FedUpUSA

Archive for the ‘Sovereign Debt’ Category

Oh no, it’s just Greece, right?  Uh, wrong.

BUDAPEST (Reuters) – Hungary is seeking an international credit line of 15 to 20 billion ($20 to $26.3 billion) euros, the secretary of state heading the prime minister’s office, Mihaly Varga, was quoted on Saturday as saying.

Hungary is seeking backup from the International Monetary Fund and the European Union to reassure investors it has financing even if it gets cut off from debt markets later this year.

Uh huh.  Remember that Hungary has been having some wee problems of late with regard to its government, the EU and IMF.

Hungarian bond yields are over 11%, which is not good at all in a world of ZIRP.  This effectively precludes most borrowing.

The problem with these pleas and “rescues” is that they continue to belie the real problem, which is that governments cannot continually borrow more than they tax.  It is simply not possible on a long-term basis for this to work, as compounding eventually gets you.  It might not immediately, but in the longer run it will with certainty.

Do I expect Hungary to eschew that which it must?  Not right away, and perhaps not at all until there’s a disaster, but in the end all governments must reconcile their budgets to this underlying fact — like it or not.

A default by any other name is still a default. When Greece defaults, the  inter-connected chains of credit default swaps will fall like dominoes.

For your Superbowl half-time reading, here is a brief summary of the situation in Europe:

1. Greece is poised to default, the end-game everyone anticipated in 2011. It is not a matter of if but when.

2. That default will trigger credit-default swap contracts, derivatives known as CDS that protect the owner from events such as default.

3. This will implode the shadow-banking system and the visible banking system, as those who sold the CDS (financial institutions) do not have enough cash or assets to pay the owners of the CDS.

4. The general idea is that sovereign default is very unlikely, so you can sell protection (CDS) against that possibility for a low premium, and cover that bet by buying your own protection from another player.

5. If that player (counterparty) can’t pay you off, then you can’t meet your obligations on the CDS you originated and sold.

6. So the failure of one counterparty can trigger a systemic failure akin to a row of dominoes being toppled by the fall of one domino.

7. To avoid such a CDS-triggered collapse, the European Union and its proxy agencies (European Central Bank, etc.) are attempting to call a default by Greece something other than “default.”

8. This will theoretically keep the first domino–a credit-default swap–from falling.  In other words, if we call a default by some other name, then it isn’t a default.

9.  Those absorbing the losses caused by a Greek default (and let’s stipulate that this references owners of Greek debt who bought CDS as insurance, not speculators who leveraged CDS at 30X the actual bond value) will want to cash in their insurance, i.e.  the CDS they own against a Greek default. They have every incentive to demand a default be  recognized as a default. If they accept the official plan to avoid calling a default a default, then all the losses will be theirs and none will fall to the counterparties who sold them  the CDS.

10. How is this fair?

11. The official response of avoiding default is focused on self-preservation, not fairness, justice or the rule of law.

12. The system can be likened to a pool of $100 bets leveraged off $5 in cash. If every bet is covered perfectly, then it’s somewhat like $95 in bets being paid by passing $5 around–much like the famous email that depicts all debts in a small town being paid by the same $5.

13. In the real world, somebody’s bets and insurance will not be perfect and their obligations will exceed their cash on hand. In other words, they will end up with $3 and owe $5. They will default and the dominoes will start falling as everyone down the line doesn’t receive their $5 counterparty payoff.

14. Empires tend to fall when the interests of their Elites diverge.  We are at such a point in the global financial Empire.

15. “Extend and pretend” has “worked” for almost 2 years. If Greece defaults and it is recognized by even one player as a default, then the system will quickly unravel and cash/dollars will be king until the deleveraging runs its course.

Charles Hugh Smith – Of Two Minds

Shortly after Dutch finance minister, said “We want no further delays” came news of further delays. The reason: Greek political parties all refuse to go along with more austerity measures.

Please consider Greece’s leaders oppose new austerity measures

All three party leaders in Greece’s teetering national unity government have opposed new austerity measures demanded by international lenders, forcing eurozone finance ministers to postpone approval of a new €130bn bail-out and moving the country closer to a full-blown default.

Representatives of the so-called “troika” – the European Commission, European Central Bank and International Monetary Fund – have demanded further cuts in government jobs and severe reductions in Greek salaries, including an immediate 25 per cent cut in the €750 minimum monthly wage, before agreeing the new rescue.

But representatives of all three coalition partners, including centre-left Pasok of former prime minister George Papandreou and the centre-right New Democracy of likely successor Antonis Samaras, said they were unwilling to back the government layoffs.

In addition, a Greek government official said the EU and IMF negotiators rejected a counter-proposal that would have frozen Greek wages for three years and cut social security contributions by 10 per cent.

Finance ministers from the four remaining triple As – Germany, the Netherlands, Finland and Luxembourg – met in Berlin on Friday where they agreed that Athens must move quickly or they would withhold assistance.

“We want no further delays,” Jan Kees de Jager, the Dutch finance minister, said after the meeting.

The delays in Athens could give new momentum to officials in Germany, the Netherlands and Finland who have been agitating to abandon the cornerstone of the new bail-out – a €200bn bond swap in which private debt holders would accept losses of 50 per cent in the face value of their holdings. A full-scale default would allow Greece to write off all privately held debt.

The brinkmanship in Athens became so intense on Friday that a government spokesman was forced to deny reports that the acting technocratic prime minister, Lucas Papademos, was considering resigning if governing parties did not agree to the new measures.

Keyword of the Day is “Hardball”

In case you missed it here is the key phrase “EU and IMF negotiators rejected a counter-proposal that would have  frozen Greek wages for three years and cut social security contributions  by 10 per cent.”

That was a pretty significant offer by Greece in the midst of an economic depression. There was no counter-offer, only a take-it-or-leave-it hardball.

For now, Greece said “Leave It” so you can add that to the words of the day as well. As I have said numerous times recently, Germany wants Greece out of the Eurozone. Those actions reinforce my opinion. Germany could easily have said a Greek wage freeze for three years and cut social security contributions by 10 per cent would suffice.

Minimum Wage

I am not a fan of minimum wage laws at all. However, let’s ponder Germany’s demand. A “25 per cent cut in the €750 minimum monthly wage” would take the minimum wage down to €562.5, roughly $739 a month.

Taxes

According to Wikipedia the following  Greece Taxes apply.

• Social Security Tax: 16%
• VAT: as high as 23% (Category 2 goods 4.5%)
• Income Tax: Progressive

I cannot find a precise description of Category 2, but eating out is category 1 and taxed at 23%. Minimum wage appears to avoid income tax.

The after SS-tax income at the proposed minimum wage is $621 a month or $7452 per year.

How far will a take-home pay of  $7452 per year go?

Living Greece discusses Value-added tax (VAT) rates in Greece

• Greece has the third highest rate of VAT in Europe
• Second highest gas/petrol tax
• Third highest tax on social insurance contributions
• Fifth highest VAT on alcohol
• Highest property tax
• One of the worst corporate tax rates
• Without the quality of living or competitiveness to match

Bear in mind that was from 2010.

On the assumption that everyone earning minimum wage is  spending every penny of it, subtract another 10% to 20% in actual purchasing power.

Keep Talking Greece has a humorous (to those not from Greece) article on Greek VAT Insanity: 6.5% for Foreigners, 23% for Greeks

That Greece is an absurd country I knew the moment I decided to return from living abroad over some decades. But it was beyond my vivid imagination that I will have to experience this, day by day – and even moment to moment. With a decision that touches the limits of European constitution because of discrimination against the citizens of this hapless country, the Finance Minister  announced that the increased VAT of 23% on catering goods  will be paid only by the Greeks -meanwhile known also as money-spewing machines!

Earlier on Monday, Finance Minister Evangelos Venizelos clarified that the increased VAT from 13% to 23% will apply to restaurants, taverns, cafes and hotel restaurants. However if you buy an All-Inclusive package abroad, you will have a 6.5% VAT.  Greeks who will buy similar packages in the country will pay 23% VAT.

The new increased VAT regulations are as complicated as they can be: there is a different VAT for consuming sitting or standing (restaurant/cafe), different for take away (but only if you take it yourself, not through delivery boy).

In short a pizza has four different VAT depending on whether you sit, stand, walk or lay (hotel room/all-inclusive).

Tortured to Death

The point of this discussion is not about minimum wage, but about absurd taxes on top of a reduction in minimum wages at a time the Greek economy is already imploding.

I am 100% in favor of work rule changes, pension changes, etc., but the tax hikes and tax structures are insane.

Furthermore, I fail to see how increased taxation and further austerity measures can possibly help Greece in the short-run. And by the way, the short run has now been extended to 2020 from 2013.
Greece is imploding. It’s really too bad Greece did not exit the Eurozone three years ago instead of now smack in the midst of a depression.

Moreover, this is exactly what Spain and Portugal ought to be thinking about as well.
Mike  “Mish”  Shedlock – Global Economic Analysis

Things that make you chuckle in the morning…

European Union leaders gather for their first summit of 2012 as a deteriorating economy and struggle to complete a Greek debt writeoff risk sidetracking efforts to stamp out the financial crisis.

EU chiefs arrive in Brussels about 2 p.m. today to put the finishing touches on a German-led deficit-control treaty and endorse the statutes of a 500 billion-euro ($661 billion) rescue fund to be set up this year. Greece and its private creditors said Jan. 28 they expect to complete a deal in coming days after bondholders signaled they would accept European government demands for a bigger cut in their debt holdings.

Uh huh.  That’s not the problem.  The problem is that Germany is screaming that Greece must surrender its national sovereignty in order to continue to receive “help”, effectively becoming a vassal state of Germany. 

In the meantime Sarkozy says he’s going to unilaterally impose a financial transactions tax.  One wonders how he’s going to pull that off, given that I don’t think France re-installed a King.  Or did they?

Here in the US we still won’t face reality — although it’s at least being talked about in the media now.

The level of debt held now by governments, the financial industry and especially consumers remains a greater drag on the U.S. than in 1983, Reinhart said Jan. 27 in a radio interview from Davos on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. In the third quarter of 2011, total household debt was 86 percent of GDP, compared with 47 percent in the third quarter of 1983, according to the U.S. Commerce Department.

“The capacity for households to carry on to be the engine of growth that they have been in past recoveries is simply not there,” said Reinhart, a senior fellow at the Peterson Institute for International Economics in Washington.

Until this is recognized and we adjust for it we cannot have the sort of “recovery” everyone wants to see.  That is, we never hit the bottom, we never purged the bad debt, and we never set the stage for a “recovery”, instead covering up the problems with more debt and fraud.

In the final three months of 1983, average after-tax personal income had risen 4.2 percent from a year earlier, adjusted for inflation, according to the Commerce Department. In the final quarter of last year, it had dropped 0.8 percent.

Now now, let’s stop the intentional misuse of statistics there Bloomberg, and instead look at what we had just started doing back in 1983….

So did personal income actually rise?  Hmmmm…. we added, in 1983, a bit more than $100 billion in GDP.  But we also added $176 billion in debt, which means we were borrowing the so-called “increase” in after-tax personal income, we were not earning it.  Indeed, here’s the debt and GDP addition numbers for the quarters from 1981 through 1989:

Growth?  Where? 

We didn’t grow at all — we borrowed from roughly 2x to nearly 5x the increase in output each and every quarter during Reagan’s so-called “recovery”!

This is the fundamental scam that we have run for the last 30 years and we’re still not talking about it honestly!  Until we do and we reconcile the overblown asset prices and costs that go into both business and personal life that have come with this debt there can be no durable recovery — only further attempts to blow more Ponzi-style bubbles.

The problem is that in order to blow another asset bubble you need to find an asset where leverage is reasonably low and can be cranked up so as to support it, at least for a while. 

But we seem to be all out of those unencumbered assets……

It may be starting….

(Reuters) – Germany is pushing for Greece to relinquish control over its budget policy to European institutions as part of discussions over a second rescue package, a European source told Reuters on Friday.

“There are internal discussions within the Euro group and proposals, one of which comes from Germany, on how to constructively treat country aid programs that are continuously off track, whether this can simply be ignored or whether we say that’s enough,” the source said.

That’s not going to work out very well.

There are many reports that Greece is “close” to a debt deal on the swap and release of the next tranche of funds from the IMF, but if it includes this provision I bet it blows up.  There are already rumblings that it has, with the BBC reporting:

Greek officials have reacted angrily to a leaked German proposal for an EU budget commissioner with veto powers over Greek taxes and spending.

The Greek government said it must remain in control of its own budget.

The European Commission says it wants to reinforce its monitoring of Greek finances, but Greece should retain sovereign control.

Meanwhile, Greece and its private investors are close to a deal which will pave the way for a second bailout.

Negotiators say a tentative agreement could be finalised next week.

Uh huh.  The two are linked folks, and Greece is not going to give up budget sovereignty.

The only solution is for Greece’s government to quit spending more than they take in via taxes — that is, stop deficit spending.  This is the same problem around the world.

What is not understood among most people is that bankruptcies (defaults) among borrowers and thus recessions are necessary any time capital can be lent out at interest.

This is simply due to the fact that two exponential (compound) functions, such as growth of output and growth of debt, must always over time run away from one another.  If debt grows faster than output it will always eventually lead to insolvency.

That is a mathematical fact and there is nothing that can be done to prevent it.

Therefore, governments should not, in the main, borrow at all and if they do then lenders must accept the risk that such borrowing is unsecured and from time to time will lead to defaults and losses.

Until this recognition occurs and the price of lent capital reflects this fact — that is, “sovereign debt” stops being considered a preferred investment (preferably by ceasing to exist!) we will not find a solution to the problems that face the world economy.