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Posts tagged ‘Ponzi scheme’

Ponzi Austerity: A Definition And An Example

By Yanis Varoufakis

For a while now I have been arguing that Europe’s policies for reducing the public debts of fiscally stressed member-states can be described as a Ponzi austerity scheme. In this post I attempt precisely to define ‘Ponzi austerity’.

Ponzi growth

Standard Ponzi schemes are based on a sleight of hand that creates the appearance of a fund whose value grows faster than the value that has come into it. In reality the opposite is true, as the scheme’s operator usually helps himself to some of the incoming capital while the scheme is not managing to create new capital with which to replenish these ‘leakages’, let alone pay the returns it promises. The appearances of growth that does not really exist is, of course, the lure that brings into the scheme new participants whose capital is utilised by the Ponzi scheme’s operator to maintain the facade of genuine growth.

Ponzi austerity

Ponzi austerity is the inverse of Ponzi growth. Whereas in standard Ponzi (growth) schemes the lure is the promise of a growing fund, in the case of Ponzi austerity the attraction to bankrupted participants is the promise of reducing their debt, so as to liberate them from insolvency, through a combination of ‘belt tightening’, austerity measures and new loans that provide the bankrupt with necessary funds for repaying maturing debts (e.g. bonds). As it is impossible to escape insolvency in this manner..

full article at source: http://www.social-europe.eu/2013/11/ponzi-austerity-a-definition-and-an-example/

Greek default is inevitable

By Mario Blejer

LONDON (MarketWatch) — The European Central Bank, with its staunch opposition to sovereign debt restructuring in Europe, is making a bad situation worse. By threatening to withdraw support for banks in countries such as Greece if they restructure their debts, the ECB is practically inciting runs on banks.

The argument that Greek state paper could no longer be used as collateral in such cases hardly justifies such a potentially destabilizing step. The ECB is effectively the lender of last resort to such banks. If depositors believe it is about to pull out, then they will withdraw money from the banks — and we will face a self-fuelling downward spiral.

Argentine economist Mario Blejer says Greece must default on its debt; it’s simple arithmetic.

The debt problem of peripheral Europe is structural. It cannot be solved by piling debt on debt. There is an analogy to a Ponzi scheme, under which more money is continually paid in to keep the pyramid-like edifice from collapsing. The debt/GDP ratio increases over time because new loans are given to pay old debt and to finance the remaining fiscal gaps.

In addition, the share of the debt in official hands continues to increase and eventually taxpayers bear the complete cost of the adjustment. This may, however, take time and, since the pyramid is unstable, the construction could break down at any moment –— a source of increasing uncertainty.

“There is no solution without debt relief, which means, without euphemisms, default.”

The International Monetary Fund so far has not performed well in peripheral Europe. It was a mistake to assume that a country like Greece can re-enter the private-sector credit markets next year. This is impossible. It is even more difficult after 2013 under the perverse permanent bailout scheme where protection for private-sector creditors is progressively lowered. Programs are based on illusory “debt sustainability scenarios” that ignore that they lead to recession where countries have no chance of outgrowing their debt.

As for privatization, this is a red herring. It is useful as a short-term stopgap and for improving productivity but a fire sale of assets cannot solve the debt problem. If there is no demand for Greek debt, then there cannot be too much demand for Greek equity.

The Argentine experience during the first decade of the 21st century is instructive. So are the broader lessons of the Latin American debt restructuring in the 1980s and also that of Mexico in 1994.

Fiscal adjustment and structural reforms are crucial and necessary conditions, and privatization may play a small role, but there is no solution without debt relief, which means, without euphemisms, default. This should be nonconfrontational and as amicable as possible.

Collateralized new bonds (along the model of the Brady bonds initiative in the late 1980s) form the best procedure. This could be backed by direct liquidity and recapitalization actions for the creditor banks under similar conditions to the 2009 “Vienna model” successfully used for central and eastern Europe.

However, without significant write-downs of existing debt, there is no way out.

Contrary to the ECB’s stated view, it is easier to regain credit market access after a significant reduction of the debt burden, as both Uruguay and Argentina showed. The latter did not handle the matter well until 2005 but corporations were soon back in the market. Today, while the issue is not fully resolved, Argentine borrowers can borrow at half the spread paid by Greece.

With regard to the fear of contagion to other countries, explicit debt relief for the most-badly hit EMU members may actually relieve the pressure on Spain and others — as long as the money used today to pay bondholders is channelled directly to recapitalize and sanitize the banking system.

Regarding the ECB’s opposition, I am convinced that the question is not whether but when the ECB will do a U-turn (as it did with purchasing bonds in the secondary markets in May 2010).

There is a good argument for taking necessary decisions on debt restructuring sooner rather than later. Further “muddling through” is a recipe for disaster. Unless a proper program of coordination and adjustment combined with debt relief is decided soon, Europe faces the risk of becoming the next emerging market.

Mario Blejer was president of the Central Bank of Argentina, and has held top positions at the International Monetary Fund, the World Bank and the Bank of England. This article originally appeared in the Bulletin of the Official Monetary and Financial Institutions Forum.

Read more here. at source

Comment:

We in Ireland are in an even worse situation and the government have chosen to cow down to the vested interests of the Bondholders .When the same bondholders have sucked everything that is to be gotten out our country they will then switch sides and call for the government to default but only after putting their Put positions on in the markets so they will benefit from this inevitable Irish default .What a scam. Heads you lose and tails you lose and the Bond holders win every time  

 

Self employed, why would you ?

Yesterday I came across a few people suffering from these same problems and they seem to be the forgotten victims and as self employed persons they are not going to get a welcome in the local Dole office far from it I can tell you from firsthand experience

The bottom line here is nobody gives a dam about the self employed  

But the big boys and the lads that kept this Ponzi scheme going are now the very people getting the big Jobs in NAMA and the little people are tossed by the wayside to rot!

Are you happy with that?

Then do something about if you’re not!

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