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No easy answers in Greek debt crisis

(Guangming Daily)

14:08, November 08, 2011

Edited and Translated by People's Daily Online

Beijing, Nov.8 (People's Daily Online) --The Greek debt crisis has undoubtedly become a severe economic problem that has a direct bearing on the European Union and even the global economy. Although the European Union has developed a preliminary plan for tackling the crisis, it has yet be seen whether or not the plan will be effectively implemented and if the Greek people can accept the European Union’s bailout conditions. Furthermore, the Greek debt crisis has already caused a chain reaction in other E.U. member states.

Slovenian Finance Minister Franc Krizanic said that the European Union asked all holders of Greek government debt to write off 50 percent. In major E.U. member states, it is mostly large banks and large enterprises that hold Greece’s debt, and writing off the debt will mean a large hit for annual profits.

However, certain member states, such as Slovenia, have used their national funds, including pension funds, to buy Greek government debt. Slovenia has a rapidly aging population, and holdings of foreign government debt have long been regarded as the safest part of its pension fund investment portfolio. With a 50 percent write-down on its Greek debt holdings, the country's pension fund will suffer huge losses, which will affect its pension payments and future investment direction of its pension fund.

Slovenia is not the only E.U. member state encountering this problem. Many small countries have invested parts of their national funds in foreign government bonds, so a 50 percent write-off of Greek debt has far-reaching impacts on the economic situation and people's lives in many countries.

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  1. Name at 2011-11-1094.79.96.*
Please people Daily you must help us urgently. This rise in Italian bond yields is absolutely disasterous. We have about five minutes left to save the world. I have written a very careful article here which explains exactly what needs to be done in the simplest possible terms. The journalism is appalling, the politicians are mad, please try and save the world by forwarding this article on:
Eurozone Crisis - Italian Government Bonds Yields Hit 7.5%09 Nov 2011 Ten year Italian government bond yields today rose to 7.5%. This is an absolutely disastrous yield which cannot be sustained for any period of time. Now is the for action, and this article carefully explains what must be done.Many journalists today have been publishing articles calling on the ECB to intervene by buying Italian Bonds. Yet this is completely the wrong advice. As one expert in financial markets pointed out repeatedly on Bloomberg News today - "ITALY IS TOO BIG TO BAIL". Over and over again the people he was talking to keep talking about different rescue measures, but over and over again he had to stop them in their tracks with these deadly words. Italy"s outstanding debt is twice that of Germany, the ECB have already spent a couple of hundred billion euros buying bonds, this kind of intervention can not rescue the situation.Many journalists have been opposed to austerity from the very start of this crisis, but it is time to face up to the fact that this advice has proven utterly disastrous. For three years European politicians have wasted their time tinkering with bailouts and bond purchases, but THE ONLY THING THAT CAN KEEP ITALY IN THE EUROZONE IS SHOCK AND AWE ECONOMIC REFORMS. All these rescue packages have bought is a little bit of extra time at a very high cost. Now it"s game over. Some journalists complain endlessly about German trade surpluses, but surpluses are simply not the problem. The idea of the Eurozone is that if Germany is competent and Italy is incompetent, Germans will gradually own more and more Italian assets. So the German surpluses are reinvested in German owned Italian factories and German owned Italian real estate. In other words these journalists have forgotten one of central pillars of capitalism, the idea that imbalances are stabilizers that rejuvenate weaker regions eventually. There is a political issue if this process goes too far, because the Italians might be tempted to nationalise the German assets. Nevertheless, we are nowhere near this hypothetical situation, the problem is much more mundane - the Italian government is simply completely and utterly incompetent and has racked up totally irresponsible debts.In addition to that, the whole austerity debate has been sold to the public in a misleading way because it makes for better headlines. The problem in Greece is that instead of implementing sensible policies that can create a more competitive economy, they are just increasing taxes and cutting benefits. You can"t fix countries like Italy and Greece by tinkering around with pensions and taxes, you need to implement profound structural reforms. Look at something Kaletsky wrote today, it really sums up how depressing this whole situation is for the smarter commentators:Politicians in Europe, America or Britain simply see the crisis entirely as a threat to established ways of life and modes of thinking. Nobody is presenting a vision, or even a credible story, about how the crisis could produce a better tomorrow... Despite the “Occupy” movement and the swirl of rhetoric surrounding the protests, Western politicians are focused entirely on rebuilding the old failed system. Germany pins its hope on fiscal discipline. France may have brought forward the raising of its retirement age from 60 to 62 but its politicians won’t consider further reforms. The US Republicans denounce as “class warfare” any suggestion that taxes on millionaires might rise from pre-crisis levels, while Democrats resist any reform of social welfare rules devised 50 years ago... The problem with so many supposedly learned academic economic journalists is that they can"t let go of their dogma, they embrace new paradigms. Traders and businessmen are better at responding to change because they start loosing money, but public opinion takes far longer to adjust. Therefore journalists and politicians are last people in society to "wake up". This is especially true of the elite journalists who are in charge of this debate. They are completely blind to the big picture economic and political philosophy, completely focused on discredited old fashioned broad macro economic statistics. So they have campaigned endlessly for stimulus and bailouts but ignored the critical issue of profound economic reforms. The politicians got caught up in this chaos, and they have wasted the last few years debating the speed of austerity, meanwhile they have done nothing improve efficiency, and now the widow has closed anyway. Because the banks were discredited they lost their voice and these supposedly learned journalists with no practical experience in financial markets campaigned for orderly default. Yet this campaign has disastrously destroyed the market for European sovereign bonds, and until banks and pension funds fall back in love with European sovereign bonds it"s just a one way trade to hell.Greece is another policymaking tragedy. Two years ago I wrote an important article about Greece saying: Greece is the worst offender, but many other countries are facing impending debt crises too. In fact almost the entire developed democratic world faces considerable difficulty, especially as the proportion of retirees increases over the next few decades... Yet Greece"s membership of the Eurozone is bringing her addiction to unsustainable government borrowing to a more rapid climax. The Dollar has strengthened recently, but I see in this crisis a silver lining that could in the long term vastly enhance the reputation of the Eurozone. With most rich democracies facing spiralling government debt I see Eurozone membership as a purging medicine which is forcing early resolution of an illness which could otherwise turn terminal; which is forcing a proper cure not just pain numbing devaluation; and which is treating individual member state cases before a pandemic develops. Countries such as Greece and Italy have been rotting under incompetent economic policy making for generations. With China, with climate change, the challenges are only getting that much harder. The cruel game changing disciple of Eurozone membership is the only hope of turning these dieing states around. If Eurozone members get this right it will put them head and shoulders above the Americans who have no such mechanism to cure them of the modern democratic disease.I also said:It is absolutely critical that the EU is seen to be taking the lead, and it must do so quickly, before it is forced into a fire fighting mode. The markets have to feel that the EU is making an example of Greece, that other member states have more support, that the EU is willing to sacrifice the profligate and dishonest Greeks if they refuse technocracy in an awesome display of political courage and will. The fate of Greece, at the end of day, does not really matter much one way or another; the key is to terrify other EU voters, forcing them to accept more responsible policymaking; without that lesson, the Eurozone"s long term survival is at risk. We are now, of course, at the state where the Eurozone"s survival is very much at risk. Today lots of journalists have been writing articles saying if the grumpy Germans won"t bail out Italy then Italy should leave the Euro. But as the commentator at Bloomberg News pointed out "ITALIAN DEFAULT IS THE END OF THE WORLD". Italy is not another Greece who can be sacrificed as an example to the rest, if Italy defaults on it"s debt half the banks and insurance companies in Europe are bankrupt. Outside the Eurozone neither the Italian government nor Italian banks are going to repay their debts and the losses are going to be unimaginable. Not only that, Italy has no future outside the Eurozone anyway. What people don"t realise it that you can"t keep devaluing your currency as an alternative to economic reforms anyway because it twists your economy in ways that make it gradually more an more inefficient. If your management sucks it needs to change, it"s not a simple linear thing that can be solved by paying you employees less. For forty years Italy has desperately needed massive reforms, in or out of the Euro the Italians are going to hell if they don"t get them.What does that mean? It means, as the commentator at Bloomberg news pointed out: ITALY NEEDS A TECHNOCRATIC GOVERNMENT IMMEDIATELY. What we need is effectively the suspension of Italian democracy and terrifying austerity measures and shocking economic reforms being forced onto hapless voters at a time when the external economic environment is catastrophic. Yes people are going to go hungry and there are going to be riots, but there is no absolutely alternative. We can"t have more elections in Greece and Italy right now, what we really need is a five year state of emergency and the suspension of parliament and a team of Chinese technocrats to secretly give the EU a big helping hand in suggesting reforms. The Chinese will come onside if you show you are deadly serious and determined to do what it takes. In fact the Chinese will use the crisis to exit their dollar position and it will bring China and Europe together and build a new political world order.Of course suspending democracy is a political nightmare, but we are in a nightmarish situation. This is not a time for dogma, there is simply no choice. Now is the time for the politicians to realise they have completely failed, to announce that democracy has failed and bite the bullet of reform. Realise that the economic environment is much worse than the 1970s, it"s possibly even worse than the 1930s, several countries across Europe fell into fascist dictatorships back in the 1970s, people are way more spoit and stupid today, democracy is finished sooner or later in countries like Greece and Italy anyway. The only question that we are waiting to find out is only whether or not failing states ends up as EU technocracies or a populist tyrannies.I realise people find this shocking, but there is no more time left to keep playing muddle headed games. Most of all people in Europe are afraid of death and war, but if countries like Greece and Italy inflict astronomical financial losses on the Germans and Dutch and Finish, their political systems will certainly collapse and war will eventually come. Just tell the votes the truth, tell them that Italian default will cost untold amounts of money and create war. Stop trying to calm people down and pretend you are in control, scare them to hell and paint yourself as a saviour. There is a way to restore some democratic legitimacy, and I have mentioned it in an article of mine called technocratic prison. The idea here is to let everyone in Europe vote in a referendum for a system in which countries that fail are put under technocracy, whilst other countries are given full freedom. I even suggest toning down the EU, abolishing the EU parliament and returning sovereignty to everyone else as part of the treaty change. Because this technocratic prison system is the big huge political bazooka that shocks the world, it ends the crisis instantly on the spot. If it was implemented right away with the Greeks, and combined with a really bold austerity package in Italy, the sovereign debt crisis might just end with only Greece ever being fully subjected to technocratic prison. Because it"s so bold and violent it will restore the faith of the German masses in Angela Merkel, she will go from wimp to hero, and they might even have the confidence to embrace Eurobonds. It is literally the last option on the table. Remember when every other path is death, you have to take the last path left standing no matter how morally offensive you think it might be. You can"t let the millions of people you care for die because of your moral dogma or reputation. Call the Chinese and discuss it with them if you need a second opinion. The secret is this: analyse the crisis not by thinking about moral dogma, but by using pragmatism to cross out all the things that won"t work. The "what is not" pragmatic rather that "what is" moral approach to decision making was the secret encapsulated by the myth of Theseus and the Minotaur. It was the vital step away from religious decision making that founded the new intellectual paradigm in Ancient Greece. If the politicians do not take this step away from dogma to pragmatism our civilization will perish. This is our existential moment, and our very lives are on the line.

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