Shipyard workers demand their unpaid wages in central Athens. Greece is now as close as it's ever been to leaving the eurozone.
I went on "The Patt Morrison Show" on Tuesday to join NPR "Planet Money" correspondent Zoe Chace and travel expert Terry McCabe to discuss the ongoing, seemingly neverending eurozone crisis. As you probably know, there are now serious conversations happening in Europe about Greece exiting the euro. Spain and Italy could be in trouble. Ireland and Portugal already are. Governments have fallen; most recently French President Nicholas Sakozy lost his re-election bid to socialist François Hollande.
Despite all this, it's easy to talk yourself into a false sense of calm. After all, the eurozone crisis feels as if it's been going in for years — because it has been going on for years!
At the Financial Times, Martin Wolf doesn't think we should be calm. He thinks we should acknowledge reality: that post-financial crisis, the world is in a "contained depression." And we're unprepared for the consequences of a eurozone meltdown:
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Men look at the IBEX-35 index curve on April 23, 2012 at Madrid's stock exchange. Top shares on the Madrid stock exchange slumped 3.24 percent in early trade, hammered by concerns over Spanish sovereign debt and the French presidential elections.
Well, it was only a matter of time before the zombie plague that is the European debt crisis once again lurched toward global markets, hungry for brains....brains...brains... I mean bailouts...bailouts...bailouts.... That's what Spain is now telegraphing, as the yield on the country's 10-year bond edged closer to the critical 7-percent mark, the point at which a bailout by European banking authorities would be necessary.
Spain's woes are very different from Greece's. Spain has a banking crisis that was brought on by a property boom. Greece borrowed to build a welfare state. For this reason, it's critically important that Spain's crisis be contained, because other banks have exposure to Spanish banks. Banks outside Spain.
Here's some insight from (of all places) Bermuda's Royal Gazette:
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He might not be worried about Greece's recent default and payout of credit default swaps. But some other people are.
I just discovered Tony Alfidi's blog and have been enjoying his uncensored views on a variety of tech and finance subjects. I agreed with him on Apple's mastery of planned obsolescence and now I'm tempted to agree with his verdict on credit default swaps (CDS) — a number of which just kicked in as Greece "defaulted" on some of its privately held sovereign dealt.
Some people think that CDS, despite their role in the financial crisis (they brought down AIG), remain useful, as a means of hedging risk and as a relatively recent example of financial innovation that was sadly misused.
Alfidi says un-uh:
I've always believed that credit default swaps are meaningless and even dangerous. [There's your Quote of the Week!] Banks and hedge funds use them to place directional bets with no regard for a counterparty's solvency. The European versions of AIG, whoever they are, can now breathe easier for a few weeks knowing they can get away with more uncapitalized CDS writing.
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An elderly man feeds pigeons on Syntagma Square on November 3, 2011 in Athens, Greece. Greece stands on the brink of economice collapse as political disagreements continue concerning the financial aid package proposed by the EU.
At this point, the Greek debt crisis probably seems like it's been going on forever. It hasn't, but it seems to defy resolution. Last Friday, the country finally defaulted, in a strictly technical sense, on part of its sovereign debt — an outstanding slice of private bondholder debt that was insured by the dreaded credit default swaps. The agency that determines whether those swaps — which amount to a bet that a country won't be able to keep up with its bond payments — should pay out said, "Yep, Greece has defaulted." Felix Salmon and John Carney provided a good explanation on Marketplace at the end of last week.
The main issue for Greece is just how long it's going to have to suffer. The austerity measures that are being forced upon it in exchange for more bailout money from the European financial authorities are setting it up for a decade of pain. On the plus side, Greece stays in the eurozone and has access to financing through the currency union; something can always be worked out...however...s-l-o-w-l-y. On the minus side...well, there's all that austerity and aforementioned pain.
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ATHENS, GREECE - NOVEMBER 03: A general view of the building of the Greek Parliament on the Syntagma (Constitution) Square is pictured on November 03, 2011 in Athens, Greece.
I've been steering clear of the euro crisis for the past month or so, but given the latest frenzied spate of negotiations about how to prevent Greece from defaulting on its debt, I figured it was time to jump back in. The latest news is pretty straightforward: over the weekend, the Greek parliament voted to accept a new set of austerity measures, in exchange for a new round of bailout money — $171 billion, roughly.
This hasn't gone down well with the population, according the the New York Times:
[C]haos on the streets of Athens, where more than 80,000 people turned out to protest on Sunday, and in other cities across Greece reflected a growing dread — certainly among Greeks, but also among economists and perhaps even European officials — that the sharp belt-tightening and the bailout money it brings will still not be enough to keep the country from going over a precipice.
Angry protesters in the capital threw rocks at the police, who fired back with tear gas. After nightfall, demonstrators threw Molotov cocktails, setting fire to more than 40 buildings, including a historic theater in downtown Athens, the worst damage in the city since May 2010, when three people were killed when protesters firebombed a bank. There were clashes in Salonika in the north, Patra in the west, Volos in central Greece, and on the islands of Crete and Corfu.
Greece and its foreign lenders are locked in a dangerous brinkmanship over the future of the nation and the euro. Until recently, a Greek default and exit from the euro zone was seen as unthinkable. [my emphasis] Now, though experts say that the European Union is not prepared for a default and does not want one, the dynamic has shifted from trying to save Greece to trying to contain the damage if it turns out to be unsalvageable.