Italy and Spain debt bomb about to explode

[K. A. Pital]

This is not a business cycle recession, it is a depression caused by major structural problems.

*blinks* Amen. I can't believe I'm actually agreeing with you wholeheartedly.

All the politicians want to do is postpone things until they're out of office, and the 'inevitable recovery' that Keynesian economists locked into the infinite growth business cycle mentality still insist will come... from somewhere.

Part of the problem that today's economics is basically a clear playing field between neoclassics, neokeynesians and monetarists. None of them have seriously considered the possibility of a structural crisis as opposed to a "mere" business cycle; and all of them subscribe to the "infinite growth" doctrine. The entire scientific field requires a good shake-up.

[Broomstick]

Look, if I had a debt of, say, $10,000 today and my creditors wanted it RIGHT NOW!!!! paying it back would utterly bankrupt me.

No one is trying to accelerate the maturity schedule of these countries debt. On the contrary the ECB has tried quite hard to postpone it. The debt load is approaching and in some cases exceeding the ability of certain nation states to service it. The more you postpone default, the more the debt compounds and the more investor money will be lost when the final default occurs (of course you can print your way out of default, but the inflation that causes is even worse).

If the debt can't be repaid in the required time period then you can discuss restructuring the debt to be paid back over a longer period of time - essentially the option governments are trying for now as opposed to a collapse. It actually works better for governments because they are theoretically immortal, unlike people. Thus, the UK took a nice, leisurely 50 years to repay the US for their WWII debts, including a couple of deferment periods. The British didn't have to beggar themselves to do it, and the US eventually got the money back with interest. Win-win. Much preferable to bleeding the UK dry in the post-war years.

Of course, there is a point of no return. I do hope we haven't reached it yet. Some countries might have, but others perhaps can still find a way other than a hard crash. If no one has any option than a hard crash then we are all in a world of shit, but why hasten the day of reckoning? Sure, delaying the inevitable can be worse than getting it over with, but it's stupid not to try to soften the blow, and stupid to hurry it up.

This is not a business cycle recession, it is a depression caused by major structural problems.

And yet, it is still not as bad as the early 1930's.... things could be worse. It would certainly help if people would be honest about it not being a normal recession but yes, more of a depression, but the world has been through worse and recovered.

Admit that we are better off with a nasty crash now than a horrific crash later.

But what if, instead of a nasty crash, there's a way to a softer landing? Why the hurry to pull the rug out from under everyone? Or do you think you will somehow me immune to the effects of such an event?

IF the structure can be propped enough long enough for the vapor and hot air to bleed off the system gradually

No such bleeding is taking place.

Oh, you mean housing prices are still rising? That market is deflating. Lots of pain there, yes, but it's coming more into line with what it should have been all along.

There are areas that are overvalued right now that don't have to crash, they can deflate slowly. That would still entail some pain and suffering, but not as extreme.

The global financial situation is so precarious that sooner or later something will set off the chain reaction.

Yes, and one day Yellowstone Caldera will blow sky high again, should we hasten that as well?

There have been boom and bust times before. There have been recessions, depressions, and panics before. Oddly enough, some of the mechanisms put into place over time have prevent mass runs on banks, or people losing everything when banks fail (thank you, deposit insurance). Does that mean such mechanisms will work in all times, places, and circumstances? No. Doesn't mean they are worth having, though.

Might as well do it now before they have a chance to stack even more explosives.

I don't see were artificially accelerating a collapse would be of benefit. If you do, explain why in objective terms.

If we get into that sort of shit what we're experiencing now will seem like the good old, golden days upon which we look back fondly with desperate longing.

We will and yes, we will. Frankly, both the US and Europe had the chance to take a little pain and sort things out in 2002, and failed to do so.

Actually, this mess started all the way back in 1980 with the first deregulation spree under Reagan. It has rolled along all these years, with the dismantling of safety mechanism and brakes to prevent speculative bubbles and their inevitable popping. We would have need to start taking pain back in the 1990's to avoid this mess, but we didn't.

The chance of a 'soft landing' was squandered. At this point we are looking at five to ten years of real pain and then a decent chance at a recovery. That's still better than a lot of possible outcomes; leave it any longer and the chances of the genuinely scary, collapse-into-war-and-totalitarianism outcomes starts shooting up.

Oh, you mean like 1929 through 1945?

Fortunately, there are people in this world who remember some of the lessons from back then, and that's why they trying to find a path other than just throwing up their hands and not even attempting to run out of the way of the avalanche. Anything that can be done to mitigate the damage is worthwhile to do, even if pain is inevitable. Would you rather lose your toe or your whole foot? Both are an amputation, but one is a lot more serious than the other.

At this point, a 5-10 year recovery IS a soft landing compared to what could be, and in the past has been. Well, maybe what YOU think is a hard crash is what I'm considering the softer alternative, in which case MY hard crash is even more horrific than yours.

[aerius]

No such bleeding is taking place.

Oh, you mean housing prices are still rising? That market is deflating. Lots of pain there, yes, but it's coming more into line with what it should have been all along.

It's a little more complicated than that. Housing prices are coming down, but the mortgages, HELOCs, and other loans which were used to buy those homes or based on those homes are almost all still in the financial system somewhere at full value. Worse yet, there's many trillions of dollars worth of derivatives and crap based on those mortgages, and they're also still in the system. Eventually when the cashflow dries up and the government can't or won't bailout the banks anymore, all those things blow up and you end up with a multi-trillion dollar loss in a really short amount of time.

Fortunately, there are people in this world who remember some of the lessons from back then, and that's why they trying to find a path other than just throwing up their hands and not even attempting to run out of the way of the avalanche. Anything that can be done to mitigate the damage is worthwhile to do, even if pain is inevitable. Would you rather lose your toe or your whole foot? Both are an amputation, but one is a lot more serious than the other.

Paul Volcker is one of thise few, but no one listens to his advice, or the advice of those who are trying to fix things. Instead they're listening to Turbotax Timmy, Larry Summers, and all the other assclowns who fucked things up in the first place. That's like me letting my mom borrow my computer and mess it up, then asking her to fix it. It ain't gonna fix a thing, it'll just screw things even worse.

[K. A. Pital]

The key problem, Broomstick, is extrapolating past to the present. Yes, the world has been through the Great Depression. That was at a time when no credible industrial competitors to the First World (Europe + America) even existed. That was at a time when industrial growth has not even reached its full potential and the transition to so-called "postindustrial models" did not happen.

[J]

ECB decides to buy Italian & Spanish bonds. Hello QE!

http://www.canadianbusiness.com/article ... costs-down

ECB's bond-buying pledge gets Spain, Italy borrowing costs down
By David McHugh and Gabriele Steinhauser, The Associated Press | August 08, 2011

FRANKFURT - A risky European Central Bank decision to fight the continent's debt crisis by buying Spanish and Italian bonds on Monday started pushing down the soaring interest rates threatening those countries with financial disaster.

But some analysts cautioned that buying up the bonds of deeply indebted governments transfers significant risk to the balance sheet of an institution long reluctant to move beyond its traditional role controlling inflation.

Others expressed fears that the ECB could end its bond-buying too soon, leading rates to rise again. Bond yields and prices move in opposite directions; purchases that drive up the price also reduces the interest rate countries face on new bonds.

The ECB has been reluctant to become directly involved in Europe's 21-month-old financial crisis, instead pushing politicians to get their countries' finances under control and give the region's euro440 billion rescue fund the power to buy government bonds on the open markets.

But a recent spike in investor concern about Italy and Spain's high debt levels and lacklustre economic growth caught the 17-country eurozone just as parliaments broke up for the summer recess, delaying the crucial changes to the bailout fund known as the European Financial Stability Facility.

Most governments say they won't be able to approve the expansion of the fund before September.

"For a democratic process with such heavy stakes, we cannot go any faster," French Finance Minister Francois Baroin said on Europe-1 radio.

Left as the last line of defence, the ECB said late Sunday that it had decided to "actively implement" its bond-buying program, a crisis tool it had not yet used for Italy and Spain.

The radical expansion of the ECB's bond-buying program to the eurozone's third and fourth largest economies cements the bank's unwilling role as the institution with primary responsibility for solving the region's crisis.

But some economists said the risk of Spanish and Italian default could soon return if the ECB hands off bond-buying to the EFSF, whose resources are fixed by eurozone leaders while the bank's are, in theory, unlimited.

Analysts at the Royal Bank of Scotland said they expected the central bank to buy an average of euro2.5 billion worth of Spanish and Italian bonds each day, equivalent to euro600 billion a year. Eventually, the bank could wind up purchasing euro850 billion (US$1.2 trillion) of Spanish and Italian debt, the analysts added.

"You need somebody who is known to have unlimited firepower, and that's what the ECB has," said Paul De Grauwe, an economist at the Catholic University of Leuven. "There is no limit to the amount that the ECB can intervene. And once people see the central bank is ready to do this, they won't need to do it. It's an insurance mechanism."

Economists say the euro440 billion fund is too small to rescue Italy if that becomes necessary, and its ability to support Italian and Spanish bonds maybe limited when it receives those powers later this year.

Germany Finance Ministry Christoph Steegmans said however, that Germany remains opposed to increasing the size of the fund, and it "will remain what it is."

Economist Michael Schubert at Commerzbank said he thought that the central bank would make bond purchases only until the EFSF was ready. He said the bank not only risked losses on the bonds, but its reputation as an inflation-fighting monetary authority.

"If people do not believe or are convinced that the ECB is only responsible for monetary policy, but is in effect supporting governments, then this could be a severe loss in reputation and the consequences would be that inflation expectations would go up."

Another analyst said the program falls short of contentious, long-term solutions such as issuing a joint eurobond, whereby the eurozone as a whole would borrow money in the markets. The problem for Germany is that it would pay higher interest rates under such a scheme.

A more drastic, and controversial, step would be joint control over budgets.

"Small steps have been taken that may put off the future of the euro crisis for a couple of months but it seems to me we have the same issues to contend with," said Simon Derrick, an analyst at The Bank of New York Mellon. "This is only over once they make the leap to fiscal union or someone leaves and the eurobond is a very strong step towards full fiscal union."

By the close, the yield, or interest rate, on Italy's 10-year bonds had dropped 0.7 percentage point to 5.3 per cent while the equivalent rate on Spain's tumbled 0.9 percentage point to 5.14 per cent.

Italy's and Spain's borrowing costs rose to above six per cent last week — rates that would seriously strain the finances of the two countries. The goal is to prevent them from an interest rate spiral like the ones that forced Ireland, Greece and Portugal to seek bailout loans from the eurozone and the International Monetary Fund.

Until now, the ECB had invested just under euro80 billion ($113 billion) in Greek, Irish and Portuguese bonds.

In contrast to the bond-buying programs of the U.S. Federal Reserve and the Bank of England, the ECB "sterilizes" its bond purchases by withdrawing funds from the financial system so that the overall amount of money in circulation remains the same, warding off any inflationary effects.

The ECB's decision to take a more active role came after both Italy and Spain announced new measures to cut spending and boost growth. Italian Prime Minister Silvio Berlusconi on Friday night said that his country would work to balance its budget by 2013, a year earlier than planned.

Spanish Finance Minister Elena Salgado on Sunday announced new reforms aimed at bringing in an extra euro5 billion to help achieve its goal of cutting its deficit to 6 per cent of GDP this year.

The bolded part sounds awfully similar to Hank Paulson's "pull out the bazooka" statement prior to the $700 billion TARP package being passed in the US. I suspect this will end the same way. In failure.

[Crown]

Can I ask a really stupid/naive question? Why don't countries who are in this situation just tell their creditors (especially banks) that they'll pay the loan back, but without the interest?

Meaning whatever the original value of the loan was, it will get paid back (adjusted for inflation if needed) but the interest payments will stop? If I understand the situation correctly (and am I allowed to massively over simplify it) isn't it the interest on the loans that are choking these countries?

[Teebs]

Can I ask a really stupid/naive question? Why don't countries who are in this situation just tell their creditors (especially banks) that they'll pay the loan back, but without the interest?

Meaning whatever the original value of the loan was, it will get paid back (adjusted for inflation if needed) but the interest payments will stop? If I understand the situation correctly (and am I allowed to massively over simplify it) isn't it the interest on the loans that are choking these countries?

Because that's still a default. You're saying, "I'm only going to pay you back some of what I owe you."

This is problematic for lenders because they have probably based their financial plans on actually getting the money they're owed. It's also problematic because once a debtor is rated as in default its debt becomes useless for capital adequacy and basically shitloads of value is wiped off the assets of the owners.

It's problematic for the troubled borrowers because currently (and for the foreseeable future with the exception of Italy) they need to keep on borrowing to fund their government spending. If they partially default no one is going to lend to them anymore for fairly obvious reasons, which means an instant cut in their government spending with all the knock on effects on the economy.

[Crown]

Because that's still a default. You're saying, "I'm only going to pay you back some of what I owe you."

This is problematic for lenders because they have probably based their financial plans on actually getting the money they're owed. It's also problematic because once a debtor is rated as in default its debt becomes useless for capital adequacy and basically shitloads of value is wiped off the assets of the owners.

It's problematic for the troubled borrowers because currently (and for the foreseeable future with the exception of Italy) they need to keep on borrowing to fund their government spending. If they partially default no one is going to lend to them anymore for fairly obvious reasons, which means an instant cut in their government spending with all the knock on effects on the economy.

But the point is; they're already going to default as it is. So why not all get their big boys & girls hats on and sit down and say 'look, you can get some of your cash back or none, choose one'.

Fuck it. Bring on the revolution and roll in Odious Debt!

[Teebs]

But the point is; they're already going to default as it is. So why not all get their big boys & girls hats on and sit down and say 'look, you can get some of your cash back or none, choose one'.

Fuck it. Bring on the revolution and roll in Odious Debt!

I think the most recent bailout for Greece contained what was effectively a small partial default, although don't quote me on it. For the rest, it's not clear that they're going to default anyway. Yes, if a country is going to default then it's better to have a managed partial default, I won't disagree. It's better not to default at all.

For example, Spain has a debt:GDP ratio of only a bit over 60% IIRC and Italy expects to be balancing its budget in the next couple of years. I don't think there is any certainty of them defaulting, and until quite recently it seemed to be viewed as quite unlikely.

As for 'odious debt', if it was borrowed by a democratic government then I think you have to take responsibility for your debt. Default if you don't want to/can't pay, but don't try to make out that it's some kind of honourable thing.

[Crown]

As for 'odious debt', if it was borrowed by a democratic government then I think you have to take responsibility for your debt. Default if you don't want to/can't pay, but don't try to make out that it's some kind of honourable thing.

Not really. Ecuador showed that previous governments - while democratically elected were corrupt and not working for the benefit of their people, and wiped off huge amounts of their debt.

[Teebs]

As for 'odious debt', if it was borrowed by a democratic government then I think you have to take responsibility for your debt. Default if you don't want to/can't pay, but don't try to make out that it's some kind of honourable thing.

Not really. Ecuador showed that previous governments - while democratically elected were corrupt and not working for the benefit of their people, and wiped off huge amounts of their debt.

I can't say that I know a great deal about Ecuador or its debt. I'm not quite sure what you mean by Ecuador showed it to be possible though? Did it default on its debt without consequences? How corrupt were those governments? I'm not denying the possibility, I'm saying that I'm not convinced by the ?moral? concept when applied to democratic governments.

[Crown]

Not really. Ecuador showed that previous governments - while democratically elected were corrupt and not working for the benefit of their people, and wiped off huge amounts of their debt.

I can't say that I know a great deal about Ecuador or its debt. I'm not quite sure what you mean by Ecuador showed it to be possible though? Did it default on its debt without consequences? How corrupt were those governments? I'm not denying the possibility, I'm saying that I'm not convinced by the ?moral? concept when applied to democratic governments.

Ecuador could have continued paying it's debt to the IMF and all the other foreign interests, but the Correa government argued that due to corruption of previous regimes the debt was odious and wiped it off. Needless to say the IMF and the creditors didn't like this, but he's been arguing in international courts the concept of Ecuador's odious debt.