Europe's Web Of Debt

http://www.nytimes.com/interactive/2010/05/02/weekinreview/02marsh.html?src=ISMR_AP_LI_LST_FB

by arunabh • 15 years ago

142 127 15 years ago

chrismealy• 15 years ago

Be a lot better if Germany, France, and the US were on there. You'd see how tiny Greece is in the big picture. A lot of people are going to get hurt just to teach a few Greeks a lesson.

dylangs1030• 15 years ago

I agree, but putting the U.S. on there would involve North America and, to be accurate, Asia too.

jeffdavis2• 15 years ago

"A lot of people are going to get hurt just to teach a few Greeks a lesson."

What is happening now that you object to, and what solution do you propose?

barrkel11• 15 years ago

Greece is being forced to destroy its economy through pro-cyclical austerity; right at the bottom, when the economy is doing poorly, it is being forced to reduce economic activity further by cutting government spending.

The solution is for the ECB to monetize government debt, and combine that with much tighter fiscal monitoring to ensure it isn't abused; but the ECB is forbidden by treaty from lending to governments and the German public is implacably opposed to changing this.

RockyMcNuts2• 15 years ago

It's gotten bigger than Greece... if the recovery was intact it would just be the weak countries like Greece that couldn't pay their debts, if the economy dips then the big countries like Spain and Italy can't either. It turns into a death spiral, the more people panic over the crisis, the worse the economy gets, the more countries are at risk of default.

Meanwhile, German economic policy essentially consists of:

  1) Tight fiscal policy to crush any signs of a recovery.

  2) Tight monetary policy to crush any signs of recovery.

  3) Tie yourself to some profligate countries so that you have a cheap exchange rate
   and can sell s***loads of exports.

  4) When the countries you provided vendor finance to start having trouble paying 
  you back insist that they follow 1) and 2).

  5) Wonder why everyone hates you.

  ..."It's a pulley system - you throw everyone over the cliff and let the rope
  take you higher. But eventually you reach the pulley."

http://macro-man.blogspot.com/2011/11/raising-dead-and-axis-...

reminds me of Air France 447, the people running the show initially reacted by pushing the stick in the wrong direction, they're still way behind the curve, by the time they react with sufficient force, might be too late, crash of markets, governments defaulting, countries abandoning the Euro.

DuncanIdaho6• 15 years ago

For one I believe that Germans know what they're doing. They might be a little bit too bent on saving Framany's banks - however if these banks drop then Framany drops. If that happens Eurozone has no steering wheel and no engine to get anywhere.

So in fact it is essential that in eurozone:

1. Germany and France be saved from the worst. 2. Germany and France beat the other juvenile countries into fiscal submission. 3. The new "germanized" europe lifts itself out of ash.

Whatever people think, the whole point of eurozone is "germanization" of Europe. It's not as some people state that Germany is trying to occupy the Europe. The fact is that Europe wants to occupy Germany. Thats the whole point, the whole Europe and its citizenry would like to live in Germany.

And Germans know full well what they're doing - I'd even dare to say that they know what they're doing even better than 'mericans. Don't forget that Germany annexed DDR 20 years ago and that DDR was in much worse shape than any of PIIGS. Alo Angela Merkl along with many people in charge, grew up in DDR.

temphn• 15 years ago

Greece (and Spain, and Italy, etc) spend profligately, Germany is asked to bail them out yet again...and the Germans are the bad guys?

I couldn't understand the worldview of the Greeks, but now I realize that the grasshopper -- by its very nature -- hates the ant and always thinks he cheated.

Confusion2• 15 years ago

If you think this is about 'teaching a few Greeks a lesson', then you really don't understand the severity and complexity of the current situation. The Greeks are a symptom that can't be dealt with by being nice to them, because then they won't change a damned thing. Why would they, if the others want to keep them in the Euro so much they can get away with anything they want? And worse, by not being severe with them, the other countries will think similarly and cater to their population instead of the population of the Eurozone as a whole. That's just how the incentives are, so they are forced to impose strong counter-incentives.

wavephorm• 15 years ago

The more I read and hear about the debt problems of the Eurozone, I wonder how France and Germany ever got duped into joining in the first place.

jvehent• 15 years ago

They didn't join anything. They created it to extend their markets with a common currency. The others joined in.

kleiba3• 15 years ago

Well, it wasn't Germany and France alone who created the Euro zone...

veyron2• 15 years ago

The euro benefited Germany immensely because weaker nations basically hindered the appreciation of the common currency.

yummyfajitas3• 15 years ago

Why is that good for Germany?

barrkel11• 15 years ago

Germany wanted to unify; France demanded they give up the DM and enter into a currency union in return. They created it together.

rb2k_2• 15 years ago

Basically this argument can be found in this nice NPR podcast: http://www.npr.org/blogs/money/2011/10/21/141512746/france-a...

cturner• 15 years ago

I see this motive for Germany: the Euro has been a back-door mechanism for buffeting weak parts of the economy during a stressful period (reunification, global plunge in manufacturing margins). The effect is similar to what China gets by constantly buying treasuries.

Beneficiaries have been the former east and farmers. Italians can buy German milk that would otherwise be expensive.

Here's some speculative fiction on Germany without the Euro: the DEM is a very strong currency. Bankers drive fast German-branded but Eastern-europe-manufactured cars along a financial-sector corridor that stretches between Zurich and a much larger Frankfurt am Main and which has sucked the momentum out of the city of London.

Munich has some strength for being in the middle of this but has been hit hard by the loss of manufacturing jobs. Most regions are less fortunate still. Production for export is impractical. There's significant social unease, particularly against hard-working migrants from other European areas "taking german jobs".

There are many poor regions that haven't crossed over into services mindset and vast regions of poverty. Wealthy western states resent seeing all their taxes disappear to weaker regions. There's general dissatisfaction with the reunification project.

In short - a harsher take on the UK.

(I've no ideas about France.)

barry-cotter4• 15 years ago

The story I heard was that Francois Mitterand more or less extorted the commitment to the single currency out of Helmut Kohl as a quid quo pro for supporting German unification.

The reasoning is approximately as follows:

It was obvious by 1989 that monetary policy for European countries was de facto set in Frankfurt by the Bundesbank. The further you moved from the D-Mark interest rate the less D-Marks your currency would buy and reality would kick in inflating your currency. Mitterand had personal experience of this dynamic having been elected on a Socialist platform and ramped up spending without increasing taxes as much as would have been necessary to pay for the spending.

So he wanted a voice in European monetary policy, so a European currency with a central bank modelled on the Bundesbank.

So France wasn't duped at all.

One proposed end game I've heard is the solid Euro zone currencies (DE,AT,NL,LX,FI, maybe FR, eventually PL and Estonia, maybe others) seceding to a new currency which would end with the ECB managing two currencies.

The Euro, not as bad an idea as it looks in hindsight, though the scrutiny for countries that wanted in should have been much higher.

puredemo• 15 years ago

What countries are running surpluses?

waitwhat4• 15 years ago

http://www.economist.com/blogs/dailychart/2011/05/europes_ec... > Debt > Budget Balance

Sweden and Estonia

waitwhat4• 15 years ago

I should note that Sweden has its own (floating) currency, making Estonia the only Euro-zone country running a surplus.

fauigerzigerk4• 15 years ago

Italy is running a primary budget surplus, meaning it is reducing debt.

sskates• 15 years ago

Every country that issues government bonds has some amount of debt. For some countries (most notably Russia) the total debt issued is a tiny fraction of their GDP.

edit: The surplus/deficit is the first derivative of the debt. Whether a country runs a surplus or a deficit changes from year to year.

mkuhn• 15 years ago

Switzerland. It also introduced a "debt brake" in 2003 [1].

Seeing where we stand now this was quite a visionary step. Switzerland paid for it with slower growth etc. but is now one of the countries with the healthiest Budget (a feat especially considering Switzerland does not have any natural resources) and one of the few (besides Singapore and Norway I think) that is not in danger of losing its Triple-A ratings.

[1] http://en.wikipedia.org/wiki/Balanced_budget_amendment#Switz...

gahahaha• 15 years ago

Thanks for the link. My first thought was that it would be a potential disaster like the inflexible and pro cyclical American balanced budget laws, but the Swiss law seems very reasonable """It states that each year, the budget must be in balance, adjusted for economic conditions. This adjustment is made by multiplying expenditures by a cyclical factor (the ratio of trend real GDP to expected real GDP), thus either allowing for deficits during recessions or forcing lawmakers to have surpluses during booms."""

Since US GDP is currently far below potential GDP that would seem to allow for a substantial fiscal stimulus right now but force the government to save when the economy is stronger again.

enjoy-your-stay• 15 years ago

Unfortunately Switzerland didn't manage to dodge the bullet entirely.

Many people saw the Swiss Franc as a safe haven currency and massively bought them up, driving up the exchange rate. This caused Switzerland's exports to become uncompetitive which is also slowing what is a very export driven economy.

Oddly enough prices haven't really come down domestically either, but neither has unemployment risen that much (despite large layoffs in the financial services sector, particularly in their biggest banks, UBS and Credit Suisse).

mrb2• 15 years ago

This diagram is 1.5 years old (May 2010). How much has changed since then?

nakkiel9• 15 years ago

I can't find that article anymore but a few days ago I read an article showing that since August, French banks have largely reduced their exposure to other European countries' debt. By largely I'm speaking of figures ranging from 40% to 80%, depending on the Bank.

What was more disturbing in that article is that it clearly shows that the activity of those banks is still very sane and that they made profits and all indicators are green even through the last few months. In other words, besides market speculation, nothing justifies the 20% drop of the CAC40 or 50% drop for certain groups (Carrefour is now worth less on the market than their assets).

I'll reach back when I find the article.

Edit: I believe it's this article, but it's now behind a paywall:

  http://lecrible.lesechos.fr/?Assurance-vie-transparence-et

hvass• 15 years ago

Here is a related link from the WSJ, essentially saying that French banks are reducing their exposure to Greek debt (and to other governments as well):

http://blogs.wsj.com/source/2011/11/08/french-banks-pleasing...

enqk• 15 years ago

"Carrefous is now worth less on the market than their assets"

Maybe equity value drop is predicting a drop in asset value?

keshuv• 15 years ago

NYTimes's Data Points published an updated interactive info graphic, which also contains Germany, Japan, the U.S. and the U.K.: http://www.nytimes.com/interactive/2011/10/23/sunday-review/....

The print version contains the above mentioned countries and speculation on China as well: http://www.nytimes.com/imagepages/2011/10/22/opinion/2011102....

Edit: Data is from statistics released October 20, 2011.

perlgeek• 15 years ago

It would be interesting to see the per-capita debt additionally to the total debt.

Someone• 15 years ago

per-capita debt as a fraction of per-capita income or possessions would be more interesting; a millionnaire or someone with a solid 200K income with a 100k mortgage is not a problem.

Tichy• 15 years ago

Sadly most edges seem to be rather one-way - otherwise it might have been a fun exercise to cancel everything out.

forrestthewoods• 15 years ago

Given that it's not entirely one-way why can't it be partially cancelled out? Sure it wouldn't go the distance but why is that step not made?

waitwhat4• 15 years ago

The hand-wavey text in the top-left explains that "Banks and governments in these five shaky economies owe each other many billions of euros."

So while it does look like "Greece owes Ireland $8.5bn" is at least partially cancelled out by "Ireland owes Greece $0.8bn", I would expect that these statements roughly translate to "The Greek government owes various Irish banks $8.5bn" and "The Irish government owes various Greek banks $0.8bn", which unfortunately don't cancel each other out.

ianpurton• 15 years ago

The debts are probably government bonds with different maturities and interest payments being held by different banks.

I'm not sure where the information from this diagram comes from because I didn't think a banks exposure to different countries was public knowledge.

Tuna-Fish• 15 years ago

The various governments largely don't act as lenders. When they say "Portugal owes Spain $86 Billion", they actually mean "The government of Portugal owes various Spanish institutions and individuals, mainly banks and retirement funds, a total of $86 Billion".

None of it cancels out.

DevX101• 15 years ago

That's a very important point. I wish it had been noted on the graph.

That being said, do governments buy bonds of other countries? Or is it just financial institutions and individuals buying them?

mikemoka2• 15 years ago

The diagram, as others have said, is old, here is probably the most updated version:

http://www.thepeakeffect.com/2011/09/europes-web-of-debt-upd...

no mention of sources though.

sixtofour2• 15 years ago

I believe the graphic you link comes from here:

http://www.eudebtwriteoff.com/

That is a site put up by one of the authors of a report exploring the idea that the PIIGS should write off their mutual net balance debt: if I owe you $10, and you owe me $2, then we strike the $2, and I owe you $8 while you owe me $0, reducing loss by friction. That report (pdf) is linked from the site.

I found that site by searching for the filename of the image (EURBEF.png), and looking for a post or article that uses it and cites its source. This is one such post:

http://www.zerohedge.com/news/european-sovereign-debt-cant-w...

mrb2• 15 years ago

This is shocking. A simple, error-proof, accounting move with zero side effects... What are we waiting to do this?

donaldc• 15 years ago

For me, the most shocking thing in the web is that Ireland and its banks owe $867 billion. That's approximately $188,000 for every man, woman, and child in Ireland.

justincormack5• 15 years ago

This was largely shifted from the banks to the Irish government, as the bank bailout was Euro 100,000 per head. All the fallout from a property boom.

dhughes2• 15 years ago

Ireland has (or had?) a pretty good economy too with well paying aerospace and other tech industry jobs.

sudonim• 15 years ago

I think what you're seeing now is the cost of that "good economy".

barry-cotter4• 15 years ago

Not that many although the tech industry doesn't seem to be going anywhere thank fate. Still, it's not like those jobs are even theoretically available to more than maybe a quarter of the population. One thing that surprised me when I read it[0] was the huge difference in profitability of domestic and multinational firms in Ireland per employee in the same sector. Twice as productive, twice.

[0]http://www.gillmacmillan.ie/economics/economics/economy-of-i...

rmc• 15 years ago

The tech industry in Ireland is still going quite well. Talk to a tech recruiter in Dublin (or a tech company) and they'll tell you how hard it is to hire people.

It's the construction sector that's not so good now.

feral• 15 years ago

Its difficult to know what the figures on that chart mean, after casual inspection. Is it gross debt? Debt net of assets? How are they calculating the debt?

There are more subtle issues, too. Its very hard to know what to count as Irish sovereign debt. Do you count 'working capital' on loan from the ECB? How do you value the assets of the nationalised banks, which perhaps count against debt? Also, adding to the confusion, is that countries have an incentive to use various accounting strategies to minimise the figures.

So its very hard to come up with an estimate that everyone agrees on.

One of the Irish economic commentators, generally thought to hold the most pessimistic outlook, is academic economist Morgan Kelly; he wrote an article in the Irish times, in May, where he estimated the debt at 250B euro (~$340B) (http://www.irishtimes.com/newspaper/opinion/2011/0507/122429... - pretty grim reading). Obviously a terrible amount of debt, but its half the amount quoted in the NYT.

How did Ireland get like this? A comment elsewhere on this article has a pretty good summary: http://news.ycombinator.com/item?id=3230142

Basically, we had a housing bubble in Ireland, some very careless bank management (like the rest of the world) and a political failure to either A) regulate the banks properly, or B) to deal with the consequent bank failures properly.

When things started to go south in September 2008, the government of the day made a decision to guarantee much of the debts of the main Irish banks. This turned out to be a very bad decision. Its also a decision that the ECB and other EU countries won't let Ireland wriggle out of, as many of the creditors of the Irish banking system are other EU financial institutions (worried about systemic risk) - to the extent that Ireland recently paid off a controversial unguaranteed bank loan, under pressure from the ECB.

So this is why the Irish sovereign debt is so high.

The fundamentals of the economy could have been better - there was too much building construction, for a start - but they weren't bad; the state functions, people pay their taxes, Irelands a good place to do business, and is becoming a very friendly place for startups; so the scenario is very different from Greece; but the level of debt is sadly huge.

brc• 15 years ago

Yes, but that's the book value of the debt, not the real value. In reality creditors will never be remunerated with this. A political and economic fantasy persists that the creditors will not lose out of this, that they will be made whole. But each loan involves a debtor and a creditor, both will end up accepting losses. The faster this is done, the better it will be for all involved.

johnbatch• 15 years ago

The source is from Bank for International Settlements, which has a nice interactive web app for doing your own analysis. http://stats.bis.org/ The data in this table is almost a year and a half old.

Europe's Web Of Debt

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