Greece.What happens next ?

[adrian29uk]

This whole Euro is a complete disaster. It was better when everyone had their own currency.

10 years of the Euro everyone is worse off because of it. Stupid laws as well we have inherited in the UK, its ruined a lot of things and cost this country billions.

By the way my favourite note used to be the 500,000 lire. My grandma always used to give me on of these each time we visited. I felt rich lol.

 

[larus]

From http://www.mindfulmoney.co.uk/wp/author/shaun-richards/

On Friday we saw quite considerable claims being made about a new deal between France and Germany on the subject of Greece. According to the political spin being displayed Germany had given up on her demand that private-sector creditors ( banks) be forced to take part in contributing to the next stage of an aid package for Greece. As this would mean that the main barrier to a deal on Greece had been removed there was some optimism in the air. This was reflected in financial markets where for the first time in a while the yield on Greek government bonds fell. For example her ten-year yield dropped from over 18% to around 17% and her two-year equivalent dropped from 30% to 28%. The Euro also rallied against the US dollar from a low of 1.413 to 1.433.

An Inconvenient Reality

Unfortunately the optimism relied on having faith in the pronouncements of politicians who love to declare that they have just had a successful meeting! We have seen many examples of politicans and official declaring all sorts of things during the peripheral euro zone countries debt crisis which have often turned out simply not to be true. Accordingly I speculated thus on my twitter feed on late on Friday, “What is the half-life of such things these days? A weekend?”

The Eurogroup Meeting

Yesterday there was a meeting of Eurogroup Finance Ministers which after the claims of accord from France and Germany was expected by some to approve the next aid tranche for Greece which would compose of 12 billion Euros. Some had got even more optimistic and were suggesting that not only would an aid package of 120 billion Euros be agreed but that private-sector creditors might voluntarily contibute another 30 billion Euros. They appeared unconcerned by the fact that after a year under the stewardship of the IMF/EU/ECB troika the second aid package was in fact planned to be larger tha the first. It did not seem to occur to them to wonder why this might be so as surely any successful scheme would either not need reinforcing or perhaps if it did by smaller and not larger sums.

As ever the reality when Euro zone ministers and officials actually had to do something rather than just indulge in hyperbole was much more disappointing. We got a hint of this from the Belgian Finance Minister suggested that only half of the latest aid tranche might be paid. So already the optimistic consensus of Friday afternoon had bitten the dust. You may notice that there was virtually no talk at all of further aid packages for Greece as the meeting descended into a dispute as to what to do about the next tranche of the existing one.

Why is this next aid tranche proving such a problem?

Time and time again we have been told that as the President of the European Central Bank has regularly put it there will be “strong conditionality” on any further aid for Greece. However as I pointed out in my article last Wednesday the Greek state budget for the year until May 2011 is not only 13% above target but is also (by coincidence) some 13% worse than last year! This of course means that Greece has not met her “strong conditionality”. This means that the International Monetary Fund will have to break its rules to lend her any more money and that the Euro zone can only lead more if it is willing to ignore its “strong conditionality”.

How are they trying to deal with it?

Something of a time shift is going on as the emphasis is being shifted from past failures to the hope of future success. If we take a look at the closing statement from the Eurogroup meeting we see two attempts at this. First we see an attempt to re-write the past.

Ministers recognised the considerable progress achieved by the Greek authorities over the last year, particularly in the area of fiscal consolidation.

At this point you might like to look at the Greek state budget figures above which rather than showing “considerable progress” have in fact got worse! Then later in the statement we get the time shift where they are attempting to move the debate from past failures to hopes of future success.

Ministers call on all political parties in Greece to support the programme’s main objectives and key policy measures to ensure a rigorous and expeditious implementation. Given the length, magnitude and nature of required reforms in Greece, national unity is a prerequisite for success.

Of course if you read the two parts of the statement they are contradictory as you cannot point out the “length,magnitude and nature” of the problems ahead if you have just had “considerable progress” can you?

Why is “voluntary” so important

In essence here the Euro zone is trying to have its cake and eat it. They want the benefits of a restructuring such as a reduced debt burden for Greece without the reality that it cannot happen without markets regarding it as a default. Accordingly contracts for differences or cds on Greek government would be triggered in a very visible sign that yes a Euro zone government not only can default but that it just had.

There is a lot of confusion surrounding these matters as many other terms such as restructuring,haircuts, soft restructuring and even reprofiling are being used. I defined them in my article of May 18th but wish today to reinforce just one message. In spite of the attempts by politicians to make them sound completely different they are all types and sub-sections of default.

A Policy Error

Early in the crisis the European Central Bank adopted the mantra that a Euro zone sovereign government could not default. This has turned out to be as disastrous an error as the previous Irish government’s decision to completely guarantee its banks. The problems this has caused are manifold. A major one is that the ECB itself has a balance sheet full of debt instruments from Greece Ireland and Portugal that it assumes cannot be defaulted one when reality is telling everyone that default is a distinct possibility and maybe even probability. This logic was extended to private-sector banks who were allowed to ignore losses on such bonds if they assumed that they were going to hold them to maturity (as by the logic repayment was certain and therefore no losses could accrue). Again this logic clashes with reality, an example of this reality is the Greek government ten-year bond issued in April 2010 which has halved in price since then.If you bought at the beginning you have lost half of your money but if you follow the ECB mantra you have not only lost nothing but as you will have received some coupon payments you can declare a profit!

I am reminded again of this song.

Reality used to be a friend of mine

The situation in Greece

Last week saw a high degree of political instability with the current PASOK government looking in danger of falling. Unfortunately this woud leave Greece with the opposition New Democrats whose previous government did so much to put her in her current position by their fudging and misrepresentation of economic statistics. So between a rock and a hard place you might think.

At the moment Greece’s parliament is in the middle of a vote of no confidence debate which will continue into tomorrow. After this the government will try to get its planned austerity package passed which will comprise some 6 billion Euros of austerity in this year alone and plans to make some 50 billion Euros of privatisations by 2015. The problem with this is to my mind twofold. Firstly it is plain that the IMF-type austerity being applied is simply not working. Secondly there is a danger in the privatisation programme that assets are sold off cheap to those who in effect created this crisis.

A Large Moral Hazard

So far there has been no punishment at all for those who precipitated this current crisis. There were clear examples of what was essentially fraudulent behaviour by the previous Greek government and examples of where firms such as Goldman Sachs used financial derivatives to help them do this. This is wrong but even worse what happens if we extend this and consider the consequences of Goldman Sachs being able to purchase some of Greece”s state assets and making a profit from it. They would then be profiting from a crisis which they helped precipitate which to my mind is completely wrong.

We are left with the image of the wealthy and influential doing quite well out of this crisis whilst those without influence and much money are facing austerity’s squeeze. This is not only unfair it is outright dangerous as that is the way revolutionary fervour can build. If those being squeezed feel hard done by it is hard to blame them as the truth is that they are.We return to a theme of mine which remains as true as it ever was. the machinations around Greece still look more like a rescue scheme for Greek and European banks that for Greece herself.

The Crucial Date

If we put to one side all the political posturing then the date to ink into everybody’s diaries is July 15th. From then onwards she needs to have recieved some of the promised aid tranche as she has bonds which will be maturing and unless she can pay them she will be in a state of default.

 

[Hatterlovesbrighton]

What will happen in Greece is that the Government will run out of money meaning they'll be unable to pay wages to state employed staff. Lots of foreign businesses will pull out. They'll probably have to kick Greece out of the Euro for fear it will bring the whole thing crsahing down.

 

[Triggaaar]

At the moment, rental prices are soaring, because there is a glut of people needing to rent.

Rental prices aren't too bad here at the moment. They were rising up to 2007, then dropped at the end of 2008 when loads of homes failed to sell and joined the rental market.

TV progs have encouraged a fashion for buy-to-let, with "ordinary people" owning hundreds of properties which they rent out. Mortgages for "buy-to-let" are still easy to find, if you have a huge deposit (bank of Mum and Dad?), because they will only lend you a fat percentage less than what you would receive in rent, meaning, the income from the rental of these properties, is used to actually pay for the properties. These "buy-to-letters" have done two separate things. First, they have helped to push prices up during the past decade. Second, many of them have split single dwellings into one or more dwellings.

But to let mortgages have been popular for more than a decade now. That's just about the availability of credit, which has increased for everyone in the last 50 years. Whether it's credit for buy to let, or credit to buy your home, it's the availabilty of credit that has led house prices to reach a natural level. It's still not a 'concept' that's pushed prices up.

As for your second point, splitting dwellings into more than one dwelling, that's not a result of the buy to let market. There are plenty of factors, increased house prices meaning we can't all afford big home, some old large homes that used to have cooks and servant living in them are too big for many of us, and they're worth more (sales market, not just rental) split up than as a whole. Like you said, divorced couples needing two homes, not one etc. That's nothing to do with "it's the concept that property prices must rise, which makes them rise.".

Many 3-bed semis have been converted into two flats and many larger houses have been split into 3, 4 or even 5 flats. At the same time, families have been splitting up into several units, between divorce, and unmarried kids needing to move out. So smaller families have been moving into smaller units, hence the never-ending supply of tenants.

Yes, smaller families in smaller units. Our council likes seeing houses being split up to provide extra units, because of the demand.

If a 30-year-old is on 30k, with his girlfriend only on, say, 16k, then their mortgage can only be about 110k. There are very few properties available in Brighton at that price, particularly if the young couple has children, which makes "studios", "bedsits" and one-bed flats useless for them.

Joing income of £46k, got to be looking at £3k income a month, after tax, should be able to afford £1k a month on rent/mortgage. That'll cover a £200k mortgage, which with a bit of a deposit will find somewhere outside of the centre. With a good credit rating and little out-goings you'll get a lot more than 2.5 times your salary.

When interest raise eventually do rise (and they must, eventually), and when the repossessions start really kicking in (the lenders are doing their best to prevent that, at the moment), then the number of prospective buyers will drop, at a time when the number of properties available to buy, will rise. That is when property prices will begin to really drop, until it settles at a level where young people can actually afford to buy again.

Why will the number of properties available to buy be rising? I agree that if interest rates rise significantly, then prices will fall, and they could fall heavily. But we've got another thread here where people think our interest rates will never go over 5% in our lifetime. I think that's a little short sighted, but there's certainly no guarantee rates will rise a lot. Raising a couple of percent will not lead to a ton of repossessions. But if rates rose enough to cause a big crash in prices, young people still won't be able to buy, because the rates will be too high. Prices are obviously determined by market forces, not buy the hope that young people can afford to buy.