Equities and commodities markets rallied on the belief that Greece would be rescued, and that notion is increasingly looking accurate. The Telegraph provides an update (hat tip Swedish Lex):
Wolfgang Schäuble, Germany’s finance minister, has asked officials to prepare a plan in time for a summit of EU leaders on Thursday, according to reports in the German media. The options include either a loan from EU states or some sort of institutional EU response.
The news pushed the euro to $1.38 against the dollar, the strongest one-day rally since the single currency began its nose-dive late last year. Yields on Greek 10-year bonds plummeted 36 basis points to 6.39pc in a matter of hours as speculators scrambled to exit overstretched positions, with synchronised moves for Portuguese, Spanish, and Italian bonds.
Michael Meister, parliamentary chief for Germany’s Christian Democrats, said the crisis could not be allowed to drag on. “Our top priority is the stability of the euro,” he told FT Deutschland. “Should Greece receive help, it will only be under tough conditions and if the Greek government undertakes root-and-branch reforms.”
Germany’s apparent backing for a bail-out comes despite worries that it will lead to the breakdown of fiscal discipline across the Club Med region. It also raises troubling questions of fairness. Ireland has tackled its own crisis by slashing wages and going far beyond any measure so far offered by Greece, yet Dublin has not received help.
Germany’s dramatic shift in policy changes the character of the euro project. It follows weeks of soul-searching in Berlin, and after increasingly loud pleas from Brussels, Paris and southern capitals. The deciding factor was concern that letting Greece fail risked a “Lehman-style” run on Club Med debt, with systemic spill-over across Europe.
German exposure to the region amounts to €43bn in Greece, €47bn in Portugal, €193bn in Ireland, and €240bn in Spain, according to the Bank for International Settlements. German lenders are already vulnerable, with the world’s lowest risk-adjusted capital ratios bar Japan…
Herman Van Rompuy, the EU’s new president, has submitted a text calling for the creation of an “economic government” that shifts responsibility for economic planning from national authorities to the “EU level”.
In a parallel move, Commission chief Jose Barroso said Brussels has treaty powers allowing it to take the reins of economic management. ”
This is a time for boldness. I believe that our economic and social situation demands a radical shift from the status quo. And the new Lisbon Treaty allows this,” he said.
“Economic policy isn’t a national, but a European matter. No modern economy is an island. When a member state doesn’t make reforms, others suffer because of that.”
Yves here. The part of the logic that puzzles me is the “defending the euro” bit. On a purchasing power parity basis, the euro should be substantially cheaper. But that excuse may be a cover for the need to protect German banks and forestall pressure on known shortcomings in EU institutional arrangements. The Rompuy/Barroso statements are at least meant to assure markets that the economic governance issues are on the table, but it remains to be seen how far this discussion gets, since the “no modern economy is an island” argument runs counter to notions of national sovereignity, which is what the imperfect EU mechanisms had tried to finesse.
Update: It looks like the Van Rompy/Barroso/other bailout booster camp is ahead of the real state of play.
It appears (as the Telegraph story indicates) that the initial report of a deal came in FT Deutscheland and was picked up by the Telegraph and Retuers. Reuters has now backtracked on the story (hat tip Ed Harrison):
“Government spokesman Ulrich Wilhelm rejects as unfounded reports citing coalition sources saying a decision for aid for Greece has in effect been made,” a government official quoted him as saying. Reuters had earlier reported a senior German ruling coalition source as saying euro zone countries had decided in principle to help Greece.
And hoisted from comments, Swedish Lex says there are others who are not keen about an EU rescue:
The EU Summit in Brussels on Thursday will at best provide an opportunity to agree on a few pages of blueprint for the future. It is clearly too early to speculate what the text will contain, but I suspect that officials in various cities are working non-stop by now.
The UK and Sweden have, according to the FT at least, signalled that they disapprove of a EU bailout/embryonic economic government mechanism, or whatever, instead preferring the IMF. Thursday’s meeting could be interesting as it could put the euro and non-euro state divde in a new light.
I dimly recall a case during the crisis where the FT jumped the gun on rescue talk and had to retreat.
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Yves,
The situation is developing really fast, involving a multitude of governments and institutions with no clear epicenter. The EU Summit in Brussels on Thursday will at best provide an opportunity to agree on a few pages of blueprint for the future. It is clearly too early to speculate what the text will contain, but I suspect that officials in various cities are working non-stop by now.
The UK and Sweden have, according to the FT at least, signalled that they disapprove of a EU bailout/embryonic economic government mechanism, or whatever, instead preferring the IMF. Thursday’s meeting could be interesting as it could put the euro and non-euro state divde in a new light.
Now it’s the time to issue EU bonds along the lines I suggested at
http://mgiannini.blogspot.com/2009/03/my-name-is-bond-european-union-bond.html. never say never again.
We can work out the details of the issuances but it will help. If only politicians and some economists listened.
All of this is fascinating in a gruesome sort of way, like a tightrope walker being laden with ever heavier, ever more unwieldy burdens. Dubai, infinite MBS ceilings, Greece, and what’s next – Portugal, CREs, Spain, second liens, the UK itself…
You know he’s got to come down eventually.
The Rompuy/Barroso statements are at least meant to assure markets that the economic governance issues are on the table, but it remains to be seen how far this discussion gets, since the “no modern economy is an island” argument runs counter to notions of national sovereignity, which is what the imperfect EU mechanisms had tried to finesse.
The whole “EU” concept doesn’t make much sense, since they roped themselves together into this economic straitjacket and yet left national sovereignty otherwise intact.
I think I detect another illusion which depended on all the markets going up forever….
Here’s an interesting article from Stratfor on Germany’s position in the EU, with special reference to geopolitics (as usual with Stratfor):
http://www.stratfor.com/weekly/20100208_germanys_choice?utm_source=GWeekly&utm_medium=email&utm_campaign=100208&utm_content=readmore&elq=c3b510e48b1448409d306c5b210f7612
attempter,
That’s an interesting analysis, but it seems to go out of its way to avoid any mention of what William Black has called “control fraud.”
Two places where I question the stratfor storyline.
First, it asserts that credit was freely extended to the PIIGS because bankers felt they had some sort of an implicit guarantee or backing from the German government. I suspect that claim is false, and that, quite the contrary, the relationship these countries ostensibly had with Germany had absolutely nothing to do with the reason credit was so generously extended to them. Bankers in the US left no stone unturned in their search for any willing warm body to lavish credit upon. The same happened here in Mexico. As this article explains, the foreign banks invaded Mexico and they created situations like this: “Taja says he knows people who earn less than $800 a month but have credit card balances exceeding $23,000.”
http://www.corpwatch.org/article.php?id=15356
The banks scoured the earth in search of parties to loan money to, parties that had no possibility whatsoever of ever repaying those loans.
Second, the stratfor storyline would lead us to believe that “Germany” is this homogenous entity devoid of any internal divisions. But that simply isn’t true, and Yves was extremely quick to pick up on this. As she points out, Spain, Greece, Portugal and Ireland owe German banks 523 billion euros. (And I’m not clear whether that is total exposure, inclusive of private debt, or represents only sovereign debt.) But anyway, I think you can see that if the German government steps in and bails out the PIIGS, this is also a bailout of German banks. In other words, German taxpayers will be bailing out German banks for their poor lending practices, which, just like their American homologues, can be described as nothing short of criminal.
To me, the narrative provided by William Black—that these bankers made massive quantities of imprudent loans which provided huge short-term commissions and profits so that they could rake off hundreds of billions of dollars in bonuses—much better fits the factual reality than this explanation coming out of stratfor.
If the German government does decide to bail out the PIIGS, will it not face some of the same criticisms from its own people that Clinton and Rubin did back in 1994 when they decided to bail out American banks when Mexico couldn’t repay them?
Clinton’s plan was certainly not without its critics. Some charged that it would benefit only large, rich investors in Mexico, doing little for the Mexicans themselves and nothing for the average American. They questioned why Clinton was willing to lend billions to a foreign government without a vote of Congress, when thousands of investors within the United States lost money and were never offered bail outs. Surely, they claimed, $20 billion in additional loan guarantees to domestic inner-city investors would have provided more benefits to Americans at home. Detractors also focused on the risk involved in the loans. They contended that in order for Mexico to pay back the loans on time it had to succeed at many difficult tasks, including lowering its account deficit, controlling its money supply, privatizing more state companies, suppressing internal rebellion, and insulating its central bank from political interference.
http://www.encyclopedia.com/doc/1G2-3406400572.html
Downsouth,
If the German government does decide to bail out the PIIGS, will it not face some of the same criticisms
No. Consequences will be more focused and drastic under Germany’s parliamentary system. Merkel’s government will risk facing a vote of confidence and early elections if deemed to have gone too far. “Ruling coalition” are the key words in all news stories containing statements attributed to anonymous German officials.
Charcad
It is not clear why the German government needed to give club med money to bail out its own banks. It could as well just capitalize its own banks and let club med go to hell. Why the roundabout way of sprinkling the money around? Sounds a bit like trickle down economy to me. Or like China financing the US. Except that Greece is no US.
I agree with what you say. I think Stratfor just has a different emphasis. Stratfor, at least in their free analyses (I’m just on the free email list), tends to isolate structural geopolitical and other “rational” factors while rubbing out messy stuff like greed, fraud, and stupidity. (To give an extreme example, pretty much everything they wrote about Iraq attributed an almost Machiavellian level of rationality and competence to the Bush admin. Clearly they couldn’t have believed that was in fact the “true” nature of things.)
It seems that they want to give a bird’s eye, historicized view of things, as if predicting the way history books will write about things hundreds of years from now.
That’s because they think, however messy the proximate causes of current events, however chaotic and stupid things seem to be as they play out on a day-to-day basis, events still in the end adhere to basic timeless trends, and so it’s likely to be in any given case today.
So that’s why they, seemingly incongruously, write about the world wars (and implicitly the Thirty Years War) in discussing a possible Greek bailout, and more broadly the nature of the EU itself.
I find it’s an interesting change of pace.
Dear Ms. Ives Myth,
The last name of the president of the European Council is “Van Rompuy”, not “Rompuy”. The first part is not optional like middle names in the US. The name would be in a sorted list by the letter V.
I greatly appreciate you blog,
Student
Dear Student,
You may not be aware of the usages of “Old Europe” so let me give you a refresher :
When a name has a nobility preposition (“Van” in Flemish/Dutch,”Von” in German,”De” in French), you say or write it when you use the first name or a title :
Mr Van Rompy, The President Van Rompuy, Herman Von Rompuy.
However, when using the name alone, you drop the nobility preposition, so you write :
“Rompuy supports a Greek bail-out” and not “Van Rompuy supports a Greek bail-out”
So it looks like it was the first use of Rompuy’s name by Yves that was correct, but not the second.
Unlike “von” the usage of “van” usually does not denote nobility:
http://en.wikipedia.org/wiki/Van_(Dutch)
One way or another, it is ignorant or impolite to skip it.
Nonsense. “De Gaulle was a French leader,” never and under no circumstances “Gaulle was a French leader.”
Not to pile on, but if what you say is true then a sentence about Vincent Van Gogh could be “Gogh had his ear chopped off” or Martin Van Buren could be referred to as “Buren is the only President to rival Obama in weakness”?
On the other hand, for Van Halen, I suppose it is acceptable to say simply “Halen rocks” :)
This is an example of too PIG to fail.
We’ll see if today’s version of The Plan (details yet to be worked out) is acceptable to all concerned. And whether a country like Greece that defrauded its way into the Maastricht Treaty and subsequently spent like it had a company charge card will now honestly comply with austerity measures.
Phase I, Private Default Crisis, took some time to play out from Spring 2007 to the most recent depths in late 2008. During this period we were treated to an alphabet soup of government and central bank lending facilities and policy announcements. The common denominator is all of them failed to stem the tide.
Phase II, Semi-Sovereign Defaults, will similarly take some time to work out. The common theme is the statelets getting into trouble (Dubai, Greece, California et al) do not have control of the central bank ruling their currency. Greece uses the euro controlled from the ECB in Frankfurt.
Meanwhile Dubai uses the United Arab Emirate’s dirham controlled by the UAE central bank in Abu Dhabi. Just another of those details the “low hanging fruit” of world finance ignored while buying into the “Dubai as the next world financial capital” story.
World crisis clearly has further to go given the quantity of low hanging financial fruits left on the limbs.
“r.e. Update Germany Says No Decision Made”
The current proponents of the EU centralization project have done their level best to avoid democratic accountability every step of the way. Their present attempts at advancing further centralization by anonymous leak are part of this.
We’re going to get another opportuity to see how far markets can be gummed and jawboned by politicians.
It will be interesting to see just how much control Berlin is willing to cede to the self perpetuating Brussels bureaucracy. And while also allowing Greek politicians to set the EU’s new maximum standards for fiscal discipline.
Why all that noise for a country of 2% GDP?
I thought UK was the troubled country.
Is english language or their media the problem?
Just stare watching to Bloomberg to stupidify your face on the mirror.
Every morning your a bit older and take it easy.
Why all that noise for a country of 2% GDP?
Because the 5%, 10% and 15% GDP countries in the euro will not accept stricter deals than Greece gets.
Really?
__________
http://www.huffingtonpost.com/2010/02/09/hes-come-a-long-way-summe_n_455292.html
Showing just how far his previous economic ideology has fallen from grace, White House senior economics adviser Larry Summers went on to CNBC Tuesday morning and sounded off against a “bloated financial system” while offering a ringing endorsement for the president’s effort to regulate Wall Street.
Larry Summers’ economic ideology was, is and always will be the same: “Me”. The question is how long the sheeple will tolerate being fleeced by him and his circle. Summers’ opinion is many years to come. He may be right.
The biggest problem with bailing out Greece is that it is a democracy, and a change in popular sentiment or control of government can mean failure to live up to the terms of any deal. The nature of Greek politics actually makes that likely. Germany would be better off covering losses at German banks and walking away. Further more, what good is being a power on the world stage anyway. How did that benefit the US or Soviet Union? Answer, it hasn’t.
I have become more convinced over time that we need a completely fresh monetary system. Fiat currencies are just too easy to manipulate and contribute to ponzi banking.
We need Economic Advent.
http://whatisthatwhistlingsound.blogspot.com/2009/11/economic-advent.html
“…what good is being a power on the world stage anyway. How did that benefit the US or Soviet Union? Answer, it hasn’t.”
It does immensely benefit a very thin crust of plutocrats and oligarchs in those empires and for a time even the peasantry, relative to vassal tribute states, but in the long run it devolves into ruin for most.
A bit disappointed that even my favorite financial blog has succumbed to the current bear-baiting on the euro.
For a while, it was quite amusing to see this largely anglo-american affair play itself out in chiefly anglophone media. Quite beneficial too, for the eurozone could use some moderate devaluation. But right now, this is starting to make you all look rather ridiculous.
First it was only crazy Ambrose & acolytes. But this morning even the venerable FT did some alarmist reporting on shorts against the euro (Can I repeat that? Alarmist reporting on shorts against the euro. Aka self-serving bs. And it was ONLY 8 billion dollar! Now that may make Soros richer, it really won’t budge the world’s second reserve currency)
Anyway, we all know the Greek sovereign debt mess is a picnic compared to, for instance, the Californian catastrophe, right? That California’s and New York’s combined pile of state debt exceeds the entire Club Med’s? That e.g. Californian-federal bonds spreads are just slightly better than Greek-German ones?
If any of you monolinguists read French or German newspapers, you’d know the Greek crisis hoax is not even a sideshow on the continent.
So to us continentals, the real story here is that eurosceptic Britons and American dollar-patriots are trying their pathetic best to talk the euro down. Something we enjoy, by the way, but in moderate amounts. And please, with some dignity.
California and Greece have different types of problems. But, unless you are predicting an earthquake along the San Andreas Fault, I see no catastrophe in California.
Of course, I do not see a catastrophe in Greece either, only a period of, let us say, discomfort. Despite the apocalyptic terms in which the crisis is described, I think that there are solutions that do not require a bailout.
Bas,
I don’t understand why you think a strong, as in overvalued, euro is good policy. An overvalued currency leads to a lower level of exports and a higher level of imports than otherwise. In the US, pre the widespread acceptance of “free markets” ideology, a trade deficit was seen as a very bad thing, it mean US demand was supporting foreign jobs.
The strong dollar policy has been terrible for the US, save its financial firms.
I can see not wanting a disorderly fall in the euro, but a weaker euro is sound policy. The yen needs to be much cheaper too, and the currency that really needs to appreciate is the renminbi. The EU should applaud a strong dollar, it would be a bad turn of events for the US (not that it would last all that long) and good for the EU).
Sorry Yves,
Do you think that all that anglosaxon noise for free?
The problem is that one thousand drums playing in a field, change the focus of the problem.
The axis of the world is not anglo not saxon, its physics.
Thank you
Yves,
Sorry, I obviously didn’t make myself clear. I do think a weakened euro would be a good thing – though not necessarily against the dollar. But it should devaluate because of Europe’s relative weakness vis-a-vis its trading partners, not because of alarmist stories in europhobic British media with an obvious agenda.
I just tried to express my disappointment with the fact that even the non-MSM in the anglophone world seem to unquestioningly propagate this narrative about a Greek/Club Med debt crisis that will either blow up the euro or bring Europe under Diktat from Brussels, like a financial Reichstag fire.
About the Spiegel piece: The international Spiegel, like many Dutch papers (I’m from the Netherlands) is written by journalists with a distinct orientation on the anglo-american cultural sphere. It’s a language thing. Yet even a cursory, quantative comparison of stories about the euro in major newspapers in French/Italian/German and those in English (and Dutch) will prove that these worries have been a distinctly anglophone affair.
Of course by this time, the process has acquired a dynamic of its own. Germany and France have to react in some way to “calm the markets”. That’s probably why Trichet is flying in from Australia for a meeting with European leaders – though noone really knows what that means as the ECB’s supposed to be independent. I do suspect Germany has been slow to react on purpose. They would surely welcome a devaluation anyway. But langsam bitte.
Still, doesn’t it make you wonder? The Germans, always so pathetically anxious about a strong currency, have been largely silent, preoccupied with their social security, Swiss tax evaders and some teenage Idols star, while the Britons and Americans are fretting about the euro?
OK, I see your point. I think there is a larger narrative that this is feeding into, so it may look like an attack on the eurozone, but the media aspect is I think a tad different.
You do have the usual Euroskeptics enjoying this episode a tad too much But this is also feeding into the bond vigilante viewpoint, people who do not like the idea of increasing government debt a lot in order to increase demand in the face of deflationary pressures. There are a lot of people who are viscerally uncomfortable with this, who are looking for some sovereign, any sovereign to go bust to prove them right.
I read German newspapers daily and Greece is at best confined to the finance pages. No headlines anywhere. I checked bond spreads yesterday night. Spain and Portugal are about where IMHO they should be. Greece’s bonds have been dropping like rocks (but then again they are only at 6.7 percent yield or so, not outragous for a club med member). German bonds are gaining somewhat in value.
Interestingly enough this is something that started second week of January. Before that movements where the other way. Why now? Who is going to benefit? Who controls the media?
Yves, you could be a bit more self-critical on this issue. Who is driving the current panic attack in Anglo-American media?
IF,
I don’t know what you are reading, but Der Spiegel is certainly treating this as a serious issue, see “How Brussels Is Trying to Prevent a Collapse of the Euro”:
The problems facing Greece are just the beginning. The countries belonging to Europe’s common currency zone are drifting further and further apart, and national bankruptcies are a distinct possibility. Brussels is faced with a number of choices, none of them good….
“We’ve reached a point where it’s possible to deal individual countries a lethal blow by downgrading their credit and boycotting their government bonds,” [Wilhelm] Nölling [former member of the German Central Bank Council] warns.
Many are now wondering how the stronger euro-zone countries should react — whether it’s possible to help the weaker ones without jeopardizing themselves and the common currency. Furthermore, there is a risk that euro-zone members will continue to grow apart economically, a trend that could cause the monetary union to eventually collapse.
Doing nothing is not an option. In light of the national debt in Greece, Portugal, Spain and Ireland, the euro zone is in danger of transforming from a “common destiny to a common liability,” Nölling says….
the stability provisions stipulated in the Maastricht Treaty to regulate the common currency aren’t working, and member states need to better coordinate their financial and economic policy measures.
That is precisely what euro skeptics have said from the beginning — that a common currency can’t work in the long run without a common economic and financial policy. The member countries’ governments ignored these objections, unready to give up a further aspect of their national sovereignty.
Now politicians are facing a difficult decision: Should they continue as they have, thus potentially undermining the euro’s ability to function? Or should they yield a portion of their national sovereignty to Brussels?
Without common policies, the individual countries drift further and further apart. Before the euro was introduced, exchange rate adjustments served to dispel tensions. Now the common currency zone lacks the option of adapting by revaluing currencies.
http://www.spiegel.de/international/business/0,1518,676507,00.html
This is not about the Greek budget. The concern is that the arrangements that undergird the euro had flaws that were known from the get-go and were ignored, on the assumption that they could be dealt with when those weaknesses were tested. And the bone of contention was that effective economic arrangements meant sacrificing elements of national sovereignity. No one wanted to trade off one for the other, but the time has come where a choice can no longer be deferred.
Trichet flew back from Australia early to contend with it.
You can hardly depict this as a figment of the Anglo media’s imagination.
Testing if I am blacklisted now. My other posting seems to have gone to Nirvana (or the spam filter?)
Sorry if you are having problems, I didn’t do anything.
Disagreeing with me will not get you barred. Being abusive often will, and persistent disregard for facts (after one has been warned) or other forms of trollish behavior is also a no-no. I don’t like intervening and unless a case is crystal clear, I will run it by some of my buddies to confirm my reading before acting.
And ex spam, I very rarely block IPs. I think Barry Ritholtz had blocked more people on single posts than I have in my entire time as a blogger. Barry has low tolerance for people he deems to be “rectoids” (and no, I do not seek his advice on particular cases).
[Last try with http removed from links]
The big news in Germany today was that the supreme court decided that the current Hartz IV social security system is unconstitutional. This is mostly on technical grounds, because the current law does not differentiate enough. Any Greece bailout discussion has to compete with the reorganization of the money flows *within* Germany.
In any case, there were periodically articles in the past week in German media. They are split between “let them eat falsified GDP reports” and “we got to help them grow again”. No breaking news anywhere. Contagion has been discussed to some extend. But it is considered not an urgent problem, and usually it is cautioned to help Greece only “if it sufficiently reforms”. Common Germans currently don’t see any need for a bailout, nor do they see sufficient conditions fulfilled by the Greek (like asking for help, promising to reform, giving up sovereignty). Germans have not forgotten how club med managed to extract subsidies for their countries every time a vote was cast. This will be the minimum price to pay. Of course, Angela Merkel could prepare an emergency plan in the background (I hope she does) and push it down on its electorate like she did when she insured all deposits fall 2007. She was close to overstepping her authority then, and I doubt she will keep winning state elections after such an unpopular move. In general the Greek will have to squeal really loudly to get something out of Germany, and so far only the Anglo American press is doing the shouting. Which hedge fund is going to strike it big this time?
Here my biased reading of the German news:
Spiegel mentions Greece under Finances/Stock Exchange in the middle of the page: spiegel.de
Stern does not mention Greece: stern.de
Faz (big conservative & money paper) mentions Greece second after the supreme court articles: faz.net
Big south German paper mentions Greece in the middle in the Money column: sueddeutsche.de
National tabloid does not mention Greece: bild.de
It worked this time. Basically I concur with Bas.
Maybe you should have also read German newspapers during the GFC around 2008. Then you would have noticed no headlines on the brewing disaster either.
This is when I lost my last respect for the Frankfurter Allgemeine Zeitung.
In contrast the British Telegraph including, but not only, represented by Ambrose Evans-Pritchard was often ahead of the curve!
This is a fair enough observation. Of course the British papers were playing a home game in 2008 and should have had an advantage. Now it might quite well be that Greece goes down. I am willing to concede that Portugal, Spain and California go one after another this year, but I can find nowhere a strong reaction by the German government, which the Anglo American press has designated as the new white knight. So far they are either not playing the game or are holding the cards close to their chest. This might change of course.
Why would Spain go down before Germany? Germany’s GDP has sunk more than any other country in this recession, after a decade of almost no growth; Germany’s public debt to GDP is 50% higher than Spain’s, etc.
For all the talk about Spanish loss of competitiveness, the fact is Spain and Germany have been the only two countries to increase their exports’ world market share in the last decade. That means Spain may be more expensive, but also much more competitive!
(Which is easily justifiable, since 10 years ago no Spanish company led on anything; but now, we’ve got some of the biggest world banks [Santander, BBVA], some of the largest clothing retailers [Inditex], telecoms [Telefónica] and green-energy utilities and manufacturers [Gamesa, Iberdrola], etc.)
There are no fundamentals behind this crisis, just BS, misinformation and derogatory acronyms.
I have written before and stand to it, that Europe does not like fireworks, Europe prefers stagnation. But, if some EU countries go down as the Anglo American media predicts and the Euro loses in value, then I don’t see how this hurts German competitiveness. The factories are still standing there (unlike US and UK).
Otherwise I tend to also agree with a @ 5:02am that the line might be Spain. But we will be wiser in a few months.
Why so? Why would markets turn against one of the euro countries with lowest debt levels and lowest decrease in GDP, a fiscally responsible country that has always saved in good times and paid its debts (well, at least for the last century)?
Why not free-floating UK, politically impaired US, dysfunctional and heavily indebted Italy or demographically and economically imploding Germany and Japan?
This is like watching the market gyrations before they dropped the ‘Too Big to Fail’ bombs.
Deception is the strongest political force on the planet.
Greece is a serious problem for the EU. Germany is the strongest party to the EU. I expect Germany to try and have the IMF impose the draconian constraints that are necessary.
My reading is that Germany would prefer to have Greece repudiate its debt. On the other hand, there are the German banks to be considered. Any bailout that occurs should be viewed as a bailout of the German banks and not necessarily Greece.
What puzzels me is how long will it be before there is a denouement that lays out the GS trades that cooked the Grecian books.
I contend that sovereign debt are often disguised Ponzi schemes.
We just bailed out the banks and put all the debt on the sovereigns who were already straining under massive debt. Then the sovereign debt (public debt) is being sold back to the banks which sometimes cover it with CDS.
Definitely “market structures helped overcome information asymmetries and sustained the development of sovereign debt”, which is being sold to banks and used by them to create liquidity. What a Ponzi scheme and market for lemons. Then you have investments banks helping governments to fudge national accounts. It’s true that the recession is uncovering what auditors could not and elite of bureaucrats and bankers did not want.
http://mgiannini.blogspot.com/2010/02/sovereign-debts-markets-for-lemons-and.html
History of AIG-Lehman is repeating itself “occuring first as tragedy, the second time as farce” as “the deciding factor was concern that letting Greece fail risked a “Lehman-style” run on Club Med debt, with systemic spill-over across Europe.”
I’ll repeat what I think is the most likely solution, because I’ve seen it mentioned in the papers this morning. Germany will draw the line somewhere, but that somewhere won’t be in front of Greece. Germany didn’t want Greece in the euro to begin with, and would think it’s entirely appropriate if Greece is forced out. In order to win the war, you have to know where to station your troops, even if it means sacrificing some territory.
Back in 92 Germany let the UK go but drew the line at France. Germany, not the markets, won (although I’m sure some in the markets claim – mistakenly – a technical victory).
It will draw the line again, IMHO with Spain.
a – That is what logical thinking would imply. Stop the crisis were it can be should be stopped (JP Morgan in 1907). Unfortunately the thinking in policy circles up to December 2009 was some sort of “Domino Theory” (I got a snapshot of it from a well informed person). Now thinking might have involved since then.
German exposure might be mixed up with banking assets of subsidiaries especially in Spain. We certainly do not know the net exposure. Lots of sovereign risk is already planned for in the “Bad Bank”-scheme. German taxpayers will foot the bill anyway – if we give the money directly to Greece we might even underwrite it twice as it ends up in other suitcases (very probable in Greece).
Germany will not force Greece out of the Euro. That would be a commie move.
I predict that there will be a bailout of some kind, probably flavored as a loan guarantee to minimize the immediate balance sheet impact of the transaction.
Greece will make contrite noises and produce another set of highly optimistic budget/revenue predictions, the strikers will be bought off in one way or another.
Portugal and Spain will then want their bailouts, too, and the poor dumb Irish, who alone made serious efforts to face the crisis and get their budget in order will wonder why they could not just have gotten theirs.
Europeans (and I live in Europe, after a fashion) can be counted on to take the easy way out. The only ones who didn’t were the Irish.
Why would low-debt Spain want heavily indebted Germany to bail it out? Just because investors can’t read numbers?
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