Greece is finally given their safety blanket
As has been hinted at for the past few days, Germany and France have agreed to involve the IMF in a joint backstop that will be there for Greece ONLY if they run into a funding crisis. Greece needs to raise about 20b euro’s by the end of May to meet upcoming maturities. ECB Pres Trichet who said he wanted to avoid using the IMF yesterday, said he was “extraordinarily happy that the government of the euro area found out a workable solution.” Greek debt is rallying, stocks are up 3% and the euro is higher. Greece issues notwithstanding, the stock market the past two days has been stopped in its tracks because of the sharp rise in US interest rates which are falling a touch today. Bankrate.com said the average 30 yr mortgage rate rose to 5.11%, up 11 bps in 2 days and to a one month high. Helped out by the weaker yen, the Nikkei rose to the highest since Oct ’08 and the rest of Asia rallied as they will be more immune to a global rise in rates.
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March 26th, 2010 at 10:24 am
Security Blanket…
March 26th, 2010 at 12:56 pm
I am not sure if the deal can be construed as special resolutions regime for sovereign default or a leap forward towards greater integration and cooperation. It could be simply a naked gun put on the table to buy time.
The naked gun: the smell of fear at http://mgiannini.blogspot.com/2010/03/naked-gun-smell-of-fear.html
March 26th, 2010 at 2:59 pm
On the issue of Greece, I tend to agree with the “naked gun” hypothesis. Consider:
1. The Greeks get the aid only if they cannot raise refinancing in the bond market;
2. The interest rate is to be higher than existing market rates when Greece’s complaint is that the rates it pays are already too high and the high rates are exacerbating its fiscal crisis; and, perhaps most importantly,
3. German public opinion is solidly against giving money to scufflaw “PIIGS” countries.
What this does, at best, is kick the can down the road a bit. Sooner or later, the Greeks are going to have to face the fact the Germans do not want to help them very much.
March 26th, 2010 at 7:41 pm
All the EU nations have the same problem, to greater or lesser degree. They do not have the unlimited ability to create money. All the American states are in the same fix. They too do not have the unlimited ability to create money.
In essence, all are part of a “standard,” similar to a gold standard, wherein their money is tied to a commodity over which they have no control. To survive, Greece will need euro infusions from the EU, which does have the unlimited ability to create euros. Illinois et al, will need dollar infusions from the federal government, which also has the unlimited ability to create dollars.
Neither Greece nor Illinois will be able to cut expenditures or raise taxes enough to balance their budgets, without destroying their economies. Lacking infusions, even low inflation slowly will eat away at the value of money in their economies. A mere 2% inflation for eleven years will reduce the value of their money by 20%.
The EU must create euros and send them to the EU members. The federal government must create dollars and send them to the states.
Rodger Malcolm Mitchell
March 26th, 2010 at 7:51 pm
I feel all warm and fuzzy…
March 27th, 2010 at 8:44 am
The bailout deal just announced is ridiculous. Greece must restructure its debt and borrow from the IMF at 3.5% interest, if needed. Greece must exit the eurozone and devalue the drachma.
Whether there is in fact any point remaining in the EU at all is a valid question. Because it is well established in economic theory that a monetary and trade union increases the divergences in competitiveness, and this is the root of the problem. And because, without solidarity, the EU is kaput. (Apart from the so-called “moral hazard”, there is a moral deficit too…)
This is the best course of action for all the GISPI (Greece, Italy, Spain, Portugal, Ireland). Let the FUKD (or FUKDE, as Edward Hugh has called them, i.e. France, UK, Deutchland ) keep the EU for themselves. Sorry UK, you’re not to blame. You did the right thing staying out of the euro.
And let the Germans sell their islands in the North Sea and their monuments, because they are also above the 3% deficit-to-GDP ratio. Did I say German monuments? What monuments???
Now how can Europe, which owes even its name to Greece, exist without Greece, that’s another question.
March 27th, 2010 at 10:03 am
Polpetro, the root of the problem is that none of the EU nations can control their own currency. That is why we ended the gold standard. The dollar was tied to an asset over which we had no control, which prevented us from creating dollars at will. All EU nations are in that fix; they now are equivalent to American states and cities, using a currency they cannot create at will.
Governments that cannot create their own money, survive only if money comes in from outside. American states and cities survive if they are net exporters (Alaska oil, Nevada gambling) or because the federal government gives them more money than it receives.
The EU nations will survive the same way: If they are net exporters or if the EU creates and provides money.
Rodger Malcolm Mitchell
March 29th, 2010 at 7:55 am
Who knew the jawbone was such an important instrument of policy?