The Faculty Lounge

Is Tax Evasion Normatively Good?

Much of tax law scholarship concerns how to improve tax compliance; in this literature, tax evasion is held out as normatively undesirable.  A senior researcher at the London-based Royal Society of Arts recently published a paper in which he argues that tax evasion in the UK might (actually) be a good thing.  In “Untapped Enterprise,” Benedict Dellot argues that the “informal economy” – those workers who do not declare their income for tax purposes – are an important part of the formal economy and that "formalization" itself is a process that occurs over the lifecycle of a business.  In some parts of the developing world, for example, the informal economy accounts for up to 90% of GDP.  The authors argue “If we rely too heavily on deterrence measures, we run the risk of derailing this[formalization] journey and preventing the entrepreneurial potential of thousands of hidden entrepreneurs from being realised.”

The study, of course, has some application limitations, but it’s an interesting read.  Should tax policy accommodate certain forms of “productive” noncompliance? Does it already do so?  I'd love to hear from some of our tax readers on this!

Friðrik Már Baldursson on “Iceland’s programme with the IMF 2008–11”

During the global crisis, Iceland was hit by the biggest banking crisis any country has ever suffered. Over at VOX, Friðrik Már Baldursson reviews the role of the IMF in Iceland’s recovery.  He argues that the IMF program, though not perfectly designed, was successful -- Iceland re-entered the capital markets less than three years after the crisis.

I’ve blogged about Friðrik here at the Lounge before: he is the dean of the school of business at Reykjavik University and was my host during a recent trip to Iceland to discuss banking reform and the political process.

Hey, Maybe Aliens Will Buy Europe!

Via Kindred Winecoff, at IPE@UNC.

  

War And Dishonor Revisited: Greece Edition

 In light of the decision taken last week in Brussels to impose a 50% (nominal) haircut on that portion of the Greek debt stock still left in the hands of private creditors, the post below, from April 2010, makes for interesting reading. 

April 26, 2010

The Greek Bailout: War Versus Dishonor

 As I noted in my last post on this topic, this week will be an important one for the European monetary union.  So I asked the Lounge’s informal counsel of sovereign debt experts for their views on what sorts of questions we should be asking now that Greece has asked for aid, and the market still appears unappeased.  Mitu Gulati (Duke) started us off by asking some pointed questions about the terms of the Greek bond contracts, arguing that, when times are good no one cares about the contracts.  But, he says, things look bad enough now that these issues should matter to debtholders (and to Greece).  Below, Lee C. Buchheit, a partner based in the New York office of Cleary Gottlieb Steen & Hamilton LLP, joins the fray:

At this point, it is worth asking how the "no debt restructuring" scenario is supposed to play out.

Is the theory that Greece will draw down on the EU/IMF bailout money to cover maturing debt obligations and budget deficits while the fiscal adjustment takes hold and, at some point in the not-too-distant future, the markets will be prepared to resume lending at moderate coupons?

If so, a couple of observations:

The bailout fund will need to be larger than EUR 45 billion.  Once the country starts suckling on the bailout fund, it may be some time before it can be weaned.

The market's nostrils are visibly flaring with the whiff of debt restructuring on the air.   They will not, I suspect, be easily or quickly persuaded that the crisis has passed.

The worst case scenario here is one in which the bailout money is exhausted in an effort to "brass it out" (as the English say), only to find that a debt restructuring cannot in the end be avoided.   Why?  Because those resources might have been used in some creative way to facilitate the debt restructuring (remember Brady Bonds?), or at the very least to backstop the local deposit insurance scheme or recapitalize local banks that are adversely affected by the restructuring.   A sovereign debt restructuring with no fresh money behind it is both a harder and an uglier thing to complete.

This then is the dilemma of the moment.   Should the bailout money be spent paying maturing debt obligations in full and on time until it is exhausted, or should it be husbanded and used to support a debt restructuring of some kind?

One is reminded of Winston Churchill's verdict on Neville Chamberlin's policies in 1939:

"You were given the choice between war and dishonor.  You chose dishonor and now you will have war".

-- Lee C. Buchheit

Fun With Debt Crises

Via Dr. Goose:

 Warning to Washington

 Said the national raters of credit:

"The Congress appears not to get it;

We may downgrade a notch

While we wait and we watch

To see how out of hand they will let it."

Meanwhile, back at the real debt crisis, via Alphaville:

 

Follow @KimKrawiec

S&P Picks Up The Can

From Standard & Poor's Press Release regarding the French Proposal:

 LONDON (Standard & Poor's) July 4, 2011:

This credit comment looks at the most prominent of the recent proposals, put forward by the Federation Bancaire Francaise (FBF) on June 24, 2011, in the context of our criteria for evaluating distressed debt exchanges and similar debt restructurings (see Related Research below). In brief, it is our view that each of the two financing options described in the FBF proposal would likely amount to a default under our criteria. (emphasis mine)

A bunch of mumbo jumbo follows.  But Daniel Gros, director of the Center for European Policy Studies in Brussels, sums it up nicely in this NY Times quote: “Ratings agencies are saying, ‘We don’t think it’s voluntary; it’s just a way to hide a default’ — which it is.”

Dare I say it?  . . . My fingers freeze on the keyboard as I type . . . S&P may have actually learned something from the last crisis.  Surely it can’t last.

But the ECB apparently has not. According to the FT:

The European Central Bank will continue to accept Greek debt as collateral for loans unless all the major credit rating agencies it uses declare it to be in default, said a senior finance official. (emphasis mine)

According to the FT, Fitch has also indicated it is likely to call a rollover a default. Moody’s has yet to comment.

For Greece and the Euro, it’s back to the drawing board, looking for another way to keep kicking that can down the road.  Only, according to Wolfgang Munchau, it’s no longer an ordinary can: now it is full of explosives.

Follow @KimKrawiec

The “French Proposal” (Or, More Fun With SPVs)

I’ve decided I like that name much better than either “EU Brady Bonds” or “The Vienna Initiative.”

Via Tracy Alloway at Alphaville comes the text of the Greek rollover plan.  You can download the file here:   Download FBFProposal

A few highlights:

- ECB and Euro Area Central Banks hold €25bn out of the €85.5bn of GGBs maturing by 2014

-An estimated “significant percentage – up to 80%” -- of existing GGB holders would be willing to participate in the proposal

- The European Union and the International Monetary Fund would continue to provide new debt financing to Greece

-During July 2011-June 2014, Participants have the option to either:

(1) Invest a minimum of 70% of the principal amount of proceeds received in new GGBs,

• With a maturity at issue of 30 years; and

• A full principal guarantee by an SPV collateralised by zero-coupon bonds purchased from one or more AAA-rated sovereigns, supranational institutions or European agencies;
• Bearing interest at a rate of 5.5% plus the yearly Greek GDP growth capped at 2.5% and floored at 0% per annum

OR

(2) Invest a minimum of 90% of the Received Amounts in new GGBs:

• with a maturity at issue of 5 years; and
• Bearing interest at a rate of 5.5%. 

Correct me if I’m missing something, but given recent Greek 5-year yields, I don’t see Option 2 as being particularly attractive to most investors.

I’ll be back with more when I get some time to digest, but a few other quick thoughts:

-       There is plenty of skepticism out there as to whether “the French Proposal” accomplishes anything other than avoiding a Greek default, such as, oh I don’t know, reducing their debt load. See, for example, this statement from Unicredit credit strategist Tim Brunne.

-       Having said that, some observers have commented that the new investment seems a pretty rational one from an investor perspective, having both a growth index and a guarantee, as well as a long maturity

-       Meanwhile, in case you wondered what Greeks think of the new proposed austerity measures:

Police have fired tear gas in running battles with stone-throwing youths in Athens, where a 48-hour general strike is being held against a parliamentary vote on tough austerity measures.

Thousands of protesters have gathered outside parliament in the capital where public transport has ground to a halt.

Follow @KimKrawiec

Yogurt, Incendiary Devices, And That Small CDS Issue

Regular Lounge readers know that the Greece crisis has been a frequent topic for us – those posts are collected here.  The news of the moment, however, relates to Greek CDS contracts and whether the recently proposed “voluntary rollover” will trigger the restructuring provision.  That determination will be made by ISDA’s Credit Derivatives Determinations Committee, which consists of: 8 global dealer voting members, 2 regional dealer voting members for the relevant region, 5 global non-dealer voting members, and certain non-voting consultative dealer and non-dealer members.  This Allen & Overy memo contains more detail on the five regional ISDA Determinations Committees. According to A & O, each Determinations Committee must reach at least 80 per cent consensus in order to pass the most important decisions.

And this is an important decision – though, not exactly, I think, for the reasons suggested in most press reports.  More on that later. 

For now, these articles in the FT, Greek Crisis Puts Future of CDS in Doubt, and the NY Times, Derivatives Cloud the Possible Fallout From a Greek Default, give some sense of the issues and what is at stake. The FT piece quotes Gary Jenkins, head of fixed income at Evolution Securities, who sums up the issue: “This is an incredibly important decision. If there is no credit event, it could destroy the sovereign CDS market as people might decide it is no longer worth buying protection.” 

According to Financial News, France has advocated a simple rollover of Greek debt, where bondholders just receive payment for their bonds and buy new ones, which would not appear to trigger the CDS provisions, because it does not affect all bondholders. David Geen, ISDA general counsel says: “A rollover of Greek debt should not trigger an event if the money is repaid and reinvested. If it is not repaid, it could trigger a credit event as that would be a failure to pay.” Proposals to extend the bonds’ maturity could also trigger a credit event, as could Germany’s hair-cut plan, says Geen, depending on how it is executed.

Now, back to that earlier point.  Many of the press reports don’t make much sense of the situation to me.  They appear filled with inconsistencies and numbers that don’t fully add up.  That could just be because they are unclear (though that is not normally the case with the FT).  But I suspect it’s because there is more to this story than meets the eye.  

Just a theory. 

Which I will test out on you shortly. 

You know it's big news when Jon Stewart has not one, but two, specials on Greece over just a few days.

Solving the EU debt cris–oh look, a rainbow!

This daily financial crisis laugh, courtesy of Joseph Cotterill at Alphaville:

   

 

Says Cotterill: 

"To criticise this feels a bit like kicking a puppy" and 

But: “EU institutions had tried to stop them…” — seriously? Still, we suppose “Time to stick to the rules” beats “We blame hedge funds” … But it’s just as laughably trite.

 

 

Buchheit & Gulati On The Greek End Game

A year ago, I blogged about the Buchheit and Gulati paper, How To Restructure Greek Debt.  In contrast to the complete disinterest with which the downloading blogosphere greets attempts to promote my own papers, an exasperating cascade of SSRN downloads followed. 

Savvy Loungers know that Greece did not, in fact, restructure.  Instead, it concluded an agreement with the Eurozone member states, with the backing of the IMF, for access to a €110 billion facility that was judged at that time sufficient to repay all Greek public-sector debts maturing during the three-year IMF program period and to cover anticipated budget deficits during that period. The European Central Bank also embarked on a program of open market purchases of Greek and other Eurozone periphery debt and is thought now to own €40-50 billion of Greek sovereign bonds purchased in the secondary market.  And last month, the Greek Finance Minister said publicly that even the €110 billion EU/IMF facility might not be enough to tide Greece over until 2013. 

So what now?  That is, in the words of Buchheit and Gulati, what are the possible endgame scenarios regarding Greek debt?  According to Buchheit and Gulati there are three:

(i) Greece goes the distance with the current IMF/EU program and a debt restructuring is avoided altogether – Greece re-enters the public debt market in 2013 to refinance maturing debt and EU/IMF loans,

(ii) a debt restructuring of some kind becomes unavoidable after June 2013 when the EU’s “read my lips -- no restructuring until 2013” promise lapses by its terms, and

(iii) a liability management transaction [Lawyer-speak for “restructuring” IMHO, the authors’ linguistic gymnastics, notwithstanding – KDK] affecting some or all of the Greek debt stock is launched before 2013.

Buchheit and Gulati are irritatingly even-handed, at least superficially, in their treatment of the “go the distance” scenarios.  For example, by their own account, the Greek public sector debt in 2013 will represent 150-170% of GDP and half of that debt will be held by official sector creditors (the EU, ECB, and IMF). At least one of these actors claims preferred creditor status for itself.  And Greece will have just emerged from three years of IMF-imposed austerity measures that inhibit economic growth.  And yet Greece is still able to retap the public debt markets in 2013 under Scenario One? 

Of the post-2013 scenarios, Buchheit and Gulati envision three involving a restructuring of Greek debt and one involving Greece as a ward of the official sector for some indefinite period.  Needless to say, the “ward of state” option would be unacceptable to Greece (and not too attractive to the official sector either).  And any scenario involving an official sector hit (that is, the EU, ECB, and IMF, which will by that time own ½ to 2/3 of outstanding Greek debt) in order to repay commercial creditors is, according to the authors, nearly inconceivable.  Thus leaving, in reality, only two post-2013 options, both of which entail costs and risks. 

Thus, by their own terms, Buchheit and Gulati seem to suggest – without ever saying so -- that the pre-2013 restructuring scenarios are the ones that make the most sense.  For the details of those proposals, read the whole paper here. 

In the words of the inimitable Larry Solum, download it while it’s hot!

Icelanders Vote No In Weekend Referendum

Icelanders have rejected a deal to settle claims by Britain and the Netherlands stemming from the 2008 collapse of Icelandic banks.  The British and Dutch governments are now expected to sue Iceland in an attempt to recoup billions paid to depositors after the Icelandic bank failure.

The deal, which would have settled the dispute on favorable terms (though, apparently, not favorable enough for Icelanders), was negotiated by Clearly Gottlieb lawyer, Lee Buchheit, a frequent guest Lounger, whose role in the deal was praised last year by the Icelandic press. 

An interesting turn of events, indeed.  Hopefully when all is settled Buchheit can be persuaded back to the Lounge for a return stint to discuss the affair.

Barry Eichengreen on the Euro Crisis

UC Berkeley economist Barry Eichengreen was on the web site Five Books a few weeks ago, sharing his recommendations for the best five books on the Euro.  His recommendations are:

Postwar: A History of Europe Since 1945, by Tony Judt

The Euro: The Politics of the New Global Currency, by David Mars

Varieties of Capitalism, by Peter Hall and David Soskice

The Euro: The First Decade, by Marco Buti

The Breakup of the Euro Area, by Barry Eichengreen (in Europe and the Euro by Alberto Alesina and Francesco Giavazzi)

The discussion with Eichengreen on the last selection, his 2007 “Breakup” article, is especially interesting for those who have been following the Euro crisis.  According to Eichengreen, he chose the article because the question of whether the euro area could break up is currently on everyone’s minds.   His conclusion in 2007 was that:

countries with serious financial problems, like Greece, and, equally, countries fearing that they would have to pay for those financial problems, like Germany, would both be extremely reluctant to abandon the euro. Doing so would be equivalent to abandoning the whole European project, which, for political reasons, I regard as bordering on the inconceivable.

Also, if a crisis country abandoned the euro in order to reintroduce its own national currency with the goal of restoring its competitiveness, it would be creating more problems for itself than it solved. The more I contemplated scenarios of possible exits from the euro, the more I concluded it wouldn’t happen.

Eichengreen says that, in hindsight, he was both right and wrong:

I was right in that, yes, if the Greek government were to announce tomorrow that it had decided to reintroduce the drachma, it would precipitate the mother of all financial crises. Everyone would know that its intention was to depreciate the new drachma, so in the first minute everyone would rush to get their money out of the country, out of its banks, and out of its bond market. The result would be the biggest bank run and financial crisis the world has ever seen. This danger is a formidable deterrent to even contemplating going down this road. So I think the argument I made in 2007, that attempting to exit the euro area would be the equivalent of burning down your own house in order to find a way out, was exactly right. (emphasis mine)

But:

I was wrong in that, as Paul Krugman observed earlier this year, if the house is burning down anyway, then the normal advice not to play with matches loses much of its force. If there’s a run on your banking system anyway, then the deterrent to action no longer applies. If there’s a run on your banking system and you have to close down your banks and financial markets anyway, you may want to take that opportunity to reintroduce your own currency. I still don’t think that things will be allowed to get to this point, but I no longer attach a zero probability to a country’s exiting the euro – just a close to zero probability. Never say never, but I still believe that the euro is an example of a path-dependent historical process that is unlikely to be reversed. (emphasis mine) 

The whole interview is quite interesting.

Lee Buchheit, Icelandic Hero

Frequent Guest Lounger Lee Buchheit was in the news this week for his role in negotiating what may, or may not, be a final resolution to the Icelandic banking crisis – recall that Icelanders defeated the last proposal in a referendum last March.  Wow, doesn’t the Icelandic crisis seem like a million years ago? This BBC article and this Wikipedia page provide a refresher – the case is really quite fascinating.

From Icenews:

Iceland, the Netherlands and the UK have completed the latest draft of a deal to settle the ongoing Icesave dispute. Initial reaction to the deal is largely positive, although the Icelandic parliament has yet to vote on it.

The leader of the Icelandic negotiators, the American lawyer Lee Buchheit, began his introduction to the deal by saying that the main question the negotiators faced was how to make a payment contract for a debt if one will not know the final amount for several years. . . .

Initial reaction to the contract in Iceland seems to be positive and there is little doubt that the deal is better than the one rejected by voters this March. Credit for the new deal will inevitably be split. Some will laud President Olafur Ragnar Grimsson for vetoing the last contract and forcing the countries back to the negotiating table. Finance Minister Steingrimur J. Sigfusson will have reason to be proud of himself if the deal comes into force, as his position on Icesave has been consistent throughout and the time and patience he has invested in the dispute could well come to symbolise his political career. Finally there is Lee Buchheit, the American lawyer appointed by Sigfusson to lead the Icelandic delegation in the latest round of talks. His rational and hard-headed attitude have likely been seminal in the creation of the latest draft. (emphasis mine)

The deal is also discussed in Reuters, Businessweek, and other news sources.

 

Gulati and Posner on How Not To Solve The European Debt Crisis

Mitu Gulati and Eric Posner have written a piece about the European debt crisis for Slate.  They think that the various proposed solutions to the debt crisis boil down to gobblydygook.  If Gulati and Posner are correct, it’s time to sell your euros.

From Slate:

The debt crisis in Europe presents a big political problem: Wealthy countries, chiefly Germany, must either agree to subsidize poor countries or abandon the euro so that Greece, Ireland, and other countries on the verge of default can reduce their debt payments by devaluing their currencies. The first option is politically explosive; the second is politically catastrophic. To duck this unwelcome choice, heads of government like German Chancellor Angela Merkel and French President Nicolas Sarkozy have proposed a variety of legal mechanisms that sound new and enticing. But these proposals are a smoke screen. The reality is that the necessary legal tools already exist, and they're not being used because they would actually make the crisis worse. . . .

 

Read the whole thing here.  Gulati also guestposted on the same topic here at the Lounge last week.

 

Collective Action Clauses: The Solution to the Eurozone’s Financial Woes?

Lounge readers have no doubt followed the Eurozone's recent travails with interest.  Below is a guest post from Mitu Gulati on one of the recent fix-it proposals: Collective Action Clauses.  At the height of the Greek crisis, we featured many posts from both Lounge regulars and guests on the European financial crisis, which are collected here: 

Numerous press reports tell us that the French and Germans have arrived at a solution for the Eurozone’s woes.  Bonds issued by Eurozone nations, in the future, will contain “Collective Action Clauses” or CACs.  Essentially, these are clauses that help coordinate bondholders; that is, solve collective action problems.  In effect then, we are being told that the sovereign debt problems in the Eurozone were, at least in large part, caused by a failure to coordinate bondholders.       

So, what do the typical CACs do to solve the coordination problem?  In their most basic form, they set up a mechanism by which the debtor can ask its bondholders for a modification of the debtor’s obligations.  Typically, either in a meeting or via a written solicitation of votes, the debtor can obtain relief if it can persuade a supermajority of bondholders (typically 75%) to agree to restructuring.   Individual bondholders cannot block the deal; in effect, a supermajority of creditors can force a deal on the others.  The supposed magic here is that if the private creditors themselves give the debtor financial relief – and this is the big payoff that the politicians in Germany and France are trying to sell their voters – there will be no need for the type of bailouts that we have seen for Greece and Ireland (and maybe now Portugal and Spain).

There are two surreal things about the foregoing.  First, it is not at all clear that there has been the slightest bit of evidence that there was a coordination problem among the holders of the Eurozone debt in the first place.  Indeed, if press reports are correct that most of the debt in question is held by Eurozone banks, then coordination should not be that difficult.  Plus, we know that the ECB, via its big purchases of Eurozone sovereign debt in recent months is likely one of the biggest holder of this paper.   If anything, as compared to many prior sovereign debt restructurings, it should be relatively easy to coordinate the restructuring of a Eurozone sovereign such as Greece or Ireland.  The second bizarre aspect of this is that no one seems to be bothering to ask whether the contracts for Greece and Ireland (and, in the future, for Portugal and Spain) already contain these magical Collective Action Clauses.  If they did – and we are fairly certain that their external debt instruments did – then the question is why they were not used.  After all, presumably the reason we (and the German and French taxpayers) are being told that CACs are needed is that the old versions were tested out and turned out not to work.  Plus, when these new clauses were put in place in 2003-2004, for both sovereign issuers in the U.S. and Europe, they supposedly were the solution to precisely the type of problems that we are facing now.  And Belize does appear to have used these CACs successfully in its restructuring in 2007.

Perhaps policymakers will come up with some story for why the existing clauses were flawed.  But the fact that they didn’t even try them out makes that story more than a trifle implausible.      

        -- Mitu Gulati                     

 

Does Greece Have The “Equipment”?

 I just came across this letter to the editor in Tuesday’s FT from my former colleague, John Orth:

Have the Greeks got what it takes?

Published: August 3 2010 03:21 | Last updated: August 3 2010 03:21

From Prof John V. Orth.

Sir, The illustration that accompanied your Analysis of Greece’s efforts at economic reform (“A marathon to sprint”, July 30) showed ancient Greek athletes with their genitals airbrushed away. Was this choice of illustration by any chance a pictorial comment on whether the current Greek government has the equipment necessary to bring about the needed changes?

 

John V. Orth,

Professor of Law,

University of North Carolina,

Chapel Hill, NC, US

I knew that there was a reason I always liked John.

Image source:  FT

Caption: Olympian challenge: an illustration from Victor Duruy’s 19th century ‘History of Greece’. Athens is today engaged in a race to bring its closed economy into the 21st century

“Some Investor Guy” On Sovereign Debt

Over at Calculated Risk, “some investor guy” has a very informative series of posts on sovereign debt, including current and historical data; market estimates of the probabilities of default around the world; estimated losses, including under a "really bad" scenario (whoa! Try not to focus on that Japan number, yikes); and the possible impact on the CDS, interest rate swap, and FX market.

Part 1: How Large is the Outstanding Value of Sovereign Bonds?


Part 2. How Often Have Sovereign Countries Defaulted in the Past?


Part 2B: More on Historic Sovereign Default Research


Part 3. What are the Market Estimates of the Probabilities of Default? 


Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default? 


Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange

We’ve also had numerous posts here at the Lounge on the legal aspects of sovereign debt and related crises, particularly the Greece bailout.  They’re collected here.

Eurozone Back in the News

I knew that the Eurozone wouldn’t head into July without providing more drama. 

From, Fresh fears over European bank sector (FT):

Fears rose over the health of the European banking system on Tuesday as interbank rates jumped to nine-month highs amid worries that the European Central Bank may be reducing emergency financial support to financial institutions too soon.

From, Greece Spreads Widen, Spanish Liquidity Issues (Calculated Risk):

The 10-year Greece-to-German bond spread has widened to over 800 bps today. This is the highest level since the the EU / ECB policy response when the spread peaked at just under 1000 bps.

And from Eric Posner (Chicago) and Mitu Gulati (Duke), a timely op-ed in the FT:

Greece joined the eurozone in 2001. But why should the market have cared that Greece entered the eurozone when its finances did not improve?

The answer is probably that the market believed that either eurozone countries would discipline Greece’s financial excesses or bail out Greece if they failed. If so, the irony is palpable. Greece (like most other eurozone countries) did not comply with a treaty provision requiring financial discipline but was allowed into the eurozone anyway. Investors must have reasoned that if the treaty provision governing financial discipline could be ignored, then the treaty provision banning bail-outs could be ignored as well. And they were right. But if the treaty could be ignored, then why would entering a treaty make a difference to Greece’s creditworthiness in the first place? . . .

[goes on to discuss ECB policies that enabled wealth transfers disguised as cheap credit and enabled by implicit government guarantees.]

The rest is history. The parallel between the Greek debt crisis and the subprime crisis is striking. Trashy debt is alchemised to gold through manipulations driven by a political agenda. In the case of subprime debt, this took the form of collateralised debt obligations consisting of government-supported mortgage-backed securities. In the case of Greek bonds, it was European Monetary Union. Subprime debt, long believed to be risky, magically becomes almost as safe as Treasury bonds. Greece, which has spent half its existence as an independent nation in default, magically becomes almost as creditworthy as Germany. In both cases, investors expected to be bailed out, and were. In both cases, politically motivated wealth transfers were disguised as cheap credit. In both cases, taxpayers who resisted cash transfers to low-income groups found out later that they had to pay for what they did not want because the alternative was financial Armageddon.

Read the whole thing here.  We’ve had numerous posts on the Euro crisis and on Greece, in particular, here at the Lounge.  You can access them here.

Oil And Greece

 Via Calculated Risk.

Cartoon from Eric G. Lewis -- www.EricGLewis.com (site coming soon)

For more serious thoughts on the BP oil spill-financial crisis connection, see this piece from Kenneth Rogoff.

Who’s On First? Euro Crisis Edition

Via Greg Mankiw