Originally posted by sh76Well, after a default Greece could just print money to meet their obligations if required.
Public debt is not the issue. Debt of 41.2% of GDP is relatively low, at least by today's standards. Greece's is almost 150% and the US' is about 100%. I'm talking about annual budget deficits of 15% of GDP, which is what Greece has, and which is exceedingly high.
Originally posted by KazetNagorraIf you were CEO of a major bank and a random country repudiates its debts and then goes on maintaining an annual budget deficit that's 15% of its GDP, would you accept that country's notes that are backed by nothing but that country's word?
It would seem highly unlikely that such exchange rates will occur, though imports will obviously become much more expensive.
I didn't think so.
Originally posted by sh76Greece would still be able to sell their bonds, after some time, and to Greek banks and investors. The new drachma wouldn't be worthless because then EU citizens could travel to Greece freely and buy a lot of stuff for almost nothing. Greece is a rich country with a very strong tourism and shipping sector. After a possible default the new drachma will devalue significantly against the euro, but not to the point of even remotely approaching "worthless".
If you were CEO of a major bank and a random country repudiates its debts and then goes on maintaining an annual budget deficit that's 15% of its GDP, would you accept that country's notes that are backed by nothing but that country's word?
I didn't think so.
Originally posted by KazetNagorra==="after a time"===
Greece would still be able to sell their bonds, after some time, and to Greek banks and investors. The new drachma wouldn't be worthless because then EU citizens could travel to Greece freely and buy a lot of stuff for almost nothing. Greece is a rich country with a very strong tourism and shipping sector. After a possible default the new drachma will d ...[text shortened]... ignificantly against the euro, but not to the point of even remotely approaching "worthless".
What does that mean for the interim?
The Drachma might be functional if Greece had a self-contained economy. But every country, especially one with a huge budget deficit, needs to be able to purchase foreign goods. With a seriously devalued currency and an already enormous budget deficit, the same level of spending would be completely untenable.
I didn't mean "worthless" as in really seriously worth "zero." I was being slightly hyperbolic. But with little foreign spending power, the drachma would be so devalued as to be functionally worthless.
Originally posted by sh76That means that in the interim strict austerity measures and tax hikes are needed, along with printing drachma's to bridge the gap. Yes, oil imports etc. would become expensive, but not prohibitively so. A devalued drachma would give a very large boost to the tourism sector, which is also a nice way to get foreign currency.
==="after a time"===
What does that mean for the interim?
The Drachma might be functional if Greece had a self-contained economy. But every country, especially one with a huge budget deficit, needs to be able to purchase foreign goods. With a seriously devalued currency and an already enormous budget deficit, the same level of spending would be completely ...[text shortened]... foreign spending power, the drachma would be so devalued as to be functionally worthless.
Originally posted by KazetNagorraIf they pass the austerity measures and tax hikes necessary to come close to balancing their budget, then repudiating their debts becomes unnecessary.
That means that in the interim strict austerity measures and tax hikes are needed, along with printing drachma's to bridge the gap. Yes, oil imports etc. would become expensive, but not prohibitively so. A devalued drachma would give a very large boost to the tourism sector, which is also a nice way to get foreign currency.
Originally posted by sh76Well, part of the problem is not just the deficit, but also the size of the debt. A default will eliminate the debt and thus reduce the deficit since it will no longer pay any interest on bonds. In Italy, for example, revenues exceed expenditure when the debt interest payments are not taken into account - so if markets believed that they could repay their debts, they would be able to quite easily. As is often the case in economics, emotions trump the fundamental value of things.
If they pass the austerity measures and tax hikes necessary to come close to balancing their budget, then repudiating their debts becomes unnecessary.
Originally posted by no1marauderWell, okay. Then you and KN are pointing out that not repudiating also may be bad. Maybe repudiating really is the lesser of two evils. I don't know.
Unless it plunges their economy into severe recession (which seems likely).
But we can't pretend that repudiating does not have severe negative repercussions.
Originally posted by sh76What's repudiating?
Well, okay. Then you and KN are pointing out that not repudiating also may be bad. Maybe repudiating really is the lesser of two evils. I don't know.
But we can't pretend that repudiating does not have severe negative repercussions.
I'm sorry, but I's not stoopid, but really... I've never heard of that word before.
Originally posted by sh76It seems to me I remember two Mexican repudiations, or if you prefer debt forgiveness. In the book, Creature From Jekyll Island, the point is made that the money owed to the banks actually never existed, other than as ledger entries, or now as zeros on computers. It was created out of thin air, by the method of fractional reserve banking.
When you announce that you refuse to pay your debts - "Yes you lent us the money, but screw you, we're not repaying it."
The banks only want the interest payments to continue, so forgiving all or part of the debt often happens, to keep the money flowing.
If you think about the money that is "lost" in simple bankruptcy of businesses and individuals, it is much the same. There is so much collected in the interest on the loans, the principal which never really existed isn't a problem.