Friday, July 15

Europe’s debt crisis

The amount of misinformation/ lack of attention to detail today in the press are quite staggering.

Recently as a consequence of hysteria concerning the economic state of Italy I downloaded their latest national accounts to try and find out what all the fuss is about.

The answer was quite startling- nothing has changed much at all in the last year and from my reckoning Italy is nowhere near the dire straits pointed out in the press. But of course there is another agenda underway and it has nothing to do with reality-but instead relates to making money on bets by large hedge funds for the benefit of the few.

Banning short selling and borrowing shares would help as would decisive leadership in the Euro zone.

Anyway at least I got my message published in one of the more respectable and informed on-line newspapers ( Scrambling for Europe's debt exit of July 12) which is as follows :

There is nothing new in the situation in ltaly and the latest GDP figures for the Italian economy point to moderate GDP growth, contained inflation and debt levels slightly up on a year ago. I think the Euro zone needs to be much more assertive and start publishing aggregated figures for the whole zone which I think would help quell the fear and despair.
Hedge funds trading in bonds and loans are simply increasing their bets that Europe's sovereign-debt crisis will spread. Of course, we also now have the rating agencies that gave AAA rating to the subprime junk bonds trying to make amends by downgrading sovereign debt. Previously they were far too generous. If not completely reckless they now risk overstating the case to act as a catalyst for selling/shorting, and in some case the failure to 'roll-over' investments in sovereign debt. Who are they actually working for at the moment?
European debt needs to be restructured in an orderly fashion (call it a default if you will) to demonstrate the Euro zone has ample resources to bail it out Greece and any other struggling countries.
But in the process of clearing the decks (which could be achieved in a matter of months) it's important the bond holders either take a haircut or agree to a repayment extension which is richly deserved.
The share market’s reaction is clearly overdone since countries unlike companies don't go into liquidation and aren't sold to someone else.
The contagion is only spreading because of the indecision by the Euro zone, the operation of the hedge funds and the undue influence of the rating agencies creating an overblown reaction. Investors are again being spooked by the action of the few who stand to make a killing.

Greece & the way ahead.
Everyone knows Greece is incapable of repaying its debts and any further austerity measures will only make the position much worse. To my way of thinking there is no question that stronger creditor nations in the eurozone have an obligation (if they want to remain part of the eurozone) to bail her out by underwriting / issuing new bonds. Since the current bonds are trading at about 50% discount a refinancing through a European issuance would not be too expensive and is well within their collective resources ( Staring down Europe's debt divide, July 19).
A sensibly determined aftermath would establish criteria so that the Greek government may not be able to borrow in the near future until such time as fiscal stability is established and the country is on a sustainable footing.
Contagion will only spread if the euorozone does not take responsibility for that which they created in the first place. This current indecision and wringing of hands reminds me of someone in charge of credit control saying they can't be held responsible for either collecting all the book debts or establishing a scheme of arrangement which is in the best interests of their employer.


gfid said...

what you say makes good sense. sadly, those at the 'top' of the financial heap are less concerned with good sense and national or international financial stability than they are with maximizing their exponentially increasing profits.

Lindsay Byrnes said...

Hi Granny f
Yes – I agree.
The latest mildly good news is there seems to be just enough goodwill with the latest proposal/ compromise to sensibly allow for a ‘Claytons’ technical default – terms of sufficient clarity so there is no excuse for the manipulators to send the markets into anther spin. A proposal to cut rates and extend maturities makes sense which hopefully will be extended to Portugal and Ireland.

gfid said...

i love this new picture with your posted comments!

susan said...

I wish more people in finance and government were as sensible and responsible as you. Sometimes I feel as though all the grownups left the stage a long time ago and we've been left with adolescents who simply aren't sober enough to run institutions that were originally designed for the longterm benefit of all.

I hope someone in a position of power will read your assessment and see its value but I have a feeling that things won't get better until a major catastrophe forces a re-evaluation of priorities.

ps: I love the new picture too. Glad to see you're back up and running.

Lindsay Byrnes said...

Hi Susan.
I agree many institutions have lost sight of the vision that originally they were designed for the long-term benefit of all.

An example is the current impasse over lifting the debt ceiling in the USA since any agreement freely negotiated must involve a degree of compromise.
Modest additions to tax or in ruling out deductions for the few and curtailment of some future expenditure will always be necessary going forward unless such measures are ruled out by ideologies incapable of compromise.

Adopting such measures and then reducing the rates of tax could clearly be incorporated in an overall fairer package to reduce the deficit/debt, but restore confidence/GDP growth to the economy.

Best wishes