Where did the Greek debt come from...

[oddlots]

As a kind of corrective to the kulturkampf regarding Greece's asiatic lifestyle, I thought this was an interesting point:

The underlying problem is the rule for printing money: in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks “repo” them (i.e., borrow using these bonds as collateral) at the ECB in return for fresh euros. The commercial banks make a profit because the ECB charges them very little for those loans, while the governments get the money – and can thus finance larger budget deficits. The problem is that eventually that government has to pay back its debt or, more modestly, at least stabilize its public debt levels.
This same structure directly distorts the incentives of commercial banks: they have a backstop at the ECB, which is the “lender of last resort”; and the ECB and European Union (EU) put a great deal of pressure on each nation to bail out commercial banks in trouble. When a country joins the eurozone, its banks win access to a large amount of cheap financing, along with the expectation they will be bailed out when they make mistakes. This, in turn, enables the banks to greatly expand their balance sheets, ploughing into domestic real estate, overseas expansion, or crazy junk products issued by Goldman Sachs. Just think of Ireland and Spain, where the banks took on massive loans that are now sinking the country.
Given the eurozone provides easy access to cheap money, it is no wonder that many more nations want to join. No wonder also that it blew up.

It's from: http://baselinescenario.com/2010/04/...d-for-the-imf/

And was highlighted by Felix Salmon with commentary here: http://blogs.reuters.com/felix-salmo...he-ecbs-fault/

[c1ue]

Re: Where did the Greek debt come from...

Not as bad an article as I first feared.

But it fails to go far enough when talking about the monetarist option:

1) a falling euro means rising prices for food and energy. For Germany the export gains make up for the import price increases, but this is NOT true for the rest of the EU outside of the Netherlands.

2) a massive issuance of euros to cover the PIIGS would mean an extremely inequitable transfer of wealth - larger by an order of magnitude - than the already existing one

3) If you're going to get both 1) and 2), why not cover all your internal debts as well? But this is exactly what Germany has been resisting.

[medved]

Re: Where did the Greek debt come from...

Not as bad an article as I first feared.

But it fails to go far enough when talking about the monetarist option:

1) a falling euro means rising prices for food and energy. For Germany the export gains make up for the import price increases, but this is NOT true for the rest of the EU outside of the Netherlands.

Not as bad a situation for the rest of EU as it may seem. Some help might be available.

http://www.trcw.ru/en/news/detail.php?ID=1535

[Danielvr]

Re: Where did the Greek debt come from...

As a kind of corrective to the kulturkampf regarding Greece's asiatic lifestyle, I thought this was an interesting point:

The underlying problem is the rule for printing money: in the eurozone, any government can finance itself by issuing bonds directly (or indirectly) to commercial banks, and then having those banks “repo” them (i.e., borrow using these bonds as collateral) at the ECB in return for fresh euros. The commercial banks make a profit because the ECB charges them very little for those loans, while the governments get the money – and can thus finance larger budget deficits. The problem is that eventually that government has to pay back its debt or, more modestly, at least stabilize its public debt levels. [..]

[..]

I'm sorry, but how is this different from the US, where the primary dealers (i.e. large commercial banks) buy treasury bonds and then borrow money from the FED against those bonds? Note btw that the ECB and FED pass on their profits from these lending operations to their governments, promoting deficit spending / credit creation even further. The authors are presenting these facts as though something remarkable is going on in Europe, but there's nothing either new or unique about the EU's monetary policy.

More importantly, why do Mrs. Boone and Johnson not mention that the ability of EU nations to finance their debts and deficits this way is constrained by the limits set forth by the Maastricht treaty? I think that's quite relevant to the point that they attempt to make.