2013-05-25T08:44:13-04:00 Michael Hewson http://www.huffingtonpost.co.uk/author/index.php?author=michael-hewson Copyright 2008, HuffingtonPost.com, Inc. HuffingtonPost Blogger Feed for Michael Hewson Good old fashioned elbow grease. tag:www.huffingtonpost.com,2013:/theblog//3.2540549 2013-01-24T08:08:34-05:00 2013-03-26T05:12:01-04:00

Michael Hewson http://www.huffingtonpost.com/michael-hewson/
Youth unemployment in Spain is now just below 60% and it is hard to make an argument that this is not as a result of the policies being adopted across Europe as part of the EU convergence process. Is this really the price of more European integration, because if it is I would argue that it is too high.

Unfortunately the hysteria accompanying Cameron's announcement is a sadly entirely predictable response from people who seem to want to stifle debate on a subject that simply won't go away. The failure to ratify the Lisbon treaty in France and Holland in the last decade suggests that populations also need convincing about how much further integration can reasonably go.

This was probably behind the refusal of the Labour Party to honour its pledge of a referendum on some parts of the treaty in its 2005 election manifesto, but all this has done is crystallise opposition to what people perceive is an undemocratic demagogic institution.

Cynics will justifiably argue that it is an electoral ploy by the prime minister to appease the more eurosceptic elements in his party. While that may undoubtedly be true, does that also mean then we should not have the debate, given we will at some point in the future need to have it anyway.

An argument has been made that the uncertainty created by this move may deter inward investment to the UK, and that might be a concern, however the same arguments were made when we didn't join the euro.

Let's also not forget that we're seen five years of uncertainty in Europe about the sustainability of the single currency while inward investment in the UK has continued without too many problems even though we didn't join the euro.

Over the past few years Europe has undergone massive upheaval and change with the increasing likelihood that a number of countries will opt to move to ever closer political and fiscal union. This is likely to dilute sovereignty at a national level and it seems entirely appropriate to have a debate on this and its likely effect on countries who opt not to go down this route.

We've already seen in Italy and Greece unaccountable technocratic governments impose unpopular measures without proper debate.

Opinion polls seem to suggest that most voters in the UK would welcome a looser arrangement with Europe and certainly there are large parts of the business community who are frustrated at the amount of red tape and regulation they have to deal with on a day to day basis, in what is supposed to be a single market that is supposed to lower the barriers to profitable trade.

This week's decision to implement a financial transaction tax, despite unsuccessful historical precedents, may appear a laudable goal but it is in an unnecessary expense at a time when banks need to be encouraged to make more credit available, to cash strapped businesses, while at the same time boosting their capital ratios and writing off bad debts.

Critics also argue that it is not immediately clear what powers the prime minister would seek to claw back, though I would argue that you don't start a game of poker by showing all the cards in your hand.

It is also untrue to suggest that the UK is alone in efforts to reform the EU which has been shown to be completely undemocratic and divorced from the economic realities of normal people.

How else can you explain the extraordinary decision of the EU parliament to insist on massive increases to its budget when other countries have to cut back locally to enforce unpopular austerity measures in order to attempt balanced budgets?

A lot of politicians in Europe probably feel the same way about EU reform but dare not say so and are quite happy for Cameron to act as a lightning rod for this debate.

Make no mistake over the next few years Europe will undergo some significant changes as countries continue to wrestle with unsustainable debt burdens, aging populations and an increasing competitive threat from emerging markets.

If Europhiles really believe in the merits of their European project then they should welcome the debate with respect to Europe's future and not react by seeking to stifle it from those who have a slightly different view about Europe's future and its shortcomings, of which there are many.

MEP's like ex Belgian prime minister Guy Verhofstadt are ideal recruiting sergeants for a "No" vote with his strident name calling and general anti-UK rhetoric every time the subject of reform is brought up. Certainly his comparison of Cameron as a suicide bomber does him no credit at all.

As far as Europe's future is concerned and the UK's role in it is concerned, it is about time all the various interested parties grew up and debated the key issues that are of concern to voters in the UK, and across Europe who feel that Europe's politicians occupy a completely different universe to the one that they all have to live in.

Whatever Cameron's motive in calling for an in/out referendum for the UK the hope is that the self-imposed deadline will concentrate minds away from the incessant navel gazing of the last five years?

There is some evidence that Cameron's move might have concentrated German minds after Angela Merkel remarked that she's ready to listen to the UK's wishes if they are "fair."

We shall see how this plays out, but if Europe is too succeed then a proper debate needs to start with respect to the current direction of travel, as the price being paid in some countries for some of the reforms appears to be far too high.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1821068 2012-08-22T08:01:43-04:00 2012-10-22T05:12:07-04:00

Michael Hewson http://www.huffingtonpost.com/michael-hewson/
Germany and other northern countries - insistent on fiscal discipline and economic reforms - versus southern European economies who are reluctant to implement reforms and cut spending levels.

It is this problem that truly defines the problems of a single currency and economies that are diverging away from each other.

Move away from a single currency
If these struggling southern economies such as Spain and Italy had their own currency, the management of this problem would be so much easier to bear. However, there would also need to be an acceptance from those peripheral countries to actually commit to implement the reforms necessary to turn their economies around. Unfortunately for them, this option is not open to them and as such the fiscal adjustment becomes that much more difficult, which begs the question....maybe this option should be open to them?

Despite political assurances to the contrary, there is no clear evidence that the Spanish or Italian governments have the necessary political clout to overcome trade union and other vested interest opposition to the status quo that have been a part and parcel of Spanish and Italian business and social culture for decades.

It is important to remember this when looking for a solution to this crisis, because the current solution of the 'extend and pretend' approach is only likely to sentence Europe to a lost decade of negative or sub-par growth.

What Europe needs now are politicians prepared to think the unthinkable; to pull back and admit that the European project, as it is, requires a massive rethink. It would appear that for now, Europe lacks politicians capable of such a cerebral leap as they continue to insist that the current path is the only path.

It is this definition of insanity of repeating the same mistake over and over, hoping the outcome will somehow be different that has come to define Europe's problems.

In the last four years this definition could well be applied to the European sovereign debt crisis and policymaker's response to it, as first Greece and then Ireland and Portugal succumbed to bailouts and austerity programs.

When Greece first applied for aid in early 2010, the opportunity to 'lance the boil' was passed up and the decision was made to bailout Greece to protect German and French banks. European policymakers have always sought to deflect the blame for Europe's woes to Anglo Saxon speculators rather than take responsibility for the flaws in the project which were well-known from the start.

For political reasons, French and German policymakers chose to ignore the economic arguments. They trusted that when the flaws were exposed for all to see that electorates would be so terrified of the prospects of a break-up they would pass up their democratic rights to manage their own sovereignty, and agree to closer political and fiscal union.

As an exercise in breathtaking arrogance, it is hard to beat and is symptomatic of the political atmosphere and response to the crisis.

"More Europe"
German Chancellor Angela Merkel and other EU policymakers are fond of saying that the solution to the crisis is "more Europe". Unfortunately they could not be more wrong.

Europhiles point to the US as the model for Europe as do some US commentators; however the two models are entirely different.

The US is a country borne from an entirely immigrant population with no common history as such, and the slow economic convergence there was not without its own difficulties, particularly the American Civil War, which cost many lives.

The Federal Reserve was only formed in 1913 to facilitate fiscal transfers around the US from weaker to poorer states, and the model works because each state buys into the idea of a common currency and a deep sense of patriotism.

You cannot make the same argument for Europe, which has hundreds of years of tribal rivalries and a history of changing borders and the nation state.

The arguments for a common currency are noble ones, borne out of the ashes of two World Wars and economic convergence, but that is what the European Free Trade Area was designed to do as countries sought to lower barriers to doing business.

The whole European project has been designed with the end goal of full political convergence behind the backs of European electorates, which in itself tells you that the project was always going to be a tough sell.

To survive now in any form, individual countries would have to agree to full scale debt pooling, political anathema to fiscally conservative countries like Finland, Austria and Germany, who have largely run their economies on fairly conservative lines for the past ten years. They would also have to put aside nationalist rivalries that have been prevalent in Europe for centuries.

That seems somewhat unlikely and given that Finland's economy contracted by 0.3% the last quarter, the pressure within that small country to push back against blank cheques will only increase, along with more stringent collateral demands.

Eurobonds
It's not hard to see why the governments of countries like France, Spain, Italy and Greece like the idea of Eurobonds, or debt pooling, given it reduces the pressure on them to reform their economies, however debt pooling would only serve to buy time for the euro, and any lack of progress on economic reform would increase friction between the more efficient northern economies and the less efficient southern ones, exacerbating tensions in the long term.

One only has to look at the response of the Italian government in November last year when the ECB started buying Italian bonds and yields fell back. Italian policymakers rowed back on making changes to labour market regulations requested by Brussels, due to their political unpopularity.

Unelected Italian PM Mario Monti bemoans the fact that Italian yields remain elevated but the reason for that is largely down to the fact that investors don't trust the Italian government, or any other indebted government for that matter, to implement the reforms necessary to streamline their economies.

This year's Greek election result could have been a seminal moment in the European crisis in terms of the next stage of the crisis; however fear of the unknown resulted in the Greek population voting for the status quo and the same political parties that put Greece in the hole they are trying to dig their way out of. That's like putting an arsonist in charge of the fire department.

You can't help thinking that it would have been better if Alex Tsipras had won the election because it would have resulted in European leaders having to make some hard decisions with respect to the future composition of the euro currency.

Let's be clear no-one wants the euro to fail, given the potential consequences but it is clearly unworkable in any sense of the word, and for European leaders to insist it is "irreversible" is fanciful, given that Greece will surely have to leave at some point. When that happens Pandora will be out of her box and that in itself will tell markets that the euro is reversible. Better to lance the boil now rather than limp on for the next 10 years.


Survival of the Euro
For the euro to survive in its current format, politicians need buy-in from European electorates across all seventeen nations and for those electorates to agree to have their tax affairs shaped by officials hundreds of miles away in Brussels. They have to sell the idea that this way is the right way, and there is no evidence whatsoever that they can sell that idea in any way shape or form.
You would need parliamentary approval from all European nations to subjugate their fiscal sovereignty to an unelected European treasury in Brussels, which would create all sorts of constitutional issues.

Europe's main problem is a broken and overleveraged banking system, and until politicians like Spain's Mariana Rajoy deal with that, the crisis will rumble on. The reluctance to wind-up over leveraged Spanish Cajas last year was a huge mistake, and turned a number of small problems into a huge one in the form of Bankia.

Asking voters to bear the cost of political mistakes just won't wash and blaming it on bankers is starting to wear a little thin. The risk is that in trying to hold the euro together, the extreme nationalist tendencies so feared by ordinary people may well come to the fore as extremist views gain currency as voters worry that they are not being listened to.

Losses need to be taken, debt forgiveness or restructuring needs to happen because given the debt dynamics it's difficult to believe that Greece, Spain or anyone else for that matter will be able to grow at a sustainable enough rate to be able to repay the money owed, let alone manage their debt servicing costs.

Austerity and low or negative growth for another 10 years is not a plan; one merely has to take Greece as the perfect case in point and yet that is what is being asked of the Greek population.

Until politicians grasp the reality that the euro is unworkable in its current guise the European economy will continue to limp on as investors pull money out of weaker countries and park it into the stronger ones.

Investors are a fickle bunch and until European leaders restore credibility quickly with some bold and creative solutions, rather than the current painful incremental approach, then it is likely that Europe's economies will continue their downward spiral for years to come.

It only needs one country to break ranks, as dissatisfaction grows within Europe, and the whole edifice could well come tumbling down.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1646558 2012-07-03T12:16:50-04:00 2012-09-02T05:12:16-04:00

Michael Hewson http://www.huffingtonpost.com/michael-hewson/
In mid-2007 the UK banking sector had a combined market value of over 11,000. It now trades at a mere 33% of that at 3,800.

Since the lows seen in 2009 at 1,877 the sector managed to recover to highs of 5,400 in 2010 and the beginning of 2011, however since then the sector has remained under pressure largely as a result of events in Europe and the sectors exposure to potential sovereign insolvencies and insolvent banks in Europe.



Banking sector, 5 year chart (Source: Digital Look)

Public perception about the banking sector had already been fairly low after the events of the last few years, which in turn has prompted calls for much tougher regulation of the banking industry and the 'too big to fail' culture.

Certainly there has been a lot of criticism of the Vickers Report on banking with the watering down of some of the more controversial aspects of the report, including the separation of the investment banking and retail arms.

Regulatory spotlight

Recent events with respect to the behaviour of banks in the UK over PPI mis-selling, interest rate swap mis-selling and now LIBOR fixing is likely to increase calls for much more regulatory oversight from regulators not only here in the UK but also worldwide as public anger demands action from politicians anxious not to be seen to be pandering to banks vested interests and big business.

If you add to that, the controversy over the JP Morgan 'London Whale' trading losses which are expected to exceed $5bn, then you have a very toxic operating environment for banks in general.

This increases the risks of the sector being used as a political football by politicians anxious to deflect attention from their own shortcomings, inadequacies and policy failings.

You only have to look at Europe's politicians and the proposed implementation of a financial transaction tax to see how much in denial these policymakers are with respect to their roles in the current crisis in Europe.

Today's resignation of Barclay's CEO Bob Diamond, while likely to draw a line under his role in the Libor fixing saga, is unlikely to be the end of the story for the banking sector.

There also remains the question of how much central bankers knew of what was going on and whether a blind eye was turned to the practice.

Regulators globally are now likely to focus their attention to the involvement of other banks and the likelihood of litigation as a result of any findings is likely to increase.

Any increased regulatory oversight is likely to increase the costs to the business models of banks and could also prompt much tougher steps to separate the business units of bigger banks, and even break some business units up altogether.

Barclays stock price: where to from here?

Barclays share price has certainly shown some resilience after its sharp falls last week and while some analysts are starting to break cover and tip the shares to move higher, the charts don't support that view in the short term.


Barclays, 1 year chart (Source: CMC Markets)

Since April, the price action has been firmly to the downside and while it remains in the downward channel from the March highs as well as the 200 day MA, the trend remains lower. A move back above the 200p level could well stabilise in the short term.

As for the nationalised banks of Royal Bank of Scotland and Lloyds Banking Group the risk remains that they too become embroiled in the Libor scandal with all the risks that entails for further share price gains. The ironic thing is that any fines, if levied, will end up being paid for by the UK tax payer.


Royal Bank of Scotland, 2 year chart (Source: CMC Markets)

Future profitability of the banks

The main downside to all of this is that any future profitability of these banks is likely to be mitigated by stronger regulation as the banks riskier activities get pared back.

It therefore seems unlikely that, given the current environment, tax payers will see any return on their investment in either of these banks.

Royal Bank of Scotland's share price needs to get back to 550p to even get close to break even, which is more than double its current value of 218p. A break above the 300p level would certainly help in stabilising the share price, but for now the range seems to be 175p, the 2011 lows, and the multiple highs this year around 299p.



HSBC, 1 year chart (Source: CMC Markets)

Even HSBC, which has found itself fairly insulated from the travails of the banking sector over the past few months, has struggled to make much in the way of gains above the highs seen this year at 588p.

If the current enquiries into other banks activities see the bank dragged into the Libor enquiry, further share price volatility in the sector seems likely.

The upshot is that the banking sector is likely to remain a fairly high risk sector going forward; with the likelihood of further regulation, possible litigation and further write downs of bad debt as economic conditions deteriorate in Europe.

According to BIS data, as of the end of 2011, UK bank exposure to Spain and Italy is estimated to be in the region of £90bn.

This raises the likelihood of significant losses especially if there is a restructuring of the Spanish banking sector further down the line, if economic conditions in the country continue to deteriorate.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1384560 2012-03-28T06:24:34-04:00 2012-05-28T05:12:02-04:00

Michael Hewson http://www.huffingtonpost.com/michael-hewson/
It would certainly need Q1 growth of at least 0.4% to keep the economy moving higher on an annualised basis, after the annual figure for Q4 dropped from 0.7% to 0.5%.

There was some evidence of a silver lining as business investment came in slightly higher than expected, but was still negative for the quarter but managed to recover into positive territory on the annual measure.

The pound has slipped back as result of this lower revision as markets weigh up the likelihood of further QE in the coming months.

The downward revision was largely driven by transport, business services and the finance sector, and no doubt validating the Bank of England's recent decision to embark on further easing in October and February this year.

Given the reliance of the UK economy on the consumer it remains doubtful that any growth in Q1 will be sustained into Q2 if recent UK retail sales data is any guide.

When averaged over the last four months sales growth remains fairly flat and this remains a concern despite all the attempts by the Bank of England to keep monetary policy fairly loose.

There remains very little evidence that easing measures are having the effect policymakers would like them too with bank lending remaining lacklustre while inflation stays sticky.

While Q1 may well show some growth policymakers are now getting there excuses in early by warning that the extra bank holiday in Q2 for the Queen's Diamond Jubilee could well see growth fall back.

The reality is given high consumer debt levels UK growth is likely to remain unevenly low for some time to come irrespective of the amount of QE and that until this deleveraging takes place it won't matter how much QE the Bank does.

The major downside to further QE will be persistently sticky inflation caused by a weaker pound and below inflation pay rises that eat into monthly incomes.

Key levels on the pound against the US dollar remain at 1.6000 on the topside and 1.5820 on the downside.]]> tag:www.huffingtonpost.com,2012:/theblog//3.1241308 2012-02-01T00:00:00-05:00 2012-04-01T05:12:01-04:00

Michael Hewson http://www.huffingtonpost.com/michael-hewson/
It is also worth noting that this is the first estimate of GDP, at -0.2% will no doubt be subject to significant revision, while Europe's problems are well documented.

The latest minutes from the Bank of England showed that policymakers remained split on whether further asset purchases are required, while a number of members remained unconvinced that inflation will quickly fall below target, especially in the second half of 2012. This could well prompt a split on whether to embark on further QE at the February meeting in two weeks' time.

The risks to the upside on inflation are set to come from rising oil prices due to rising tensions in the Middle East and also from firms looking to increase margins, especially with the Olympics and the Diamond Jubilee coming up.

It remains likely that inflation will continue its recent downward path with last year's VAT rise due to drop out in the January figures and the fall in energy prices also set to filter through in February.

Even with those falls it is by no means certain that prices will fall back below the 2% level as indicated by Mervyn King, given that even the core inflation rate still remains above the 3% level.

Judging by recent comments by Mervyn King in a speech in Brighton last week he appears to be in the Posen camp with respect to further QE, with the likelihood that further asset purchases will be on the agenda at the February meeting.

Given that an extra £75bn was added to the economy in October and the economy still slipped back, it could be argued as to the effectiveness of the delivery mechanism of the extra asset purchases. This then lends itself to ask how much more effective will any extra QE be.

Markets are entitled to ask is the Bank boosting the economy in the most effective way possible. Certainly October's additional stimulus wasn't the panacea that the Bank hoped it would be, and there's no guarantee that further QE will be any different, given that this money doesn't appear to be filtering down into the real economy, in the form of business investment.

The effect on the pound has been remarkably benign despite the speculation of further QE and there certainly hasn't been the weakness one would associate with such a policy.

This can be mainly put down to the problems in Europe and irrespective of the measures taken by the central bank we could well see further sterling gains against the euro.

The key level on EURGBP is currently around the 0.8425 area and further sterling strength seems likely towards 0.8065 while this level holds, especially if the situation in Europe continues to weigh on sentiment and the ECB continues its recent relaxed monetary policy, and its policy of QE by the back door in the form of more LTRO's in February.

Against the US dollar it is slightly different scenario and it is here we could well see sterling weakness.

The pound is currently pushing against a range of resistance levels above the 1.5610 level which if broken could well see further upside.

Certainly a close below the 1.5550 level could well signal a move back towards the January lows at 1.5240, but we would need to see a close around these levels in NY today.

Last week's dovish FOMC press conference could well play a factor in the future direction of the cable especially given the Fed pushed out its low rates policy beyond 2013, which could result in some short term US dollar weakness.]]> tag:www.huffingtonpost.com,2011:/theblog//3.1150316 2011-12-15T19:00:00-05:00 2012-02-14T05:12:02-05:00

Michael Hewson http://www.huffingtonpost.com/michael-hewson/
However, the reality was that Portugal was already under pressure in the bond markets. In April, Portugal succumbed to the inevitable and asked the EU and IMF for a bailout, which was approved in May with a loan of €78bn.

Greece, the first European nation to ask for help, found that the austerity measures imposed as a condition of their bailout were having a toxic effect on their economy, as unemployment rose rapidly and growth slid sharply. The IMF, ECB and EU insisted that Greece must impose further austerity measures before it got to the next tranche of its IMF loan, raising fears that the country will be forced to leave the eurozone.

In July the Greek parliament voted in favour of a fresh round of drastic austerity measures amidst a background of civil disorder and unrest from protestors having to bear fresh pain. In any event, the summit approved a new bailout of €110bn for Greece in addition to the original bailout plan.

At this point, the crisis started to spread to the bigger economies of Spain and Italy. Yields on Spanish and Italian bonds began to rise as investors trimmed down their holdings of European government bonds and moved them into safer German, Dutch and even UK government bonds. As a result, pressure was brought to bear on Italy and Spain to assure the markets that their finances were under control. Italy finally passed a €50bn austerity budget in August after weeks of haggling in parliament in the face of fierce public and political opposition, with the result that several measures were watered down.

Europe was beginning to spin out of control and anxiety started to build across the globe with US Treasury secretary Tim Geithner urging European leaders to get to grips with the crisis. With the IMF, OECD and the EU starting to downgrade growth forecasts for Europe, markets started to come to the conclusion that EU leaders were running out of ideas as to how to deal with the crisis.

Matters eventually came to a head in Greece and Italy with the replacement of both elected Prime Ministers, with Lucas Papademos in Greece and Mario Monti in Italy. Both leaders tightened the screw even further under pressure from German leader Angela Merkel, who insisted that their economies needed structural reform against a backdrop of civil unrest and rioting.

Summit after summit came and went during October and November each accompanied by dramatic headlines such as "6 weeks to save the euro" and later "5 days to save the euro". These headlines culminated in the EU summit on 9 December which resulted in the controversial fiscal compact from Angela Merkel and Nicolas Sarkozy, ultimately vetoed by David Cameron and the UK.

Changes proposed by the compact included an agreement to stick to the budgetary disciplines of the original Maastricht treaty which stipulated that deficits should not exceed 3% of GDP and that debt to GDP ratios should not exceed 60% of GDP, with penalties for non-compliance.

Despite the compact, most EU members are already in breach of the Maastricht criteria. In order to get in line, spending cuts and tax rises will have to be implemented, which will impinge growth even further at a time when growth is already stalling.

Much has been written about the wisdom of David Cameron's actions with a lot of his critics suggesting that he has thrown the baby out with the bath water. However, given the obstinacy of Merkel and Sarkozy in driving the new fiscal compact with forensic scrutiny of national budgets, one can't help thinking that the euro is heading full tilt towards the buffers.

If this is the case, the UK may find that it is not as isolated as it once was, especially if the austerity espoused by Merkel drives taxpayers to revolt and governments to fall, as has already been the case in over four European countries this year.

Ultimately, the European banking system is fundamentally insolvent, as are some governments, and with cracks already starting to appear it can only be a matter of time before the fault lines start to turn into chasms in the face of zero growth.

The bottom line is that for the euro to survive it needs to go for full blown fiscal union, or break up, it's as binary as that. Given the political and legal obstacles in its way, the current odds are on it breaking up.]]> tag:www.huffingtonpost.com,2011:/theblog//3.1061604 2011-10-27T19:00:00-04:00 2011-12-27T05:12:02-05:00

Michael Hewson http://www.huffingtonpost.com/michael-hewson/
It was made clear that unless they accepted this proposal, EU leaders would move to a nuclear option of the total insolvency of Greece. This would essentially mean the country would go bankrupt, which would have wiped a lot of banks out. This "voluntary" restructuring can be compared to using diplomacy with a gun to the heads of the banks to arrive at the desired outcome.

Whether it is enough, only time will tell - but in any event, it is hoped that this voluntary write off of Greek debt will get the country's outstanding balance down to 120% of GDP by 2020 from 160% of GDP now.

However, it is worth noting that this would take Greece to the same relative debt level as a country such as Italy, which as it happens, is still considered in a poor economic state.

So what does this mean for Greece? The best way to illustrate it is by using an analogy of an ordinary house purchase, and the total mortgage payments on it.

Imagine the total value of the house or the Greek economy/GDP is €100k and the total debt owed on it is €160k. Unfortunately, to add to this, the value of that house is also falling, while the debt and interest on it still needs to be paid.

So, what does the EU deal mean to Greece (or the house value)? It means that instead of owing €160k on an economy that is only worth €100k, they will eventually only owe €120K, by 2020.

However that assumes that the value of their economy (or the house) won't shrink any further, and this is the big unknown.

Greece still needs to generate income to service the debt it still has to the IMF (International Monetary Fund) and other sovereign institutions. However, unfortunately its economy is still shrinking (or the value of the house is still falling) so the gap between the value of the house and the size of the debt continues to rise.

The public spending cuts in Greece, while necessary, are impacting on the ability of Greek businesses and the Greek people to grow their way out of the debt problems afflicting the country.

A change needs to take place to ensure taxes are collected from everyone as historically taxes have never been collected in an efficient manner.

The balance between income and expenditure for Greek government spending needs to be balanced in the same way household finances are balanced, and for years and years this had never been the case in the Greek economy. The bill has finally arrived and Greece can't pay, hence the problems now.

At the same time, the rest of Europe's consumers are also retrenching in the face of higher costs. This is in the form of rising inflation and fears about rising unemployment, which in turn is slowing down economic growth in Europe.

If consumers stop spending money then economies slow down. In turn, manufacturers stop producing as many goods and services, because they can't sell the ones they've already produced and stockpiles build up. Ultimately, economic growth slows down which means the ability of individual countries to generate income to pay down debt is diminished.

Greece is therefore a miniature version of the debt crisis in Europe affecting all countries.

Unless measures are taken to address the structural issues in Europe with respect to low growth and high debt levels, then last night's action by EU leaders merely serves to delay further debt "haircuts" further down the line.

This is why investors are so worried about Italy - it's the third largest European economy which has large banking exposure to France and Germany.

The Italians have €1.9trn worth of debts, or a debt to GDP ratio of 120%, with a stagnant economy. A loss of confidence in Italy therefore could well precipitate a full scale crisis in Europe.]]>