Kyle Bass: Greece a failed state, Euro will collapse, Japan debt crisis next

[ag]

Now, Greece/Portugal/Ireland, etc. are tiny. They themselves are not likely to produce so much havoc for this to matter by itself. Financing national economy through the printing press is going to have humongous benefits - with very little cost to them, at least early on. The bulk of the cost will go to the Germans - there economy is much bigger, so it will absorb most of the inflationary pressure. Again, by itself it won't be that much - but all the benefit will go to the Greeks (they will collect the seignorage), while most of the cost will be charged to others. Now, it is extremely unlikely that the Germans themselves will start printing like hell - they are the biggest economy, they will bear much more of the cost, so they will, probably, be somewhat restrained. But even for Spaniards, Italians, etc., etc. it will be very tempting to help themselves - especially given that the midgets are alreayd imposing the cost on everybody.

This, of course, can be prevented - either by imposing limits on what can be printed, or by guaranteeing collective retaliation against the happy printer. Both of these features are in the current framework - and you propose to dispense with them.

[ag]

The defenses would not be blown up because Greece has put forth a strong effort to cut its budget. Had it not put forth such incredible effort, it would not be worth saving perhaps, but it has. The only major area of fail is wage rigidity, but the government spending drop of 8.7 percent of GDP in two years is very impressive.

Yes, it is impressive. Even more (tragically) impressive is that it doesn't look sufficient. We all know, it is just sucking Greece into a depression.

[Beet]

I don't propose that they be dispensed with, only adjusted. The limits & retaliation were meant to prevent irresponsible behavior; but Greece's problem now is not that it is being irresponsible. It is that the scale of adjustment being asked of it is not feasible without the limits & retaliation being relaxed somewhat.

[ag]

Imagine greek government defaulting. People are ALREADY massively withdrawing their money from the banking system in expectation of either the drachma, or bank defaults, or both. Once the government defaults, it will be a stampede. Remember, to use Target 2 banks have to provide collateral to the Greek Central Bank. What are the assets of the Greek banks that can serve as such collateral (on a massive scale)? BTW, at that point the Greek government bonds are worse than junk.

So, ECB would have to vote to accept junk for collateral and just provide as much liquidiy as the Greek CB asks for - nothing less will stop the run. But why should the run stop? What would induce Greek depositors to return their money to Greek banks - the money is safer in Germany or under the mattrass. In any case, everything that has run out will stay out for the forseable future. This is Greece printing money that immediately goes to Germany, not to Greece. Within Greece the crunch will continue. How long is that going to last? Well, unless ECB clamps down on transfers, there is no reason it would stop, while the crisis is continuing. And there is no reason for the crisis to stop any time soon.

So, a gygantic flow of cash is going to be poured into Greece - with all of it leaking out nearly immediately. This is not solving anything, but making the non-Greeks angry. And Greeks can't even promise anything in exchange - they don't even have a government.

[ag]

I don't propose that they be dispensed with, only adjusted. The limits & retaliation were meant to prevent irresponsible behavior; but Greece's problem now is not that it is being irresponsible. It is that the scale of adjustment being asked of it is not feasible without the limits & retaliation being relaxed somewhat.

You are proposing, as far as I can understand, to let Greece inflate the whole European economy to the point it resolves its own financial problems. This is a huge bomb - it's insane. I wouldn't be surprised if the entire Greek economy has never been worth the damage thus incurred. An outright fiscal transfer from the German budget (i.e., Germany assuming all Greek debts and pension/salary obligations) is bound to be cheaper.

[Beet]

The ECB has already accepted what outsiders would consider junk has collateral. It holds Greek bonds (another reason why a Greek exit would be a catastrophe, it would man immediate losses to the ECB). Since the difference between liquidity and solvency is to some extent subjective, especially when the problems are due to a business cycle depression, central banks can continue to accept trouble collateral at face value for a long time. As long as they don't mark to market, there is no problem.

As recently as April, money was actually flowing into Greek banks. Don't assume that the situation can't stabilize if a political agreement is reached, or the right parties win in elections.

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What's insane, from my perspective, is to have another Lehman Bros. which would be as bad as the last Lehman Bros., centered in Europe. The cost of such an event is in the trillions. This is not even to mention the strategic stuff that I discussed earlier. The cost of that is potentially priceless. The cost to Germany alone in lost sales, growth, etc. not to mention from defaults in southern European countries, are in the trillions. Greece is not the only European economy that needs inflating. The countries in Europe that are at or below zero growth at the moment have a collective population dwarfing that of Germany; indeed outnumbering the total of countries in Europe that do not need inflating. So if you were to put the countries of Europe on a blind scale, the side that needs inflating is heavier.

[ag]

Unless Greece exists euro in an orderly fashion - which would require a lot of hard decisions and a lot of careful preparation - the "Lehman Brothers" scenario (or worse) might become inevitable in pretty short order. A major bank run on Greek banks is not goign to be easy to stop. And even if it is stopped, it is likely to be repeated.  It would be much easier to stop contagion if Greek departure from euro is viewed as a result of a conscious policy and negotiation than if it is spontaneous. And, of course, it would be much easier to negotiate Greek exit before Greece gets a revolutionary government hellbent on mischief - which seems increasingly likely.

It would have been MUCH easier to manage Greek exist if it were done 6 months or a year go, when Greece still had a government. Alas, we are rapidly approaching the spontaneous collapse point - and right at the moment when nobody is in charge.

[ag]

Yes, ECB has already accepted junk. You are asking it to make an unlimited commitment to accept junk in the future in arbitrary ammounts. That's blowing things up.

[Beet]

Nope, I am asking the ECB to make a commitment to help manage the situation and protect countries that make an effort at reform as serious as can possibly be expected in terms of costs to the domestic society.

Edit: From radical bomb-thrower David Cameron:

"Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory which carries huge risks for everybody".

[ag]

I am all w/ Cameron. There is a reason Brits never joined euro - and they've been proven right. Cudos to them.

What he is,really, saying is that Europe "does not have a comitted, stable and successfull eurozone with an effective firewall, well capitalized regulated banks and a system of fiscal burden sharing", so we are, indeed, in an "ucharted territory". The problem is, it is pretty hard to get to "well-capitalized regulated banks and a system of fiscal burden sharing" when, at present, one of the eurozone members doesn't even have a government, or, for that matter, any realistic prospect for obtaining a government that would be even interested in providing "well-capitalized regulated banks and a system of fiscal burden-sharing".

So, for the moment, the task is to concentrate on getting to "a comitted, stable and successfull eurozone with an effective firewall, well capitalized regulated banks and a system of fiscal burden sharing". And that, unfortunately, implies getting rid of Greece - and, probably, a few others.

[ag]

The situation is unmanageable at this point. It should have been managed when Greece still had a government, capable of negotiating an orderly withdrawal. You can't commit to screwing the European financial system for the sake of keeping Greece in the euro zone.

[Beet]

Nice twisting of Cameron's words. He is clearly saying that policymakers have a choice - one or the other. And a chaotic exit of Greece and "a few others" would definitely been in the category of "uncharted waters."

The idea that an orderly withdrawal could be negotiated is absurd. If Greece has no government, it is because the government committed suicide trying to meet Germany's impossible demands. The one committed to screwing the European financial system is yourself, and the others adopting the austerian position. Now only screwing Europe's financial system, but its political, economic and social fabric, and the lives of millions of people. It's sadistic.

[ag]

I haven't said a word about austerity (pro, or contra). Nor do I approve of the way the previous Greek governments vainly, if heroically, fell on their swords. They should have been negotiating withdrawal from the beginning of the crisis - it is extremely unfortunate for everyone that they chose otherwise.

The European financial system has been screwed by those, who designed it without regard to the existing political institutions. No additional ammount of screwing is necessary - the seeds of the disaster have been planted a long time ago. The system has to be urgently reformed, and that involves scaling back the level of integration, at least temporarily. The longer the present unsustainable situation continues, the more likely we shall see a chaotic disintegration - which would be disastrous for all.

Inflating the euro economy now to an extent sufficient to "save" Greece is simply not realistic - it will kille the patient (i.e., the euro) more comprehensively and surely than anything. That does not mean that strict "austerity" should be maintained - relaxing it (as  it has been done, in fact, by general agreement) will help others. But for Greece it is far too little, far too late.

[Beet]

Austerity has not been relaxed - only recently has talk about it occurred, but nothing has happened yet. The opposite of austerity is inflating the economy. If, in general, you oppose austerity, then you are by definition supporting some sort of 'inflation' or reflation. None of the policies we've discussed here avoid a choice between the two outcomes. The choices are the same no matter what currency you are in. The Euro is no more vulnerable to the dangers of inflation than any currency - indeed, it is less vulnerable because of the sheer size of the Euro economy and the presence of countries like Germany in it. Reflation would not destroy the Euro - but failure to reflate will destroy the Euro.

An orderly exit of the Euro at this time by any country under pressure is not realistic. I don't think that a Greek 'negotiated' exit would have been possible at the beginning of the crisis, either. Once the crisis began, the possibility of a successful negotiated exit ended. But regardless, at the present time, none of the peripheral countries would be able to negotiate a managed exit. The practical effect of such an exit would be a 'Lehman event.'

[ag]

1. euro is A LOT more vulnerable than other currencies - because of the unique political arrangement. If you abolished the power of the US Congress to impose taxes and reduced the federal presidency to a minor bureaucratic job, incomparable in imporance with the truly powerful governorships, I'd be very scared about the federal (paper) dollar. I'd want gold. So that's exactly what they've engineered - "gold". Of course, it's not the best arrangement imaginable - but that's what's out there. Relax it - and it will be paper, that isn't going to stay around long.

2.  The ECB has been providing quite a bit of liquidity, hasn't it? It would be able to provide more, if Greece weren't there in the first place.

3. Without a crisis there will never be a possibility to manage a euro exit - except, possibly, as a general dissolution treaty. Otherwise, whichever politician would take his country out would be committing his/her own political suicide.


4. Lack of political exit mechanisms means, I guess, that ECB should be ready to save others with extraordinary measures, while letting the Greeks drop dead. I don't see any other way.

[Beet]

1. euro is A LOT more vulnerable than other currencies - because of the unique political arrangement. If you abolished the power of the US Congress to impose taxes and reduced the federal presidency to a minor bureaucratic job, incomparable in imporance with the truly powerful governorships, I'd be very scared about the federal (paper) dollar. I'd want gold. So that's exactly what they've engineered - "gold". Of course, it's not the best arrangement imaginable - but that's what's out there. Relax it - and it will be paper, that isn't going to stay around long.

Okay - the euro is more vulnerable than other currencies - to breakup risk. Without a strong government backing up, it faces the precise risk which is the reason why it is now dropping in value. But inflation risk? No. Not with the money supply centrally managed by the ECB and the Eurosystem. The risk to the Euro would be magnified by Greece's exit, because it would indicate breakup risk. Why do you think the value of the Euro has been plummeting since May 6? Because investors are scared of inflation? Not so. They are afraid of breakup. Do what I recommend, and the value of the Euro will rise, because Europe will become more like the United States today. Do what you recommend, and it will fall for the opposite reason.

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Greece's presence or absence has nothing to do with the ECB's ability to provide liquidity. And yes it has been providing quite a bit - in fact if it had simply stated a willingness to do so from the beginning, it would ironically have ended up having to provide a lot less. The more it undermines its own actions with paranoid inflation-concern, the more it will end up having to provide for the same result.

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Well then, that just shows that the Euro is popular after all, isn't it? Because you admit that in a time of tranquility, when people do not have the gun of crisis pointed at their head, voters will support the Euro.

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That might only work if Greece was contained and the response was strong enough to convince people that Greece was a single case. But you've already said a "few" more countries could leave the Euro. That's four countries. By the time you reach that number, the contagion will have long become a stampede and nothing will be able to stop the total unraveling of the continent's economy and the Euro itself, in the most awesome cataclysm since 1931, if not greater.

[ag]

Let's put it this way. Euro is either vulnerable to the break-up risk, or to inflation. If you insist that ECB remains in control and independent of anything and everything, it's not vulnerable to inflation of course. If you insist ECB is to yield to political pressures to avoid the break-up - it is vulnerable to inflation.

The fact is: what you propose is to take the de facto management decisions from the hands of the ECB and give it to national banks and politicians. If your proposals are followed, member states would be able to force ECB to do their bidding by taking decisions that would imply certain behavior of the ECB becomes inevitable, if the objective is to avoid the break up. So, no, under the measures you propose, ECB control will not be there. Hence, inflation.

I could see most other states surviving inside the euro - though I don't believe it makes sense for all of them. But Greece will not stay a euro member, no matter what anybody (realistically) says or does, methinks.

[opebo]

ag, what sort of inflation do you anticipate if the debt is repaid by printing?  If I remember correctly the entire Greek debt is only something like 400 billion Euros.

[Beet]

No, that is not what I propose at all. Under my proposal the ECB's objective would be to balance the risks of controlling inflation and avoiding breakup, which is the natural result of recognizing both as serious risks. But if member states took decisions that would imply behavior of the ECB that would result in high inflation, those member states would not receive support and might be kicked out.

[ag]

ag, what sort of inflation do you anticipate if the debt is repaid by printing?  If I remember correctly the entire Greek debt is only something like 400 billion Euros.

Ah, the problem is not Greek debt. Of course, it would be much cheaper for the Germans to pay the Greek debt out of their own budget, without printing: to get rid of 400 billion Euros in Greek debt by printing you'd have destroy a lot more than that in Germany,  so it would make sense for the Germans simply to tax their own population and pay the damn Greeks that way.

But even that is of secondary importance. The problem is, that once the institutions are adjusted to make printing possible, the printing will never stop: everybody will be getting into debt and printing like crazy - when I print, I gett all the benefits, but the Germans pay most of the cost, so I'd be an idiot not to print. The damage done may be orders of magnitude bigger than the whole size of the Greek economy )

[ag]

No, that is not what I propose at all. Under my proposal the ECB's objective would be to balance the risks of controlling inflation and avoiding breakup, which is the natural result of recognizing both as serious risks. But if member states took decisions that would imply behavior of the ECB that would result in high inflation, those member states would not receive support and might be kicked out.

So, you will have countries continuously threatening break-up: as a matter of deliberate policy, not by accident.

Anyway, the ECB is already balancing the threats - and, I would say, bending all the way out to do everything possible to avoid the break-up and more. It would be a lot better to accept the inevitable.

[opebo]

No, the printing would be done by the ECB, ag. 

[ag]

No, the printing would be done by the ECB, ag.  

Yes, of course. Doesn't matter in the least who'd doing it, though: it's a single currency area, isn't it?

Or are you saying ECB would just forgive the Greek debts ("print" the money and give it straigt to the Greek government) ? Well, short term that's pretty much the same as if Germany, France and the rest taxed their citizens and gave the money to the Greeks. On the other hand, in the medium term it would probably guarantee even speedier end of it all - at that point any government not borrowing 200% of its GDP ASAP and at arbitrary interest rate would be ridiculous. Why bother, when ECB will make sure it all burns? Euro will become a (loathed) history within a decade.

[opebo]

No, the printing would be done by the ECB, ag.  

Yes, of course. Doesn't matter in the least who'd doing it, though: it's a single currency area, isn't it?

In your post you said 'everyone' would do it.

[ag]

In your post you said 'everyone' would do it.

Do what? Everyone would make sure ECB has to print money. Leaving the pro forma honors to the bankers is not going to matter.