Friday, April 30, 2010

Germans on Greeks: "They had their fun"

See this summary of the Greek debt / eurozone crisis in the NYTimes.

Can anyone analyze the implied probabilities for different scenarios based on credit derivative prices? This is down to national politics now -- if the Germans can't stomach a Greek bailout, what's going to happen with the other PIIGS (Portugal, Ireland, Italy, Greece, Spain)? Default insurance on some of those countries must be going through the roof.

Here are eurozone credit spreads over time (WSJ). Looks like Ireland is next, then Italy and Spain. What is Soros up to? :-)


davebackus said...

This is the economist's equivalent of the LHC, new data generated every day. Time may say differently, but it's not obvious to me that the fixed exchange rate or Soros are central. Certainly they're important background, but this looks like a more common story of sovereign budget problems, of which we have many examples over several centuries. I think a fair summary for Greece would go something like this:

* Greece has had lots of govt debt for at least a couple decades.
* The interest burden of managing this debt fell sharply when Greece entered the Euro Zone: spreads over German debt fell from 10% to zero over a couple years in the late 1990s.
* Neither the Greeks nor their Euro Zone partners forced Greece to follow more disciplined policies, even though they are an explicit requirement for EZ membership.
* When the financial crisis hit, a massive increase in the govt deficit raised concern about repayment among investors. Hence the current troubles.

Not a complex story, or a new one. The only difference from the norm is that there's a chance the Germans etc will bail them out. Even that may be a mixed blessing if it postpones eventual adjustment. We may see similar issues play out in the US with California, NJ, and NY. Same rules: fixed exchange rate, no obligation for the federal government to bail them out, lots of potential for bickering and assessing blame.

steve hsu said...

Dave, thanks for the nice summary. I think the analogy is apt for the US states you list. I mentioned Soros not to imply he is central to any of this -- I'm just curious what trades he has on :-) Remember who broke the Bank of England!

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