13 Jul 2015, 2:32pm
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  • the Irresistible Force and the Immovable Object meet again

    Another day, another sideshow in the Punch and Judy sideshow that is the slow crawl towards Grexit. It’s getting tiresome, because this is a crisis of leadership – problems don’t go away by whistling a dancing tune and come up with ever more outlandish ways of looking the other way.

    At the heart of the matter is that Greece doesn’t like austerity, and doesn’t want to exit the Euro. They can have that, provided there’s a permanent influx of other people’s money. Those other people are getting shirty about this, and are saying that the price of our money is that we get to run your country in a different way. That different way looks pretty rough to me – there’s no way it’s going to stick.

    Greece has promised to pass laws introducing controversial economic reforms by Wednesday. These include reforming the VAT system, overhauling pensions and signing up to plans that ensure immediate spending cuts in the event of breaching creditor-mandated budget targets.

    In the end Greece needs to find the cojones to seize control of their own destiny and quit the Euro – because it’s clear that the price of support is getting dearer and dearer. In the long run things that can’t go on, don’t, but it takes time to resolve the conundrum of the irresistible force and the immovable object. In the long run, of course, we’re all dead – it’s not surprising that most of the Oxi came from the young, who have most long run left 😉 By the looks of it the consensus of avoiding Grexit at all costs is losing the fight as it drags on. One of the flecks of gold panned from the endless tailings of random wibble from G Dubya Bush was

    If money isn’t loosened up, this sucker could go down

    Dubya in a moment of clarity

    Fortune favours the brave and the decisive in situations like that, those that look at the predicament they are in and who take decisive action early to try and influence the outcome. I kinda like the pithy summary of

    “The facts tell us what to do and how to do it, but it is our humanity which tells us that we must do something and why we must do it.”
    — Sully Sullenberger

    Sullenberger was piloting a jet aircraft over New York when suddenly a flock of geese stopped the clockwork 3000ft above the city. Unlike the Greeks and the Troika with their endless river of make-believe deadlines, he had three and a half minutes to bring things to a definite conclusion.

    Tsipras failed the Greek people in asking them in a referendum ‘do you want the particular form of austerity that was on offer in early July’. He should have asked them the straight question

    This much austerity or more, or leave the Euro?

    At the moment it looks like he went to the country, asked them their opinion in an incomplete manner, then tore it up the confusing result 1. This is not a fellow I would want in the cockpit.

    Financial problems don’t get better through fudging them. The Ermine didn’t fudge the problem of my career going down the pan in 2009, within a month I had shifted savings to ISAs and drove my spending down to be able to save the maximum possible. I lived on the minimum wage plus an ISA allowance and saving the ISA with the rest going into pension savings to stop paying tax and NI on it. It worked – I was able to leave after three years and coast for three years more before I can get those pension savings. It wasn’t fun spending minimum wage while working at a higher level, because I couldn’t afford the middle class distractions that compensate for the suckyness of the way the job was going. I was lucky to be able to jump to a different project, but unlucky to run into the wall in the first place.

    Sometimes you have to accept that all solutions before you stink, but that some of them are more ugly than others. The Greeks can either be a lot poorer soon, but then stop getting poorer and possibly turn things round, or they can face becoming incrementally poorer without a clear end stop, dependent on the unknown future grace and favour of others.

    this fine Greek graffito says it well

    a fine Greek graffito

    Greece has a lot going for it – but not in the Euro, and all the time they spend chasing the chimera of less austerity within the Euro the situation is degrading. Everyone with movable assets has been moving them, that much is sensible. The middle class’s savings will be destroyed, just like they were in Germany – twice. They will be destroyed in the fall of the drachma or destroyed in trying to stave off the impact of austerity – basically the choice is death of their savings fast or slow.

    It’s all too easy to choose the slow death approach by trying to avoid making a decision, but it nearly always makes the outcome worse. This ain’t going to end well. Germany can afford to throw money down this money pit, but are getting increasingly unwilling to do so. The question is can Greece afford to live the way that the Troika want them to, and I venture probably not. We’ll get to watch this movie again.

    Notes:

    1. Since writing this I have learned that referenda are advisory not binding in Greece which makes this a little bit more understandable
    29 Jun 2015, 1:07pm
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  • A long hot summer, perhaps a Grexit – and hopefully a rescue mission

    This is a story too hard to call, and yet it seems to be gathering speed. Hot summers are also good for a decent rumble in the markets, in the immortal words of George “Dubya” Bush

    If money isn’t loosened up, this sucker could go down,

    And here it is from Tsipras himself

    Now I’m sure there’s going to be loads of punters and talking heads, most of them better qualified than I on the whole macro thing, but this is my blog so I’ll add to the wall of noise.

    I think the Greeks are taking the piss wanting to stay in the Euro on other people’s ticket, though I do see the point that the Germans are also taking the piss in a different way. The advantage the Germans have is they are the ones with the money. Fundamentally there seems to be the tension in the design of the Euro and the regulations about fiscal probity and not having it as a transferunion, it’s like wanting things to be light and dark at the same time. We’re about to find out, when push comes to shove whether we will have fiscal probity or we will have a transfer union in the Euro, and the symptom will be Grexit in the first case and Grescue in the second.

    My hope is for Grexit – it is a second shoe that didn’t drop in the 2009 financial crisis. Something unsustainable gets worse and worse as time goes by. I see the point that Europe stiffed the Greeks by bailing out Europe’s banks in 2010. Greece is owed something by Europe, but not everlasting transfer – unless that is democratically agreed not just by Greeks wanting it or not but by Germans and the rest of the Eurozone voting for a transferunion – it’s not just up to the debtors to holler “I want”. Too much of European policy is decided before putting it to the people, and that sort of thing needs to stop until the people can catch up or say “enough of that”. Half the trouble we have is that it’s not clear if there’s enough common cause for a United States of the Eurozone, the symptoms seem to indicate not. A lack of common cause in Europe has been ugly in the past.

    Europe does owe the Greeks something. A Grexit will be a serious shitstorm. Not much can be done to avert the initial storm, but Europe could do well to take inspiration from the United States. Both the Marshall Plan, and indeed how Nixon handled Hurricane Camille in the 1960s rather better than Dubya handled Katrina that attacked the same region.

    The Nixon administration realised they could not fight the storm, but they could chase it, and render assistance the day after. Perhaps something similar is owed Greece – yes, they may have to default, and return to the drachma to regain fiscal sovereignty. In the shitstorm that ensues, Europe should render humanitarian and basic stabilising  financial assistance without strings and given, not lent. It will then be up to the Greek people how they want to live, with some semblance of fiscal probity or with the high levels of tax evasion they seemed to have. In the latter the value of the drachma can fall to adjust, and people still feel good.It’s got form…

    As time went by you needed more and more drachma to buy that 1990s US dollar

    As time went by you needed more and more drachma to buy that 1990s US dollar (I mislabelled the £ and DM which need to be switched)

    I called this too early in February and maybe I call this early now. A long,hot summer is good for damn fine financial crisis.

    Interesting times ahoy?

    Too tough to call at this stage, but it’s worth getting ready. I don’t think that the credit crunch was ever properly fixed – what seemed to happen is QE went into inflating asset prices – that’s houses for you lucky BTL landlords if you can sell at the higher price and share prices for the rest of the PF community. The hard-pressed middle seemed to get the short end of the stick, and indeed are due for a second helping in Osborne’s budget next month. Further afield there seems to be trouble in paradise China though there seems to have been a fair bit of irrational exuberance too.

    I need to shift about half my AVCs to my SIPP, but the remaining half is due to come out in just over five years time, and I don’t need it for income. Although as a deferred member I am a second-class citizen it appears I can still switch from the cash fund I have been in for a while (when I thought I would have to draw it early) to the 50:50 Global:FTSE100 index fund that served me so well between 2009 and 2012. Since I can shift some to a SIPP I am not up against the 25% tax-free PCLS limit any more, so I may well go back in for another bite of the cherry over the next few months, spreading myself over time buying into (hopefully) a falling market.

    At the moment the market isn’t really reacting in any big way. For sure, I may look stupid saying that in the coming week!  The Grauniad says Shares slide as deepening Greek crisis shakes global markets and the Torygraph says World Markets in Turmoil but we’re only talking 2% – at the elevated levels shares have been this last couple of years a 20% fall would probably still be a correction rather than a dive IMO 🙂 Only hindsight will tell us if these are the trumpets at dawn heralding the second phase of the 2007-9 credit crunch. But yeah, looks like times could get more interesting and the stock market a lot less boring than it has been of late.

    Interesting times are also times when it’s more comforting to have paid down the mortgage and be debt-free, with a unreasonable amount of cash, and have most of this year’s ISA allowance free. Mind you, over at Fidelity there are fellows telling you to go a step further and hold physical cash in the mattress…

    Let’s hope for some statesmanship from our EU leaders

    It may be time to surrender a piece of the Eurozone dream in the case of Greece. But I despise the talk of Greece having to leave the EU at the same time, and I hope in the back rooms there are people drafting a different tone. If the Greeks move to the drachma which is probably their best long-term route, the history of the EU and indeed the spirit of the people who set up the Treaty of Rome in 1958 should prevail. Europe fought a second world war because the victors pushed for an ignominious defeat. Greece doesn’t belong in the Eurozone, but it belongs in the EU if that is the wish of the Greek people, and the EU as a whole owes it the grace of assistance across the troubled times ahead. It’s time for a magnanimous resolution, and giving thought to establishing what a successful Eurozone looks like, what needs to happen and whether the people really want that. The markets will be gunning for the next target soon…

     

     

     

    26 May 2012, 10:08pm
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  • Treuhandanstalt for Greece – the first glimmer of a solution?

    All the so-called ‘solutions’ for keeping Greece in the Eurozone have been targeted at the symptoms. Too much debt or not enough money; Greece spends more than it earns, so either cancel their debts or give them a load of money. That sort of thing works well enough to address the debt, but not the deficit.

    Which is why Angela Merkel hates it. In there mind’s eye she sees Greece’s National Debt as some sort of nasty sawtooth function starting at 0 in 2001, dropping to -loadsamoney in 2011, injection of loadsamoney from someone probably Germany, rinse and repeat every 10 years.

    Merkel's vision of Greece's finances. Nasty, eh? Each red oval is a injection of Someone Else's Cash

    Meanwhile, over at FT Deutschland we have the Dutch finance minister de Jager snarling about the way club Med have taken over the ECB and the clowns are running the circus. You don’t need to speak German to understand the graphic showing the vicious circle (Teufelskreis). Basically the kitty is empty, the government goes to the IMF, IMF gives money with strings that include raising pension age, weakening employment protection etc, the voters go on the streets, kick the government out, new government forms, goes to IMF etc..

    So de Jager wants to take the process out of the hands of the Greek government, by privatising the state organisations in a similar way to how West Germany bought out the East German state-owned organisations. He has to sell the money going to Greece to his own Dutch voters, insisting the money is only doled out via a Greek Treuhandanstalt.

    It might be a solution. What needs to happen in Greece is for the rule of law to be broken – the contracts that established the absurdly low retirement age and overmanning would be annulled, just as the rules of the old East Germany were written off. There will be a lot of losers in that game.

    Now you can’t impose that sort of thing from outside. But Greece will have an election in June, so a clear message ‘ we offer this solution, that has worked before, and the money to make it fix your problems’ together with the clear alternative ‘or you need to find a different way on your own’ is binary enough to be put to the vote.

    The problems seems to be that the Greek constitution doesn’t work with the Eurozone – it can’t achieve enough productivity to have any hope of sorting the balance of payments. There’s not enough trust in the action of Government to get enough tax revenue to pay for what it does. Indeed, de Jager is most forthright about it –

    Weite Teile der griechischen Wirtschaft sind nicht nur sozialistisch, sondern fast kommunistisch organisiert

    Large parts of the Greek business are organised not so much along socialist lines, rather they almost organised along communist lines.

    Before the Euro Greece could simply devalue to adjust. That’s the great thing about having your own currency – if you can’t be bothered to be productive, your currency will fall to make imports dearer to compensate, so your national lifestyle choice can be retained. Greece doesn’t have this luxury now, something has to change. Greece and Germany are outliers in Europe, and somehow thay have to become more alike. There are huge risks – a lot of what Greeks think of as rights and value will be written off.

    Interestingly, there is a similarity between the Treuhandanstalt proposal for Greece and the analogy to the nascent USA drawn by Ray Dalio (hat tip to Monevator). At the moment Europe is a collection of countries each pursing their national self-interest. There is no executive tax-raising entity called Europe [1].

    The early American states had many of the problems Europe has now, including trade imbalances and debt. This too took about a decade to show up, post Independence. What they did to resolve it was create the United States of America. Pretty wild, eh?

    They had advantages over Eurozone Europeans, though.

    • no extensive history of fighting each other like rats in a sack
    • a single language
    • greater commonality of situation (all had recently become independent from Britain)
    • no common currency

    East Germany compared to Greece

    Although I see the Griechische Treuhandanstalt as a potential technical solution, I don’t think it will fly. East Germans shared a common pre-war history with West Germany, a common language and a common culture. There were obvious things wrong with their pre-unification existence in terms of material wealth and restrictions on movement. It’s interesting that even so, there was a lot of turmoil and discontent in the actions of the Treuhandanstalt, as things east Germans had taken for granted such as job security and some entitlements were wrecked in the upheaval and the shift to private enterprises from the old State run enterprises.

    The West Germans weren’t all chuffed either. I recall my grandmother grouching about how her generation had rolled up their sleeves to rebuild Germany after the war and implement the Wirtschaftswunder (economic miracle of postware Germany under Adenauer) and now their pensions were being taxed another 1% to do the same for the East. The Hartz reforms of the early 20o0s in Germany reduced the level of unemployment benefits, and caused some public unrest.

    The equivalent of the economic handouts to Greece was the acceptance of the OstMark at parity with the West German Deutschmark. The East German economy was a basket case and this vastly overvalued the Ostmark.

    However, it would be churlish to say that the buying out of East Germany by the West has been anything other than a success

    Let’s take a look at the comparison with Greece. Greeks have had a great time of the early 2000s, so all they see is loss in any move to a Griechische Treuhandanstalt. That’s the greatest problem – there’s no real upside. As Christine Lagarde said, it’s payback time for Greeks. That’s a hard sell, and voters are likely to flip the bird to such a suggestion, even if the alternative isn’t all milk and honey either.

    So although it’s the first suggestion about the Greek crisis that might work at a fundamental level, I don’t expect to see Greeks to vote for a Greek THA. That’s the trouble with IMF tough love in a democracy, it’s not a vote winner. And herein lies the problem with democracy all round – it’s hard to get votes for tough  decisions. I’m still expecting a Grexit

    [1]before UKIPpers jump in, if the British Government didn’t agree to the level of EU taxation it could secede which is not so much the case for say, Idaho.
     
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