dominique Strauss-Khan, the Managing Director of the IMF, said Thursday on French radio that the Fund stands ready to help Greece. But he knows this is wishful thinking.

?Going to the IMF? brings with it a great deal of stigma. European governments are unwilling to take such a step as it could well be their last.

The IMF is supposed to provide only ?balance of payments? lending. That doesn?t fit well when a country is in a currency union such as the euro, which floats freely and does not have a current account issue, and the main problem is just the budget.

Greece and the other weak eurozone countries need euro loans, not any other currency. If the IMF lent euros, that would be distinctly awkward ? as this is what the European Central Bank (ECB) is supposed to control.

Sending Greece to the IMF would result in some international ?burden sharing,? as it would be IMF resources ? from all its member countries around the world ? on the line, rather than just European Union funds. But is the US really willing to burden share through the IMF? After all, Europe has long refused to confront the trouble in its weaker countries, now known as PIIGS (Portugal, Ireland, Italy, Greece, and Spain)? How would the Chinese react if such a proposition came to the IMF?

Would the Europeans really want the IMF and its somewhat cumbersome rules to get involved ? this would be a huge loss of prestige. It could also lead to some perverse outcomes ? you never know what the IMF and the US Treasury (and Larry Summers) will come up with in terms of needed policies (ask Korea about 1997-98; not a good experience). The European Union (EU) has handled IMF recent engagement well in eastern Europe (from the EU perspective), but that was seen as the EU?s backyard. If the eurozone is in trouble, everyone will be paying much more attention ? no more sweetheart deals.

The IMF gave eastern Europe amazingly good deals over the past 2 years (by IMF standards). Would this fly with financial markets in the sense of restoring confidence in the PIIGS and their medium-term fiscal futures?

Does the IMF really have enough resources to backstop all the PIIGS? The IMF?s notional capital was increased substantially last year, but just based on what we see now, the Fund would need even more ready money to tackle the eurozone ? all the weaker countries would need at least preventive lending programs and these would need to be large. If that is where this goes, the EU looks simply awful and has failed at a deep level.
The IMF could play a constructive ?technical assistance role? alongside the European Commission, but everyone would want to keep this pretty low profile. Anything that goes to the IMF executive board would result in a lot of cheering and jeering from emerging markets. This would break the power of Europe on the international stage ? perhaps a good thing, but not at all what the European policy elite is looking for.

The IMF cannot help in any meaningful way. And the stronger EU countries are not willing to help ? in part because they want to be tough, but also because they do not have effective mechanisms for providing assistance-with-strings. Unconditional bailouts are simple ? just send a check. Structuring a rescue package that will garner support among the German electorate ? whose current and future taxes will be on the line ? is considerably more complicated.

The financial markets know all this and last week sharpened their swords. As we move into this week, expect more selling pressure across a wide range of European assets.

As this pressure mounts, we?ll see cracks appear also in the private sector. Significant banks and large hedge funds have been selling insurance against default by European sovereigns. As countries lose creditworthiness ? and, under sufficient pressure, very few government credit ratings will hold up ? these financial institutions will need to come up with cash to post increasing amounts of collateral against their derivative obligations (yes, the same credit default swaps that triggered the collapse last time).

Remember that none of the opaqueness of the credit default swap market has been addressed since the crisis of September 2008. And generalized counter-party risk ? the fear that your insurer will fail and this will bring down all connected banks ? raises its ugly head again.

In such a situation, investors scramble for the safest assets available ? ?cash?, which actually (and ironically, given our budget woes) means short-term US government securities. It?s not that the US is in good shape or even has anything approaching a credible medium-term fiscal framework, it?s just that everyone else is in much worse shape.

Another Lehman/AIG-type situation lurks somewhere on the European continent, and again our purported G7 (or even G20) leaders are slow to see the risk. And this time, given that they already used almost all their fiscal bullets, it will be considerably more difficult for governments to respond effectively when they do wake up.

By Simon Johnson

2//7/10

 

[AlaskaDenise]

Re: European Troubles

How much money does Greece need (in % of GDP) to get their debt to an acceptable level? Is it feasible?

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[kent nickell]

Re: European Troubles

I think the goal is to try to get the budget deficit which is currently around 12% of GDP to closer to 3% of GDP. This would appear to require some very austere measures at a very difficult time...

 

[sharon sanders]

Re: European Troubles

"...all the democracies are bankrupt.."

http://www.youtube.com/watch?v=9RDGklfT6HE

 

[AlaskaDenise]

Re: European Troubles

I think the goal is to try to get the budget deficit which is currently around 12% of GDP to closer to 3% of GDP. This would appear to require some very austere measures at a very difficult time...

I've heard those numbers, yet another source quoted a figure over 100% - perhaps they're adding in private debt. 12% is fairly low compared to many countries, but I understand the EU goal is 3%.

This chart shows debt as % of GDP for all countries: http://www.visualeconomics.com/gdp-vs-national-debt-by-country/

text with chart (which appears to be from 2009):

(snipped)

The amount owed varies greatly with the amount of money a country generates, its population and how much its government spends. In Germany, the national debt is $1.79 trillion. This represents 62.6 percent of Germany?s gross domestic product, or GDP. In The U.K. the national debt is $42.2 trillion. This is 47.2 percent of the GDP of the U.K.

In Russia, the national debt is $151.3 billion. This is 6.8 percent of the Russian GDP. Italy owes a national debt of $1.89 trillion, or 103.7 percent of the Italian GDP. The national debt of France is $1.40 trillion. This is 67 percent of France?s GDP.

One of the highest levels of national debt relative to the country?s GDP can be found in Japan. The Japanese national debt is $7.47 trillion. This is 170.4 percent of the Japanese GDP. India has a national debt of $2.55 trillion. This debt is 78 percent of the GDP of India. Zimbabwe has a national debt of $472.51 billion. This level of national debt is 241.2 percent of Zimbabwe?s GDP.

In the Americas, The United States has a national debt of 8.68 trillion. In the U.S., this is 60.8 percent of the American GDP. The Canadian national debt is $814.26 billion. In Canada, the national debt is 62.3 percent of the GDP. In South America, Argentina has a national debt of $293.56 billion. The Argentinean national debt is 51 percent of the GDP of Argentina.

I would expect that the strength of the economy, i.e.. anticipated capacity to repay debt, is also a factor.

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[AlaskaDenise]

Re: European Troubles

I've heard those numbers, yet another source quoted a figure over 100% - perhaps they're adding in private debt. 12% is fairly low compared to many countries, but I understand the EU goal is 3%..............

found it:

Greece's foreign debt reaches record level of 125% of GDP

18:1010/12/2009
Greece's foreign debt has risen to 300 billion euros ($441 billion), or about 125% of national GDP, Deputy Finance Minister Filippos Sahinidis said on Thursday.

"The country's debt has reached 300 billion euros, which is the highest in the country's modern history," Sahinidis told parliament.

Greece's economy has suffered more than most other EU states since the onset of the financial crisis last year, with a soaring rising budget deficit. The previous government was widely criticized for failure to take measures to stabilize the economy.

At the early parliamentary elections in October, the ruling New Democracy party suffered a crushing defeat. Its main rival, PASOK (Panhellenic Socialist Movement), led by former foreign minister George Papandreou, which won a majority of seats in the legislature, approved an anti-crisis program to steer the country away from a potential default on its obligations.

Papandreou, who was sworn in as the country's prime minister on October 6, said last Friday there was no danger of a sovereign default.

International rating agency Fitch this week downgraded Greece's credit rating to BBB+ from A- with a negative outlook. Another rating agency, Standard & Poor's warned that it might lower Greece's sovereign rating over possible debt servicing problems.

http://en.rian.ru/business/20091210/157189048.html

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[Treyfish]

Re: European Troubles

Franco-German bailout of Athens expected to avert euro collapse

Summit may see moves to guarantee Greek solvency, as prospect of action by Paris and Berlin buoys markets

• Wednesday 10 February 2010 20.41 GMT
• 
  

Pigheaded protests: As discussions took place across EU capitals over whether to bail Greece out, protesters marched through Athens over the Greek government?s plans to reduce the debt deficit. Photograph: Simela Pantzartzi/EPA

Germany and France are tomorrow expected to move to guarantee Greek solvency and to shore up the euro against assault from gamblers on the financial markets.
At a summit of EU leaders in Brussels which looks like being overwhelmed by the implications of Greece's debt and deficit emergency, Chancellor Angela Merkel and President Nicolas Sarkozy, said senior EU sources, should deliver a joint Franco-German signal that they stand ready to come to Athens' rescue if need be.
Herman Van Rompuy, the new European Council president steeringtomorrow's summit, expects the planned response to the Greek crisis to overtake an agenda focused on medium-term European economic strategy.
Signs of action buoyed financial markets for the third successive day ? with the cost of insuring Greek debt falling again and European stock markets, including the FTSE, climbing after falls last week. The possibility of a rescue also eased pressure on the euro, which could lead to heavy losses for hedge funds and other speculators who have bet that the currency will collapse.
The Germans, apparently determined to avert any euro crisis, are leading the drive to concoct a Greek bailout. They may not reveal full details tomorrow, but they are certain to insist on punitive terms for loans or loan guarantees, and also may dash hopes of a "European" bailout plan in favour of bilateral pacts between national governments and Athens. Berlin is said to believe this will confer greater clout and rigour in forcing Greece to meet a bailout's terms ? major public spending cuts, better revenue collection, reliable data, and reforms to the pension, health, and civil service systems.
Expectations of a Franco-German initiative hardened tonight after a day of frantic discussions in Brussels and across European capitals over what to do about Greece and the mixed signals over the timing and substance of the response.
Finance ministers of the eurozone, as well as Jean-Claude Trichet, the European Central Bank president, and Olli Rehn of Finland, the European commissioner for economic and monetary affairs, rehearsed their options by video-conference.
Sources close to Van Rompuy, conceded that tomorrow's summit had to deliver a strong message to the markets. But his eight-page paper on economic strategy sent out to government leaders for the summit omitted all mention of the crisis.
Analysts said much was riding on how EU leaders responded but those speculators betting on a fall of the euro will have to rush back to the market to cover up their "short" positions to limit their losses.
"If a deal is done and Greece is rescued, we could see a rally because a lot of people are short and they will have to wind up their positions," said Neil Mellor, a Bank of New York Mellon currency strategist.
Others said the markets were confused. "If Greece doesn't get support from the EU, the question in the markets will be why should we [buy Greek bonds]. The concern then is that knocks sentiment. The market will look at who is next, and Portugal will be next," said Gary Jenkins, of stock brokers Evo Securities.
There are divisions among the 16 eurozone countries and the 11 other EU states over whether Europe can weather the crisis or whether the International Monetary Fund should be called in. But those splits also extend to within the eurozone.
"The EU initiative must be placed in a common framework, which is that of the IMF," Belgium's finance minister, Didier Reynders, told Le Monde. "Greece has a right to assistance from the IMF, of which it is a member. If not, there is no point in being a member."
Reflecting a common view that an IMF rescue would be a grievous blow to European self-esteem and perhaps afford the Americans an inroad into ECB monetary policy-making, a senior official in Brussels said: "From a legal point of view, the IMF is possible. But politically, it's inconceivable that the IMF will rescue Greece. Because we have a monetary union, a system for supporting the currency."
As well as battling a budget deficit nudging 13% of GDP, Greece owes nearly ?300bn (?264bn) to foreign banks. With French and German banks the biggest lenders, exposed to around one third of the total, Berlin and Paris appear to be reaching the conclusion that helping Athens would be helping themselves, as they would be among the biggest victims of a Greek default.:tiphat:
http://www.guardian.co.uk/world/2010/feb/10/greece-france-germany-euro

 

[kent nickell]

Re: European Troubles

Bill Gross, head of the huge bond fund PIMCO will have significant influence on how high deficits can go without being too risky to bond investors.... Relative to deleveraging which I would say applies to the housing market he finds ""Typically deleveraging begins two years after the beginning of the crisis (2008 in this case) and lasts for six to seven years."""

The accompaning graph of the 'ring of fire' shows annual budget deficits plotted against total outstanding debt, both of which are problematic.



http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/February+2010+Gross+Ring+of+Fire.htm





Investment Outlook
Bill Gross | February 2010

The Ring of Fire






Investment management is a privileged profession ? not just for being paid by X-times what you?re really worth to society, but from the standpoint of longevity. If you?re good, and you at least give the impression that you still have most of your faculties, you can literally hang around forever. James Carville, the well-meaning but evil-lookin? guy from the Clinton Administration once remarked that in his next life he?d like to come back as a bond manager. He had part of it right ? the influence, the wealth, and even fame ? but there was no need to imagine himself as some cryogenically preserved Wall Street version of Ted Williams ? he was young enough at the time to make the leap and still have a 20-year career ahead of him. Other professions do not afford such opportunities ? the gold watch at 65 is not only symbolic, but a statement in most professions that says you are more or less washed up. Athletes have at most 20 years and musicians seem to have that brief window of creation as well. The Beatles, for instance, were done after a decade?s time. Paul is still writing songs, but the magic clearly disappeared in the 70s and now his concerts are ?garden parties? of remembrances as opposed to creation.

What I think is close to unique about investment management is that it?s really about the stewardship of capital markets, and that time weeds out the impostors, leaving the aging survivors to appear as wise and capable of guiding clients through the next crisis ? whatever and whenever it might appear. That assumption has some logic behind it, but critically depends on the investor truly enjoying the game and ? of course ? holding on to at least a few billion brain cells that keeps him from being obviously senile or at least being accused of having ?lost it.? An investment manager at 65 fears both. I remember having met John Templeton on the set of Wall Street Week nearly 20 years ago. I was a young buck and he was ? well ? on the downside of his career. About the only thing he could tell Rukeyser, it seemed to me, was to cite the rule of 72 and proclaim that stocks and the Dow would be at 100,000 by 2030 or something like that. Now, approaching that same age, I?m a little more understanding and a little less young-buckish. If that was his only lesson, then it was a pretty good one I suppose ? Dow 5,000 and the New Normal notwithstanding. And despite the strikingly premature departure of Peter Lynch and the transition of George Soros to philanthropic pursuits, there are some great examples of longevity in this business. Warren Buffett, of course, comes immediately to mind, as does Dan Fuss of Loomis Sayles, who may wind up as the Bear Bryant or Adolph Rupp of the bond business. Peter Bernstein, who passed away but a few months ago, was a brilliant writer and commentator on the investment scene well into his 80s. So there?s hope for you still, James Carville, and, I suppose, for me as well. It?s quite a privilege to be a ?steward of the capital markets,? to have done it well for so long and to still be able to walk up to the plate and face a 95-mile-an-hour fastball. Or, is it a curve? Time will tell.

There have been numerous changeups and curveballs in the financial markets over the past 15 months or so. Liquidation, reliquification, and the substituting of the government wallet for the invisible hand of the private sector describe the events from 30,000 feet. Now that a semblance of stability has been imparted to the economy and its markets, the attempted detoxification and deleveraging of the private sector is underway. Having survived due to a steady two-trillion-dollar-plus dose of government ?Red Bull,? Adderall, or simply strong black coffee, the global private sector is now expected by some to detox and resume a normal cyclical schedule where animal spirits and the willingness to take risk move front and center. But there is a problem. While corporations may be heading in that direction due to steep yield curves and government check writing that have partially repaired their balance sheets, their consumer customers remain fully levered and undercapitalized with little hope of escaping rehab as long as unemployment and underemployment remain at 10-20% levels worldwide. ?Build it and they will come? is an old saw more applicable to Kevin Costner?s Field of Dreams than to today?s economy. ?Say?s Law? proclaiming that supply creates its own demand is hardly applicable to a modern day credit-oriented society where credit cards are maxed out, 25% of homeowners are underwater, and job and income creation are nearly invisible.

In this New Normal environment it is instructive to observe that the operative word is ?new? and that the use of historical models and econometric forecasting based on the experience of the past several decades may not only be useless, but counterproductive. When leveraging and deregulating not only slow down, but move into reverse gear encompassing deleveraging and reregulating, then it pays to look at historical examples where those conditions have prevailed. Two excellent studies provide assistance in that regard ? the first, a study of eight centuries of financial crisis by Carmen Reinhart and Kenneth Rogoff titled This Time is Different, and the second, a study by the McKinsey Global Institute speaking to ?Debt and deleveraging: The global credit bubble and its economic consequences.?

The Reinhart/Rogoff book speaks primarily to public debt that balloons in response to financial crises. It is a voluminous, somewhat academic production but it has numerous critical conclusions gleaned from an analysis of centuries of creditor/sovereign debt cycles. It states:

1. The true legacy of banking crises is greater public indebtedness, far beyond the direct headline costs of bailout packages. On average a country?s outstanding debt nearly doubles within three years following the crisis.

2. The aftermath of banking crises is associated with an average increase of seven percentage points in the unemployment rate, which remains elevated for five years.

3. Once a country?s public debt exceeds 90% of GDP, its economic growth rate slows by 1%.

Their conclusions are eerily parallel to events of the past 12 months and suggest that PIMCO?s New Normal may as well be described as the ?time-tested historical reliable.? These examples tend to confirm that banking crises are followed by a deleveraging of the private sector accompanied by a substitution and escalation of government debt, which in turn slows economic growth and (PIMCO?s thesis) lowers returns on investment and financial assets. The most vulnerable countries in 2010 are shown in PIMCO?s chart ?The Ring of Fire.? These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years? time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth.

A different study by the McKinsey Group analyzes current leverage in the total economy (household, corporate and government debt) and looks to history, finding 32 examples of sustained deleveraging in the aftermath of a financial crisis. It concludes:

1. Typically deleveraging begins two years after the beginning of the crisis (2008 in this case) and lasts for six to seven years.

2. In about 50% of the cases the deleveraging results in a prolonged period of belt-tightening exerting a significant drag on GDP growth. In the remainder, deleveraging results in a base case of outright corporate and sovereign defaults or accelerating inflation, all of which are anathema to an investor.

3. Initial conditions are important. Currently the gross level of public and private debt is shown in Chart 2.

Initial conditions are important because the ability of a country to respond to a financial crisis is related to the size of its existing debt burden and because it points to future financing potential. Is it any wonder that in this New Normal, China, India, Brazil and other developing economies have fared far better than G-7 stalwarts? PIMCO?s New Normal distinguishes between emerging and developed economic growth, forecasting a much better future for the former as opposed to the latter. Chart 3 displays a startling recent historical and IMF future forecast for government debt levels of developed and developing countries. ?Escalating? might be a conservative future description for advanced countries. ?Stable? might now be more applicable to many emerging sovereigns.
What then is an investor to do? If, instead of econometric models founded on the past 30?40 years, an analysis must depend on centuries-old examples of deleveraging economies in the aftermath of a financial crisis, how does one select and then time an investment theme that can be expected to generate outperformance, or what professionals label ?alpha?? Carefully and cautiously with regard to timing, I suppose, but rather aggressively in the selection process under the assumption that it?s never ?different this time? and that history repeats as well as rhymes. Reinhart and Rogoff?s book, if anything, points to the inescapable conclusion that human nature is the one defining constant in history and that the cycles of greed, fear and their economic consequences paint an indelible landscape for investors to observe. If so, then investors should focus on the following 30,000-foot observations in the selection of global assets:

1. Risk/growth-oriented assets (as well as currencies) should be directed towards Asian/developing countries less levered and less easily prone to bubbling and therefore the negative deleveraging aspects of bubble popping. When the price is right, go where the growth is, where the consumer sector is still in its infancy, where national debt levels are low, where reserves are high, and where trade surpluses promise to generate additional reserves for years to come. Look, in other words, for a savings-oriented economy which should gradually evolve into a consumer-focused economy. China, India, Brazil and more miniature-sized examples of each would be excellent examples. The old established G-7 and their lookalikes as they delever have lost their position as drivers of the global economy.

2. Invest less risky, fixed income assets in many of these same countries if possible. Because of their reduced liquidity and less developed financial markets, however, most bond money must still look to the ?old? as opposed to the new world for returns. It is true as well, that the ?old? offer a more favorable environment from the standpoint of property rights and ?willingness? to make interest payments under duress. Therefore, see #3 below.

3. Interest rate trends in developed markets may not follow the same historical conditions observed during the recent Great Moderation. The downward path of yields for many G-7 economies was remarkably similar over the past several decades with exception for the West German/East German amalgamation and the Japanese experience which still places their yields in relative isolation. Should an investor expect a similarly correlated upward wave in future years? Not as much. Not only have credit default expectations begun to widen sovereign spreads, but initial condition debt levels as mentioned in the McKinsey study will be important as they influence inflation and real interest rates in respective countries in future years. Each of several distinct developed economy bond markets presents interesting aspects that bear watching: 1) Japan with its aging demographics and need for external financing, 2) the U.S. with its large deficits and exploding entitlements, 3) Euroland with its disparate members ? Germany the extreme saver and productive producer, Spain and Greece with their excessive reliance on debt and 4) the U.K., with the highest debt levels and a finance-oriented economy ? exposed like London to the cold dark winter nights of deleveraging.

Of all of the developed countries, three broad fixed-income observations stand out: 1) given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country, 2) Germany is the safest, most liquid sovereign alternative, although its leadership and the EU?s potential stance toward bailouts of Greece and Ireland must be watched. Think AIG and GMAC and you have a similar comparative predicament, and 3) the U.K. is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors. In addition, its interest rates are already artificially influenced by accounting standards that at one point last year produced long-term real interest rates of 1/2 % and lower.

The last decade ? the ?aughts? ? were remarkable in a number of areas: jobless recoveries in major economies, negative equity returns in U.S. and other developed markets, and of course the financial crisis and its aftermath. If an investment manager and an investment management firm proved to be good stewards of capital markets during the turbulent but vapid ?aughts,? they may be granted a license to navigate the rapids of the ?teens,? a decade likely to be fed by the melting snows of debt deleveraging, offering life for unlevered emerging and developed economies, but risk and uncertainty for those overfed on a diet of financed-based consumption. Beware the ring of fire!

William H. Gross
Managing Director


also of interest

http://mediaserver.fxstreet.com/Rep...57bb/6731a945-f109-4019-b4b2-fc0476c5fae8.pdf

UniCredit 2/2/10

California Dreamin?

At the press conference on Thursday, ECB President Trichet will again be asked about Greece, and he might be tempted to again draw a parallel between Greece and California. He should not. True, California has a much greater weight in the US economy than Greece in the eurozone; and this in turn implies that while Greece suffers from a far higher debt/GDP ratio than California, both are negligible as a fraction of eurozone and US GDP respectively. But that is where the similarities end, and once you consider how current fiscal problems can be addressed, the differences become painfully obvious. In the US, the federal government already plays a dominant role in the economic life of individual states, it can help smooth out gradual adjustments and it has the resources to mount a rescue if needed. In the case of the eurozone, it is far from obvious who can come to the rescue and with what resources?and how the accompanying policy conditionality would be imposed. Eurozone policymakers are clearly struggling on these issues under the nervous watch of markets. Paradoxically, it would be easier for the US to abandon California to its own devices than it would be for the eurozone to abandon Greece: contagion would be far stronger, and the eurozone has no mechanism to deal with it: there is no federal debt, no real sharing of resources. The weakness of centralized eurozone institutions will define the response to the current crisis, and it will play an even greater role in constraining long-term adjustments, which loom large for Greece, other member countries, and the eurozone as a whole; these include the burden of aging populations, but also how to generate growth without recurrent large external imbalances at the single country level. California dreamin? cannot dispel the Greek nightmare.

Trichet has pointed out that like Greece, California also faces fiscal problems, and that California is a much greater part of the US economy than Greece is of the eurozone; therefore, Greece?s troubles should be of lesser concern to eurozone policymakers than California?s are to the US government. This fits into the ECB?s view that there is no substantial difference between the US and the eurozone: US states share a common currency but still maintain a degree of fiscal autonomy, like eurozone member countries; and the dispersion of growth and inflation rates across eurozone countries is no greater than across US states. The strongest implication of this view is that one should no more be concerned with the external current account balance of Greece or Portugal than with those of Georgia or Pennsylvania. This view is fundamentally misguided.

Let us first look at the Greece vs California comparison in greater detail. The observation about the relative weights in overall eurozone and US GDP is of course correct: Greece accounts for about 2% of eurozone GDP (based on latest Eurostat estimates), whereas California accounts for 13% of US GDP; indeed California is the largest US state in terms of GDP, followed by Texas with a share of about 8 ? % and New York with a share of about 8%. If it were an independent country, it would rank as the eighth largest economy in the world, somewhat smaller than Italy but larger than Spain, and would enjoy a seat at the G20. It is therefore certainly correct that a downturn in California?s economy would have a greater impact on the US than a Greek recession in the eurozone.

Looking at the fiscal numbers, though, the first impression is that comparing California to Greece is rather unfair. In 2008, the latest year for which official US Census Bureau data are available, California ran a budget deficit of USD46bn, or some 2.5% of California GDP. In the same year, Greece recorded a deficit of 7.7% of GDP, which then went on to an estimated 12.7% of GDP last year. Moreover, California?s debt amounted to a paltry 7% of the state?s GDP at end-2008; in Greece it stood at about 100% of GDP, ready to escalate to over 110% in 2009. On this metric, Greece?s troubles look far more serious. If, however, we take an ?implicit bailout assumption? in both cases, the difference vanishes: California?s debt amounts to less than 1% of US GDP, but as Greece is so small its debt amounts to just over 2% of eurozone GDP. So the US could in principle take over California?s liabilities without much of an impact, and the same could the eurozone do with Greece. As we know, however, moral hazard makes that scenario undesirable in both cases.

It is exactly when you consider a possible bailout scenario, however, that the difference starts becoming apparent. First of all, who would come to the rescue, why, and with what funds? In the case of California it would be the Federal government, and for a very obvious reason it already plays a major role. Consider personal income taxes: California, which has one of the highest state taxes in the US, levies up to 10% for the highest income bracket; federal income tax rates range between 10% and 35%. While California, like other US states, does enjoy a degree of fiscal autonomy, it is the Federal government that raises the bulk of the tax intake, and provides the corresponding services. The Federal government was raising about 18% of US GDP in revenues in 2008 (before the recession caused a significant decline in 2009), and it provides a number of key services from national security to social security to Medicare and unemployment insurance; moreover, the Federal government provides transfers to the individual states to help fund education, Medicaid and other programs. It seems obvious that the Federal government would have both the responsibility and the resources to help if needed.

In the case of Greece, as we are seeing, the answer is far from obvious. While the EU provides structural funds under various headings, there is no European Federal government that raises a substantial proportion of revenues and provides key services to the EU population. As a consequence it is not obvious at all how a financial rescue can be organized if needed. A bilateral loan? A multilateral loan? A newly created EU fund? This in turn relates to how the corresponding conditionality would be imposed: would it be a single EU country imposing policy conditionality? It is not clear how the Greek population would react at having key public expenditures and tax decisions imposed from Berlin, for example. Or would the conditionality be imposed at the EU level, and in this case would it need to be formally ratified by all remaining 26 member states?

EU policymakers are currently struggling with these issues as it seems increasingly likely that a rescue operation will be needed. And here there is an apparent paradox: it would be easier for the US to let California default than for the EU to allow Greece to do so?and the reason is contagion. I noted above that a California recession would have a far more damaging direct impact on the US economy than a Greek recession on the eurozone. But if California defaulted, the repercussions on US federal debt would in all likelihood be minimal. US federal debt has vulnerabilities of its own, and these are becoming increasingly obvious with the ongoing deterioration of the federal fiscal accounts?but they are very clearly distinct from those of state debt. There is no federal debt in the eurozone: the eurozone sovereign debt market is a mosaic of national debts that have so far been held closely together by the market?s confidence in the so-called ?implicit bailout assumption?, that is the idea that a member countries would be rescued by its peers if needed. Confidence in that assumption is already fraying, and spreads are widening. A sovereign default would shatter it, creating serious funding difficulties for other member countries with weak fiscal balances, and serious tensions in the financial sector. The overall repercussions would be far more severe than a simple Greek recession, and far more severe than a California default.

A currency union does not make a federal state?that is the bottomline and the crux of the problem. It will define the response to the current tensions, and it will play an even more important role in constraining the long-term adjustment needed at the EU and individual country level. Once the current funding difficulties have been surmounted, Greece will still face with a looming aging problem of epic proportions?the European Commission estimates a rise in public expenditures of about 16% of GDP over the next 50 years. Reform of pensions and health care appears inevitable, but to make the overall fiscal adjustment tolerable Greece would need to raise its growth potential, which in turns requires it to recover some of the lost competitiveness (which the IMF estimated at some 20-30% in its latest Staff Report). Greece cannot rely on a currency devaluation, and neither can California, but the latter can rely on transfers from the federal government, and on a degree of labor mobility which within the US is far higher than within the eurozone. Without high labor mobility, strong transfer programs, and a truly unified fiscal authority, external imbalances at the single country level will continue to matter, and to pose a risk to the eurozone?s medium term growth prospects.

 

[AlaskaDenise]

Re: European Troubles

Thanks Kent. That clarifies why the Greek situation is of so much concern. While a currency union may not have all the options of a federal state, I wonder if Greece, et al, will fare better than they would without a currency union.

I wouldn't have expected that the US has a higher level of labor mobility than the EU. Do they mean physical movement or skills mobility?

Hearing that unemployment levels after a crisis can expect to be elevated for 5 years is not comforting and sounds like the basis for political turmoil.

.

 

[kent nickell]

Re: European Troubles

Thanks AD, good question, I assumed they meant more physical mobility.

Definitely seems like a lot of potential for global political turmoil.

 

[sharon sanders]

Re: European Troubles

Thanks Kent and AD!

I think one point completely ignored by Gross is the political climate in such a country as mainland China, which, without too much political discussion here at FT, is a dictatorship. Investing in such a climate is extremely risky. In a minute investors can lose 100% of their portfolios due to nationalization, enactment of new regulations/laws by decree, opaque markets, etc.

Not that the U.S. is an example of perfection. But in a global sense, preservation of principle must be a precedent over return on investment. So when evaluating various investment scenarios, in an uncertain world, where is your money the "safest"?

 

[sharon sanders]

Re: European Troubles

hat tip - S.F.

For example - Chinese State Run Media cut Obama's inaugural speech last year when he mentioned the word communist:



Chinese censors pull plug on Obama
<!-- LANDSCAPE IMAGE FOR THE ARTICLE-->
State broadcaster made yet another `moron move' after communism remark, says Web commentator

Jan 22, 2009 04:30 AM
<!-- CREDIT 1-->
<!-- ARTICLE CONTENT --> BEIJING–It seemed a fine way to demonstrate to its countless millions of viewers that China is a powerful, modern nation connected to, and interested in, world events.
Airing a live broadcast of U.S. President Barack Obama's inaugural speech with simultaneous translation? It seemed harmless.
But then Obama derisively mentioned the "C" word – communism – and sent China's state broadcaster CCTV scrambling.

An on-air host cut in, the translation cut out and the host moved swiftly to awaken an apparently slumbering panelist in another studio for an urgent discussion on the economy. It was, by anyone's measure, ham-handed and embarrassing, making CCTV look foolish.

And it was also yet another reminder that censorship is not just a common or even daily occurrence in Chinese life. It is, in fact, tightly woven into the country's entire information system. (this would include financial system - s.)

snip

"Recall that earlier generations faced down communism and fascism not just with missiles and tanks, but with sturdy alliances and enduring convictions," Obama said.
And later: "To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history, but that we will extend a hand if you are willing to unclench your fist."
Obama did not name China.

But Chinese censors, by their actions, clearly felt the sting.
Chinese-language Web portal Net Ease was a rare exception, killing the paragraph that mentioned communism but allowing the paragraph in which Obama mentioned dissent. But dissent itself is still not allowed in China.
The Reuters news agency reported that an advocate of free elections in China, who had been invited to a reception in honour of Obama's inauguration at the American consulate in Wuhan, was prevented from attending this week.

snip


http://www.thestar.com/World/Columnist/article/575241

 

[sharon sanders]

Re: European Troubles

And there is pressure to expand social costs paid by the government to match increases in affluence for the private sector -

The basic pension for enterprise retirees increased by 10%

http://gd.news.sina.com.cn 2010年02月11日04:48 南方都市报​

http://gd.news.sina.com.cn 2010 Nian 02 Yue 11 Ri 04:48 Nanfang Dushi Bao

<!--今日导读开始-->

数据加载中??​

Data is loaded in the ... ...
<!--今日导读结束--><!--正文内容开始-->

摘要：1月起，深圳调整全市企业退休人员基本养老金。​

Abstract: In January, the city of Shenzhen to adjust the basic pension for enterprise retirees.

调整后，全市企业退休人员月平均基本养老金比调整前增加227元，增幅约为10%。​

Adjustment, the city's corporate average monthly basic pension for retirees than before adjustments increased by 227 yuan, an increase of about 10%.

此次调整惠及全市14万余企业退休人员，深圳企业退休人员月平均养老金为2225元，调整后为2452元。​

The adjustment of the benefit of the city's 14 thousand retirees from enterprises, the Shenzhen company average monthly old-age pensions for retirees 2225 yuan, adjusted for 2452 yuan.


more.....


http://translate.googleusercontent....le.com&usg=ALkJrhjbkoIKA-Gq1xxb9_ilJ2QvEldxGg

 

[sharon sanders]

Re: European Troubles

And finally why Europe looks like a great investment in comparision.....


China's rapid economic growth has hidden behind the "stumbling block" a large number of
At 06:52 on February 10, 2010 Source: China News XING Li-yu

Behind China's rapid economic growth, there are worries.

​

J

January 21, the National Bureau of Statistics 2009 China GDP growth of 8.7%.

​

A ripple, while foreign media marvel, but also worry that the Chinese economy to overheat, the financial markets and the real estate market bubble could burst and so on.

​

Worried about the non-groundless, affect China's economy "stabilize" a large number of stumbling blocks.

​

If 8.7% of this data with 4 trillion economic stimulus package, large-scale investment in fixed assets, as well as loose bank credit and other closely related, but not the formation of private investment boom.

​

Meanwhile, the urban-rural income growth.

​

Data show that in 1978 the reform and opening to the international financial crisis the previous year in 2007, China's average annual GDP growth rate of 9% to 10%; of which 1995 to 2007, state revenue, average annual growth rate of 16%, exceeding GDP growth speed, an average annual disposable income of urban residents increased only 8% average annual net income of rural residents increased 6.2%. (Time for the delayed social expenditures to catch up. See next paragraph - s.).

​

The growth of economic data does not mean that growth of social wealth, or equivalent to improve people's livelihood, much less in the way of social development marks the green light.

​

China's medical insurance, employment, investments and services in the investment ratio in a small volume, the economic structure is also quite uneven, deep-seated contradictions in the socio-economic impact of the financial crisis, continually exposed.

​

There have been comments that "the old mode of economic growth is not our people's livelihood and well-being of the best model at this stage." Failure to pay close attention to the transformation of economic development approach to address the resource over-investment, the investment rate is too high, insufficient consumption, environmental destruction and other issues, China rapid pace of development will sooner or later, "staggering."

Of such risks, Chinese leaders have a clear understanding.

​

Chinese President Hu Jintao this month on the 3rd of the "local high officials" stated that "unswervingly to accelerate change in the mode of economic development to continuously improve quality and efficiency of economic development to continuously improve our economy's international competitiveness and risk-resisting ability, so that our country's development higher and higher quality, more and more development space and develop the road wider and wider. "

Chinese Premier Wen Jiabao, January 30 at home in the village in Hebei discussion revealed that this year from the increase in agriculture-related subsidies to increase food offer, old-age insurance in rural areas from further experiments to improve the new rural cooperative medical care standards, and emphasized that "the new revenue by some to be mostly for rural areas, agriculture and farmers, which is an important principle. "

​

January 11 to February 6, Wen Jiabao has presided over five seminars, being developed on the "National Reform and Development Plan and long-term" to listen to community views and suggestions.
In bringing together all sectors of society elite of the CPPCC in 2009, also change the mode of advancing development and structural adjustment, improve the active employment policies, deepen economic reforms focused on institutional mechanisms to inspect the research, and create a good policy recommendations.

​

CPPCC proposals have pointed out that "only by adhering to improve development quality, to promote the healthy growth of the economy is it possible to really resolve the crisis." Proposal was made to prevent the economy reverted to the extensive growth mode; a positive adjustment of social income distribution (This probably means a regressive income tax system adjustment - s.) ; vigorously promote the development of service industry; the reform of resources and energy price formation mechanism.

​

The proposal by the National Development and Reform Commission attention.

​

Early December 2009, the Central Economic Work Conference for 2010 set the tone for China's economic development.

​

The meeting pointed out in 2010 should improve people's livelihood, the development of social undertakings as to expand domestic demand, adjust the economic structure, focus, determination push this forward.

Related to the development of low-carbon economy, and continuously adjust and optimize industrial structure, and actively support small and medium enterprises, as well as adjust the way that food direct subsidies to grain farmers more benefits, such as the promotion of employment of university students offer advice and suggestions of CPPCC members, many in high-level decision-making can be manifested.

From the accelerating change in the mode of economic development, to the attention to improving people's livelihood, industrial upgrading, green economy and sustainable development, these initiatives are highlighted in comparison to early 2009, emphasized that "Paul 8" target, in the new year, China will be more to issues relating to the harmonious development of all aspects of overall socio-economic.

​

Bank stability can be Zhiyuan.

​

The effectiveness of these measures bring about how people can wait and see.

​

However, in the "fast", while the "stable" tactics on the efforts that China's development will present a new trend.

http://translate.google.com/translate?langpair=auto|en&u=http://big5.ce.cn/xwzx/gnsz/gdxw/201002/10/t20100210_20948786.shtml


http://big5.ce.cn/xwzx/gnsz/gdxw/201002/10/t20100210_20948786.shtml

 

[AlaskaDenise]

Re: European Troubles

Why Greece's problems matter

By Jorn Madslien
Business reporter, BBC News

Greece's economic problems matter, not just to heads of governments, but also to private individuals.

This is obvious for the Greeks who will soon have to get used to no pay rises, higher taxes, raised petrol prices and two more years of work before they get to retire.

But people elsewhere in Europe may also find that Greece's troubles could eventually hit their wallets.

Cost to taxpayers

The most obvious way would be through tax bills, if Europe agrees to ride to the rescue and help Greece deal with its mounting public and foreign debts.

? The valuation of wealth is coming down because of the crisis ?
Vanessa Rossi, international economist, Chatham House

It is not yet clear what leaders of eurozone nations have agreed to do, but one thing is certain: any assistance will come at a cost that will ultimately have to be borne by taxpayers in the nations that contribute.

European citizens, both those within and those outside the eurozone, would even have have to contribute indirectly if the International Monetery Fund was to get involved, since it is funded by a charge - known as a "quota" - paid by member nations.

But their contribution would have been reduced proportionally with contributions made by non-European countries.

In other words, the financial burden would have been more widely shared.

Contagion effect

All this begs the question; given the costs involved, why is the outside world getting involved in what many see as a Greek problem?

The answer turns the question on its head, pointing out that this was never a problem just facing Greece, but an international one.

How come?

Well, partly because the Greek crisis has made investors nervous about lending money to governments through buying government bonds.

Consequently, everybody's interest rates are heading higher as governments are having to pay a greater risk premium to borrow money, according to Vanessa Rossi, an international economist at Chatham House, a think tank.

"Everybody gets a ripple effect," she says, though how strongly the impact is felt will depend on how much difficulty individual countries are in.

The European Central Bank is expected to raise the eurozone interest rate by half a percentage point to 1.5% later this year, according to a Reuters poll of more than 60 economists conducted between 4 and 9 February.

So the reasons why people outside Europe should care are broadly the same as the reasons why the Greeks should care. Going forth, they too are facing slower wage growth, rising taxes and rising retirement ages as governments everywhere - in the eurozone, the UK, the US and Japan - start slashing their debts.

Reduced wealth

Take-home pay is likely to fall as it is eroded by rising taxes and everyone will have to work longer before they retire - by which time they are likely to find that their pensions have shrunk.

This is because pension funds by and large invest in stock markets, which have been hit by the crisis in Greece, or they buy government bonds, which have also fallen in value.

"The valuation of wealth is coming down because of the crisis," observes Ms Rossi. This means private sector pension funds will find it harder to make up shortfalls in their pension plans, and even individual pension saving will be hit as asset values are falling.

Heavily indebted countries such as Spain, Portugal and Ireland, or indeed the UK, have been punished more by the markets than, say, Germany.

Slower recovery

The crisis is also set to slow down the embryonic economic recovery.

? There is no expectation of any marked rebound in investment ?
Isabelle Job, Credit Agricole CIB

Economic growth in the eurozone is expected to slow to 0.3% during the January to March period, rising to 0.4% in the final quarter of 2010, according to the Reuters poll.

This will prolong the suffering of the unemployed as job creation will be slower than it would have been had there not been a crisis, explains Ms Rossi.

Already, the eurozone unemployment rate stands at about 10%, though in Spain, Europe's fourth largest economy, it is almost 20%.

Even people whose jobs are safe may feel the impact. It is harder to negotiate pay rises during periods when many are competing for every vacant job, so wages are not expected to rise quickly in the near future.

Crisis spreading

The high and perhaps rising unemployment rate is in turn further curbing the economic recovery.

"Unemployment will continue to be a drag on growth in the coming quarters," according to Isabelle Job, head of macroeconomic research at Credit Agricole CIB.

With rising unemployment, demand for the products companies make tends to fall as people have less money to spend.

With a shrinking market, companies may well reduce their capital investments, instead battening down the hatches, getting ready to ride out the economic storm.

"In an environment of moderate demand prospects and low capacity utilisation rates, there is no expectation of any marked rebound in investment," says Ms Job.

Currency moves

If such a scenario was to play out, the euro could well fall against other currency, in line with the economic weakness in the countries that use it as its currency.

This would be beneficial for exporters within the eurozone, as it would make the products they sell abroad cheaper, which in turn should lead to raised demand.

Exporters would then start hiring more workers and invest more in new production equipment - exactly the sort of developments that would bring about an economic recovery.

And until that happens, a weaker euro will make it cheaper for US, or UK or other non-eurozone tourists to go on holiday in Continental Europe - unless their own currency also takes a tumble.


http://news.bbc.co.uk/2/hi/business/8510295.stm


Published: 2010/02/11 13:33:58 GMT

 

[sharon sanders]

Re: European Troubles

Greece woes hit euro, China fuels risk aversion



LONDON (Reuters) - The euro hit a nine-month low against the dollar on Friday after a European Union summit the previous day failed to quell investors' concerns on Greece, and China's surprise monetary tightening hit riskier assets.


China
The Chinese central bank's move to raise commercial banks' reserve requirements hurt risk-taking on the view it may choke economic recovery. The move pushed the dollar index to a seven-month high and the Australian dollar tumbled broadly.
EU countries on Thursday offered their support to help Athens rein in its deficits, but a lack of detail of the assistance kept investors jittery, resulting in widening yield spreads between benchmark government bonds in Greece and Germany -- widely considered the safest in the euro zone.


more.....

http://www.reuters.com/article/idUSTRE5BF27F20100212

 

[kent nickell]

Re: European Troubles

Sharon, I was also surprised at Gross's enthusiasm on China although he did add the caveat.. 'When the price is right, go where the growth is,'

We all wish we could time the markets and there is definitely a lot of manipulation in China as elsewhere

I tend to agree with the people who think China is overheating and similar to the US will need to go through a correction (bubble burst) before embarking on a more stable path of growth

Exchange traded funds (ETFs) are becoming popular... An interesting one to watch just as a speculative indicator on China is FXP which shorts the Chinese stock market... It is currently trading at 9.52 (up .54 today) with a 52 week range of 7.16 to 47.92. It would seem to have some good upside potential if the Chinese stock market sputters...

An interesting play for those speculatively minded and that think China is overheating would be to try and ride this fund up a bit and then sell it when the Chinese market goes down and then take long positions in stocks that have been beaten down to more reasonable levels....

 

[sharon sanders]

Re: European Troubles

I agree the timing will be very hard to anticipate due to government moves that will affect the market as it strives to dampen inflationary pressures.

See PPI chart here.

 

[sharon sanders]

Re: European Troubles

As to the U.S....well....that is another thread I think.

 

[AlaskaDenise]

Re: European Troubles

Only Supply-Side Reforms Can Save Greece
A bailout from Berlin could lead to higher interest rates in Germany, rather than lower ones for Greece.

By GEORGE PAPAMARKAKIS

It is unfortunate for the new Greek government that it finds itself in the cross-fire of the markets' credibility war on the euro zone. What is at stake is not just the Greek economy, but the credibility of the European Central Bank and Euroland as a whole.

Greece is, though, as Prime Minister Giorgos Papandreou acknowledged, the weak link. The markets' main concern now is whether the government's budget consolidation plan will actually be implemented and, if not, how the rest of the euro zone and the ECB would react to such a failure.

The real problem, however, is that even if Athens manages to push though its program of tax hikes and spending cuts, it is questionable whether these measures would be enough to arrest the decline in Greece's already unsustainable public finances. Many economists are treating Greece's fiscal deterioration (in 2009, the deficit was 12.7% of GDP and overall debt was 113.4% of GDP) as cyclical and are ignoring the underlying structural issues. Greece needs to recalibrate its economy; it must move away from credit-driven domestic consumption to a more balanced growth model while simultaneously addressing the substantial fixed expenditures of its entitlement programs.

Are current measures enough? The answer has to be a resounding no. Greece is one of the most closed economies in Europe, with one of the world's lowest levels of foreign direct investment per capita and one of the highest "informal" barriers to entry within Europe. It is no coincidence that the Greek retail industry is so dominated by Greek companies. Foreign multinationals are essentially unable to operate in Greece without local partners. As a result, Greece has one of the priciest tradable-goods sectors in Europe.

The fact that currency devaluations are no longer an option for euro-zone members is often seen as a disadvantage for Greece and other periphery countries currently in trouble, such as Spain or Portugal.

This is one of the most misunderstood issues by the market. Past devaluations have not addressed Greece's lack of competitiveness and would not do so today. Greece's fundamental problems are structural. To regain lost competitiveness, Greece needs to implement supply-side and institutional reforms, such as reducing the number of state-owned companies. This would make the economy more competitive, and reduce sources of corruption and nepotism. Instead of rotating senior civil service staff in line with the political cycle?further exacerbating an already ineffective bureaucracy?these appointments must be made based on merit, not party affiliations. Due to the lack of political will to face down illegal land claims, Greece?together with Albania?is now the only country in Europe that does not have a centralized and computerized land registry, a fundamental principle of any modern economy. As a result, farmers would routinely start cultivating public land, claim it as their own and eventually even receive agricultural subsidies.

Institutional reform must lead to a significant reduction in regulatory and legal uncertainty. At the moment, businesses need numerous approvals and have to follow myriad regulations in order to operate in Greece. What's more, these bureaucratic hurdles change with high frequency. The exceptionally litigious nature of Greek society and the huge backlog at Greek courts only add to the high costs of doing business in Greece.

Greeks complain all the time about why the prices of products are more expensive than in the rest of Europe. They wouldn't be if only Greece would level the playing field for businesses and allow the competitive forces of a free-market economy to work. Finally, political parties need to fortify their positions against special business-interest groups that, through their control of the media, still steer the political agenda.

Luckily, this government has a strong mandate and is led by a reform-minded prime minister. Now is the time to promote an honest economic debate within the country. The Greek press can help with more objective, factual reporting rather than sensationalizing the situation at every opportunity. It is particularly unhelpful when the media blames "foreign speculators" (which undoubtedly exist but are not the cause of the problem) for all of the country's economic ills. Let's not forget, after all, that in the past two months alone, foreign creditors have seen the value of their Greek government bond holdings fall by 20%?a loss of tens of billions of euros.

Greece has substantial debt-servicing needs in April and May that, together with the country's regular spending requirements, means it must soon borrow an estimated ?20 billion. This would be a test for any country of this size let alone one that has damaged its reputation in international markets. Investors will likely want to see more action from the government before buying any more Greek bonds. This will be true irrespective of the general consensus?Thursday's inconclusive European Union summit notwithstanding?that because the euro is ultimately a political creation, the euro-zone countries (e.g. Germany) will eventually bail out Greece.

Without comprehensive reforms, the costs for Berlin may go beyond just financing Greek debt. The real price might be a convergence of German yields to the high level of Greek bonds rather than vice versa. It is this inverse convergence that fiscally orthodox countries are now starting to fear and which may be beyond the control and abilities of the ECB.

As Greece's economy is in for a demand-led contraction, only supply-side reforms can restore economic growth and investor confidence in Greek debt.

Mr. Papamarkakis is co-founder and managing partner of North Asset Management, a London-based asset management company active in the European government bond markets.

http://online.wsj.com/article/SB100...5065033057524318.html?mod=WSJ_latestheadlines