sábado, abril 07, 2012

Stages of Grief in the Eurozone

Debt workout 101 - part 8

Like one-armed midgets, Ireland and the other small Eurozone countries are facing fairly classic balance-of-payments / external debt crises, but without the classic adjustment instruments (FX, trade and monetary policies, import tariffs, capital controls...).

It's all about excessive incoming credit.  The origins of the crises are not that different in the various countries, only their manifestations, in property, or in import and PPP bubbles.

And yes, we are going through the various stages of credit-grief, but differently than some analysts suggest:

Denial- Mostly on the part of the creditors, who refuse to take responsibility for their part in the credit bubble, and prefer to believe that it's all the borrowers' fault. Credit by immaculate conception, fatherless,  one might say. (Dívida de pai incógnito, we would say in Portuguese).
But the foolish creditors can be SWIFTly traced.  After all, it was the German banks that reached leverage of 49X....

Bargaining -  There's been very poor bargaining between creditors and borrowers as the combined powers of the infamous Troika (IMF/ECB/EU) have been used to force nearly all the adjustment costs onto the net importers / net borrowers.  There has been no fair sharing of the adjustment burden, as required in a balanced credit workout and debt restructuring program. Even in Greece, where SOME external creditors have taken some losses, local investors are being hit in three ways:  Higher local taxes, lower local salaries and pensions, and unconscionable CAC-enforced cuts on their holdings of their own Goverment debt, the traditional "risk-free asset" in any country.  No wonder capital flight continues as local savers vote with their wallets.

Anger:  We see some anger in the streets, some of it is turned  inward, against  themselves or against the  untrustworthy  local elites.   In most borrowing countries, FEAR is probably over-riding anger.

Depression:  GDP drops of 3-5% per year, as the deficit economies are lacking the instruments to cut imports,   which continue to garner more than their fair share of the available credit, as the net-exporting countries continue to promote their exports.

Acceptance:  This requires sustainability at a new level, so it will be long time before we get to acceptance.  The current situation of diverging intra-Eurozone CAB surplus / deficits continues to be unsustainable. If the light at the end of the tunnel is there, it is still shrouded in a very thick fog.

Mariana Abrantes de Sousa
PPP Lusofonia

Testing the Limits of Divergence

See   5 recommendations towards a solution for the Eurozone

The many stages of grief in Ireland