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Sunday, June 19, 2011

The Greek and European debt crisis

The following is from an Irish Economy Blog thread on an article in The Wall Street Journal:

It’s odd that two academics could produce such a fact-less op-ed article.

The banks in Spain, Portugal and Italy are not ‘chock full of their government’s debt’ as clliamed - - the figures for 2010 were €200bn, €13.7bn and €145bn respectively.

The earnings of most of Europe’s big banks are at risk from restructuring rather than capitalsiations.

Italy’s UniCredit had a sovereign exposure of 2.8% of 2010 total book value while Spain’s Banco Santander was at 11.8%. Spain’s second biggest bank BBVA was at 3.7% - - 43% of BS profit in Q1 was from Latin America.

How realistic is it to include Italy when the private sector has the highest savings rate in Europe and half the sovereign debt is financed locally?

The main risk from Greek debt is the exposure of its banking system and a related collapse of its economy; the direct exposure of German and French banks is relatively low at €34bn and €55bn (2 Greek banks are majority owned by French banks) respectively. There are other distributed exposures to insurance companies etc and the ECB.

A Greek default would unlikely bring down a big European finance firm.

An editorial in Friday’s FT titled ‘The evaporating reform of Greece,’ says “The international financial rescue of Greece in May 2010 was, first and foremost, an emergency operation to avert a sovereign debt default, save Europe’s banks and prevent the collapse of the euro. But the crisis also represented a once-in-a-generation opportunity for Greek politicians, business leaders, trade unionists and the general public to join together in cleaning the putrid Augean stables of the modern Greek state…Thirteen months on..myopic politicians, in government and opposition, trade accusations over trivialities and pay lip service to the cause of reform. The public, suffering its third successive year of economic recession, is by turns angry, desperate and drained of hope.”

Greece had a debt to GDP ratio of 25% in 1981 when it joined the then EEC. Turkey’s was 42% in 2010.

I made similar arguments to the FT’s in respect of Ireland in the article in the Dublin Review of Books - - only to have them dismissed by UCD economist Karl Whelan as ‘nonsense.’

I also argued that the socialisation of bank debt had been pioneered by Ireland when as Commissioner Almunia confirmed this week, there was no EU policy on protecting senior bondholders. It’s a pertinent issue as Anglo was nationalised just 15 weeks after the issue of the bank guarantee.

On reform of Europe’s governance system, it’s reported that it’s the directly elected European Parliament, that is pushing for a system with credible sanctions against the resistance of member governments.

Dr. Stephen Roach of Yale and Morgan Stanley, wrote this week of zombie consumers and the gridlock on fiscal reform in Washington DC.

The chattering class may not view reform as important but in the real world of jobs and business at a time of uncertainty, agreement on long-term reforms must surely have some positive current impact on consumers and business investment.

Dublin Review of Books: Article on Irish economic crisis