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    #51
    Greece, or why Europe's doomed

    I should note that RBC aren't claiming this to be a measure of default risk, just the extent to which economies are under duress.

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      #52
      Greece, or why Europe's doomed

      That makes more sense, though I would suggest including some additional metrics (demographics, weight of banking sector, something to capture the "reserve currency" effect, etc.)

      Do you have easy access to a ranking of current CDS spreads for the EU? My sense is that Greece is the highest and that Portugal, Spain, and Italy are all significantly higher than the UK.

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        #53
        Greece, or why Europe's doomed

        There was an article in a Swiss paper about Goldman Sachs shenanigans with Greece, basically the bank lent money from the backdoor then put a few bet the country's economy would crumble...

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          #54
          Greece, or why Europe's doomed

          That's somewhat distorted. Basically (and this is a huge oversimplification), GS did do a fairly dodgy currency swap with Greece, which had the effect of giving Greece an extra Eu1bn of off balance sheet funding at the cost of locking in higher interest rates. It then hedged the credit risk of that position, which inevitably takes the form of a "bet the country's economy would crumble". There's nothing at all shady in the latter part - it's what investment banks do every time they take on credit risk while constructing trades for clients as opposed to their proprietary bets.

          You can read the (pretty much) full details of the arrangementhere.

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            #55
            Greece, or why Europe's doomed

            UA:

            Greece 354bp
            Portugal 193bp
            Ireland 158bp
            Spain 139bp
            Italy 130bp
            UK 92bp

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              #56
              Greece, or why Europe's doomed

              Thanks very much GY.

              That's pretty much what I would have guessed, though it looks like Greece has tightened a bit, and I might have put Spain over Ireland based on all of the recent bleating from Madrid.

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                #57
                Greece, or why Europe's doomed

                Ireland is a funny one - their biggest risk to their debt and wider economy is actually in the EC's hands. The financing for virtually all the real estate in Ireland is by banks awaiting restructuring notification from the EC. With the government guaranteeing all their debt (including sub-debt as - apparently - crushing the sub-debt was perceived to risk relationships), what happens in the EC very much controls how much a handle they have.

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                  #58
                  Greece, or why Europe's doomed

                  ursus arctos wrote:
                  I might have put Spain over Ireland based on all of the recent bleating from Madrid.
                  Yeah, but financial markets don't pay that much attention to Marca, do they?

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                    #59
                    Greece, or why Europe's doomed

                    The problem is that Zapatero is equally credible these days . . .

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                      #60
                      Greece, or why Europe's doomed

                      One problem Ireland has is that the government, going back over ten years, has been overgenerous in expanding the public sector and also welfare payments (especially in election years...). For example, the dole payment in the Republic is more than twice what it is in Northern Ireland. Added to this, the government completely failed to foresee the economic crisis and a consequent collapse in tax revenues, and continued spending money and handing out a blanket guarantee to the banks, until it was too late. Hence the need for the austerity measures now.
                      Some cuts are needed, particularly to the public service pay budget and the social welfare budget, which seem to me too high, but the cuts are causing a lot of pain (obviously) that could have been avoided if the government hadn't gone round spending money like water.

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                        #61
                        Greece, or why Europe's doomed

                        This thread is fascinating stuff - thanks to all the people who know what they're talking about. It's much more insightful than anything else I've read around the subject.

                        Unfortunately, it's also a bit depressing; from what little I had previously understood, I'd thought that most of the bleating about the UK debt was really just that: unnecessary bleating from the Tories who were insanely dogmatic on the subject of deficit cutting, even in the middle of a recession. It appears from what I'm reading here that they might actually have a bit of a point.

                        We in the UK may not actually have that much leeway to keep spending for another 2 or 3 years if growth isn't returning quickly enough, even if it's just "market sentiment" that's requiring some symbolic gesture that convinces them we're serious about not getting too far into debt. Which would mean that we're fucked, one way or another - either we stop borrowing, stop spending and are fucked, or we carry on spending and end up with the markets charging an insane amount to lend to us. Neither is very pretty. So, it appears that we're now in the position of just hoping that the economy recovers quickly because there's not much else that can be done.

                        Depressing.

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                          #62
                          Greece, or why Europe's doomed

                          Aye, anyone would think the system didn't work, or something.

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                            #63
                            Greece, or why Europe's doomed

                            Ginger Yellow wrote:
                            Not all deficits/debt ratios are alike. Japan has a debt to GDP ratio of nearly 200% and it's still rated double-A and nobody thinks they're going to default. Clearly the current deficit spending is unsustainable, but it would be stupid to start slashing spending by double digits while the economy is barely growing, especially given the UK's maturity profile. Also, as mentioned earlier in the thread, the UK has a huge natural investor base which basically has no choice but to buy Gilts, a luxury the Greeks don't have.
                            I've been thinking about this for a couple of days. It's certainly true that not all debt ratios are the same. But I'm not sure it's as cut-and-dry as having a "natural investor base".

                            I seem to recall that early in the Clinton administration the bond market went nuts over something or other and forced Clinton into an earlier bout of deficit-fighting than he otherwise would have done (hence Carville's quote that he wanted to be reincarnated as the bond market so he could have some real power). But the US debt ratio wasn't that high at the time, and they have a much larger natural investor base than the UK.

                            Surely the only hard and fast rule is that lenders have to believe you are serious about paying them back. And multiple years of borrowing at over 10% of GDP would tend to put that in doubt.

                            In this vein, I'm more than half-convinced we've got another collapse coming towards the latter half of this year when it becomes clear to lenders that the US has absolutely no institutional capacity to either cut spending or raise taxes. Washington becomes Sacramento on the Potomac and we're all seriously screwed.

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                              #64
                              Greece, or why Europe's doomed

                              I've been thinking about this for a couple of days. It's certainly true that not all debt ratios are the same. But I'm not sure it's as cut-and-dry as having a "natural investor base".
                              I never said it was. I'm just saying that there is a huge pool of "natural" demand for UK government bonds in the UK, relative to natural Greek demand for Greek government bonds. Pension funds and insurance companies, which make up most of the sterling investor base (which is itself far, far larger than the Greek investor base), are basically obligated to buy large amounts of Gilts. UK banks will also be obligated to do so when the FSA's new liquidity rules come into force.

                              But the US debt ratio wasn't that high at the time, and they have a much larger natural investor base than the UK.
                              Not relative to the national debt, and not relative to the total investor base. Sure, the dollar's status as reserve currency means that lots of people want to buy Treasuries, but it also means that if China, say, decides to switch some of its huge reserves into euros, that will have a massive impact on pricing. UK pension funds don't have the option to switch (below a certain threshold, anyway).

                              Surely the only hard and fast rule is that lenders have to believe you are serious about paying them back. And multiple years of borrowing at over 10% of GDP would tend to put that in doubt.
                              No doubt. I'm just saying that various structural features make the Gilt market more stable than it would otherwise be.

                              In this vein, I'm more than half-convinced we've got another collapse coming towards the latter half of this year when it becomes clear to lenders that the US has absolutely no institutional capacity to either cut spending or raise taxes
                              It may already be happening.

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                                #65
                                Greece, or why Europe's doomed

                                Why does the UK call bonds "gilts", anyway?

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                                  #66
                                  Greece, or why Europe's doomed

                                  It's short for gilt edged bonds. The certificates literally had a gilt edge.

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                                    #67
                                    Greece, or why Europe's doomed

                                    Is the dole in Ireland really double what it is in the North? Or is there some social insurance element in that- ie if you've earned a fair bit in the past then you get a higher dole? Do they both have comparable housing benefit systems?

                                    Echoing LLR, this is a great thread.

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                                      #68
                                      Greece, or why Europe's doomed

                                      Ireland is usually considered to be at or below the EU average in terms of spending on social benefits as a % of GDP, and slightly lower than the UK. Part of the reason is that Irish benefits are means-tested to a much greater extent than other EU countries. It's possible that some people at the very bottom of the scale might get more than their equivalent in the UK due to tighter targetting, but overall I doubt that this is the case.

                                      Social protection expenditures have been rising quite quickly there recently, but not enough to get them to the level of the EU average or even of the UK.

                                      A good primer on this can be found here

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                                        #69
                                        Greece, or why Europe's doomed

                                        Fun times...

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                                          #70
                                          Greece, or why Europe's doomed

                                          I think a lot of the confusion between the dole in Ireland and the UK when comparisons are done is that like is not being compared with like. If you lose your job in Ireland but have paid PRSI (Pay related social insurance) for the last three years you get Jobseeker's Benefit. This is non means tested and is €196* a week (it was €204.30 until 1 Jan 2010). It lasts for a maximum of one year (was 15 months, cut in the budget before last). You are also eligible to get mortgage interest payments or rent relief. These only last for a certain period of time (I think it is also one year but am not sure).

                                          Once you are finished that or, in the case of someone who hasn't the necessary PRSI (some young people, part time workers, self-employed, your employer committed fraud etc.), you go onto Job-Seeker's Allowance. This is means tested with a maximum of €196* but there is no minimum. You could and do get offered €15 a week under this scheme.

                                          I think in most comparisons Jobseeker's Benefit is used which grabs headlines but isn't realistic to me.

                                          * That's the figure for a single person with no dependents, if you have dependents the figure is higher.

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                                            #71
                                            Greece, or why Europe's doomed

                                            The very last graph in GY's link is interesting. It shows a quick run up in the price of UK debt in the last little while (what you'd expect given all we've been shatting about), but it also shows that those kinds of spreads are not unprecedented even in the recent past - the pound-bund spread was also this high back in 2004-5 before falling back essentially to zero in early 2009. I can't remember anything that would have provoked that kind of spread...does anyone know the explanation for this?

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                                              #72
                                              Greece, or why Europe's doomed

                                              Social protection expenditures have been rising quite quickly there recently, but not enough to get them to the level of the EU average or even of the UK.
                                              That's what happens when your unemployment figures go from 2% to 12% in 18 months, it's not that we're quickly developing a social conscience.

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                                                #73
                                                Greece, or why Europe's doomed

                                                AG: I suspect it's just a function the difference in base rates, to be honest. But I haven't checked.

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                                                  #74
                                                  Greece, or why Europe's doomed

                                                  Nil - no, I meant throughout the decade. I doubt if there are any decent figures for 2009 yet. Social protection payments rose from 14 to 18% of GDP between 2000 and 2006 (see the document from the link I attached earlier).

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                                                    #75
                                                    Greece, or why Europe's doomed

                                                    I don't actually know the figures for overall social welfare spending in Ireland compared to other countries, but I have friends north and south of the border who were claiming the dole last summer, and according to what they told me, my friend in Dublin was getting more than twice my friend in Belfast. Possibly there is some kind of means testing going on, so this is not a typical case, but nonetheless I was quite shocked by the difference.

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