Another Boring Euro Debt Crisis Thread

[C0ckney]

while the ECB/EU/national politicians continue to tell us that western civilisation will collapse if a country defaults on its unpayable debts, here's some news from iceland.

Iceland has today issued a USD 1 billion Reg S / 144A bond offering due in 2016. This is a fixed rate issue with a 4.993% semi-annual yield, which reflects 3.20% premium over mid-swaps. The transaction was well received by global investors and the book was two times oversubscribed.

so a return to the markets around 2 and 1/2 years after a default. for comparison greek five year bonds are currently yield well over 20%, ireland's are 17% and portugal's are close to 17% (16.90). meanwhile the next crisis countries, spain and italy have their 5 years bonds yielding 5.8% and 5% respectively.

[Flubber]

while the ECB/EU/national politicians continue to tell us that western civilisation will collapse if a country defaults on its unpayable debts, here's some news from iceland.



so a return to the markets around 2 and 1/2 years after a default. for comparison greek five year bonds are currently yield well over 20%, ireland's are 17% and portugal's are close to 17% (16.90). meanwhile the next crisis countries, spain and italy have their 5 years bonds yielding 5.8% and 5% respectively.

I will confess to being underinformed about Iceland but wasn't their default triggered by essentially their banks taking some positions in the world markets that failed. Isn't Iceland a country that despite this default has traditionally had higher employment rates and lower deficets on a per capita basis than your comparison group. Would not their chance of future default appear to be relatively low based on available economic and budgetary indicators?


Implicit in your recitation of rates is that "defaulting wouldn't be so bad". Its posssible this is correct but the market would have to assess the economy post default and my belief that is unless Portugal or Greece or the like make major structural changes, after a default they would face rates far higher than Iceland now , because structurally the economy would not look as strong--I haven't researched this so the comments are based on semi remembered articles from months ago but its accurate to say that prior default is just one factor that goes into the rates. I just don't know that a Greece or Portugal could reverse their situation to exhibit the same relative health that Iceland now exhibits

[Barnabas]

Iceland is a town, its population is less than 500.000

[C0ckney]

my main point is really that our politicians are not telling us the truth about what is likely to happen and because of the dishonest assessment we are given, it robs people of a real choice. also it demonstrates that the shut out from debt markets isn't necessarily that long and perhaps will be shorter than with the bailouts and rescues that we have seen. if anyone believes that greece will return to the markets in 18 months then i have a bridge to sell them.

the question of defaults themselves, i think each country needs to be treated differently.

a default would hurt greece enormously but it would bring some benefits in the longer term. it's clear that a default is going to happen eventually because its debt burden is unsustainable. it's problem is one of solvency, it has severe structural issues, but the 'solutions' have only provided liquidity and will do nothing to solve the underlying problems. the whole rescue has been an exercise in kicking the can down the road. the problem with the plan is essentially that it is a larger version of the 'rescue' that greece got a year ago and which has utterly failed. the greek people are paying the price now with cuts and austerity measures and will pay the price going forward with an unpayable debt strangling economic growth. the reasons are to buy time for the euro and the european banking system.

ireland needs to defeault. it would benefit the most. it is the most similar to iceland, it's bankrupt banks are the main cause of its problems. at the moment the debts of its banks (caused by in the main by bad loans to property developers) were taken on by the government in 2008 (if you have a chance to read about the story of dishonesty and incompetence which is the irish banking crisis and the government's response to it, it's really breathtaking), which means that the people have assumed responsibility for the mistakes of the banks. it's like a giant millstone around the country's neck. if it defaulted and left the banks to fend for themselves (i.e. fail) then this would have some unpleasant short term consequences but would remove this millstone and allow a real recovery.

portugal's situation is more complicated, it seems to suffer more than anything from a lack of economic competitiveness. i'm not sure that a default would be right for them, as it's the country i know least about.

italy's and spain's importance is their size. if the 3rd and 4th largest eurozone economies get into serious trouble, what happens then? does northern europe try to bail them out, using the same failed methods we have seen, only on a much bigger scale or do we finally admit failure and allow nature to take its course.

[notyoueither]

Everything I've read points to the entire reason for recent actions being the health of the European banking system.

Cue KH in 3, 2, 1...

[Dinner]

Yep, banks have already lost huge amounts in the real estate asset bubble; so much that many of them were called "zombie banks" which actually had net negative asset value. The Fed and the ECB has been trying to help banks reconstruct their balance sheets through dozens of different programs but if any of the PIIGs default then it will take many of the biggest banks in the EU with them. It will be Lehman Brothers X 10 with a corresponding amount of decrease in credit and the money supply (since banks loan out more money then they actually have in assets).

[C0ckney]

Everything I've read points to the entire reason for recent actions being the health of the European banking system.

Cue KH in 3, 2, 1...

there are two reasons. the one you describe and saving the euro.

oerdin makes a good point about zombie banks. it's what we saw in japan in the 1990s and what we are seeing today in europe. t the moment our politicians are engaging in an exercise of dealing with insolvency by pretending that we're solvent, dealing with pain on the horizon by pretending that that pain doesn't have to be felt and that if we just kick that can down the road a little further, close our eyes and keep believing, the pain will just go away and never have to be felt. or at least, not until these particular politicians are out of office and can lay the blame on the first guy to accept reality.

[BeBMan]

I thought this was about the US joining the EU to get bailout money from me

[Dinner]

The US easily has plenty of money to pay it's debts. The problem is Republicans have decided they want to crash the economy by deliberately by forcing a default. Yep, I said they're intentionally trying to destroy the economy and they should be hanged from the street lamps like the treasonous pigs they are.

[dannubis]

Thanks Fritz, for all of your hard work...

[Hauldren Collider]

Oerdin is thoroughly wrong

To be clear, in the US, Congress has to raise the debt limit as per the constitution in Article I, Section 8. The United States is fully capable of paying off its debt, but the Treasury doesn't have the authority without Congressional approval. Both parties have now admitted to the fact that new borrowing must be balanced by reduction in the deficit. Republicans believe that raising taxes will hurt economic growth more than cutting excessive spending and wish to bring spending back down to the more reasonable levels pre-2008. Democrats want to essentially make permanent much of the spending increase of the stimulus by raising taxes.

[Dinner]

No, it could very well result in a technical default due to a money crunch as in even though we'll get enough money to pay it over the course of a year it is possible we could have spot shortages of cash which would mean we couldn't make a debt payment. As in we need $X at 12:00 on one day but we only have $X-$Y.

[Jon Miller]

Both parties have now admitted to the fact that new borrowing must be balanced by reduction in the deficit. Republicans believe that raising taxes will hurt economic growth more than cutting excessive spending and wish to bring spending back down to the more reasonable levels pre-2008. Democrats want to essentially make permanent much of the spending increase of the stimulus by raising taxes.

Democrats weren't the retards who raised spending enormously in the early 00s while cutting taxes...

JM

[MikeH]

Indeed.

[Dinner]

HC is completely clueless on this issue. Obama's proposal was to make $3 in cuts for every $1 in tax increases. The hard truth is our hole is so large NO SOLUTION is possible without tax increases since the deficit is almost the size of the ENTIRE discretionary budget. Does anyone think Congress is going to eliminate the entire discreationary budget including ALL military spending? That's what it would take to balance the budget without tax increases.

Luckily Federal tax levels are currently at the lowest level in the last 100 years, yes, lowest in the last century, so there is plenty of room to increase taxes yet still remain below the 65 year post WW2 average. Here's some more facts for you, HC. Since 1945 Federal spending has averaged 25.5% of GDP while taxes have averaged 24.5% of GDP but right now spending is 26.5% of GDP while tax rates are waaaaaaaaaayyyyyyyyy down to just 17% of GDP so, yes, we're spending slightly more then the 65 year average (which seems reasonable since we're currently fighting THREE foreign wars) but the main reason, we're talking almost the exclusive reason, we have a deficit is because taxes have been cut, and cut, and cut again usually only for the top 1%.