The European Debt Crisis

Here is a great video presentation of the European Debt Crisis.

Doom to the Euro

The next time I teach a class on monetary union or international finance, I will be sure to show this graph from the Atlantic.

"Here is what this chart shows. Compared across more than 100 factors measured by the World Economic Forum Global Competitiveness Report, from corruption to deficits, JP Morgan analyst Michael Cembalest calculates that the major countries on the euro are more different from each other than basically every random grab bag of nations there is, including: the make-believe reconstituted Ottoman Empire; all the English speaking Eastern and Southern African countries; and all countries on Earth at the 5th parallel north."

No argument from me. Keeping the Euro currency afloat with this many dissimilar countries is like forcing square pegs into round holes.

More Aid to Greece

The BBC has a good story summarizing what is known about the latest aid package to Greece. The story also has a link to the original EU press release which is a short 4 page document short on specifics.

According to the BBC story:

"Debt relief
The Institute of International Finance - a global trade body representing big banks and other major lenders - said the planned debt restructuring would target participation by 90% of Greece's private sector lenders.
French President Nicolas Sarkozy said private lenders will contribute a total of 135bn euros of financing to Greece.
The plan is expected to provide some 50bn euros of debt relief to Greece.
Three of the four options offered to lenders to swap or relend existing debts would extend Greece's repayment terms by 30 years, while the fourth would do so by 15 years.
They all offer a much lower interest rate than Greece's current 15%-25% cost of borrowing in financial markets.
Two of the options would also involve "haircuts" - reducing the principal amount of debt Greece has to repay.
The terms of the deal imply a loss to Greece's lenders equivalent to 21% of the market value of their debts, said the IIF."

This sounds like a short-run band aid solution to buy some time before a new round of financing is required. The voluntary target participation by 90% of Greece's private sector lenders is a way to stop credit default swap (CDS) payouts. Which brings up an interesting question. What then is the point of purchasing CDS if payouts can be voluntarily suspended?

While the aid package is designed to soften the blow of Greece's current debt situation, it is unlikely that the austerity measures imposed in Greece are going to do anything except plunge the economy into a deep and long recession (see here). In Greece, tax collection is too low (or too lax, since tax evasion is prominent) relative to government spending. Realistically, the EU needs to consider the option of allowing Greece to default on their debt obligations and a possible strategy for allowing Greece to exit the Euro.

Spiegel Online International has really good coverage of the European debt crisis.

Greek Debt Troubles

Well this is interesting. Rolling over debt is not  what  S&P considers to be enough to address Greece's debt problems.

"A leading credit ratings agency warned Monday that Greece would be considered to be in default if banks rolled over their holdings in the country's debt as proposed by a French plan."
 
 French banks are heavily exposed to Greek debt and are no doubt looking for a quick short-term fix to their problems. French banks hold about $21 billion of Greek sovereign debt, while Germany holds about $23 billion.This is not going to play well with traders of the Euro.

Greek Austerity Measures

Courtesy of  the BBC here is the latest information on the austerity measures that the Greek government needs to pass. In short, the plan is proposing massive tax increases and drastic spending cuts.