Greek Crisis: an update
1. The news
On Friday, Reuters and the WSJ reported that France, Germany and possibly the
Netherlands would directly or indirectly bailout Greece. 48h later, Mrs Merkel, the
German Prime Minister, denied this.
What is clear is that we have entered a period of
marketing/smoke screen/market testing campaign to
assess a market response to Greece issuing a couple of
billion EUR part of the EUR 23 billion refinancing exercise of
maturing debt coming due by May to be refinanced. Then, you
would get EUR 30+ billion of issuance by the end of the year
(without taking into account new debt to bridge the fiscal
deficit). This refinancing is therefore crucial for Greece.
The rumored plan would have powerful State owned financial
entities in Germany (KfW) and France (CDC) either buying
bonds outright or issuing guarantees to national banks buying
the bonds to be soon issued by Greece. This means that private
banks would get a nice yield (probably in the 7% region) with
no risk but with a bit of arm-twisting from Governments…
This would not only be an indirect bailout of Greece
but also a subsidy to the banking sector.
However, on Sunday, Germany's Angela Merkel told German ARD public television,
according to the Sydney Morning Herald:
“...the German chancellor denied any such plan was in the works, saying "there is
absolutely no question of it.”
“We have a (European) treaty under which there is no possibility of paying to bail out
states in difficulty."
And she is right.
Last week strike and the violence that followed do not bode well for the Greece successfully
reigning in debt and budget deficits. This would be particularly true if they get some kind
of bailout from other European countries. It seems however - if one believes what
European politicians are saying- that the pressure is mounting on Greece to take
more drastic measures.
All this gesture in Europe looks more as being for face saving -“We sold the EU political
and economic integration as well as the EUR as bringing more prosperity for all
Europeans”- than to see what happens when confronted to the reality of a deep crisis: it is
not possible to integrate so many countries at so different stages of economic,
fiscal and social development so quickly. Politics pre-empted reality and
reality is catching up with a vengeance.
2. What’s next?
There is not necessarily a contradiction between what Mrs Merkel said and the behind
closed doors drawing plans for a bailout of Greece by the European Union (or at least
France and Germany and maybe some others): KfW and CDC could guarantee banks
buying Greek bonds and/or directly buy them for their own fixed income portfolios. So
this is a real possibility. This scenario is the most probable one in my opinion. The
EU has now a tradition of bypassing rules casted in stone (just refer to France and
Germany about their budget deficit higher than 3% and debt/GDP higher than 60% for
years, not talking of Italy or Belgium).
I personally think that bailing out a cheater is not right: Greece should pay for its
sins. In addition it would be just plugging a hole short term but would not solve the
longer term problem of the EUR and the EU integration: the one fits all does
not work without loosing sovereignty on fiscal and social policies. In any case
what is feasible for Greece is not possible for Spain or Italy or France due to the sheer size
of their deficits and debts in absolute terms.
A rescue from the IMF is not palatable to European politicians since it would
demonstrate their incapacity to solve a Eurozone problem. The IMF receipts are
generally not a particularly efficient one either, but in the absence of any good solution,
always take the least worst one. This is my preferred solution as it would mutualise the
potential cost to the IMF members and not Eurozone one only. It would also limit the
usual arm-twisting/bagging wrapped as consensus between member states. Nevertheless,
I rate this solution as a low probability (event if I think that at some stage the IMF
involvement will be inevitable – BRICs should be delighted: they will be able to buy a
big chunk of IMF gold-hard-asset for dollars-paper-money).
This would be my preferred route and the one that will prevail when the enormity of the
task will make it inevitable.
All the rest, Greece leaving the EUR (or selling the Acropolis to the Chinese or the
Minautor to the Indians) and other ideas, will not occur but for exceptional events (like
violent social unrests bordering with a revolution or coup d’état) which I do no foresee.
This crisis was necessary for Europe to wake up to the reality of flaws and
fraud in the construction of the EU and the EUR, and should therefore be
welcomed in order to found the construction of Europe on solid ground instead of “grand”
ideas based on thin air. This is a chance that Europe should grasp. Otherwise, the demise
However, as reported by Reuters, Jean-Claude Juncker Prime Minister and President of
the Eurogroup (in charge of EU economic policy coordination) pointed the finger at
speculators and declared to the German business daily Handelsblatt: "We have the torture
equipment in the cellar, and we will show them if needed."
Here we are, the bad guys are the so-called speculators but not the ones who put Greece in
such a mess (and Portugal and Spain and Italy; by the way add France and Belgium, and
the rest of European politicians who forced the EU integration and disregarded facts). Not
Where does this leave us for the Eurozone?
• The growth in the Eurozone will be much smaller than enthusiastic and
unrealistic forecasts at the end of last year
• The EUR will weaken until the roots of the problem are not properly
But frankly, beyond Germany that wants a strong currency, most other countries don’t
care if it is not (too) inflationary. We are in a world of competitive currency devaluation
Buy real assets, invest in high yielding equities with strong balance sheet and
The Sydney Morning Herald: No German rescue plan for debt-ridden Greece
NYT: Germany, France, Netherlands to Buy Greek Bonds: MEP (reporting from Reuters)
Reuters: EU urges new Greek cuts
WSJ: Greece Set to Outline New Austerity Measures Wednesday