(one for dglh and GY, especially)

The Greeks can't balance their budget for toffee. Didn't think they needed to, since France and Germany farted in the general direction of the EU's 3% deficit rule back mid-decade. Now, all of a sudden, lenders are saying inconvenient things like "we don't fully believe you ever intend to pay us back - we might have to start charging higher risk-premium, please". And not just to Greece, but to lots of other EU countries, too.

So now the EU wants to step in to guarantee the debt so that Greece (and by extension, Portugal and Spain as well) will not fail. This plan seems to assume that a) Greece is prepared to hand over fiscal sovereignty to Brussels and b) Brussels is better at resisting pressures to spend than the Greek government. Neither of those appear to be givens, to me at least.

So we've got a euro crisis on our hands. The cost of debt across Europe is going to go up, (maybe way up) very soon, making public expenditure cuts even more urgent (if no more palatable).

Will the UK, being outside the euro, be able to sidestep this? Or will its bonds, with deficit levels very similar to those of Portugal and Spain, start to come under attack as well?

Paul Mason has been very informative on this here and here.

Will the UK, being outside the euro, be able to sidestep this? Or will its bonds, with deficit levels very similar to those of Portugal and Spain, start to come under attack as well?

Depends on your definition of attack. They've been under pressure for some time, and will come under considerably more pressure when the Bank of England stops buying up huge quantities of Gilts as part of its quantitative easing programme. And if one or more rating agencies downgrades the UK, that's obviously going to be bad. But, on the other hand, there are reasons to think the situation will be somewhat different. For a start, the UK has a hell of a lot more credibility when it comes to budget figures than Greece (not that that's saying much). Second, it's starting from a relatively low debt to GDP ratio, giving it a fair bit of headroom despite large deficits. Third, I think investors generally expect the Tories to do their usual rampant spending cuts when they get in. Fourth, there's a very large, moderately robust natural domestic investor base for UK government debt, on top of other central banks etc, and the FSA's new bank liquidity rules mean that private sector banks too will be buying large quantities of Gilts.

So basically, and bearing in mind this isn't my field, I expect yields to increase quite a lot (especially if we have strong inflation), but I don't expect a proper funding crisis. All this speculation is assuming the absence of another recession/banking crisis, of course.

Those are very good, thanks, NHH. Mason is the dude E10 is always saying is so good, isn't he?

As he points out, the real problem here is whether or not there actually is any deal which is sell-able to Greek unions (meaning here not something they like, but something they won't make them try to destabilize the government) but at the same time, sufficiently tough that the German government feels it can credibly stand behind it without ruining its own credit rating.

GY - when you say "increase quite a lot", what are we talking about here?

That's the sort of thing I wouldn't like to say, not being a specialist in government debt or economics. Also, that sort of thing is a bit of a mugs game anyway, given the wide variety of factors at play. But, like I said on the other thread, we do know where Greek yields are compared to UK yields, so that may provide something of a guide, in the short to medium term anyway.

What's are the practicalities of chucking a country out of the Euro, making it reform its own currency?

A complete nightmare, I'd have thought.

What, printing all the zeroes on the new Greek notes?

There should have been 2 divisions of the Euro, shouldn't there? The so-called PIGS could have been in there. Talking of which, why is Ireland not one of those? Because it would muck up the acronym, or is it better off?

It's not included mainly because it's already taken harsh austerity measures that investors think will get the budget situation under control. Plus it doesn't fit the southern Europe theme the PIGS are rocking. Although it is often spoken of in the same breath.

I have seem some commentators use the acronym PIIGS, to include Ireland. I've also seen PIGS with the I standing for Ireland and not Italy because in fact Italy really isn't in the same category as the others (short-term finances not nearly so fucked, long-term economic problems arguably much worse). But mostly, what GY said.

I normally have seen it as PIIGS. The reason why Ireland is dropped? One, it isn't on the Med, Two, it is actually making pretty stringent budgetary actions, three - it means that you can use PIGS, which is way better and geographically easier to fit on a zoomed map without having a box like you do for Hawaii or Alaska.

Removing Greece from the Euro would discredit the Euro so much that they would be almost forced to give in on the idea of currency union.

I think the nature of the Irish problem is somewhat different as a speculatory private problem rather than a government problem.

To go back to Tubby's question, there is no existing legal mechanism for "expelling" a country from the Euro. What the other countries would have to do is to form a new currency union without Greece (and any other country they agreed not to invite). I don't think than anyone sees that as being in the realm of the economically and politically possible at this time.

Greece could theoretically withdraw from the Euro (either of its own violition or in response to pressure), but the countries that have looked at that possibility in the past have found it to be an absolute logistical nightmare (for one thing, it wouldn't redenominate any of your existing Euro debt).

ursus arctos wrote:
countries that have looked at that possibility in the past have found it to be an absolute logistical nightmare (for one thing, it wouldn't redenominate any of your existing Euro debt).

Wow. That would be brutal - given that the debt would be part of the basis of the decision, you are almost walking straight into a default.

Nice little chart in the Economist this week, showing OECD countries' budget balance, net debt, GDP growth minus the cost of finance and years to maturity on sovereign debt. Britain is actually in a much better position than one might think not because of a low stock of debt (Ireland's is much lower), but because the average years to maturity of sovereign debt is very high compared to other countries at 13.7. Meaning that even if the price of UK debt rose suddenly, it wouldn't affect government payments that much because they'll be paying lower interest rates on older debt for a long time.

But the chart really lays out how Greece is fucked. You can sort of see how Spain, Ireland and Portugal might get out of this, but Greece is just a disaster.

Surely there's no way a country can leave the Euro once it's in? I mean, if I was a Greek citizen I'd just open a Euro account in another Euro country, move all my savings into it and hey presto, sorted. I assume businesses would do exactly the same. There would be no cash left in Greece to convert back into New Drachmas. The new currency would be a currency entirely composed of debt, a sort of zombie currency. The euro would continue as a black market de facto currency in Greece. Greece would turn into Mexico.

And anyway, the Greek writing on the notes looks really cool.

So David McWilliams is really having a laugh when he says Ireland should leave the Euro. It's not possible to go back, surely.

Wait, somebody wrote above that the debt would remain in Euro. And anybody with cash would move it into another Euro country. The new currency would have nothing in it. No, it would never work. And you can be sure the PIIGS knew it all along too...

the real problem here is whether or not there actually is any deal which is sell-able to Greek unions (meaning here not something they like, but something they won't make them try to destabilize the government)

The crux of this issue is indeed if the Greek government can force through attacks on living standards or not. Although there does seem to be some combativity among Greek workers, the capacity and willingness of TU leaders to squash that should not be underestimated.

Something I don’t quite get is the idea that countries can’t leave the monetary union once in. But surely that happened loads of times last century & throughout history? I mean after the end of WW1 a whole load of monetary unions broke up and managed perfectly well (erm, well allowing for the Great Depression and that), didn’t they? Or does the decoupling of a whole load of economies and general dislocation of markets have more to do with the second part of the inter-war economic crisis than I think?

Or is there something about becoming a “new” country that gives you more of a pass with the markets etc.? One article I read over the weekend mentioned the “ancient drachma” – surely it will have only started in its modern form in the 1820s or so? As Greece was part of the Ottoman monetary union for a fair while before that. Or did the Ottomans have a variety of currencies working within their empire?

I mean I’m sure this type of thing causes its fair share of chaos, and there would be all kinds of political ramifications, but you know, isn’t it quite a commonplace? Or am I just even more economically illiterate that I previously thought?

Well, yes, I suppose you could put it like that. But if the Greek government doesn't do it, then the bond market will in a much nastier fashion.

The crux of the problem is that the standard of living that is under attacks was achieved to a large extent through spending other people's money. Keynesian deficit spending depends crucially on finding people who want to lend to you. Once the supply of lenders starts to dry up, you're fucked no matter what you do.