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Greece's liquidity problem needs to be sorted first

Robert Peston | 13:09 UK time, Friday, 12 February 2010

The pathology of banking crises and sovereign debt crises are very different.

They may stem from a similar fundamental cause: excessive debt or leverage.

Greek ParliamentBut banks go kaput overnight, while countries go bust in a malaise that tends to be long and drawn out.

So although the erosion of investors' confidence in the ability of Greece to pay its debts may turn out to be as significant as the collapse of Lehman Brothers in the autumn of 2008 or the wholesale run on the likes of HBOS and Royal Bank of Scotland, they are very different phenomena.

The most important distinction is that once confidence in a bank has been lost, that's it - fat lady sings, curtains, goodnight.

How so?

Well all banks suffer from the endemic vulnerability that they borrow short and lend long. So if too many of a bank's creditors and depositors want their money back at the same time, that's a disaster - because most of creditors' money will have been lent out to the likes of homeowners or companies, which don't have to pay it back for years.

By contrast, if you happen to have lent money to the Greek government by buying a Greek government bond, you have no right to demand your money back until the redemption date on the bond (although you should be able to sell the bond to another investor).

So the moments of painful truth for governments perceived to be in financial crisis are those contractual dates when the debts they've incurred years ago have to be repaid.

According to Laurence Mutkin at Morgan Stanley, the "pressure point" for Greece will be April and May, when 20bn euros of debt and interest falls due.

In particular, one bond of 8.22bn euros has to be redeemed on 20 April.

And another one of 8.1bn euros is supposed to be repaid on 19 May.

Looking at projections of Greece's tax revenues, expenditures and cash in its central bank, it will struggle to find the 20bn euros.

However all is not lost.

In normal circumstances it would simply borrow a further 20bn euros from investors to pay off the old debt - although to state the obvious, circumstances are anything but normal.

The significant issue - which seems to have been lost in politicians' rhetoric - is that Greece faces two distinct (though related) problems.

The first is a liquidity challenge. Can it find 20bn euros to get through April and May?

If it can, then it may well be able to finance itself through the rest of 2010, since there are no other big spikes in debt payments for the rest of the year.

And, by the way, on this analysis, Ireland looks in very good shape for 2010, says Morgan Stanley, in spite of its big deficit and debt - because it has more than enough cash to cover forthcoming debt redemptions.

By contrast, the borrowing and repayment profiles for Spain, Portugal and the UK are rather more like Greece's - with some substantial financing challenges ahead.

All that said, it seems pretty clear that if the eurozone's members were prepared to underwrite Greece's 20bn euros of imminent refinancing need, that would buy the Greek's a good deal of time to sort its second challenge - how to remain solvent by cutting its public expenditure so that it comes into balance with revenues.

That is a task for heroes: it requires persuading Greek citizens to accept cuts in public services and living standards for a prolonged period.

Meanwhile the world's regulators might perhaps rebalance risk and reward a bit more in the direction of the Greek people and away from banks, hedge funds and assorted financial speculators by revisiting whether naked trading in credit default swaps should be permitted.

a searing indictment of the powerful financial motives to destabilise Greece - or Portugal, or Spain, or the UK - of those who would profit if it were to default, thanks to the bets they've made on default in the CDS market.

The author may be seen as an intriguing authority: he is James Rickards the former general counsel of Long-Term Capital Management.

For those with short memories, LTCM was once the world's biggest hedge fund, whose insane leverage and indebtedness took the global financial system to the edge of the precipice.

What's that cliche about the joy at one sinner's repentance?

Comments

  • Comment number 1.

    There may be hope for us all yet if a poacher demands bailiffs with better weapons!

  • Comment number 2.

    Imagine the pranks I could pull if I could get a secret life insurance policy on some stranger that I picked at random from the phone book, i.e. I had no insurable interest. I could hire a hitman to get rid of him, and claim my prize. Well, that's exactly what bankers are doing with Greece, using CDSs.

    You know, maybe we should send the lot of them to Ellesmere Island?

  • Comment number 3.

    This is a classic case of mismatching of assets and liabilities. Insurance companies would be required by regulation to hold reserves to safeguard against this type of event. Its a shame that there are no equivalent international regulators to keep countries solvent.

  • Comment number 4.

    Remember that the banking & sovereign debt crises are manifestations of the underlying crisis in profitability.

    But why are there crises in profitability, i.e. booms & busts?

    The economists have no answers beyond animal spirits (Keynesians) The 'wrong' monetary policy (Austrians) doesn't explain the crises just their exaggeration.

    Where's the economic model that has the rate of profit & an explanation of economic crises?

  • Comment number 5.

    Thanks Robert,

    That was the best layman's explanation of the Greek / Piigs crisis that I have seen lately.
    Great work.

    Will Portugal, Spain, etc and the UK find enough Sovereign Wealth funds to keep them from defaulting over the next three years ?
    Only time will tell.

  • Comment number 6.

    Banks aren't allowed to "go kaput overnight" - they get bailed out. This leads to a loss of "moral hazard" and a fundemental inbalance in the risk / reward ratio.

    With the experience that you can bet against banks without the potential loss of depositors funds, surely speculators have been taught that to take such risks is a sure way of being rewarded and that it is a "victimless crime". To push the analogy used in James Rickards' article, hurting the pi帽ata results in no hardship to the assailants and there is no "higher authority" that they fear. In cases where there is no teacher in the playground to stop the game a feeding frenzy develops with inevitable excesses.

    So who will stop these "socially useless" institutions? Regulation is unlikely to work, particularly if it is self-imposed, and there is no global policeman. A "tobin tax" will have little effect. In short, perhaps the only solution will be an aggressive form of penalty financially more equivalent to capital punishment than the current fines or community service order.

  • Comment number 7.

    Robert, you hit the nail on the head.....
    "...the worlds' regulators might perhaps rebalance risk and reward a bit more in the direction of the Greek people and away from banks, hedge funds and assorted financial speculators...".
    EXACTLY the same applies to Britain and the USA.
    This is the dire problem we face today.
    Without massive reform, control and regulation, the West could be facing a political disaster....perhaps even the return of communism. Certainly serious union trouble, general strikes etc.....something we thought was behind us.
    Are governments blind? Or just stupid?
    City wide-boys, uncontrolled financial markets and deep-pocketed speculators are bringing the West to its' knees.

  • Comment number 8.

    "By contrast, the borrowing and repayment profiles for Spain, Portugal and the UK are rather more like Greece's - with some substantial financing challenges ahead."


    Onward-ho says no!

    1 UK has far more longer term rather than shorter term borrowing than the PIGS.
    2 UK debt is far more UK owned.(Much of it by BOE following QE!)
    3 UK does not have credibility problem of false accounting the Greeks have had.
    4 UK,[ as opposed to the Germans who are static (see today's figures)and the PIGS, who are shrinking}, is, as you said 2 weeks ago,out of recession !

    So let's not do a Northern Rock on UK plc!

  • Comment number 9.

    How do you put the skids under the Euro? Add a little Greece

  • Comment number 10.

    8 Also
    5 UK's interest premium is only about 50-75 basis points over Germany's versus the extra 305 points the Greeks are paying , our public sector debt as a percentage of GDP has been considerably less than Germany's over the past 20 years,and is only now approaching Germany's level.

  • Comment number 11.

    Well done, Robert, for clearly splitting out the liquidity crisis of April and May from the longer term issues.
    The trouble for Greece (assuming that the short term liquidity is indeed sorted out by the EU and 16 billion is not that much) is not really the speculators on the bond issues etc. The real problem is that the tax receipts are structurally lower than expenditure and have been for many years.
    Even if all traders are locked up and banned from dealing in CDSs etc, that basic problem will not be solved.
    When people compare the UK to Greece, it is very unlikely that liquidity will really be a problem for some time (the Bank of England can carry on printing money, for example), but we have exactly the same longer term problem.

  • Comment number 12.

    There is a nation in Europe who needs to raise 拢225Bn from the markets this year, while only being able to raise 拢144Bn in income tax from its residents. And next year it needs to raise almost 拢200Bn more ontop of this. And the next year it needs to raise over 拢150Bn more again ontop of this. And the next year.... you get the point.

  • Comment number 13.

    In the old days speculators took down currencies, now it the countries!
    Does anyone in any government look at history ? They might all need degrees to work there but from what is happening the degrees were taken in media studies and arts.....

    Overall a new age for Greece, taken over by the the rest of Europe this time, not just the Romans. They will have to sell a lot of olive oil to pay back this "loan".

    How will our next government get us all out of our mess? I think all the family silver has been sold off.

  • Comment number 14.

    "... But the crisis is manageable, and Europe has sent clear signals ..." says the man with form! Signals of conspicuous, predictable Euro fudge which the hedge funds will love, whether or not you agree with their morals. He seems extraordinarily naive to me since the Greeks have a time-honoured tradition of coups. Also their army has 700 battle tanks & 400 combat aircraft, & so the attitude of their military to the austerity programme will be crucial. No, if anarchy breaks out in Greece this one really could blow the Euro currency experiment apart.

  • Comment number 15.

    A nice clean split between liquidity and insolvency but it isn't that simple.

    Part of the reason no one wants to roll over the Greek short term debt is that given likely growth rates and budgetary performance their long term debt to income ratio is not sustainable. Given that eventually they are likely to default no one wants even short term hold any of their debt hence the liquidity problem.

    All very well blaming the messenger (market prices of CDSs) but remove the option to insure Greek bonds against capital losses which is what the CDSs allow and the underlying bonds become still less attractive - but that unfortunately isn't part of your agenda is it Mr Peston.

    The EU needs to look at how they saved the EMS by relaxing the float bounds to save the PIGS at an affordable price )perhaps a guarantee of Greek debt by the ECB?) but there is still a long term cost of moral hazard if they do this.

  • Comment number 16.

    Greece has some advantages in that, being part of the euro there are several other countries who would not want to see it go down the tubes (if only because of the impact that it would have on the euro and thus their own currency).

    However, the UK has no such support for just currency reasons. So, if whatever government fail to get spending under control because it is totally out of control at the moment and not just in relation to the recession - even before then it was but less apparent to everybody), then come the UK repayments, the interest on the new borrowing will have to be higher which will cause interest rates to rise. In practice this is not all bad. Most people with mortgages have been through much higher interest rates. If they moved up the housing ladder because of a low base rate then they are just daft. Thus their own household budgets can manage higher interest rates. Plus, the UK needs to encourage some savers. Pensions down the toilet and worthless, any savings losing value in relation to inflation, etc. why would anybody in their right mind save for their security and future. But that lack of savings and excessive debt is part of the problem. So maybe the UK government having to pay a bit more for new borrowing would be a good thing (within reasonable limits). Add to that that slightly higher interest rates would help the already far too high inflation. Remember that the current very high inflation rate is not just a month or two "blip" but has been very high for a long time now and with current economic conditions (UK and overseas) is unlikely to drop on its own (despite the wishful thinking of BoE).

  • Comment number 17.

    ''Banks....not until the fat lady sings.Kaput.''

    Greece withdraws from the Eurovision singing contest, almalgamation, or is rejected ?? Not quite trickless in Piquet.

    Not going to happen is it ??

    Patriotism NOT the last refuge of the scoundrel ??
    [1.2:In response to previous question:Why did Aachen not run in the Totesport Trophy tomorrow ?]

  • Comment number 18.

    That is a task for heroes: it requires persuading Greek citizens to accept cuts in public services and living standards for a prolonged period.

    So the ordinary Jo and Josie will be asked to go without the services they depend on. Their living standards will be reduced to what, exactly?
    And the rich folk, they'll be just fine as usual, might have to forgo the second yacht will they.... while the bankers claim their over-inflated bonuses.

    No I wouldn't be too willing to accept that myself.

    This is not a game of cards, it is about people's lives, about feeding the population, providing healthcare, education and all the other things we consider to be essential.

    The bankers, the traders and all the rest of them really should see those bits of paper from where they earn their mega bucks for what they really are. The time to take responsibility for their actions is long overdue.





  • Comment number 19.

    Thank you Robert for this interesting analysis. However having also followed the analysis of notayesmanseconomics I feel that you have missed several points. For example countries can borrow short too and in effect lend long with their spending promises (I think onward-ho also makes this point). Also notayesmanseconmics points out many moral hazards in current behaviour. Let me suggest another, if you do not like a market shut it down. If you and the governments are so sure that these CDS are wrong why do you not trade with them? Also Greek bond yields rose because of malpractice and misrepresentation would you ban that too?

    Whilst some of these markets do misbehave and the prospect of hedge funds profiting from a crisis does not fill me with glee. It would be worse if markets were closed down because there is a massive moral hazard here for the authorities. I think that it would be the inconvenient ones that get closed which is not necessarily the same as ones which have their own moral hazard.

  • Comment number 20.

    This morning's FT contains a searing indictment of the powerful financial motives to destabilise Greece - or Portugal, or Spain, or the UK - of those who would profit if it were to default, thanks to the bets they've made on default in the CDS market.

    How many times have people, over the past year or so, mentioned words like 'war', 'appreasement', 'terrorism' and 'treason' when commenting on the financial crises....

  • Comment number 21.

    Is not one route through this for the EU to invest in infrastructure or public service related projects in Greece and retain an economic interest in the developments until Greece can buy the enterprises? This would enable Greece to undertake public spending cuts to bring its budget under control whilst not inflicting unnecessarily tough curbs on essential developments.

  • Comment number 22.

    #18 "This is not a game of cards, it is about people's lives, about feeding the population, providing healthcare, education and all the other things we consider to be essential. "

    True but what you consider essential and what the Greeks consider essential may differ - it is for the Greeks to pay for their essentials not expect the world to pay it for them.

    After all would you have any sympathy for a normal family earning say 拢15000 a year in the UK who decided that 3 foreign holidays a year, a new BMW every year and a very flat screen TV in every room were "essential" but not having the income for all that decided to borrow all the money to pay for it and then complained that it all our fault and we should not only pay off most of their debts but also given than anouther 拢20,000 a year so that they could continue with their "essentials"

    Greece will have to cut their spending and raise taxes and yes this means a re-think about what constitutes "essentials"

    In the UK we need to do the same thing - over the next parliament cutting public spending by about 20%, no political party is yet willing to give us a glimpse of what that means and what things govt will simply have to stop doing - or are we supposed to believe that "effeciency savings" will do and that the govt trackrecord on IT procurement is perfect

  • Comment number 23.

    Robert,
    Your analysis is missing the footnote that the UK is only between 18 months and 3 years away from being exactly where Greece is now. You could weep to think that such a great nation is being brought to the level of a basket case like Greece. All the numbers are out there Robert... why are you and the opposition not warning that we have a small tiny window of opportunity to turn our juggernaut now, and at least avert the worse of the impending depression?

  • Comment number 24.

    But weren't we told that Gordon Brown had saved the world? So how come Greece becomes the exception?

    What do these speculators expect to gain from ripping a country apart and ruining millions of people? Can't they see the biggger picture or do they expect us not to hunt them down as if they were terrorists.

    You can see them now all lined up in the dock of No.1 Court at the Old Bailey.

    `Not me guv, I was only following the rules so I did nothing that was against the law.'

    Where have we heard that before?

    I think we need to bring integrity back into our financial affairs; the harsh slap of firm government will not go amiss. If Westminster can't or won't provide it as it is up to its armpits in the same sort of sleaze, then Brussels must oblige. Now they are in the firing line they might just do it now.

  • Comment number 25.

    "Meanwhile the world's regulators might perhaps rebalance risk and reward a bit more in the direction of the Greek people and away from banks, hedge funds and assorted financial speculators by revisiting whether naked trading in credit default swaps should be permitted."

    The very idea that the governments have done nothing to change the regulations regarding the instruments that caused the crisis is all anyone needs to know about who runs the governments....the banks...it will only happen again. Your governments cannot be trusted to protect your interest. Marx was right about what would destroy captialism....

  • Comment number 26.

    This article and so many like it simply does not address the real problem. It assumes the end game is a balanced budget in Greece. It isn't. The consequences of the last 2 years is that Western Goverments are going to be dangerously in debt (that is in excess of 80% of GDP). They will be incredibly vulnerable to any subsequent adverse development and will rapidly tip into crisis.
    The UK demonstrates that well. We went into this with about 40% GDP debt. That with QE allowed the Goverment to throw about half a trillion pounds at the banking crisis to keep the economy alive. We will get back to balance with debt about 90% of GDP at best. Our absurd Government's best promise is reduce the deficit to about half of its current level (that is down to a completely unsustainable 6% of GDP) in 4 years. The consequences of that is that if any subsequent crisis transpires (which is very likely given that many Governments will be in the same boat) it will be extremely difficult to raise the money spent this time. To protect ourselves in this more uncertain world we need to get into surplus and stay there as fast as possible. The social consequences of doing this will be painful. The economic consequences of not doing this could be disastrous.

  • Comment number 27.

    A few random thoughts.

    Basic bank exam key info:
    Never borrow short and lend long.
    Don't lend more than 75% of the asset value and keep capital to make it up to 100%.

    They were in the bank exams when I took them years ago. I escaped from banking shortly afterwards.

    Greece, Spain, Portugal and Ireland have all been net beneficiaries of the EU, so it is hardly surprising that they now have not only to live within their means but also be contributors to the EU so that some of the newer EU member states can be beneficiaries. That's tough stuff to not only live within your means but also make a net contribution when you have been used to being a beneficiary.

    Smug faces in other places simply don't get the dangers of the transition from beneficiary to contributor.

    Why is Mervyn King so keen on cocos? It appears to be a desire for another crash or bang to happen as the point of conversion cocos will lead to the death of the bank concerned. If Mervyn is suggesting that contingent capital should be part of the liability structure of the banking system. It would surely ensure that investors hedge and sell the stock short to balance out the effect of the reduction of value thereby making everyone get their liquidity out at one time = CRASH!

  • Comment number 28.

    Someone (Thomas Jefferson, I think?) once wrote that the price of freedom is eternal vigilance. This has proved itself so true again today when Goldman Sachs has been shown up as using one of its corporate computer servers to fiddle the result of a No10 poll on the Tobin Tax.

    Another one (On 大象传媒 News Channel) today argued that it is a good thing that the UK is outside the Euro because sterling could depreciate so easily. Hang on a minute, this depreciation made us all poorer - but not the banker who said it of course, because he has just stolen our money to keep himself a wash in bonuses which by the way have gone UP since 2008 while we all get poorer.

    The 大象传媒 are also reporting today that banker's bonuses for 2009 are up on 2008.

    (Apologies for partially reposting my post 26 from the previous blog.)

    Can any employee of Goldman Sachs (or other banking advocate) please supply any good reasoning as to why the people should, or will, put up with this? And further explain how the bankers hoped to get away with this?

    There are people staving in many parts of the World and these leeches expect to steal more and more money from the poor! It is beyond rationality to expect that the World's peoples will put up with such blatant exploitation.

    I would be really pleased to hear a banking supporter defend the bankers. They may have suborned the regulators, or seen to that that incompetents are employed that do their bidding, but this is the internet age and we can fight back.

  • Comment number 29.

    22. At 3:21pm on 12 Feb 2010, Justin150 wrote:
    #18 "This is not a game of cards, it is about people's lives, about feeding the population, providing healthcare, education and all the other things we consider to be essential. "

    True but what you consider essential and what the Greeks consider essential may differ - it is for the Greeks to pay for their essentials not expect the world to pay it for them.

    After all would you have any sympathy for a normal family earning say 拢15000 a year in the UK who decided that 3 foreign holidays a year, a new BMW every year and a very flat screen TV in every room were "essential" but not having the income for all that decided to borrow all the money to pay for it and then complained that it all our fault and we should not only pay off most of their debts but also given than anouther 拢20,000 a year so that they could continue with their "essentials"


    'OK. You win. Lets pull out of all sharing of wealth....the feckless poor in Greece and all over the world have no one to blame but themselves.... and when east Africa hits the next famine, we'll be smug and tell the hungry villagers they shouldn't have sold the land to funds who made money selling grain to the highest bidder. Feckless or what! That just does sit too easy with me at all.'

    We've had that debate over and over again for more than a year. A lot of people in the west have grasped what the spivs have been getting up to all these years.
    Just not the kind of world I want to live in. I've no idea what the Greeks would consider to be essential - that is for them to decide democratically. I reckon that given they are human, food, healthcare and education would be pretty important. The interviews I've seen this week don't lead me to think otherwise.

  • Comment number 30.

    18. copperDolomite:

    "This is not a game of cards, it is about people's lives, about feeding the population, providing healthcare, education and all the other things we consider to be essential. The bankers, the traders and all the rest of them really should see those bits of paper from where they earn their mega bucks for what they really are. The time to take responsibility for their actions is long overdue."


    You're assuming of course that leeches, cockroaches and locusts have the ability to take responsibility for their deeds or consider the moral ramifications of their actions.

    In my experience you don't enter into moral debate with parasites.
    You crush them under the heel of your boot.

    The government had better wake up and start taking 'financial services' in hand. If they don't do it quickly, the people will do it for them.

  • Comment number 31.

    22. At 3:21pm on 12 Feb 2010, Justin150 wrote:

    > 3 foreign holidays a year, a new BMW every year and
    > a very flat screen TV in every room were "essential"

    They sound like Mr and Mrs Banker to me!

  • Comment number 32.

    In the modern world, banks are too big to fail, but nations are not. I don't think either the governments or the banks really understand how people are fed up with this kind of on-going corruption and placing the fate of personal incomes to nations in the hands of unregulated bankers. None of them will understand when the revolutions begin. Before the end of every ruling government in history has come the consolidation of wealth.

  • Comment number 33.

    "In particular, one bond of 8.22bn euros has to be redeemed on 20 April. And another one of 8.1bn euros is supposed to be repaid on 19 May."

    You've made me feel really guilty now. OK Tell them they can give me the 8.22bn Euros in June, but I absolutely insist on the 8.1bn in May

  • Comment number 34.

    Hey we're doing over-time at the mint in the UK... surely if the Greek Government chips in on the Magenta ink we can print them 16bn Euros off?

  • Comment number 35.

    The UK is unlikely to default on its debt because it can print money and inflate its way out of trouble.
    Greece is unable to do this because it is tied to the Euro so it is compelled (hopefully) to come to terms with its fundamental problems.

    I may be mad but, to me, that makes the Euro a better bet than the pound in the long run. Is that too simplistic ?

  • Comment number 36.

    Robert.

    You refer to the Greeks second challenge as "how to remain solvent by cutting its public expenditure"

    Cutting public expenditure is not the only way for Greece to remain solvent, it could raise taxes instead. In a recession it makes much more sense to raise personal taxes on the rich - on their wealth, not just their income - rather than to reduce public expenditure.

    Furthermore, if the extra taxes are carefully targeted on a small minority of very wealthy people, there is no risk of serious public unrest. Indeed, the wealthy are generally seen to have been responsible for the crisis, so the move would be generally popular.

    It is this ability of governments to transfer private funds to the public purse by taxation. which makes sovereign debt intrinsically different from private debt.

    Those who speculate against Greece cannot cause its currency to become worthless. The usual means by which speculation destroys national public and private wealth simultaneously.

    If the Greek government keeps its head and does not let itself be bullied into destabilising expenditure cuts and balances its budget by targeted taxation instead, Greece will be able to avoid political disaster.

  • Comment number 37.

    From the Great Fall 2008-2019 isbn 2323-3897893-99349-001

    The financial tsunami that was to engulf Europe began in the Aegean sea. Greece could no longer refinance her debt and European Central Bankers at the insistence of Germany would not step in to help.

    The famous quote "The Weak must not Pollute the Strong" was criticised for its Nazi overtones, but the Germans were right. Today only a small group of five countries remain in the Euro led by the Germans.

    Chaos reigned as martial law was declared in the streets of Greece. The population was confined to their homes as the Greek Government rush printed the Drachma for recirculation.

    Riots ensued as the population realised their dracmas were no more than Monopoly money. A left wing Government defaulted on debts. Two years later it purchased its own debt back at 10c on the dollar.

    Greek interest rates were approaching 20% whilst Cameron struggled to cope with general dissatisfaction with Mortgage costs of 14%. Brown gleefully enjoyed seeing the Tories drink from the poisoned chalice he had bequeathed them and astonishingly held onto his job as Labour Leader.




  • Comment number 38.

    It would seem obvious that Credit Default Swaps should require one party to have an insurable interest but why stop there?

    Over the past decade or so I have modelled over 150 distinct financial instruments 鈥 everything you can think of from Securities (Stock and Bonds), Physical Assets (Commodities, Property) through to some seriously exotic Derivatives. In all that time I have never understood why most of the derivative instruments are even legal!

    Originally they all served a purpose which is mostly to shift risk and financial liability from one party to a counterparty in the event of something going wrong but in practice all suffer from the same common flaw in that the party that is 鈥渟elling鈥 doesn鈥檛 need to own the underlying asset that they have on offer.

    If I buy a Call Option (the right to buy) on something then I should only be able to buy that option from someone who actually owns the asset 鈥 if they don鈥檛 own it then how can they sell it? This is how Porsche managed to get options on 105% of Volkswagon stock 鈥 they were buying from people who were selling stock they actually didn鈥檛 own and hoping that Porsche either (a) didn鈥檛 exercise the option or (b) if they did then they could borrow the stock from someone else.

    Anyway, for a long time I鈥檝e told anyone who would listen (including the odd politician) that this is plain wrong 鈥 in any other area of business it would be regarded as fraud! At the very least there鈥檚 a case for deliberate market manipulation (which is what this Greek business looks like) which I thought was a crime in all major markets 鈥 maybe Greece (or the EU) should identify a couple of people and drag them into court just to test the theory.

    Unfortunately, as most are finding out the hard way, the problem with global trading through electronic marketplaces is that it can be done from pretty much anywhere so there鈥檚 no real way of controlling it from a national level.

  • Comment number 39.

    Greece is not much different then America. There is crisis coming to America too. We need to stop spending.

  • Comment number 40.

    stanblogger #36 wrote

    'Cutting public expenditure is not the only way for Greece to remain solvent, it could raise taxes instead. In a recession it makes much more sense to raise personal taxes on the rich - on their wealth, not just their income - rather than to reduce public expenditure.'

    and who do you tax when the rich all emigrate ?

  • Comment number 41.

    10. At 2:18pm on 12 Feb 2010, onward-ho wrote:
    8 Also
    5 UK's interest premium is only about 50-75 basis points over Germany's versus the extra 305 points the Greeks are paying , our public sector debt as a percentage of GDP has been considerably less than Germany's over the past 20 years,and is only now approaching Germany's level.

    ========
    But Germany bought a whole country with that debt (East Germany) - what have we 'bought' with ours, AND, I am rather dubious about how we can loan ourselves 拢200 Billion to get out of debt, heck if it were that easy, I'd vote Gordon in again, and he WOULD promise to send us brown (no pun intended, but now I've seen it I like it) envelopes stuffed with newly printed notes to achieve it!

  • Comment number 42.

    Europe needs to be really tough on Greece - if it isn't, the whole euro project could unravel.

    If you read other reports on the 大象传媒 website, you will learn a lot of things that are pertinent, even if they are unsurprising.

    First, Greeks don't like paying taxes - amongst those earning six-figure incomes, actually paying tax is considered non-smart. If the authorities threaten to investigate you, no sweat - the tax inspector will look the other way for E10k in a brown envelope. This is typical of bureaucratic corruption in Greece, apparently.

    Second, Greece has the disease of bureaucracy in a very virulent form (though we in Britain are in no position to criticise this, of course).

    Then they have a fossilised economy, full of inefficient state-controlled monopolies which are employment sinecures and are in generally cosy relationships with over powerful unions. Sorting this out could boost GDP by 10%, if it ever happened.

    So, if I were a German taxpayer, I'd be extremely angry if my government paid a cent to sort this out. In her own interests, Greece needs to shape up. She will not do this if she is bailed out. Handing Greece an EU bail-out would be like handing an alcoholic a bottle.

    Listening to Greek union leaders and protestors can seem surreal. The fact is that no-one owes Greece a living. The euro is a currency - it is not a safety-net or a parachute.

    So, Greece needs economic restructuring. It needs to enforce its tax code. It needs to crack down on bureaucratic corruption. It needs to cut public spending. It won't do any of this if the EU bails it out.

  • Comment number 43.

    41. DevilsAdvocate:

    "our public sector debt as a percentage of GDP has been considerably less than Germany's over the past 20 years,and is only now approaching Germany's level.

    ========
    But Germany bought a whole country with that debt (East Germany) - what have we 'bought' with ours, AND, I am rather dubious about how we can loan ourselves 拢200 Billion to get out of debt...."

    Absolutely. Plus, UK debt is a huge understatement of unfunded liabilities, such as public sector pensions and PFI. We may be liquid (for now), but I'm not sure we're solvent!

  • Comment number 44.

    Thanks for the link to the article by James Rickards in the FT.

    Wow, that makes it very clear what an astonishingly immoral lot these financiers are.

    If they've got so much to gain from companies (and countries) going bust, then they really would stop at nothing......

    You talk about "naked" short selling and trading. Well it seems like the whole of what these guys - Goldmans, Morgan Stanley and the rest - do is "naked".

  • Comment number 45.

    We moved to Greece in 2009 and still find the "cash only" concept that is prevalent, difficult to accept - this is one of the basic problems in terms of tax collection as there is no "proof" of income and therefore many are not paying anything approaching the correct amounts of tax to match their "real" income. The Greek governemnt have presented new laws, but these MUST be applied rigorously starting with the richest (who are the main avoiders of tax) before the lower paid / poorer get hit. It is generally accepted that billions of Euros are lost through illegal tax declarations - this could make a significant difference to Greece's future if these taxes were collected.

  • Comment number 46.

    Re 2 - can you not take out a life insurance policy on a stranger then?

  • Comment number 47.

    #29 you misunderstand.

    I have no problem with bailing out east africa when famine strikes, it is a natural disaster not their fault and the right thing to do. I would go even further and suggest that the rich countries have spent most of the last 80 years preventing East Africa growing through the protectionist farm trade rules (the CAP being EUs contribution to those wretched rules).

    The Greeks, the Spanish, the Italians and yes the Brits as well are not subject to a natural disaster but the inevitable consequence of long term binging on debt - no one forced those countries to take on debt they made a choice to spend far in excess of their income. I see no reason why we should give a drug addict another big fix, however, where a country like Ireland is making the efforts to beat its addiction I do think a helping hand is fine. Greece has yet to show it is capable of making the necessary adjustments.

    But then again I am unashamedly a free market capitalist. If you want a socialist utopia where no one is allowed to be poor (measured on a relative not absolute basis) no matter how bad their own personal talents, lifestyle choices etc and as result no one can be rich on the back of their own efforts that is your choice. Personally I am reminded of a line from the film The Invincibles which goes something like if everyone is supposed to be "special" then no one is.

  • Comment number 48.

    Re: 35 - yes, but just don't live in the euro zone while those who do are having to make economies!

  • Comment number 49.

    Again fascinating, even if I admit I don't understand it all or even most, nor do I understand all the contributors - the one conclusion I do draw is that if I make to heaven there will be many more camels than bankers

  • Comment number 50.

    Hi Robert

    This is my current post on Stephanomics ('Thinking the unthinkable')

    >>>>>>>>>>>>>>>>

    60. At 9:09pm on 11 Feb 2010, nautonier wrote:

    35. At 5:48pm on 11 Feb 2010, Hesketh wrote:

    "Arguably, the ECB are to blame for the 'PIIGS crisis' for not enforcing the debt/defict criteria under the Maastrict treaty?"

    The ECB is not responsible for enforcement of the Maastrict treaty, the Council is.

    >>>>>>>>>>>>>>>>>>>>>>>

    Really! (?)

    You may be right in terms of constitutional approval but under the original Treaty I understand that the ESCB was given a very strong set of responsibilities:

    See



    THE MAASTRICHT TREATY
    TREATY ON EUROPEAN UNION
    AND
    THE TREATIES ESTABLISHING THE
    EUROPEAN COMMUNITIES

    PROTOCOLS


    OBJECTIVES AND TASKS OF THE ESCB
    ARTICLE 2
    Objectives
    In accordance with Article 105(1) of this Treaty, the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability,it shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 of this Treaty. The ESCB shall act in accordance with the principle of an
    open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a of this Treaty.

    ARTICLE 3
    Tasks
    3.1. In accordance with Article 105(2) of this Treaty, the basic tasks to be carried out
    through the ESCB shall be:
    - to define and implement the monetary policy of the Community;
    - to conduct foreign exchange operations consistent with the provisions of Article
    109 of this Treaty;
    - to hold and manage the official foreign reserves of the Member States;
    - to promote the smooth operation of payment systems.
    3.2. In accordance with Article 105(3) of this Treaty, the third indent of Article 3.1
    shall be without prejudice to the holding and management by the governments of Member States of foreign exchange working balances.
    3.3. In accordance with Article 105(5) of this Treaty, the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.

    ARTICLE 4
    Advisory functions
    In accordance with Article 105(4) of this Treaty:
    (a) the ECB shall be consulted:

    4
    - on any proposed Community act in its fields of competence;
    - by national authorities regarding any draft legislative provision in its fields of competence, but within the limits and under the conditions set out by the Council in accordance with the procedure laid down in Article 42;

    (b) the ECB may submit opinions to the appropriate Community institutions or bodies or to national authorities on matters in its fields of competence.

    >>>>>>>>>>>>>>>>>>>>>>>>>>>

    It looks like the 'ECB' has failed to keep proper regulatory control to me?

    I'm not really interested in the ins and outs of EU bureacracy - just 'cause and effect'

    By the way does anyone know what the ESCB's 'field of competence' is supposed to be?

    >>>>>>>>>>>>>>>>>>>>>>>>>>

    Robert - your quote:

    'But banks go kaput overnight, while countries go bust in a malaise that tends to be long and drawn out.'

    >>>>>>>>>>>>>>>>>>>>>>>>

    Does all this depend more on the detail of the 'debt trail' - e.g. countries, banks, projects, central banks, intermediaries?

    My post regarding the Maastrict Treaty -did not attract any comment (as I had expected). But are there are some important issues here and which collectively is a closely guarded 'secret' outside of EU finance?
    Eg.
    How does the ECB/ESCB assess soverign debt?
    Which are the banks providing the advice and funds to ECB /EU for EU stability?
    According to the Maastrict Treaty - the responsibility of the ECB/ESCB extends to managing issues such as all banking reform?
    QE in the UK is subject to EU management? (I have posted previously on a number of posts saying that I think that 'UK QE initiative' came from the EU /ECB /early dealings with Greek debt).

    My hopefully 'educated guess' (in the complete absence of anything reassuring from the ECB) is that the ECB (and /or ESCB if this actually exists as a live regulatory entity?) is not monitoring the stability of the EU - i.e. 'No one' has a proper handle on the financial stability of the Eurozone/ ESCB/ECB/ EU currency.

    Hopefully, we may be about to find out how well the Eurozones finances, planning and regulation are in fact now receiving and are subject to - competent, basic economic management.

    My guess is that some of the profligate UK property lending extends to the Med and to resort developments now critically short of tourist customers?

    If this is case then:

    1) the UK and wider banking crises may indeed overlap with the EU soverign debt crisis?

    2) there is an awful lot that we're not now being told by Darling/ BoE/ EU/ECB/ESCB

    3) what is the UK banking sector's exposure to and participation in EU sovereign debt (particularly if EU governments are themslves funding large projects) - there is potential for the domino debt effect here and in pratice it does not matter whether the debt trail is 'banking' or sovereign debt as so much debt is internationised in the 'new chaotic debt economics'.

    We do indeed now have new economics - its the chaos of large scale internatiolised domino debt economics in a technological era (since although the 'domino theory' has been around for a quite a while in terms of political stability - this appears to be the pre-condition of its application to international economies).

    My suspicion is that we're not being told the full story here regarding the largely invisible but very real relationship between 'bank sector' and 'sovereign sector' debt - Perhaps even, for once, for valid reasons?



  • Comment number 51.

    If Greece cant support it's debt, and receives no help, what actualy will happen?

    I'm sure there will be loads of personal tradgedies, grapes of wrath style, (and I don't mean to trivialise this) but will Greece be better off afterwards? I mean Germany benefited hugely from being made "bankcrupt" in 1945...

    I'm reminded of a certain ministers comments that bankcrupcy would be the best route out for certain folk...

  • Comment number 52.

    I had this daft idea once that currency speculation would be wiped out if it had to be done with real money. Imagine if you had to count out a couple of billion in 拢50 notes or 100-euros and take it to a bank - it would take weeks and be completely impossible. But now it is a couple of keystrokes in a computer and Bingo, one country gone broke.

  • Comment number 53.

    47. At 6:33pm on 12 Feb 2010, Justin150
    There is a US Senate Report you might want to search online for.
    Senator Carl Levin (D-Mich.), Chairman of the U.S. Senate Permanent Subcommittee on Investigations, and Sen. Tom Coburn (R-Okla.), Acting Ranking Minority Member.
    鈥淓xcessive Speculation in the Wheat Market鈥.

    Not wanting to live a world where this goes on his hardly a socialist utopian dream.
    Not sure the food riots we've seen (eg , too many of which have been down to financial speculation of food commodities are natural disasters.

    I could bang away at the keyboard with example after example of explanation, but that would be merely repeating far too much of what has already been posted here and elsewhere.





  • Comment number 54.

    During the next elections the only question to be asked is: What are you going to do to regulate the banks...be specific? These governments are nothing more than sock-puppets of bankers.

  • Comment number 55.

    My confidence in the banks is long gone, I would rather keep my cash in a safe at home while inflation lets rip than let these so called bankers profit from it.

  • Comment number 56.

    Pity we haven't changed our currency to the Euro. If we had we could depend on fellow members of the EU to help us out when the crunch comes for our own economy ,

  • Comment number 57.

    Here's an interesting thought. lets say Greece, the UK etc etc only spent what they earned - what would the Hedge Funds hedge?

    There may well be reason for a family to take a Mortgage, but for a Government to do so continually simply for the daily living is a disgrace and a gamble, and as Greece, and the UK are finding out, in the long run, you lose.

    "My other piece of advice, Copperfield, said Mr. Micawber, you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and, in short, you are for ever floored. As I am! "

    I may not like Hedge funds, but let us not blame them for all the misery, Flies may well inhabit the refuse tip, but they didn't build it.

  • Comment number 58.

    The Greek government doesn't need to cut spending at all. It only needs to do one thing, to fix the root of all the financial problems of Greece which explain why what was once the greatest civilisation on the planet is now nothing more than a periferal figure (at best) and the solution is simple. The government needs to get the citizens of Greece to pay tax!

    Greece has the highest tax evasion rate in the EU, as an article on this site claims most Greeks try and keep as much back as possible and are willing to bribe tax collectors several k to do it. These people need to realise they can either pay their taxes or take service cuts. Public services need to be funding them and I resent that the taxes of other hard working europeans are going to pay to help a country which according to a bbc article, is full of tax dodgers! Its a disgrace! Not only that it is unsutainable! What happens next? Greece get bailed out, do they fix the problem? or will they assume they can carry on? What about Spain, Ireland and the UK? Do we really need to cut services or can we just go cap in hand to the EU too? We may actually worsen our econmic problems trying to pull the Greeks out and to save a currency we aren't part of! The entire idea makes underwriting the debt of some of the worlds biggest banks looke like the best idea ever!

  • Comment number 59.

    58. At 10:12pm on 12 Feb 2010, laughingdevil wrote:
    The Greek government doesn't need to cut spending at all. It only needs to do one thing, to fix the root of all the financial problems of Greece which explain why what was once the greatest civilisation on the planet is now nothing more than a periferal figure (at best) and the solution is simple. The government needs to get the citizens of Greece to pay tax!
    ==========

    That can't be right, if paying tax makes a country the greatest civilisation on the planet, the UK would be there now!

    Although, IF Gordon thought that, it would explain a lot!

  • Comment number 60.

    Robert:

    Well, yes, the Greek Authorities and other vested parties are needed to sort out the liquidity problems first and, reforms should be implemented afterwards to repaired the damaged..


    -Dennis Junior-

  • Comment number 61.

    Uncommented upon so far in the Greek crisis is the fact that the Government there is trapped between the need to pay two separate but conflicting sets of debt, which complicates any rescue package.

    The first debt is the call to pay down the debt on Greek government bonds, which it may or may not be able to do - although personally I would not believe any rescue package that does not spell out what hard money is actually on the table.

    However, this is relatively straighforward compared to the second debt, which no Greek government of any persuasion can afford ever to renage on. This is the make work political appointments which contaminate more or less the whole of the Greek public service and assorted other political payoffs, let alone all those bribes and corruption, which many public officials have got rich on. By and large, those are not crowds of regular demonstrators you see on the TV protesting against cuts, but rather groups of the Governments friends and relatives warning them not to push their luck.

    In order to pay down all those fiancial debts that are grabbing the headlines, the Greek Government would have to dismantle the countries entire post-war system of cronyism that has kept the politcal parties alive there for decades. I do not beleive that they will be able to do it, because if they do the countries entire political architechure will most likely collapse - with highly unpredicable consequences all round. Which would you choose? Which would be worse?

    If a bailout can be scraped together to get Greece through the next few months, it will only be putting off for a few months or so the painful day when it would yet again have to choose between the rock or the hard place. It was all its grace and favour friends that Mr Papandreou was addressing on his return from Brussels, not the financial markets, so when push comes to shove you can make your own guesses about which way the country will jump?

    The only rays of weak winter sunshine that come though this gloom (if that is the word) is that most Greeks never trusted any of their Governments in the first place, which is why they evade taxes as much as they can and put their money somewhere safer than the Greek banking system - and the political elite especially so.

    This is another reason why the Greek Government will fear the calls on its financial debts less than one on its political debts, and thus it is much more of a question of 'when' Greece defaults, than 'if'. It will of course be the poor with very little to loose who will loose the most, as always. Shades of Argentina?

  • Comment number 62.

    # 61 Trevor

    It will be the lower middle classes plunged into the lower working classes who will suffer the most (ala Argentina), some of the upper middle classes will be able (through luck, connections and circumstance) to drag themselves into the upper/ruling class to insulate themselves (and profit) from the degeneration to come.
    Those lower middle classes will be unable to cope with poverty, the traditionally poor will cope as always.(but with greater competition)

  • Comment number 63.

    When you see a country get itself into a financial mess like this I do tend to wonder how well the politicians involved manage their own personal finances.

    There does appear to be a lamentable lack of common sense and given that the same applies to our own politicians,I wonder too if this is a characteristic feature?

    What's even more surprising is that ordinary people can come up with lots of practical solutions, which politicians seem incapable of considering.

  • Comment number 64.

    # 47. At 6:33pm on 12 Feb 2010, Justin150 wrote:

    > Personally I am reminded of a line from the film
    > The Invincibles which goes something like if
    > everyone is supposed to be "special" then no one is.

    That's right - no one is special. They are all born,
    they live a while, they suffer and then they die. It's
    always the same story, whoever they are. There are one
    or two who exagerate thier own importance during the
    middle bit (life). They are usually rather domineering
    people (bankers, politicians, coppers and whatnot) who
    are best avoided. I wished there was a better way of
    dealing with them, but I havn't found one yet.

    Better education might be the answer.

  • Comment number 65.

    I am a norwegian businessman living in Athens,Greece. You article is lucid and explains the immediate debt problem. My worries is though how the Greek government will fix the mess. There is no investments in this country since tax policies are changed by the month. We that operate small businesses here work more than 60hours week to keep up, and if we are able to make a profit the greek tax office take it away at the first opportunity. Everybody wants to work in the public sector with salaries of 600-1000 Euros. The government do not generally pay it bills but if you are late with your payments they can charge you up to 60% interest. In order to fix things here they have to do a revolution. I doubt they will make it. Happily the summer season is coming on so we can enjoy the sea and the best climate in the world - nearly for free.

  • Comment number 66.

    As usual in life, there is no simple single solution to a meaningful change in current "acceptable" (or in this case unacceptable) behaviour. To rectify the economic issues right across the board there has to be a realignment of expectations right across the board too. So put bankers out of work if you like, but as a for instance, you better have a back-up plan for the millions of little people who provide services to these people to make their own less glamorous ends meet.

    Also, having lived in rural Spain, and I have friends in Greece, I get the feeling that good honest and dare I say uncomplicated folk have been sort of dumped into a wildly exciting Franco/German/rich folks go-getter society, and left to fend for themselves in the candy store. The people have surged ahead of themselves, become endebted, and now it is time to regroup, a little wiser, and pretty angry at being ensnared in an economic system that they never really grasped had ramifications like sovereign debt default and all that comes with that.

    All part of the growing pains of the EU, experienced by most members at some stage, I suspect. However for Greece and co, their growing pains are unfortunately coinciding with a global economic crisis.

  • Comment number 67.

    Ah, when they gave up Drachmae they gave up their financial freedom.

    Now, they find the Financiers and their cronies wish to take command of their Public Services.

    Perhaps, a new Drachma would be the wisest course ?

  • Comment number 68.

    62: Just like in Britain.

    Every one becoming poorer, except corrupt Bankers and a handful of others who claw their way up over the bodies of those below.

    What fun........

    The Rat Race redefined, hmm, bonuses all round !

  • Comment number 69.

    37:

    Presentient except the bit about Cameron.

    And the Liberal Renaissance.

    Okay, just messing with your heads there.

  • Comment number 70.

    24. At 3:32pm on 12 Feb 2010, stanilic wrote:
    'What do these speculators expect to gain from ripping a country apart and ruining millions of people?'

    er, IMMENSE amounts of money - and prestige amongst their peers 'Don't mess with those guys, they brought down Greece'. Like Soros taking down the pound on 'Black Wednesday' (which wasn't actually as Black as it was painted but I digress) they are employed to get the biggest returns possible for their investors/and or employers and the faster they can do it the better. In general I think this is a pretty venal outlook, but in the case of Greece it might actually prompt them to update their political practices from the 15th century to the 21st. 'Hey, run your country better and we wouldnt have anything to bet against' would be the Hedge Funds argument..and who could really disagree?

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