02 March 2010

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 will accelerate.

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 encouraging.

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 properly addressed
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 after all.

Buy real assets, invest in high yielding equities with strong balance sheet and a franchise.


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