In todays FT

Berlin has been insisting that it include measures to coerce Greek bondholders to accept new, longer-maturing bonds that would not have to be repaid for seven years.

No 5th – I understand that – not that anyone has deliberately devalued that I know of.

Yes you do know. You must. It’s called quantative easing. When you print more money your money is worth less.

That is not the same thing as a devaluation. It may result in downward pressure on the currency but it is not a devaluation as I understand it.

That is not the same thing as a devaluation

yes it is. We did it and so did the Americans. A lot of people were very unhappy about the Americans doing it, particularly the Chinese, as they hold currency reserves in dollars that are now worth a lot less

Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged.

In common modern usage, it specifically implies an official lowering of the value of a country’s currency within a fixed exchange rate system, by which the monetary authority formally sets a new fixed rate with respect to a foreign reference currency. In contrast, depreciation is used for the unofficial decrease in the exchange rate in a floating exchange rate system. The opposite of devaluation is called revaluation.

Depreciation and devaluation are sometimes incorrectly used interchangeably, but they always refer to values in terms of other currencies. Inflation, on the other hand, refers to the value of the currency in goods and services (related to its purchasing power). Altering the face value of a currency without reducing its exchange rate is a redenomination, not a devaluation or revaluation.

http://en.wikipedia.org/wiki/Devaluation

Yes its good old wiki

Semantics, I’m afraid TJ. The end result’s the same. Its just wrapping it in another name to try and make it look like its not a deliberate policy. It fools no-one

Except, it appears, you. 😉

anyway

it specifically implies an official lowering of the value of a country’s currency within a fixed exchange rate system

since when were we or the Americans in a FIXED exchange rate system?

Its not just semantics – you can alter the relative value of a currency by other measures than “quantitative easing” – central banks can buy or sell specific currencies for example – if they act in concert it can have very strong effects on currencies values. Similarly inflation rates have an effect on currency values

Quantitative easing can have deprecation effects on a currency. It however is not the same as devaluing – which can be done without printing more money.

since when were we or the Americans in a FIXED exchange rate system?

Exactly – thats why what is happening is not devaluation!

Teej – QE = devaluation. It just does. Not sure how anyone would define the Euro as “failing”, I don’t see how the French/German core would go back to the franc/DM but we’re highly likely to see at least one country fall out.

Everyone should want a weak currency, it’s a zero sum game fella, the Chinese sell theirs all day long.

Quantitative easing can have deprecation effects on a currency

Can? Can have deprecation effects? I can’t think of any example’s of where they wouldn’t. If you can find one, please feel free to supply it

Anyroad up. I’m not getting into an argument about Semantics.

the euro is propped up by the fact that it has big brthers supporting it , the germans and to a lesser extent les bleus, if de greeks dont pay up everyone who covered the debt will be called upon ( including GB) so they ll all be wanting to borrow and as it is for you and me it ll be at distress rates so it ll be an ouch, down side for the greeks is no one will lend them a dime so there economy will sink like a lead ballon they ll alllbe on the streets and it could be hard to find a sunlounger in august.

So…..it isn’t so much the size of the Greek national debt that is the problem, it’s who owns it. The Japanese owe more than DOUBLE their annual GDP but no-one cares becaue something like 95% of it is owned by domestic investors. They have one of the highest saving rates in the world, which is why they have been in and out of recession for the last 15yrs. Greek debt is held to a significant degree by international banks, so an un-controlled default is going to cause the markets to question whether they are solvent. Thats what happened before and during the Lehman debacle in 2008.

Best case most holders have already marked their Greek Government Bond (GGB) holdings down to 50-60%, and are capitalised accordingly but the problem is no-one really believes they have. Its a mess.

Everyone should want a weak currency

Surely only net exporters want a weak currency?

To the folk who think the euro is in such trouble – why is it highly valued? Mch higher than the £ right now and doing well against the dollar IIRC. Wehre would you rather have your money? £ Euro? Dollar? Yen?

The German €uro and not the Spanish €uro, do you get it yet?
What does €uro mean to you?

Even with a strong €uro, I will be able to have goods manufactured for me, transported from spain to the UK and give me a reasonable profit AND still be significantly cheaper than the UK manufacturers. 😆 Bring on a strong pound… 😈

A lot of people in the markets actually think the Greeks (and Irish) should probably just get on with it and impose a managed restructuring on bondholders. The size of the debt is way too big for them to service so why cripple your economy for 30yrs trying? Better to hand out the bitter pills now, say extend maturities on the bonds out to 15-20yrs average with a lower coupon. Nobody dies and we can all move on.

Yes the Greeks and Irish went on a credit fuelled party and lived way beyond their means, but no-one forced the banks to lend them all that money. Bondholders got paid a premium for holding GGBs and Irish govies so kind of have it coming to them.

Surely only net exporters want a weak currency?

Thats the point. Get yourself a nice weak currency and you too can be a net exporter.

And you can make the transition to lower carbon consumption a bit quicker…

The Japanese owe more than DOUBLE their annual GDP but no-one cares becaue something like 95% of it is owned by domestic investors.

Hmm – interesting and surprising. Why don’t more foreigners buy Japanese Govt Bonds if they’re so safe?
http://www.morganstanley.com/views/gef/archive/2005/20050524-Tue.html

Hmm – interesting and surprising. Why don’t more foreigners buy Japanese Govt Bonds if they’re so safe?

Because they are so expensive. 10yr Japan yields 1.1%. 10yr Australia 5.1%, UK 3.2%, Germany 2.9% etc etc…..all that demand from Mom and Pop in Tokyo…….

EDIT – and they might not be that safe in the long term. Is a school of thought that the ageing Japanese population is a sleeping time bomb. They might simply run out of workers and wont be able to pay for all the old folk and service this enormous debt. That happens you all want to stock up on tinned food and shotgun ammunition.

Surely only net exporters want a weak currency?

Quite handy when you have a load of debt. All of a sudden all that cash you owe people is worthless.

Annoys the hell out of the Chinese.

TJ,

You wont ever find a Country admit to a devaluation policy – the name of the game is to devalue whilst claiming a tough stance on inflation that way you minimise your borrowing cost but also devalue your liability at the same time. Its naughty but we the yanks are doing it, the Pigs would love to but cant.

the Pigs would love to but cant.

This, I assume, is due to the €uro. Wouldn’t it be possible to devalue one’s economy? Wholesale reductions in salaries? And as a result wholesale reductions in the cost of nationally produced goods? In theory…

Wouldn’t it be possible to devalue one’s economy? Wholesale reductions in salaries?

See those burning cars in Athens?

This is why sovereigns cant just keep spending money like it grows on trees. At some point the music stops and unlike say a corporate, you dont have a bunch of shareholders to shaft. Ed Balls please take note.

I’ll put my hands up straight away and say I don’t have much of a clue on this – same sort of level as TJ, I’d say 😀

Anyway, listening to some talk show on the radio in the States, they were talking about the high levels of tax evasion in Greece, Spain, Portugal
Does that play a significant role in their predicament?
If so, the tax Euros and Pounds etc of other European citizens bailing them out is a tad rich [no pun intended]

The US media are revelling in this storm in the Med but conveniently forgetting own problems.. Should California go back to the gold standard and issue its own currency?

The numbers for Greece don’t look so bad when you consider there are 300 million Europeans.

When countries had their own currencies it was easy to indulge in competetive devaluations, we are now in the situation the US has lived with for as long as it has had the dollar. Prosperity will be regional with growth in the most favourable areas and decline in others. Language barriers to migration will limit responses that allowed the US economy to adjust such as the rush to California as the industrial Northeast declined.

The numbers for Greece don’t look so bad when you consider there are 300 million Europeans.

Not a good time to mention Ireland, Spain or Portugal then?

EDIT:

When countries had their own currencies it was easy to indulge in competetive devaluations, we are now in the situation the US has lived with for as long as it has had the dollar. Prosperity will be regional with growth in the most favourable areas and decline in others. Language barriers to migration will limit responses that allowed the US economy to adjust such as the rush to California as the industrial Northeast declined.

Isn’t there a problem in making comparisons between the €uro and dollar as the US has a single fiscal policy whereas the €urozone doesn’t?

Ireland, 2% of the European population or thereabouts and not a fat lot in terms of GDP, Lousiana (4.3 million) to continue the US comparison. Now California is about 36 million people and a significant chunk of US GDP.

“the US has a single fiscal policy”

No it doesn’t. US taxes are regionlly highly variable: sales taxes, property taxes… .

The rise and fall of EUROs … 😯 🙄

No it doesn’t. US taxes are regionlly highly variable: sales taxes, property taxes… .

I knew California had sales taxes, didn’t know about the rest, thanks.

Well if the euro drops drastically against the pound imagine how cheap canyon/ghost bikes will be.

Happy days.

Quantitative easing can have deprecation effects on a currency

Can? Can have deprecation effects? I can’t think of any example’s of where they wouldn’t. If you can find one, please feel free to supply it

Anyroad up. I’m not getting into an argument about Semantics

I love the way everyone rips into whatever Tandemjeremy says, regardless of whether their own knowledge on the subject is sufficient. Quantitative easing can quite clearly occur without causing inflation and a depreciative effect on the currency – have a look at ‘sterilisation’. By the way it’s depreciation, not deprecation.

Whether the central bank or the banks themselves do the sterilising, the net result is the same; no increase in the money supply. It is (or has been) happening in the US where the banks are selling Treasury’s to the Fed and then immediately placing the funds on deposit with the Fed rather than lending them out.

Secondly, the raison d’etre of quantitative easing is not to devalue a currency, that is a potential side effect of any (I think) unsterilised intervention. It’s actually to try and generate more lending/spending in the economy by increasing the money supply and lowering yields.

To the OP, the implications for Greece of defaulting are quite interesting depending on your point of view. You could make a strong argument (as TJ alluded to with his rainfall comment) that post default the productive assets of the Greek nation would still be there, it’s just that the lenders (mainly the French and German banks but also ours) will be hopping mad and probably need assistance from their own tax payers. Your pension would feel it, and the European Central Bank would be sat on €140bn of unrecoverable Euros from Greek paper used as collateral.

In the future though, if the Greeks tidied up their disgraceful tax system, and decided as a citizenry that they might have to work a bit harder and for longer, then they could re-enter the market and borrow again. Plenty have done in the past, like Argentina I think.

Of course, the issue for Greece is that they are in the EU so cannot easily do anything unilateral. All their debt is Euro denominated, the ECB is maintaining their banking system through liquidity operations, and they are party to the legal structures which would make extraction from the EU a nightmare.

bainbrge – Ssssssshhh. I just like arguing with Uncle Jezzer. And I know, deep down, he loves it too 🙂

Some really interesting answers here. Thanks all. Its fascinating reading the economic theory that underpins all this, and seeing how, or indeed if, it stands up to stress testing on the ground

Somehow I get the feeling this isn’t going to pan out as the economists planned it

http://www.bbc.co.uk/news/business-11990006

Apparently the Argentine default is the closest thing… Article above gives an insight in to what could happen… But then a slowing euro country must be different to a growing southern American country in terms of how it would respond to a default…. I can only see both routes would mean austerity… If they are over spending. But on a macro level it must be like defaulting on a credit card… The bank has no choice but to accept a lower payment.. but then you might not get another credit card in a while…

As a further question possibly related to this topic, what happens if the Republicans keep being spiteful arses and don’t allow the US Debt Ceiling to be raised. Apparently if it isn’t, the US national debt becomes unserviceable some time in August. That can’t be good.