Finito?

[KrazyHorse]

Gross debt is hardly a good indicator of a country's fiscal prospects

[DanS]

Very interesting. Spain really levered up in the past two decades.

Edit: Also, the UK.

[DanS]

KH: Would seem like a very convenient thing to do to shift some of the leverage to the public sector (directly or indirectly), no? That appears to be happening in the US, for instance.

[Dauphin]

Gross debt is hardly a good indicator of a country's fiscal prospects

Net debt would of course be more relavent, but I don't have that information to hand. For Japan, they're assets are clearly very sizeable though.

[KrazyHorse]

It's called net international investment position

[C0ckney]

something from ireland

http://ww<br /> w.independent.ie/opi...n-2973716.html

David McWilliams: Leaving the euro may be our least extreme option
the exchange rate question will rarely be far from the headlines. #If we are to have a referendum -- which, according to the Finance Minister, will be a vote on whether we are in or out of the euro -- we should get our heads around what the exchange rate does, what having your own exchange rate allows you to do and why that might be a valuable alternative for Ireland.

At the moment, the central plank of Irish economic policy, backed by the IMF and the EU, is something called "internal devaluation" and the logic of it goes like this: Ireland is uncompetitive and needs to export its way out of the recession. As we don't have an exchange rate that can fall, we need to grind down wages over a period of years so that Irish industry can be competitive again.

At the same time as we are forcing down wages, we must also reduce government expenditure, because we can't afford to pay for it. As the government deficit at the start of the IMF bailout programme was 14pc of GNP and we need to get the deficit down to 3pc, we will reduce spending by 11pc of GNP over the next two or three years.

Therefore, government spending will be reduced dramatically. But if the government is not spending, who is?

We should be, but we are not because we are worried about the future, so we are saving. Who is spending the missing 11pc of our income which has just been taken out of the Irish economy? Now here is where our policy gets a bit hopeful to say the least because in order for our economy to stay just as it is, foreigners need to massively increase their buying of Irish goods.

But why would they do this? Have Irish goods become dramatically cheaper so that they have become dramatically better value?

The theory of "internal devaluation" says that the Irish economy and workforce are so flexible that we will all take dramatic paycuts, this will drive down wages and we will become competitive this way. Because we have no exchange rate and are members of the euro, we will devalue by canabalising our own wages -- but according to the present policy, even at these much lower wages we will be able to service the huge debts built up in the credit bubble. How is that possible? Well, it is not.

But before we explain why debt dynamics at lower wages makes servicing old debt impossible, let's examine the first bit of the theory which says that Irish wages have fallen dramatically and will continue to do so. Let us examine the evidence that Irish workers -- or any workers for that matter -- accept reductions in their wages as the theory says.

Look at the cartoon. It shows wages in Ireland, Iceland and Latvia. Ireland and Latvia are in the euro (well, Latvia has a fixed exchange rate with the euro). We are both locked in austerity programmes, and we are supposed to be devaluing internally. The other chart shows Icelandic wages measured in euro. Iceland has its own currency, the kroner.

What the chart in the cartoon reveals is that Irish and Latvian wages have remained more or less the same since 2008 against our competitors. In contrast, Icelandic wages against its competitors have fallen dramatically. Iceland has become dramatically more competitive vis-a-vis Ireland and Latvia because it devalued its currency dramatically in 2008/09.

Iceland in one sharp devaluation has achieved what Ireland and Latvia are supposed to achieve over years of grinding down wages. If we are supposed to achieve Icelandic levels of wage competitiveness, we will have to shrink the economy over the next few years. By having their own currency the Icelandics did in a few weeks what we have been trying -- unsucessfully -- to do over four years.

Having its own exchange rate allows a country to adjust quickly. Yes, living standards when measured in euro fall, but that has to happen in both the Irish and the Icelandic case. The question is how do you achieve this and are you giving your people a chance?

There is a reason why no economy in the world has ever emerged from a recession like ours without changing its exchange rate. The reason is that it simply can't be done. There is no evidence anywhere, ever, that shows that a country can operate a successful "internal devaluation" -- particularly an economy carrying as much debt as we have.

So if it can't be done, what are we trying to do? And more to the point, what is the cost of this lunacy? Look at the chart again. Much is made of the "flexibility" of the Irish labour force. But the flexibility is not in wages but in levels of unemployment. The Irish labour market adjusts alright, but the adjustment comes not in falling wages but in rising unemployment and emigration. This is what we don't want to happen, yet this is what the policy is leading to.

So those getting paid too much in Ireland still get paid too much, yet the people who feel the real cost of the "internal devaluation" are those who lose their jobs because rather than cut wages, employers cut staff.

When people are laid off, it is very difficult to get a new job because no one is spending in the economy. The government is not spending and the people are not spending. But what about the the much heralded export-led growth which postulates that foreigners will buy loads of Irish goods, more than compensating for the fall in domestic spending?

Well it doesn't happen, partly because Irish wages don't fall as we can see in the chart, so Irish goods are no more competitive than they were a few years ago. Yes, exports have risen, but nowhere near enough to offset the local contraction. This is why unemployment has trebled in three years and why emigration is running at over 1,000 people a week. It is not that the policy of internal devaluation is not working, it can't work. It has never worked anywhere, ever.

Yet the really strange thing is that it is billed as being mainstream economic thinking. It is not mainstream economics, it is highly radical. What is mainstream and proven is the power of devaluations. Yet those recommending the course of action that mainstream economics tells us to do are labelled radicals.

Language will be very important in a referendum year and you will notice that the Irish and European economic establishment will deploy language to paint those who support the country returning to its own currency as extreme. The truth is that what is extreme is following a policy which has never worked anywhere and the cost of which is mass unemployment and mass emigration. Now that is truly radical.

[pchang]

I hope that if they drop the Euro, they don't go back to the pound. I hope they pick something really Irish like the Shillelaghs or the Blarney.

[Elok]

Ideally they would go back to the historical cumal, which IIRC was the price of a female slave.

[BeBMan]

Blarney? I like that

[DanS]

Italian and Spanish yields have crept back up again...

[Dauphin]

Hungary looks a problem too.

[pchang]

Hungary uses the Forint. Looks like the PM there is going to give the IMF the middle finger. That may be the best for the people.

[kittenOFchaos]

Britain is okay...we've got £35 billion to waste on a high-speed rail link to Birmingham.

[notyoueither]

http://www.economist.com/blogs/buttonwood/2012/01/euro-zone-crisis

Watch the Greeks, not the agencies
Jan 16th 2012, 13:55 by Buttonwood

WHILE the big headlines over the weekend were about S&P's downgrades of European countries, the more worrying news came from Greece, where talks on a debt deal broke up. While I am not as negative as some on the agencies (their record on rating sovereign debt is pretty good), the market had already anticipated a downgrade of France, which has been paying a higher rate on its debt than Germany.

Greece's debt is a complex issue. Clearly, it must default to get its debt-to-GDP ratio down. But it also has a competitiveness problem that requires either a devaluation (not possible within the euro) or a fall in its costs (lower wages and thus a lower standard of living). Some of the pain of the latter option can be cushioned by subsidies from its fellow EU nations but they demand reforms in return. Many of those reforms are opposed by Greeks; it remains to be seen whether the technocratic government can push them though.

Of course, Greece has already had loans from the rest of the EU and this complicates matters further. The authorities are unwilling to see take any write-downs on their money. That puts all the burden on the private sector. Indeed, the more money lent by official bodies, the greater the write-down the private sector is forced to absorb if the Greek debt-to-GDP ratio is to fall significantly.

Throw in another twist. The authorities are obsessed (rather perversely in my view) with making the agreement voluntary so that the Greek deal is not classed as a default in terms of credit default swap market. That gives the creditors a bit more bargaining power. The banks appear likely to go along with whatever they're offered but the hedge funds are putting up more of a stink.

Talks between Greece and its private sector creditors are due to resume on Wednesday, January 18. Whereas a tentative deal was reached in October to write the debt down by 50%, a lot depends on the interest rate on the new debt. The lower the rate, the better for Greece but the bigger the hit (in present value terms) to the creditors. And then there are the knock-on effects. The EU has said that the Greek deal won't set a precedent for other nations. But, pull the other one. The EU has said a lot of stuff during this crisis and has backtracked many times. The bigger the write-off for Greece and the more aid (in terms of cheap finance), the more other nations will be encouraged to default and the greater the worries of creditors of other nations. That's why the Greek deal (or lack of it) is so crucial.

[Dinner]

Why don't they just kick out the Greeks already and be done with it? Dragging this out for years probably won't result in a different outcome.