Arnold Kling  

The PIIGS Crisis

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Knowledge-Power Discrepancy... Means-Testing Really Is Relati...

Peter Boone, Simon Johnson,, and James Kwak discuss the current financial situation, focusing on the PIIGS crisis. Their bottom line translates into: have a nice day.

The PIIGS crisis seems a bit like the subprime crisis. That is the PIIGS are the subprime sovereign credits. But maybe the prime sovereign credits are not really so prime, and we will some day be calling this the global sovereign debt crisis instead of the PIIGS crisis, just as today we refer to the overall financial crisis of 2008, not the subprime crisis.

Elsewhere, I read that the UK and Switzerland (two non-EU members) want the IMF to help Greece, but the EU wants to avoid the IMF. Why is that? If Johnson is correct, then the IMF cannot do anything, so the UK and Switzerland are basically saying they do not care what happens to Greece.

Alternatively, the UK and Switzerland think they will be more competitive in European markets if the euro is strong. Because an EU-engineered bailout would likely weaken the euro, the Keynesian-mercantilist inclination in the UK and Switzerland might prefer that the IMF step in.

Alternatively, everyone is advocating policies that they think are optimal from a detached world citizen point of view, and the advocates of using the IMF just happen to be from non-EU countries.

Timothy Geithner says that the financial sector is pretty healthy. Don't worry, he loves Simon Johnson. Geithner was planning to send Johnson a valentine, but with the snow and all, well, you know how it is.



COMMENTS (7 to date)
Joe Carl White writes:

The UK is an EU country; it's just not a Eurozone country.

razib writes:

why you got to stress me out arnold? reality, it's a b*tch i guess....

R. Pointer writes:

The Swiss probably are knee deep in it and think that the IMF has the brass tacks to make sure Greece pays; the E.U.nichs, not so much.

Britain may be it the same boat as the Swiss. Moreover, they might think that the Germans will let Greece sink, damn the cost. So the only options is the IMF.

All I know, is that my partner is from Athens (the parents still live there) and I am scrambling to give advice to the family to save their assets. Do you have any advice? I think putting all funds into German banks/bonds would be a good idea.

I contend that sovereign debt are often disguised Ponzi schemes.
We just bailed out the banks and put all the debt on the sovereigns who were already straining under massive debt. Then the sovereign debt (public debt) is being sold back to the banks which sometimes cover it with CDS.
Definitely “market structures helped overcome information asymmetries and sustained the development of sovereign debt”, which is being sold to banks and used by them to create liquidity. What a Ponzi scheme and market for lemons. Then you have investments banks helping governments to fudge national accounts. It's true that the recession is uncovering what auditors could not and elite of bureaucrats and bankers did not want.

http://mgiannini.blogspot.com/2010/02/sovereign-debts-markets-for-lemons-and.html

History of AIG-Lehman is repeating itself “occuring first as tragedy, the second time as farce" as "the deciding factor was concern that letting Greece fail risked a “Lehman-style” run on Club Med debt, with systemic spill-over across Europe."

Matt writes:

How does a strong euro help Switzerland and UK? Were wouldn't expect currency collapse or anything close to that, just a slightly weaker currency.

Tracy W writes:

Matt, a strong euro helps Switzerland and the UK because it implies that their currencies are low against the Euro and thus the Swiss and the Brits get more money from their exports to euro-countries.

Of course it is possible that a) the euro could weaken against the US dollar, and b) the Swiss franc and the British pound could simultaneously weaken even more against the US dollar, so a weak euro relative to the US dollar needed wreck the British/Swisss advantage. But the thing about currencies is that not all currencies can all be weak against each other. Everyone who sells the euro has to be buying *something* and the US and Japan have their own fiscal problems so at some point as the euro weakens buying Swiss francs or British pounds would likely get more attractive.

Nick Rozen writes:

This was already pointed out, but it bears repeating, that the UK is a member of the EU.

>>Elsewhere, I read that the UK and Switzerland (two non-EU members) want the IMF to help Greece, but the EU wants to avoid the IMF. Why is that? If Johnson is correct, then the IMF cannot do anything, so the UK and Switzerland are basically saying they do not care what happens to Greece.

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