POLL: Greek Debt Default?

Discussion in 'Business & Economics' started by Michael, Feb 23, 2010.

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Will Greece default on their debt?

  1. Yes - the Greeks will default.

    42.1%
  2. No - the Greeks will not default.

    57.9%
  1. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    Using the data from post 63, the PIIGS owe Germany 704 billion dollars and to France 911B or a total to just these two of 1.615 Trillion dollars. By EU, mainly these two, lending now to try to keep Greece from defaulting, they are looking after their own interest – really just rolling the debts and getting promises that the debtor will change its ways and eventually pay them off. Rolling debt with a new 139 dollar billion* loan to Greece to help protect a 1.6+ Trillion debt seems like a good thing to do, even just considered economically.

    PS you can also see why France would be more anxious than Germany to lend to Greece too, even if the German elections were not a factor.

    *Probably less now that the euro has taken another hit yesterday.
     
    Last edited by a moderator: May 8, 2010
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  3. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    "... {As} Argentina is one of the precedents for what is happening in Greece today, it might be worth paying attention to the views of former Argentine economy minister Domingo Cavallo.

    He argues that Greece could cut its high labour costs and balance its books by a programme of tax reform. Payroll taxes, where collected, add hugely to the cost of creating jobs, but they are widely evaded, he points out.

    As a result, he suggests, raising the VAT rate to 25% across the board, instead of the current differential rates that vary from 4.5% to 19%, would allow the government to scrap payroll taxes entirely and collect more revenue. ..."

    From: http://news.bbc.co.uk/2/hi/business/8648456.stm

    Billy T comment:
    That sounds like a very good idea to me. In fact a good idea where ever there is wide spread tax evasion /cheating, but it does hurt the little guy. In Greece's case he is going to get hurt anyway.
     
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  5. Mrs.Lucysnow Valued Senior Member

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    Billy T what do you think the options for Greece would be if they took 786's advice default and get out of the EU?

    I have heard this suggestion before, that they would be better off going back to the Drachma but I am not sure how that would impact the situation they are in at the moment. What are your thoughts?
     
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  7. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    From a strickly Greek POV, I think default may be best move. There is going to be a lot of pain in any "solution." By defaulting the Greeks get to share some of it with the bond holders (they take a "hair cut").

    However, from EU's POV, Greece defaulting is not a good idea. In recent post 81 I gave debt data showing that the loan, mainly from Germany & France was small part of what the PIIGS owe to Germany & France, so really they are just "rolling" old debts into a new one hoping to buy time for Greece (and other PIIGs) to recover fiscal responsibility and then later pay off these much larger debts (than the current loan to Greece) to the German and French lenders.

    I fear the public reaction / resistance in Greece to the needed belt tightening will block the recovery and in the end Greece will default. I predicted the drachma would return in post 53 at: http://www.sciforums.com/showpost.php?p=2536175&postcount=53

    I.e. the public protests are very self injuring - Tourist will not come and spend money if cars are burning in the streets of Athens, etc. The cost of government (and private) borrowing will be greatly elevated. The best thing for Greece would be all Greeks to go home orderly and for the tax dodging Greeks to pay their taxes, but I don't think that will happen. Thus, I think government should up the VAT to about 25%., but perhaps with a cap on individual sales. I.e. lots of little but significant bites and still not greatly depress the economy with termination of bigger ticket sales, such as new refrigerator or car.

    Here is why I say Greece WILL default:
    "... Greece needs around 50 billion euros ($64.2 billion USD) in 2010, of which around E25 billion ($32.1 billion) was needed by June. In early April 2010, with characteristic insouciance, Greek officials assured creditors that they were fine till end the end of the month! The market called their bluff.

    "Unfortunately, the Greek financing problems run far deeper. From now through 2014, Greece needs to refinance borrowings of around 10% of its GDP each year, with major maturities occurring in 2011 and 2012. In addition, Greece is currently running a budget deficit of over 12% that must be financed.

    "Greece's total borrowing, currently around E270 billion ($346.5 billion), is forecast to increase to around E340 billion ($436.4 billion, or 150% of gross domestic product) by 2014. So in all probability, Greece will need E30 billion to E50 billion ($38.5 billion to $64.2 billion) each year for the next five years to meet maturing obligations." ..."

    From: http://moneymorning.com/2010/05/11/global-debt-bomb/
     
    Last edited by a moderator: May 11, 2010
  8. kmguru Staff Member

    Messages:
    11,757
    Greece could be in serious trouble as their trade deficit is growing since 2006, meaning no domestic generation of real wealth. Most economists do not factor trade deficits as an issue, because when the economics books were written, the Asian factors were absent.

    Greece still has not instituted real growth processes.

    Disclosure: I am involved as a consultant in the growth strategies with a large Greek Consulting Outfit. The results so far are not encouraging.
     
  9. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    I hope you are considering my suggestion that the final or "retail VAT" be upped to about 20 or 25% but capped so that it does not deter larger cost purchases. VAT is nearly impossible to avoid and tax avoidance is a way of life in Greece. Doing that may make some reduction of non-essential purchase, like meals in a restaurant, new dress, etc. but that will boost domestic saving and lower the need to borrow externally - a "Heads Greece wins and Tails Greece wins" situation.

    If Greece could collect all the taxes that are legally due, they would have a budget surplus and few problems. A stiff but capped for each purchase VAT can balance their budget with little slow down of their economy. - Lots of little tax bites quickly add up, but are not much of a percentage cost or deterrent on the bigger ticket items.
     
    Last edited by a moderator: May 16, 2010
  10. kmguru Staff Member

    Messages:
    11,757
    Yes, VAT is a solution to increase the revenue of the State. But Greece service sector is 76% of the GDP. Mostly in tourism and government sector that does not balance out with high value industrial sector. Greece has a trade deficit since 2003 and perhaps long before that.

    If the income of the society is less than expenditure - there is a problem. Government has no choice but socialize the country to keep peace - for so long.

    My latest contact says, the panic mode that the Ministry of Finance had is gone and now business is as usual. Those in government who do not have a solution or are not responsible for a solution will start hiding the expenditures until next creative audit...

    We are supposed to start a review process this month...now it would be in July....
     
  11. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    I don't understand what difference it make that 76% is services. The services are paid for by the consumer of the services. - That would be what I called the final or retail layer of the VAT. Certainly no problem if the service is getting your hair cut, or a tourist is getting boat trip to a Greek Island, or a lawyer is getting paid, etc. If there is a problem that I don't understand then Greece could do what Brazil does to reduce tax cheating. I.e. when you buy something you give you ID number and it is printed on your sales slip. Then when you pay your taxes you get a small percentage of what you have paid back as credit on the tax bill.

    That encourages most buyers to ask for this type of sales receipt which the Brazilian IRS can use to make sure the stores are declaring their sales, etc. I am not sure how it all works but the government does reduce your tax bill as cheating by the stores is reduced much more than enough to pay for that small tax reduction they give the tax payers. For example, if you get your teeth cleaned and the dentist gives (and you can demand it) this type of receipt he better have declared that as income too. I sure it is only a spot checking system but, if caught the huge fines or going to jail is too big a risk to cheat on taxes.

    Probably at least as high a percentage of US GDP is services. Are you suggesting the US could not apply a VAT?
     
  12. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    23,198
    When did the US last have a trade surplus? Long before 2003 I bet. The main difference (other than size) is the US can print money to pay its trade balance problems, but that may be ending. China has for last four, (probably 5) months cashed in more Treasury bonds than it has bought despite running a favorable trade balance with the US,
     
  13. kmguru Staff Member

    Messages:
    11,757
    Most people have a similar thought as to why it should matter if services are very high. Here are the issues.

    1. You do not eat services or consume services. You eat physical products as well as consume physical products.

    2. Physical manufactured or processed products have a high profit margin, services do not (except a few like brain surgery). A million sewing needles have more value/profit than a ton of iron ore.

    3. Then you have to import those products and send those profits overseas.

    Some services are an expense that should be minimized. Health Care is one of them. Most services are not an income to the society as a whole - exceptions are education, R&D etc. Even Military is an expense, not an income.

    So, when a country runs a high trade deficit like U.S. for many years, this reduces employment of high paying jobs (we lost 5.5 million manufacturing jobs) which then does not trickle down through society. All the middle class people moved down to lower middle class down to poor class. The only reason U.S. survived this long is because, our Wall Street has been running Ponzi Schemes using the whole planet as the mark. In the mean time, the people who worked in production/manufacturing companies are losing jobs and the people who supported them.

    Trade deficit is a sign that the manufacturing has been moved overseas or that services to foreigners has been reduced (as in Tourism) or both. Even though African countries are rich in resources, their economy is an extraction based low value economy. Therefore not all citizens have the facility and ability to participate in any high value production. So they stay poor.

    Examples are Oil rich Angola and Nigeria. Our money is concentrated in Wall Street, theirs in crude oil. Therefore they have no need for engineers or physicists. And so, no trickle down economics.

    To better understand, you have to create an economic model and see what happens. There are computer games such as Civilization and SimCity that illustrates this point very well.

    U.S. can and should implement a VAT system, but that is just a small part of the solution that would create a burden on the society if the manufacturing continue to go overseas. There is no such thing as free enterprise and competition, where it counts. A large number of manufacturing are cartels - from Oil to Titanium to Chemicals etc. There are other factors why even with VAT, the manufacturing of Television will not return to the USA.
     
  14. kmguru Staff Member

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    11,757
    See the graph

    Please Register or Log in to view the hidden image!



    While it is beneficial to have a trade deficit of $200 Billion (for dollar currency - for other reasons), it is detrimental to have a high trade deficit. It would be like bleeding to death slowly...
     
  15. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

    Messages:
    23,198
    To kmguru:

    I agree completely with your post 90, but your points 1 & 2 are irrelivant to my question about why 76% service GDP would hurt the VAT idea I suggested. Your are merely pointing out that the ton of needles is much more valuable than the ton of iron ore, that services are lower profit margins, etc. BUT the GDP is measured in money, not tons or profit margins. It is the added money value that is taxed by the VAT so again, and still, I don't think it makes much difference if that money was made by services or by manufacturing.

    Thanks for your post 91 graph of US trade problems - It really makes clear that US is going to hell (and not even in a hand basket)!
     
    Last edited by a moderator: May 17, 2010
  16. soullust Registered Senior Member

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    1,380
    It's funny things started going to the shits after the Gold standard.
     
  17. kmguru Staff Member

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    11,757
    Well, I was not too much interested in VAT due to the fact that it is a Tax like all other taxes including Sales Tax, Import duty tax, Inspection tax etc. that you pay to the government. But I do not know how it is taxed between Importers and domestic manufacturers. My understanding is that it is the same to consumers.

    According to Wikipedia, here are the breakdowns:

    No Tax: Raw material costs $1.00. Cost to consumer: $150
    10% Sales Tax: Cost to consumer: $1.65
    10% VAT: Cost to consumer: $1.65

    My point was that in a country that engages 80% of economic activity in service, the people make less money (there are always exceptions like Switzerland) and pay less towards taxes (as it happened to USA recently) – unless there are new taxes to cover the government losses thus causing budget deficit.

    How adding VAT (another creative Tax) would help, I do not see the calculations, unless you can provide some examples differentiating between service like Health Care, Domestic Manufacturing of a Motor Cycle and importing the same motor cycle.

    According to Wiki:
    The "value-added tax" has been criticized as the burden of it relies on personal end-consumers of products. Some critics consider it to be a regressive tax, meaning the poor pay more, as a percentage of their income, than the rich. Defenders argue that excising taxation through income is an arbitrary standard, and that the value-added tax is in fact a proportional tax in that people with higher income pay more at the same rate that they consume more. The effective progressiveness or regressiveness of a VAT system can also be affected when different classes of goods are taxed at different rates. To maintain the progressive nature of total taxes on individuals, countries implementing VAT have reduced income tax on lower income-earners, as well as instituted direct transfer payments to lower-income groups, resulting in lower tax burdens on the poor.

    Revenues from a value added tax are frequently lower than expected because they are difficult and costly to administer and collect. In many countries, however, where collection of personal income taxes and corporate profit taxes has been historically weak, VAT collection has been more successful than other types of taxes. VAT has become more important in many jurisdictions as tariff levels have fallen worldwide due to trade liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and distortions of value added taxes are lower than the economic inefficiencies and enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory suggests value added taxes are far more efficient.

    Perhaps, it is the above bold statement that you may be referring to for Greece. That is a sound argument. But that does not solve the over all reduction in economy from outsourcing which causes lower income in a spiral down. This type of economy is not sustainable. In case of US, we cover that up by printing money. Is that a solution?
     
  18. kmguru Staff Member

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    11,757
    Having spent all my adult life in Manufacturing industries, I have developed a rule of thumb. For a domestic manufacture where raw material and parts are sourced domestically, the economic boost to the economy is 10 times (sometimes 14 times) of the revenue of that company. Think about our imports and the loss to our economy. But, that is for another day....
     
  19. Saint Valued Senior Member

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    4,752
    Will Greece cause the second meltdown?
     
  20. kmguru Staff Member

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    11,757
    It is too early to tell what would be the last influence before the real meltdown in 2012 (2014 per Billy T)

    Late addition on Greece

    Eurozone problem children
     
    Last edited: May 18, 2010
  21. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    Hi Saint: You have not been very active recently. Do you know that the thread you started some years ago (called then something like: "Do you think China will pass the US?") had its name changed, but I have been keeping it alive. See it at: http://www.sciforums.com/showthread.php?t=50213

    To kmguru et al: In your last post you imply that I am predicting a economic crash in 2014. That is not quite my prediction. Halloween 2014 was the end of a six year window I predicted would see the run on the dollar, which would be quickly followed by a depression in US & EU, but not in suppliers of raw materials, energy and food stocks to Asia, mainly China, but India included also. I made that prediction based on GWB's disastrous policies when he had nearly two years left in his term as POTUS.

    More than a year ago I posted that the US economy was deteriorating more rapidly* than I anticipated but that Obama was much more intelligent than GWB (Clinton's equal in that area) and probably would be able to delay the run on the dollar until after the end of his four year term and wisely refuse to run for a second term. Thus although not officially changing my original prediction, I now expect the run on the dollar will occur after January 2012 and before Halloween 2013 - I.e. narrowing down the six year window to less than 21 months.

    -------------------
    *In part for the reason you often mention - US losing manufacturing jobs, out sourcing etc. but GWB's needless wars are still a huge economic burden on the US. However, his tax relief for the wealthy was a fundamental cause of this as it helped fund the trickle down investments which built the more modern factories in Asia, especially China. I.e. GWB's tax changes are a large part of the reason why US now has chronic un & under employment and why Joe American's real purchasing power declined during GWB's administration - another disastrous factor for an economy which relied on Joe's purchasing for 64% of GDP.
     
    Last edited by a moderator: May 18, 2010
  22. kmguru Staff Member

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    11,757
    My prediction is still 2012, December to match with the end of Mayan Calendar. It has a nice ring to it.
     
  23. Billy T Use Sugar Cane Alcohol car Fuel Valued Senior Member

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    We have,even with my unoffical prediction 11 months in common. I.e. I expect run on dollar to begin after Jan2012 and occur by or before Halloween 2013, but am officially keep my original year later margin as Obama may decide to run for a second term despite my doubts. (Being POTUS goes to your head - even very smart people do crazy things - ask Bill Clinton.)
     

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