Monday, July 11, 2011

Clowns to the [West] of Me...

This is the second downer post.  I kept starting it but then it would spin off into too-long-land.  I finally decided to break it up into two posts.

West:  Have you been watching Greece?  Melting like an ice-cube on my deck (98 and sunny today).  The Greek government, feeling rich as they joined the EU, decided to increase the benefits paid to various "deserving" layers of society and bureaucracy.  Check here for some unbelievable examples, including bonuses for showing up at work on time or using computers.  Greeks have always had a culture that didn't emphasize actual work so much.  Once they got to link their currency to the harder-working Germans (and others in Northern Europe), well, why not spend all that?  And then, who's to say we don't make big fat promises to pay later, too, because the money's going to keep rolling on in.

Except that it didn't.  A slowing economy, extra debt from the 2004 Olympics, and ever-increasing payments from the government have come home to roost.  Greece no longer has the money to pay back its loans, in Euros or drachmas or clams or any other form of payment.  So the other countries in the EU are having to figure out how to make Greece settle up on their obligations.  The International Monetary Fund is also in on the negotiations.

Dry, so far, which is why you don't hear too much about it.  But Greece is merely the first tentacle of Leviathan of our economic problems.  Here there are a couple of things to watch for. 

First, not many Greek bonds were sold to American holders, so there is not much at stake in the U.S. should Greece go under.  However, lots of credit-default-swaps WERE sold by American banks on Greek bonds.  Tons, really.  (A CDS is a complicated name for "bond insurance.")  The CDS only pays if the Greeks default on their bonds.  The problem is that the CDS doesn't usually apply to a systemic collapse such as this.  So watch to see who seems to be coming out ahead in the Greek debt negotiations.  A "hard" landing will fall on the Germans, mostly, and also the rest of the EU, but a "soft" landing will mean huge payments from American banks. Payouts from American banks mean less money available to lend, should our recovery ever start.

Second, watch Portugal.  Portugal, while lovely, is not on the same industrial level as Germany, or Spain, or even Greece.  And they've spent like crazy, with Spain financing most of it.  As Portugal stumbles, the EU is not in a position to step in with further assistance.  The contagion has spread to Italy, as well.  Here is the bond yield in Italy.  Remember that higher yields are a reflection of, among other things, higher risk:

You know, I feel very said about the Casey/Caylee Anthony murder trial outcome, but it shouldn't have dominated our news like it did.  The problem is that it is much easier to program trial coverage than to discuss hard things like the economy, especially when it seems so far away.  I get it.  But we should demand more from our news coverage.

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