Greece: Is Default Imminent?

On Monday the banks will open again in Greece.  By the end of the week we could see the end of the experiment in European unity called the Euro, the common currency.

In recent elections, Greek voters repudiated the conservative political parties that had agreed to cut government spending in exchange for continued loans from the European Central Bank.  By European Central Bank, we really mean the Germans, since they are putting up most of the funding.

The ECB agreed to a complex deal that included holders of Greek government debt taking a fifty percent reduction in the face value of Greek bonds, and the Greek government agreeing to cuts that would reduce their deficit to around 3% of government spending.  In exchange, the ECB would loan Greece more money so that Greece could continue making interest payments on bond they had already issued.

The political parties that gained the most in the election have declared their intention to renegotiate the deal.  Their position is that pushing Greece into a depression so that German bondholders can continue to get interest payments is not a good deal for Greece.  The new guys position is essentially this: “If you don’t continue to loan us money, we’ll default, and then your banks will get 0% of their money instead of 50% of their money.  And your interest payments? You won’t get any of that either.”

The German position is pretty simple: “If we don’t loan you more money, your government defaults, you won’t be able to pay salaries or pensions, and you’ll have to pull out of the Euro zone and issue your own currency.  Who wants drachmas?  Nobody wants drachmas.  And even with your worthless currency, you still haven’t solved the problem that your government spends more than it takes in.”

The problem with what is essentially a high stakes game of chicken between the left wing Greek political parties and the ECB is that they are out of time.  The Greeks could not agree to form a ruling party after the elections, so now they are going to have another election on June 17.  After that election a clear winner may emerge, which can then form a government.  But the Greek government will require more bailout funds before then.

Meanwhile, Greek citizens are pulling their Euros out of banks, and either stuffing their mattresses or putting the money into non-Greek banks to hold.  This is a process that has been ongoing.  Last month Greeks pulled about 5 billion Euros out of Greek banks.  Last week they took 750 million Euros out of their banks on Monday alone.  If the pace of withdrawals accelerates, by the end of next week the Greek banking system could collapse, requiring a messy, unplanned exit of Greece from the Euro zone.

If the problems were limited to Greece, it probably wouldn’t be so bad over on this side of the Atlantic.  Our banks don’t hold a lot of Greek government debt, and we don’t do a ton of trade with Greece either.  What is keeping policy makers up at night is that nobody thinks the problem can be restricted to just Greece.  Portugal, Spain, and Italy are the next potential dominos to fall.  Italy alone is the eighth largest economy in the world.  If the southern periphery of the Eurozone falls apart, it will have major implications for the world economy as a whole.

That’s the problem with playing chicken.  Sometimes neither guy swerves out of the way in time.

Austerity vs. Growth

Two European nations have recently had elections: France and Greece. In both cases the electoral shift raises the level of uncertainty in financial markets.


At the polls this last week, both France and Greece threw out center right parties and replaced them with more left wing political coalitions. This is widely regarded as a reaction to the austerity policies being pushed by the current administrations. The incoming administrations will press an agenda more focused on growing the economy of their respective nations.

Why would you want to live a life of austerity when you could be growing your economy? That seems like kind of a no brainer. The answer lies in the disparate economic policies behind the buzzwords “austerity” and “growth.”

Austerity is a program of cutbacks in government spending, attempting to balance the budget, and maybe reduce government debt. Some of the cutbacks are immediate, in the form of pay cuts and layoffs of government employees. Some of the cutbacks are long term, such as raising the retirement age. The idea is to live within your means, and so reduce the risk that you will have to default on the money you have borrowed.

Growth policies mean spend money that you don’t have. Increase government deficit spending to employ more people. Those people will spend their government supplied income, leading to an expansion of the economy. As the economy expands, taxes go up along with the expansion. Classic Keynesian economics.

Of course, governments have run large deficits for years, in good times and bad. That is why they are starting to have problems borrowing money.

My thought is that it is better to cut spending now, while you still can borrow money, than to default, and then have to cut spending anyway. But if I was having to cut my standard of living, or lost my paycheck and had no other options, I might see things differently.

Spirit Airlines Baggage Fees

Spirit Airlines just announced that they are increasing the fee to check a bag up to $100.  This new fee increase is for carry on bags that are paid for at the boarding gate.  If you check in online, and pay for your carry on in advance, the fee is much lower.

Baggage fees are a terrific example of unbundling services.  Bundling is the practice of combining multiple services within a single price.  The airlines used to bundle a host of services together in their ticket price.  Once you bought your ticket, you got to fly, your bags got to fly, your carry on got to fly, they fed you, and you got the in flight movie.  The logic behind bundling is that most passengers use and appreciate the extra services, and it is more convenient.  Paying multiple fees feels like getting nibbled to death by ducks.

The downside of bundling is that if you don't want the extra services, well, that's tough, because you still pay the same price.  Not bringing any luggage?  Still the same price.  Airline food gives you indigestion?  You're still paying for it.  In a sense, bundling means that some passengers are subsidizing services for the other passengers.

So now the airlines are unbundling their services.  When you buy a ticket, that gets you from point A to point B.  You want to get luggage from point A to point B, that will be charged separately.  You want a headset?  Pony up two bucks, big spender.

For the light packer, unbundling baggage fees from ticket prices keeps ticket prices low.  The people who can't bear to be parted from their anvil collection, on the other hand, are paying the full price of flying their stuff all around the country.  Unbundling can lead to higher efficiency, as people pay for only the services they deem essential.  This is not a bad thing.

The downside is that unbundling increases the complexity of the transaction.  On Spirit Airlines baggage fee schedule, there are at least fourteen different ways of paying for a single bag brought onto a flight, which range from $18 to $100.  Trying to get the best deal can require a lot of thought, planning, and effort.

Like I said, it can be like getting nibbled to death by ducks.