Wednesday, May 05, 2010

Greek Bailout

From the AP wire May 2, 2010:

Of the 110 billion euros in total commitments endorsed Sunday, the euro zone will contribute 80 billion euros to the package, with 30 billion of that to be made available this year. The rest of the money would come from the Washington-based IMF
Greece gets 30 billion this year from everyone. But reexamine the statement. The total amount raised is 110 billion euros. The Eurozone will contribute 80 billion (sometime in the future) with 30 billion of that available to Greece this year. 110 minus 80 comes out to 30 billion not covered---“The rest of the money would come from the Washington-based IMF.” Here is a Link that goes into more detail

IMF funding, hmmm! Sounds like some big bucks there, ever wonder whose money is being spent? Who’s in charge of this “One stop shop for loans with no collateral?” The United States of America pretty much runs the organization they have 17% of the vote and nothing happens unless they say so. Who’s in charge for our side?--- Tim Geithner and Ben Bernanke. At the last Senate hearing for the Federal Reserve, Bernanke got asked a question about the IMF and more or less stated he didn’t have enough information on the subject. Talk about a piece of lit dynamite and no one in the panel called Ben on it! Here's a graphical representation of how the United States fits into the IMF. It is our baby, we run it.


There is absolutely no reason to bail out Greece. They had a walapalosa party; does the rest of the world have to pick up the tab? Do we keep the game going one more year, or let the chips fall where they may? There is Spain and Portugal with Ireland waiting in the wings.

Germany may find 29 billion (over a time span of 3 years) for Greece, what happens when Spain comes knocking? At what point do these loans become grants of aid that have to be written off by the issuer? This wouldn’t be an issue to bring up when running for reelection in say Germany.

There are two different goals here “Save the Euro,” and/or “Save the PIIGS.” Everyone is for the idealistic Euro. Europe is not ready to save the Greeks. The bar of soap is on the shower floor, and no one has any intention, to bend over and pick it up. Refinancing Greece’s debt, in a world economy that is plunging into the abyss, has very little chance of success. You are only adding more debt to the system. It could be time to cut and run. Sometimes doing nothing is the solution, the problem solves itself.

My advice, go to the concession stand and get a box of popcorn and a drink and find a seat, the show is about to begin. In this episode, Ben is going to save the Euro with American Dollars from the IMF. Aw gee, I guess I spoiled the ending—sorry.

22 comments:

Anonymous said...

The only positive for all this right now, is for U.S. tourists going to Europe this year, or anyone buying a European car.
The Euro is rapidly approaching exchange rate of 1 euro= 1 dollar.
A few years ago, it was 1/2 euro=1 dollar.
So American tourists will benefit, and European tourists will disappear from the U.S. this summer.Any area that depends on foreign tourists will be hurting this year.

NamesAreHardToPick said...

Jim, how far do you think the Euro will fall? The trouble is, if the Euro continues to fall, America will experience a major amount of trouble in trying to export goods.

Jim in San Marcos said...

Hi Anon 7:33

Your right, but think about it. American tourists will be flying to Europe on a new Airbus not a Boeing 787. If you are unemployed in the US, you're probably not traveling anywhere. If you live in Europe, you're going to work and produce whatever the United States wants to buy at discount prices.

I see Europe as the real winner in a currency devaluation.

Jim in San Marcos said...

Hi NamesAreHardToPick

The Euro seems to be a real store of value that is being beaten to death by bad news.

Here in the States, if our government needs more money, it prints it. They can't do that with the Euro. Thats what is killing the PIIGS. They can't print their way out of this mess.

Devaluation use to be a way of life in Europe. Europeans use to joke that the French devalued the Franc every time they changed their underwear.

The trouble is, if I was to put my money where my mouth is, I would be losing money. Bernanke and Geithner can't print Euros, common sense doesn't seem to apply here. Go figure!

As for the US being hurt on exporting, there is some truth there, on aircraft and cars. But a lot of our real production moved overseas to avoid our high tax rate. That is going to bite us.

Thank you for your comments.

Anonymous said...

Jim:

Any thoughts on today's meltdown? HFT is just the greatest.

BB

Jim in San Marcos said...

Hi BB

There are several things in play. HFT (high frequency trading) tries to take advantage of it.

Most of the funds are running the same software packages, so it is kind of random on a ho-hum day. On a big swing day most of these computer packages will give the same recommendations of what to buy and sell making the swings more drastic.

There are what is call "Air pockets" there are no bids to buy the stock offered. Before the NYSE went automated, there were market makers that bought and sold say 5 or 6 particular stocks. They would bid when there were no buyers and kept the market stable. The Market makers are gone, so if you enter a bid of one cent per share your order could be executed and it looks like a few were today, and these trades are going to be labeled null and void. This will have a backlash I am sure.

We have the options markets which are highly leveraged. this can be a real driving force, most of the computer modules used by mutual funds try to hold the portfolio and hedge bets with options.

The press release that someone typed in a billion instead of million for P & G sounds laughable. The company only has 2.88 billion shares, and no one is dumb enough to dump a block of stock that size on the market. Even if you were going to sell a million shares, you'd at least spread it out over a week to get a decent price.

The thing to remember about today, was that this was a very big battle and there were severe losses but the market held.

This could happen again very soon. Only the next time you'll hear that baby boomer say "get me out of the market, I need a good nights sleep." The only trouble is, everyone else will come to the same conclusion at the same time.

So hold on to your hat, we live in interesting times!

Thank you for your comments.

Anonymous said...

I have been watching gold rise along with the dollar. Originally I thought gold would fall as the dollar rose. Must be a lot of demand for something that even in the worst of times you can use to buy bread

frakrak said...

Jim the interest in the Bailout lies in the structure. The IMF were the first to make the payment of $30bn, France and Germany have made pledges, but no money as yet.

My thinking is that if both countries thought it was worth while, they would be in there boots and all, to stop what is happening at the moment, not for Greece's sake but for a healthy dose of self preservation!

My line of thinking is that they realise it is a pointless exercise. Greece today, Spain next week, its a domino championship!

The IMF may not even get the chance to waste of your tax payers money.

As for Bernanke printing Euro's (in one of the comments), that may not be such a bad idea! Still think we're headed for the big "D"
cheers

AIM said...

A couple more years or so and Greece will be happening right here in the good ol' USA. After 40 years of being on a fiat currency and disregarding the common sense principles of economics we are going to pay for our sins. GULP!

AIM

Jim in San Marcos said...

Hi Frakrak

I'm in total agreement.

This whole Greek exercise is like teaching a blind guy to hunt with a shotgun. Its a dumb idea to begin with.

As you suggest, the other PIIGS are close behind. I really expect the Greek government to be overthrown by the military in short order. The people have had their fill of this Greek form of Democracy.

Thank you for your comments and take care.

Jim in San Marcos said...

Hi Aim

It could happen sooner that that.

Right now 56 percent of the population pays no income tax. Once we destroy the middle class and the rich, who's left to pay taxes?

The reality factor hasn't set in yet, we are in denial. Congress is going to figure out how to tax that 56 percent that pay no taxes, and Obama's health care bill comes to mind. Give the citizens health care and take away all their spending money.

The French Revolution comes to mind. Are we there yet? Gulp

RNS said...

The Greeks are going to be bailed out by countries that are themselves insolvent. If one thinks about it this is the definition of insanity.

rob

Anonymous said...

Some object to "the US bailout of Greece," with no quantitative information (from ignorance or on purpose).  This annoys me (see below), facts are inconvenient. Many, many people with political positions continually try to mislead by quoting partial information, or by making completely untrue statements.

In the first place, EU countries are important to US private enterprise.  23% ($390B) of US exports go to EU countries annually (2008 data):
http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/united-states/
www.trade.gov/publications/pdfs/exports-support-american-jobs.pdf
EU and Euro pain translates to US workers' job losses.

In the second place, the actual, long-term cost of US involvement in the Greece aid is miniscule, and not in the form of immediate cash transfer.  Any funds are in the form of credit lines to the IMF as one of 186 member countries, not from any other US source.  Let's go to the numbers:

a)  Last year the US agreed to a line of credit to the IMF to help, along with other countries, the national economies in need of urgent help (not just for Greece).  This article argues that we cannot expect to get all of the $108B back:
http://ideas.repec.org/p/epo/papers/2009-18.html
Up to $26B of $108B, 24%, may not be recouped, assuming all $105B is used by the IMF--let's assume it is. Another worst-case assumption is that 24% is correct, although others dispute it.

IMF is likely to get a substantial return on its loans, since IMF is always first in line among all entities to which a country owes repayment.  It is inconceivable that IMF would default on its deal with the US Treasury (never has), or the IMF loans would not have been made in the first place.

b) US contribution is 17% of the total annual IMF budget, based on the GDP of member countries:
http://online.wsj.com/article/SB10001424052748704866204575224421086866944.html
US contributes the most, and hence has a proportional amount of voting power.

c) The agreed-upon amount to help Greece is $145B, with 2/3 provided by EU countries, and 1/3 by the IMF.  IMF's share is to be provided over three years:
www.imf.org/external/pubs/ft/survey/so/2010/car050210a.htm

Putting b) and c) together,
$145B * (1/3 IMF share) * (1/3 per year) * (17% US share of IMF annual income)
computes that US annual contribution to the Greece bailout is worst-case estimated at $2.7B, or 3X that, $8.1B in all. This amount is about 8% of the US credit line to the IMF, so there is plenty of headroom to help other EU countries that may need it: Spain, Portugal, Ireland.

Let's put that into more context.

d) If 24% of the IMF loans from the US are lost as claimed in a), the actual long-term cost to the US is 0.24 * $2.7B, or $650M per year for 3 years. This is the true, worst-case cost to US taxpayers, just 0.17% of the annual value of exports by US business to EU countries.

e) Here's a breakdown of the current federal budget expenditure, $3.55T:
http://en.wikipedia.org/wiki/File:Fy2010_spending_by_category.jpg
The Treasury Department budget is 0.3% of the total budget, or $10.65B.  The long-term cost to the Treasury Department is up to 6% of its budget for 3 years, and is 0.0018% of the total federal budget.

Whew!   Complainers should do their 'rithmetic before mewling.

Jim in San Marcos said...

Hi Rob

I agree. One of Greenspan's quotes that bounces around in my mind a lot is "Often wrong but never in doubt!" There's a guy with a sense of humor, only the joke is on us.

It kind of makes you wonder about the guys in charge. Too much hubris can be a bad thing.

Jim in San Marcos said...

Hi Anon 4:41

No argument from me. I tend to agree with your comments.

The problem is more about how this will be financed. My real concern with the Federal Reserve and the IMF is that they are spending "taxpayers" money without any Congressional say in the matter. Pure confiscation without representation. Bernanke mise well be King Bernanke, he doesn't have to answer to the voters.

The Federal Reserve and the IMF were created with purposes far different that what they are presently pursuing. The Feds can print dollars, but when it comes to backing up the Euro, they have to deliver Euros. One way that could happen is for the IMF to sell gold. That might offer a better explanation of the gold sale I reported back November 19,2009. Here is a link to it.

Bernanke can be held accountable, but it is a little like Bernie Madoff. At that point, it is too late, the damage is already done.

Even though your figures are from good sources, I tend to believe that everyone is lying their fool heads off and we the taxpayers are none the wiser.

I look for the IMF to be on the hook for about 500 billion minimum to rescue the PIIGS, and it just isn't there.

Thank you for your comments.

Anonymous said...

Jim in San Marcos,

Thanks for your comments on my long comment. First, I made two small errors: The Greek package is $146B, not $145B, and the IMF share is 27%, not 1/3. It changes the numbers only a little.

Second, I would like to improve the comment to address your statement that "everyone is lying their fool heads off." The only IMF reference is pretty innocuous, as is the single .gov reference, and the rest are from varied sources. I am supposing that you mean everyone is assuming the situation is not as bad as you deem it to be (not that there is a vast conspiracy), and I cannot see a way to respond to that.

I came across this blog by accident, and I am pleasantly surprised at the quality and civility of discourse, for a place with unmoderated comments. Thank you to all here.

Jim in San Marcos said...

Hi Anon 4:41

What I meant by "lying their heads off" is we are looking at human nature here. The PIGGS are trying to make their predicament solvable with a loan. Without the loan, they are dead meat.

I am suggesting that the books are so cooked that the data is meaningless. These countries are more than broke. They have spent money they don't have.

It kind of reminds you of what Congress is doing. The concept of paying for it is not there, the concept of financing our way out of it, is. We can't be out of money, we still have checks.

If we were to audit the Fed, you might see another 3 trillion dollars of debt to add onto the national debt. Every country in the world is broke, But of course, we aren't, we have Bernanke and the Federal Reserve--god bless them, they will print us out of this mess.

Thank you for your comments

Rob in NS said...

Jim

Hard to believe Greenspan said that but I guess that is why they call him the Maestro and loved him on Wall Street. One thing we can say is he was up front about all this foolery, so we all have some part of the blame for this mess. It all makes me laugh as even the Wizard had to hide behind curtain to fool Alice.


rob

frakrak said...

It is amazing what can be done in the “light of day,” in full view and to the face of their intended victims. These people should not be admired for their grotesque arrogance towards the average tax payers though. We need a change of mindset; it is not in my view a case of them or us, but preserving what has always been a fragile ideal, “democracy.”

The crucible has been slowly warmed over the past short history of the “west” and we have all but watched our very slight freedoms evaporate. In my opinion it isn’t about setting in place an “ideal” system either. It’s all about now a scramble to hold on to what little we have.

Obama is banging on about the internet again and the danger it posses for democracy, in the past few months there has been a gathering tide of European leaders saying much the same. The University of google does have its short comings, but if you can sift thru the fiction, myth, you generally come out with some knowledge that has a tendency to empower.

For instance eighteen months ago the average joe thought that the Federal Reserve was a government run democratic institution, and believed it was for the past ninety years. It really is poignant reminder to me that a tax payer should have to go to the internet to pursue facts, when you have a democratically elected government and what is supposed to be a free press!!??

What I do find a little off putting is when people “label” others as lunatics or conspiracists because they have actually uncovered or brought to light something that was hidden, or have a tendency to link it as the “fringe.” In my opinion the more ideas out there that are expressed freely, and the more there is an opportunity to correct or comment on these freely expressed thoughts, the healthier society will be.

I don’t need to check under my bed for “reds” I can simply do a search on google:)

Jim in San Marcos said...

Hi Frakrak

I'm not looking for Reds, I want to find one of those guys buying Greek bonds, I've got a bridge to sell them. Of course the way the market went up today, it looks like they sold a bridge or two already.

I think you're right in some respects, there is a lot of financial items being hidden from view. I wouldn't blame the news media though, they pretty much lose their audience if it doesn't involve sex, sports or Tiger Woods.

There is no need to check under your bed tonight, the monsters would eat the reds first---you're next--just pray you don't taste good and maybe they'll move on to better things.

Take care.

Rob in NS said...

Here's a thought

If Portugal has to contribute to this bailout and has to raise money via bonds at higher rate than what ECB will charge Greece who gets to eat the difference? I'm sure it will be the same for rest of heavily indebted countries. This in itself seems like the fly in the ointment even for a market novice like me.

Rob

Jim in San Marcos said...

Hi Rob

I agree. I worked for a loan company long ago. If you had lousy credit you paid 36% interest.

I can't figure out how a deadbeat like Greece qualifies for special treatment. I wouldn't loan them a dime under any circumstances.