The future of European stabilty?

[Surferbeetle]

What the Greeks really need is someone who leaves the Euro, converts all debt to free exchange rate Drachme, inflates the debt away and by the way also breaks the sticky wages that inhibit many reforms.
Greece could be out of its troubles by 2020, if only it leaves the Euro and gets rid of the debt. It might become unbearable as EU member by doing so, though.
Maybe it could let its membership rest (= not being subject to EU rules and decisions, but also no Greek bureaucrats in Bruxelles, no Greek EU parliament or commission seats and no Greek vote in the councils).

Ok, let's assume that Greece will leave the Euro.

Given the following assumptions on my part, I have some questions.

First the assumptions:

• The Greek Drachma will trade below the Euro. Let's assume 341 Drachma to the Euro for the purposes of this conversation at the start of the exit from the Euro, and that as more information regarding Government debts surfaces the conversion rate will further drop against the Drachma.

• Greek government employee rolls will be decreased, resulting in an increase in unemployment....government employees, companies offering government services, etc.

• Greek social services will be decreased, resulting in increased uncertainty and restlessness in a vulnerable segment of the population.

• The average Greek will act to maximize their lot in life.

Now the questions:

• Given that the average Greek is aware that a hypothetical 1,000 Euro's in his/her bank account is about to lose value in the conversion to Drachma, how will bank runs be controlled? (An exchange rate of 1 Euro = 341 Drachma today, perhaps worse tomorrow) Corralito?

• How does the precedence set with your proposed course of action for Greece impact Slovenia, Ireland, Portugal, Italy, Spain, and potentially France?

• What are the measures to be put in place to prevent bank runs in the rest of Europe?

• What are the anticipated impacts of the exit of Greece from the Euro upon the rest of the world?

[Fuchs]

Only Greece and Portugal makes sense for an exit from the Euro.
Thus only bank runs in these countries make sense. They could happen without making sense, of course.


In regard to Greece, I would simply not exchange Euro for Drachme, but instead simply establish Drachme as the official currency - and send the police to close all businesses that refuse to accept Drachme.
Euro would effectively be a foreign currency, and be used accordingly (see Kosovo).

Meanwhile, the Greek state would receive all its revenues in Drachme and pay all its employees and contractors in Drachme.

Whatever state bonds the Greek banks hold (and would lose) could be compensated by the government adding equity capital to those banks on an as-needed basis. A kind of equity capital giver of last resort for one year (including an immediate re-election of the management board so current shareholders have the opportunity to make sure the management doesn't see this as a carte blanche for risk speculation).


There would basically no reason for a bank run, as the Euros in bank accounts would not lose value and the banks would have liquidity.



Impact outside Europe; see the latest Argentinian bankruptcy. Everyone got over it.


Whatever damage such a drop out of the Euro means; it has to be compared to the damage that's being done by staying in it.
The currency is awfully overvalued for Greece, the ECB is no lender of last resort to them and they cannot handle their debts without a bankruptcy or strong debt devaluation (-1/2 is probably not enough; they would be on the safe side with -2/3).


They' have a between the devil and the deep blue sea. No answer is going to be nice.

[Surferbeetle]

They' have a between the devil and the deep blue sea. No answer is going to be nice.

Agreed. Risk is increasing for all of us in this interconnected world (..."the probability that an investment's actual return will be different than expected.")

In my previous post I posed some questions regarding how a Greek exit from the Euro and how that will impact the average Greek who uses banks to pay bills and save a bit of money. Retail banking is not the only sector that is impacted however. (Greece seems to have 20 main banks at the time of this post by the way - Citi and HSBC stand out).

The impacts upon Contract Law are interesting to think about.

Commercial Banking, Investment Banking, Central Banking (ECB and Bundesbank), and the IMF are also involved as bank runs are not limited to just the retail sector. We can see associated risk expressed as increased interest rates for sovereign debt, reduced interbank lending, and increased lending by central banks.

• Invisible Bank Run Becomes Conversation With 7% Italy Yield, By John Glover and Elisa Martinuzzi - Nov 11, 2011 9:32 AM MT, Bloomberg News

“The market is pricing in an Italy event and assuming that Italy fails,” said Patrick Lemmens, a senior money manager who helps oversee about $13 billion, including Intesa Sanpaolo shares, at Robeco Groep in Rotterdam.

Household deposits in Italy still are expanding “at a moderate pace,” according to the Bank of Italy. That’s a contrast to withdrawals seen in Greece, Ireland and Portugal.

Italy’s lenders started increasing their reliance on the ECB in July, when end-of-month borrowings from the central bank minus the amount deposited reached 58.8 billion euros, according to John Raymond, an analyst at CreditSights Inc. in London. Before that, net borrowings from the ECB ranged from 9 billion euros to 30 billion euros, he said.

The Economist Intelligence Unit has a timely, and interesting, read to consider: After Eurogeddon? Frequently Asked Questions About the Breakup of the Euro Zone.

There are too many unknowns to make confident predictions about the trajectory of the crisis or the extent and speed of any break-up, should efforts to save the single currency fail. The following FAQ represents an exploration of alternative scenarios that diverge from our central forecast. We attach a 60% probability to this central “muddle through” scenario, not least because the catastrophic consequences of a break-up provide a strong incentive for policymakers to do whatever is necessary to save the euro. In contrast, we think there is a 35% chance of a break-up of the euro zone, in which the most likely scenario would be the exit from monetary union of the smaller so-called “periphery” economies, as well as both Italy and Spain. We assign a 5% probability to Greece leaving the euro zone on its own, without triggering other departures.

[Firn]

Having very recently aquired Greek bonds for a price of 40 cent on the € running only another year I have to say that I do believe that Greece will pay back his debts reduced by a big "voluntary" haircut, but that it also has to get the economy running again and to clean up the economic mess resulting in huge regular debts.

Sadly Greece and a lot of Greek have used European funds too often in the worst possible manner, making them nothing more then very inefficient short-term boosts for income and growth. This approach is sadly also quite widespread in southern Italy, where money from the North and Europe just seems to flow through rotten buildings and invented land into the pockets of some "clever" ones.

However I do think that the fellow Italians still think that Italy will make it. Sadly it is pretty much Italian to react when it is almost too late, just look at the way Italy entered the Euro and that many think politics don't make an impact on their live. We had for so many years now a deeply corrupt, shadey sun king as PM, very capable to keep his power through all sorts of "manovre di palazzo", media power and money but utterly uncapable to work for the good of the nation and the common people. A PM able to sell failures with a false smile and big gestures, perhaps best seen in the earthquake of Aquila where he played the salesman with great acumen and but hardly bettered the live of the fellow countrymen hard hit.

So let us hope that Monti like Prodi before will do the right thing and won't get hindered to much by the "casta politica". I still remember my anger when Prodi got backstabbed by a small radical part of his fragile alliance, paving the way for Berlusconi once again. The gravitas of the situation should however (hopefully) keep such attempts in check.

I also don't believe that Italy will leave the Euro, the pride is in this case too big, perhaps trumping also economic reason.

[Surferbeetle]

Having very recently aquired Greek bonds for a price of 40 cent on the € running only another year I have to say that I do believe that Greece will pay back his debts reduced by a big "voluntary" haircut, but that it also has to get the economy running again and to clean up the economic mess resulting in huge regular debts.

No risk, no reward.

Sadly Greece and a lot of Greek have used European funds too often in the worst possible manner, making them nothing more then very inefficient short-term boosts for income and growth. This approach is sadly also quite widespread in southern Italy, where money from the North and Europe just seems to flow through rotten buildings and invented land into the pockets of some "clever" ones.

Regulatory frameworks and associated staffing seem to be a tough balance for any country to get right; criteria that most can agree too (popular by-in) enforced by impartial regulators with fairly recent industry experience, in sufficient quantities, with appropriate powers to reward and punish...hmm maybe it's just a utopian dream

However I do think that the fellow Italians still think that Italy will make it. Sadly it is pretty much Italian to react when it is almost too late, just look at the way Italy entered the Euro and that many think politics don't make an impact on their live. We had for so many years now a deeply corrupt, shadey sun king as PM, very capable to keep his power through all sorts of "manovre di palazzo", media power and money but utterly uncapable to work for the good of the nation and the common people. A PM able to sell failures with a false smile and big gestures, perhaps best seen in the earthquake of Aquila where he played the salesman with great acumen and but hardly bettered the live of the fellow countrymen hard hit.

There are many who are rooting for you guys.

The engineering & manufacturing business cluster which covers parts of northern Italy, Austria, Switzerland, and Southern Germany has always been interesting to watch. Aprilia, Rotax, BMW, Brembo, Bimota....Massimo Tamburini's work in particular embodies some of that particular/regional engineering sensibility IMO.

The people/culture/languages/food/geography were great and I never locked my doors when I lived in that region....

So let us hope that Monti like Prodi before will do the right thing and won't get hindered to much by the "casta politica". I still remember my anger when Prodi got backstabbed by a small radical part of his fragile alliance, paving the way for Berlusconi once again. The gravitas of the situation should however (hopefully) keep such attempts in check.

Mr. Moniti's ascent to power is worrisome to me. Technically, he certainly appears to have the required skills for this crisis. Politically, he will have a challenging/diverse field (political class) to contend with (for how long and to what extent will the People of Liberty Party - among others - cooperate with him?) and forming political consensus rarely appears to be easy (technical grounds, deals, patronage, fear, jealously, love, etc). The biggest question in my mind, with this appointment, concerns adherence to a democratic process...

I have hope, we will see how it goes...

[Firn]

No risk, no reward.
There are many who are rooting for you guys.

The engineering & manufacturing business cluster which covers parts of northern Italy, Austria, Switzerland, and Southern Germany has always been interesting to watch. Aprilia, Rotax, BMW, Brembo, Bimota....Massimo Tamburini's work in particular embodies some of that particular/regional engineering sensibility IMO.

The people/culture/languages/food/geography were great and I never locked my doors when I lived in that region....

Thanks, hopefully the trust and the economy will be restored.

Northern Italy is really part of a powerful, central European cluster in terms of enterprises. As a person living and working as part of it, speaking Italian, German and some French you really appreciate the importances of the links crossing many borders. The north has attracted (at least) in the last fifty years a lot of internal immigration, which however in recent times has been dwarfed by the external one. From an economic point of view the latter has been incredibly important one, taking mostly jobs nobody else wanted to do. [From a military perspective, this is (sadly) similar. Due to the conditions and the pay Northern Italians are hard to find among the lower ranks of volunteer armed forces]

While I know the political discourse and reason behind decisions like the "patti territoriali", it has, like the poor support for many "mestieri", it has done little to attract the precious young labour force into the right geographical and business areas. Anyway the Italian strenght is also in it's creative and hard-working "Mittelstand", pretty similar to other regions in the big cluster.

Mr. Moniti's ascent to power is worrisome to me. Technically, he certainly appears to have the required skills for this crisis. Politically, he will have a challenging/diverse field (political class) to contend with (for how long and to what extent will the People of Liberty Party - among others - cooperate with him?) and forming political consensus rarely appears to be easy (technical grounds, deals, patronage, fear, jealously, love, etc). The biggest question in my mind, with this appointment, concerns adherence to a democratic process...

I have hope, we will see how it goes...

Napolitano used his constitutional power IMHO wisely .You are of course right that he lacks the direct vote of the people, not such much as a vote of confidence but in form of a powerful party under his control. Berlusconi's government was surprisingly long-lived due to him holding many threads of power firmly in his hand, among them the biggest political party, "his" party, in which hardly anybody was ready to criticize him. Your biggest question, adherence to a democratic process might surprise the ordinary Italian, as it is pretty much a given that until we get election barter, trading, patronage, deals and so forth will make the palazzo an even busier place then usual.

It is of course an important question also for the Italian investor. Should he invest into Italian gov. bonds? Traditionally a lot of Italian money is owed to Italians, but it is of course not always wise to put alot of eggs in one basket.