France cuts frantically as Italy nears debt spiral

[hack89]

Source: The Telegraph

France has unveiled the toughest austerity measures since World War Two despite the looming danger of a double-dip recession, vowing to slash borrowing by €65bn over the next five years in a last-ditch effort to save the country's AAA rating.

The belt-tightening plan -- the second package since August, taking total cuts to €112bn -- include a 5pc super-tax on big firms, a rise in VAT on restaurants and construction, and cuts on pensions, schools, health, and welfare. It is the latest squeeze in a relentless campaign of fiscal tightening across the eurozone.

Mr Fillon said the country must accept sacrifice to "avoid the day where policies are imposed upon us by others," insisting that France would meet its "untouchable" deficit target of 4.5pc of GDP next year -- down from 5.7pc this year.

The austerity plan seems aimed at insulating France from the unfolding disaster in Italy, where a deepening slump and the final agonies of Silvio Berlusconi's government sent debt markets into a tail-spin on Monday.

Read more: http://www.telegraph.co.uk/finance/financialcrisis/8875444/France-cuts-frantically-as-Italy-nears-debt-spiral.html

[StarsInHerHair]

1. geez they're STUPID! Hooverism GUARANTEES FAILURE! unless they're

aiming to wreck themselves, which seems to be the case for every far western civilization in general at the moment

[Psephos]

8. Who will lend them money when their credit ratings tank?

I hear your argument, but the problem with Keynesian procedure is that Keynes himself said that governments should borrow and spend in downturns, but then pay back the borrowings in upturns. He was vociferous that deficit spending should not be structural (i.e., deficits in both good and bad times) or the result would be ruin.

Eurozone deficits have been structural for a long time. Politicians have a way of using Keynes to justify big debts, but never to support repayments.

No one with money is going to lend it to entities who can't pay it back. Cf. credit freezes to Greece, Iceland, or Ireland.

[plumbob]

11. Iceland isn't trying to borrow money, are they?

Nope. They did just what every other country ought to do.

Then these tin-pan ratings would assume their real importance - paper pushers cheating to make money for themselves.

[Psephos]

12. I used the past tense.

When their crisis hit, Iceland was completely frozen out of the credit markets.

I agree with you that Iceland is doing it right these days. The Icelanders nearly strung up their go-go bankers and financiers when their debt positions unwound. I highly doubt we'll see a return to high-leverage finance or profligate government spending in Iceland during my lifetime.

[muriel_volestrangler]

17. Iceland did, and is still, borrowing money, and never defaulted on its sovereign debt

It borrowed $2.1 billion from the IMF in the period after the 2008 crisis, and up to €1.76 billion from Nordic countries.

This year, it's borrowing on the international markets, and this article points out what happened - they never defaulted on their sovereign debt, but what they did do was to refuse to take on the private debt of the Icelandic banks.

ICELAND RETURNED to international debt markets for the first time since its banking meltdown more than two years ago as investors offered to buy twice the amount the government offered in dollar-denominated bonds.
...
Iceland, which averted a sovereign default by refusing to bail out bondholders when its banks failed in October 2008, will enjoy economic growth of 2.2 per cent this year and 2.9 per cent in 2012 as its budget deficit narrows to 1.4 per cent of gross domestic product, according to the Organisation for Economic Co-operation and Development.

http://www.irishtimes.com/newspaper/finance/2011/0611/1224298736664.html

Before the crisis, Iceland's government debt in 2007 was 28.3% of GDP. Now, "debt levels close to the European average of between 80% and 90% of GDP".

The point is that Iceland's position in 2008 was completely different from Greece, or Italy. Iceland did not have a lot of public debt, and so they said "screw the Icelandic banks and their owners and lenders, we'll let them go bankrupt, and then construct some basic banks from the wreckage for the economy to use as it recovers". They've managed to borrow enough money to do this. Greece and Italy's governments, however, already owed a lot of money - to banks and other entities outside Greece or Italy. Their decision is "when do we declare ourselves in default?" But since they would be the party saying "we can't pay", as opposed to the Icelandic case of "the private entities that Icelandic banks recklessly lent to can't pay", there's a lot of pressure on them from the governments of the countries with the banks to avoid this.

[StarsInHerHair]

23. Greece didn't have public debt-that was swapped with the Banksters

same as the rest of the world......that was the very heart of the "bail-outs", Bankster debt forced onto publics while the Banksters EMPTIED Public Coffers, that's what "bail out" really means.


more, from your link "Iceland's luck was that it did not qualify for a bailout. Since Iceland was not part of the European Union and the failure of its banking system wasn't sparking any "contagion" fears, no other major central banks were willing to lend to a hypothetical Icelandic bank-bailout scheme. When the government attempted on its own to take over one of the island's three banks, investors rushed to retrieve their funds, and in one week, Iceland's financial system was drained of liquidity.
Alone and melting down financially, the government used emergency legislation to change course in the first week of October 2008. It divided each of the failed banks into two parts: a foreign bank that went into receivership, and a domestic bank whose deposit base Reykjavik guaranteed. In the process, Iceland's banking system shrunk by 80%..."

..."There may be no better contrast between restructuring versus bailouts than to compare Iceland to Ireland. Dublin faced the same predicament as Reykjavik in 2008, but it responded with a blanket guarantee that turned Irish taxpayers' money into collateral for Irish bank debts. Rating agencies and so-called experts hailed the move at the time, in part because Dublin had the euro and the mighty German state vouching for its credibility. But Iceland's experience of botched government takeovers and private-capital flight has also played out in Ireland—only much more slowly and, arguably, more painfully..."

see: bailouts=massive fake Public Debt

[muriel_volestrangler]

24. No, Greece did have large public debt before the crisis, though Ireland was similar to Iceland

Government debt in 2007, as % of GDP:
Greece: 107.4%
Italy: 103.1%
Ireland: 24.9%
Euro area avg: 66.3%
Iceland: 28.5%

http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=teina225&plugin=1

It is very valid to say that Iceland shows how Ireland could have done things. Notice that Iceland's debt has still gone up a lot, in fact about as much as Ireland's has, to 2010; but Ireland still has struggling banks that are nominally independent but that the government is still legally liable to bail out if needed (I think they should be looking at laws to change this), while Iceland has disconnected its public finances from the bankrupt banks:

Arni Pall Arnason, 44, Iceland’s minister of economic affairs, says the decision to make debt holders share the pain saved the country’s future.

“If we’d guaranteed all the banks’ liabilities, we’d be in the same situation as Ireland,” says Arnason, whose Social Democratic Alliance was a junior coalition partner in the Haarde government.

By guaranteeing bank liabilities, Ireland faces a potential public debt burden that could swell to twice its GDP, up from 94 percent now.

http://www.bloomberg.com/news/2011-02-01/iceland-proves-ireland-did-wrong-things-saving-banks-instead-of-taxpayer.html

But Greece, and Italy, did already have very large public debts before the crisis started. Here's Paul Krugman, comparing Greece and Ireland:

Mr. Ryan made highly dubious assertions about employment, health care and more. But what caught my eye, when I read the transcript, was what he said about other countries: “Just take a look at what’s happening to Greece, Ireland, the United Kingdom and other nations in Europe. They didn’t act soon enough; and now their governments have been forced to impose painful austerity measures: large benefit cuts to seniors and huge tax increases on everybody.”

It’s a good story: Europeans dithered on deficits, and that led to crisis. Unfortunately, while that’s more or less true for Greece, it isn’t at all what happened either in Ireland or in Britain, whose experience actually refutes the current Republican narrative.
...
On the eve of the financial crisis, conservatives had nothing but praise for Ireland, a low-tax, low-spending country by European standards. The Heritage Foundation’s Index of Economic Freedom ranked it above every other Western nation. In 2006, George Osborne, now Britain’s chancellor of the Exchequer, declared Ireland “a shining example of the art of the possible in long-term economic policy making.” And the truth was that in 2006-2007 Ireland was running a budget surplus, and had one of the lowest debt levels in the advanced world.

So what went wrong? The answer is: out-of-control banks; Irish banks ran wild during the good years, creating a huge property bubble. When the bubble burst, revenue collapsed, causing the deficit to surge, while public debt exploded because the government ended up taking over bank debts. And harsh spending cuts, while they have led to huge job losses, have failed to restore confidence.

http://www.nytimes.com/2011/01/28/opinion/28krugman.html

[aquart]

2. Any bankers taking cuts?

[hack89]

3. No one forced France to rack up that much debt. nt

[aquart]

4. I love Fox economics.

It's so vigorously uninformed.

[hack89]

10. So they had no choice - is that what you believe?

you non-sequitor suggests there is nothing deeper than anger towards bankers behind your opinion.

[davidwparker]

5. Cutting pensions is so WRONG. These were negotiated

as part of compensation. To work, then retire, then have what you were promised slashed is wrong.

This is France?

I can see that here, in TeaBagging, USA, but France?

[GliderGuider]

6. It's going to spread world-wide.

It may be wrong, but it's inevitable. The whole interwoven tapestry of clusterfuck is coming apart in front of our eyes.

[hack89]

22. Politicians making promises they can't pay for is not a uniquely American thing.

that is what is happening - they cannot fund their promises without borrowing a shit ton (excuse the technical term) of money. As Greece so aptly demonstrates, bad things happen when that debt gets out of hand.

[Prometheus Bound]

7. I don't quite understand how cutting the deficit from 5.7% to 4.5% should be this painful.

I guess the recession means less tax revenue.

[Little Tich]

9. Sarkozy is doing the right thing. I don't like him, but he has grown in stature the last few months.

Tightening the budget to prevent debt crisis is a must. If the market keeps full confidence in France's ability to handle its economy, the way to recovery is so much easier. Even the eventual double dip is much less scary with a clean budget.

[JDPriestly]

15. OK, so France tightens its budget and saves money.

Financial matters are balance sheets. For every loss there is a gain. If the French government takes money away from pensioners, who will get that money? Where will that money go? It does exist. It's just a matter of moving it from here to there.

There won't be fewer Euros because France cuts pensions.

What will people who want to lend money to France do with their money? Sit on it like our banks are doing?

France does not create money out of thin air. So the money saved will be spent somewhere else by someone else.

[hack89]

18. That money saved is money they will not have to borrow.

There will be no excess money to redistribute - they are borrowing money because they have insufficient revenue. That money you refer to is money that will remain in some foreign bank unloaned.

[unkachuck]

13. "avoid the day where policies are imposed upon us by others,"

"Mr Fillon said the country must accept sacrifice..."

....who are these super-uber 'others' that have super-human powers greater than all the democracies, greater than the most powerful of sovereign nations, greater than the highest elected officials in all the lands?

....who are these diabolical 'others' with powers greater than all mortals, Mr. Fillon? Are they beyond the range of reason, black ops, Tomahawks or Hellfire missiles?

[hack89]

14. Politicians surrender sovereignty for loans

simple as that. The power held over them is simply the power to not lend them anymore money. Which is why the French are wise to reduce their dependence on borrowed money.

[Psephos]

16. Perfectly said. n/t

[apnu]

21. Which isn't much different when the Kings of old surrendered to the Church and Templars

History is repeating itself right in front of us.

Good post BTW.

[Nihil]

19. Take one notch from your hyperbole and the answer isn't that confusing ...

> ....who are these super-uber 'others' that have super-human powers greater
> than all the democracies, greater than the most powerful of sovereign nations,
> greater than the highest elected officials in all the lands?

Remove the "all the", the "most powerful of" and the second "all" in the above
question and you end up with a far less hyperbolic question:

-> Who are these super-uber 'others' that have super-human powers greater
-> than democracies, greater than sovereign nations, greater than the highest
-> elected officials in the lands?

Now review the history of the last couple of decades and you are on the right
track to find your answers.


> ....who are these diabolical 'others' with powers greater than all mortals,
> Mr. Fillon? Are they beyond the range of reason, black ops, Tomahawks or
> Hellfire missiles?

In many cases, these "others" are not merely "beyond" but are in fact
behind the "black ops, Tomahawks (and) Hellfire missiles".

Or maybe you think you live in a true democracy rather than a plutarchy?

:shrug:

(Edited to clarify my first paragraph)

[Javaman]

20. I don't even try to pretend I know anything about world finance, but...

it seems to me that all the nations are frantically building mud walls against a coming tsunami.

it won't be after the waves have crested and the waters have receded that the true extent of the world wide financial disaster will be exposed.

it will be only then that the "world's leaders" will hit themselves in the head and say, "shoulda, woulda, coulda".

All obvious fixes are apparent in 20/20 hind site and appeared risky before.