A post by Edward Harrison
Greek Prime Minister Papandreou asked the European leaders to "put the loaded gun on the table" at this summit i.e. do something concrete to ward off speculators. So they have. The deal which European leaders have now struck is the best we could have hoped for given the political constraints for everyone involved. The 16 countries in the eurozone have agreed to a contingent aid package of loans and IMF assistance and supervision. The Greek Prime Minister expressed satisfaction with the result, largely hammered out by the French and the Germans before the EU summit.
But, is it enough? Will it be enough? When I posted this at Credit Writedowns I made the title a statement. I have changed it to a question here because I suspect many of you will have some opinions. Below are a few salient points that are likely to be made in order to ‘sell’ this deal to a sceptical European voting public. Update 29 Mar 2010: I have to stress I don’t buy these arguments below. I have presented them because they are likely to be employed, not because they are true. My view is that this plan is another version of extend and pretend.
- This is not a bailout. The accord is a contingency plan. The ‘no-bailout’ concept was always a key sticking point for the Germans. In this plan, any aid Greece receives will be made as loans. Moreover, monies will only be made available as a last resort if Greece finds itself shut out of normal market-based debt financing and faces default.
- This has always been a psychological crisis. From the very start, most European leaders stressed the need for ‘psychological and political support‘ over immediate financial aid. The point in this positioning is to avoid showing panic which would spill over as contagion into the markets for other eurozone sovereign debt (Portugal, Italy, Spain or Ireland).
- Greece never asked for a bailout. I guarantee you we will soon hear the politicians saying Greece made no formal request for aid, which is technically true. This allows Greek Prime Minister Papandreou to save face, rather than appear to be dependent on the graces 0f Germany or France.
- The loaded gun is on the table. From Papandreou’s perspective, it was important that he receive immediate psychological and political support, but that this support be backed by specific contingency plans. According to diplomats in Brussels, this aid package is in the 20-23 billion euro range. Note that all 16 eurozone members must agree to release the monies and all members would contribute to the loan. Germany will contribute the largest share, at 27%. The IMF will pony up 10 billion euros according to its rules of engagement.
This plan is largely similar to the one I have been recommending when it became evident that the Germans would not support a bailout (see my post The politicization of economic problems for specifics). The key is the IMF involvement, which I have advocated to both take the heat off the EU as task master and to ensure budgetary compliance. Update 29 Mar 2010: The key problem, however, is that it is not immediately operative – and, thus, in my view, will be tested down the line. It must be so because of the Germans’ aversion to a bailout.
The biggest stumbling block has been the French because IMF head Dominique Strauss-Kahn is a political rival to the French President Sarkozy, who is looking weak, having just been handed astounding losses in French provincial elections. While many Europeans don’t like the IMF because of its American influence, under no circumstances did Sarkozy personally want the IMF riding to the rescue because it would strengthen Strauss-Kahn in a future election against Sarkozy.
Last night, I posted an article based on a Figaro report that was the first to outline the deal now in place. My guess is that Sarkozy and Merkel agreed for a number of reasons. The principal one is that they did not want Europe to look weak. Having no definite plan after this summit would certainly qualify. I said in a separate post yesterday that "I suspect, the EU will do nothing except offer political support for the foreseeable future unless default is imminent." And while this is technically true even now, the contingency plan is likely to change the optics considerably Sarkozy also gets comfort from the fact that Strauss-Kahn is not involved unless absolutely necessary. While Merkel is able to say that there will be no bailout.
All around, this is an optimal outcome given the number of chefs in the kitchen, all with differing agendas.
Note, however, that The Economist says Greece is likely to need far more financial aid than seems to be on offer, three times as much, in fact. For now, the worst has been avoided.