I’m mystified as to the cheerleading in some circles on Greece. It is not clear that its €45 billion EU-IMF band-aid will be deployed (among other things, it faces a legal challenge in Germany) and even if it is, it falls well short of Greece’s anticipated needs beyond one year. More important, a successful deal does not mean the rescue will prevent default. The austerity program for Greece (in terms of reduction of fiscal deficit) has no successful precedents, and street protests indicate that the populace is not on board. And Ed Harrison sees eerie parallels to the rescue of CreditAnstalt, which kicked off more bank runs, ultimately precipitating the second leg down of the Great Depression.
While stock markets are perking up in Asia, credit default swap spread for the other Club Med countries rose on Friday, signaling that investors are worried about the risk of contagion. And in the UK, several savvy investors told me they expect a 20% pound depreciation once the election is over. Europe is clearly on a deflationary path.
More like minded commentary, first from Wolfgang Munchau of the Financial Times:
This is going to be the most important week in the 11-year history of Europe’s monetary union. By the end of it we will know whether the Greek fiscal crisis can be contained or whether it will metastasise to other parts of the eurozone…..There are three things to watch out for. First, and most important, Greece will need to present a transition programme that explains how a large primary deficit can be turned into an equally large primary surplus without causing a slump in economic growth….
Second, the total loan package has to be substantially higher than the €45bn pledged so far….The EU’s contribution is for one year only, and I see little chance that the EU will be able to increase it either now or next year…..What we need to hear is a credible and watertight commitment that extends beyond €45bn….Third, we need to watch the situation in Germany. The government originally tried to tag the Greek loan legislation on to an existing piece of legislation, but this ran into opposition. There will now be a full legislative process. Some parliamentarians from Angela Merkel’s coalition have already cast doubt on whether they will support it…
There are many co-ordination problems and too many self-important people to be consulted, most of whom lack an understanding of what is going on and have a wrong sense of priorities. In such an environment, accidents happen. So far the EU’s policy process has been a net contributor to this crisis. We need to hear something that does not fall short of our lowest expectations. Otherwise Greece will be heading for default, and the crisis will spread to Portugal and beyond.
Ambrose Evans-Pritchard looks at contagion risk:
The EU-IMF “therapy” of deflation for Greece repeats the catastrophic errors of Chancellor Heinrich Bruning in the early 1930s and must lead to a depression,,,The Greek people must be sacrificed for the Project and to hold the EMU line, like the Spartans of Thermopylae who perished to gain time for the Alliance.
They are to squeeze fiscal policy by 6pc of GDP this year in a slump – a “death spiral”, warns George Soros. They are to do this without the IMF’s devaluation cure. If they do stabilise the debt – to hit 130pc of GDP this year after Eurostat’s revelations – they will be left paying 6pc to 8pc of GDP to foreign creditors for ever. Will Greeks comply meekly, or turn their Spartan blades on Europe?
No country in Western Europe has defaulted since the Second World War. More than €7 trillion has been lent to Club Med states, banks and homeowners in the belief that it cannot happen. EMU shut the warning signals, disguising risk. What investors overlooked is that currency risk mutates into default risk in a monetary union.
It makes default more likely, not less. The bond markets have suddenly twigged.
In barely two weeks, the City mood has shifted from ruling out a Greek default as absurd, to accepting that it could happen, to now fearing that restructuring is highly likely.
A country such as Portugal with total debt of 300pc of GDP, a current account deficit of 11.2pc, and a budget deficit of 9.4pc should not think it has the luxury to trim spending at a leisurely pace. Portugal has an ugly choice. If it tightens hard to soothe bond markets, it too risks depression. EMU’s Faustian Pact is closing in.