Eurohandcuffs

posted at 1:39 pm on February 11, 2010 by King Banaian

Greece has been the story underneath much of the financial markets this week. The problem is that while everyone wants to solve the problem with Greece’s sovereign debt crisis, nobody wants to put money behind it.

Germany and France will on Thursday promise their support for debt-laden Greece in a vow of eurozone solidarity but they are unlikely to come up with a detailed rescue plan.

President Nicolas Sarkozy and Chancellor Angela Merkel are expected to give a show of political support to Athens at a summit of EU leaders in Brussels, one of the most momentous in the bloc’s recent history, in the hope that it will calm debt market turmoil.

But officials in Paris said there was “reticence” in Berlin about signing up to a bail-out package with further “assurances that the Greek government would undertake the measures necessary” to cut its budget deficit by 4 percentage points a year by 2012.

At the time this is posted, we have only word that they have an agreement to take “co-ordinated measures”"if needed to safeguard stability of the euro zone as a whole”, but no details.

If this was a developing country, there’d be no doubt what would happen — Greece would be given IMF assistance in return for a plan from the Greek government to restrain government spending — but this is the Eurozone, and you cannot really do that. And finding a lender of last resort is much harder. Germany, towards whom everyone is looking, seems more constrained these days. STRATFOR reports:

Most investors assumed that all eurozone economies had the blessing — and if need be, the pocketbook — of the Bundesrepublik. It isn’t difficult to see why. Germany had written large checks for Europe repeatedly in recent memory, including directly intervening in currency markets to prop up its neighbors’ currencies before the euro’s adoption ended the need to coordinate exchange rates. Moreover, an economic union without Germany at its core would have been a pointless exercise.

…The 2008-2009 global recession tightened credit and made investors much more sensitive to national macroeconomic indicators, first in emerging markets of Europe and then in the eurozone. Some investors decided actually to read the EU treaty, where they learned that there is in fact no German bailout at the end of the rainbow, and that Article 104 of the Maastricht Treaty (and Article 21 of the Statute establishing the European Central Bank) actually forbids one explicitly. They further discovered that Greece now boasts a budget deficit and national debt that compares unfavorably with other defaulted states of the past such as Argentina.

…As the EU’s largest economy and main architect of the European Central Bank, Germany is where the proverbial buck stops. Germany has a choice to make.

The first option, letting the chips fall where they may, must be tempting to Berlin. After being treated as Europe’s slush fund for 60 years, the Germans must be itching simply to let Greece and others fail. Should the markets truly believe that Germany is not going to ride to the rescue, the spread on Greek debt would expand massively. Remember that despite all the problems in recent weeks, Greek debt currently trades at a spread that is only one-eighth the gap of what it was pre-Maastricht — meaning there is a lot of room for things to get worse. With Greece now facing a budget deficit of at least 9.1 percent in 2010 — and given Greek proclivity to fudge statistics the real figure is probably much worse — any sharp increase in debt servicing costs could push Athens over the brink.

From the perspective of German finances, letting Greece fail would be the financially prudent thing to do. The shock of a Greek default undoubtedly would motivate other European states to get their acts together, budget for steeper borrowing costs and ultimately take their futures into their own hands. But Greece would not be the only default. The rest of Club Med is not all that far behind Greece, and budget deficits have exploded across the European Union.

And that really is the issue: The French and German governments now face the constraints of Maastricht and the ECB charter, which were written to prevent one of those PIIGS from profligacy but never were meant to handle a systemic shock hitting all five at once. A guarantee or pledge of unity for Greece will mean a pledge to all. And the problem then is whether speculators will test the pledge. If they use actual funds they will cause a constitutional crisis in the EU; if they do not, they risk having these countries make an exit from the Eurozone, something nobody is prepared for (even the biggest skeptics.)

Megan McArdle says it’s a design flaw, and she’s right to say “none of the choices are good.” The markets have so far seemed to put considerable weight on the likelihood of a bailout — the scene to the left from Athens indicates that a government austerity plan, if enacted, would be very unpopular. Large cash infusions may be the only way to get the public to swallow the bitter medicine. But markets do not seem aware of the constitutional restrictions placed on a bailout package from EU member states or from the IMF.

Thus it is unsurprising that there will be little more than a statement today from the EU members, with details to be worked out later. But time is of the essence, for as we learned in 2008, when the end comes it can be swift and a less-than-united front could cause far greater harm in Europe than what happened here.

UPDATE: Just as a coda to this story, the markets didn’t buy the band-aid the EU tried to apply to the gash in the Greek budget:

An attempt by Europe’s richest countries to end the crisis engulfing the euro failed to impress financial markets today as the single currency fell despite promises that the battered Greek economy would not be allowed to implode.

As the EU’s main paymaster, Angela Merkel refused to tie Germany down to a bailout of Athens at a one-day European summit, with EU leaders instead making a general pledge to take “determined and co-ordinated action if needed” to prop up the euro.

The statement of political intent followed a failure by the 16 nations in the eurozone to agree the precise details of a rescue plan for Greece, leaving the euro to lose most of the gains it had made in the run-up to the Brussels meeting of the 27 EU leaders.

The euro is down to about $1.36 as I type this (1:30 pm CT.)

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Why would the Germans bailout Greece? Does that not just give the green light to lesser EuroZone states that their uncontrolled spending can continue?

It is “hard lessons of life” time in Europe, and this is a sneek preview for us here in the states.

WashJeff on February 11, 2010 at 1:43 PM

The IMF (20% of funding from US…. thank us very much) will probably bail them out over a weekend where the impact will be blunted and muted.

Chubbs65 on February 11, 2010 at 1:47 PM

I love stratfor.com

bridgetown on February 11, 2010 at 1:47 PM

I see a euro crash in the offing.

andy85719 on February 11, 2010 at 1:48 PM

Wouldn’t it be so juicy for the Euro to crash after Asian countries worked furiously over the last few years to replace dollar reserves with euro reserves. Juicy oh juicy.

andy85719 on February 11, 2010 at 1:49 PM

I honestly don’t think the Germans can do the bailout. They aren’t sitting pretty themselves right now.

Johnnyreb on February 11, 2010 at 1:50 PM

But Greece hosted the Olmpics in 2004 and all the economic stimulation that comes with it. Just look at how awesome the venues are.

WashJeff on February 11, 2010 at 1:53 PM

andy85719 on February 11, 2010 at 1:49 PM

The Euro has decreased 10% in strength relative to the dollar in the bast couple months. SO I would guess that people that have money on the line are ahead of the curve.

WashJeff on February 11, 2010 at 1:55 PM

The problem with socialism is eventually you run out of money!

Christian Conservative on February 11, 2010 at 1:56 PM

Keep and eye on Soros, he is “having a good crisis”.

dIb on February 11, 2010 at 1:58 PM

WashJeff on February 11, 2010 at 1:53 PM

Maybe that’s why Obooba couldn’t get the Olympics for Chicago: “Your old district is already squalid.”

Akzed on February 11, 2010 at 2:03 PM

Christian Conservative on February 11, 2010 at 1:56 PM

The problem with socialism is eventually you run out of

Other Peoples

money!

Margret Thatcher

Ok FIFY!

xler8bmw on February 11, 2010 at 2:09 PM

Off the PIIGS (Portugal, Italy, Ireland, Greece and Spain,)Greece is the least troublesome. Wait until Spain or Ireland implode. That’s when you see fireworks.

jdun on February 11, 2010 at 2:10 PM

Maybe that’s why Obooba couldn’t get the Olympics for Chicago: “Your old district is already squalid.”

Akzed on February 11, 2010 at 2:03 PM

The ability to “redirect” billions of dollars of money in mega-projects in Brazil is slightly greater than even Chicago.

Better to wait until the heat is off from all the Illinois Governors currently in jail.

pedestrian on February 11, 2010 at 2:11 PM

The problem with socialism is eventually you run out of other people’s money!

Christian Conservative on February 11, 2010 at 1:56 PM

FIFY

strictnein on February 11, 2010 at 2:11 PM

The problem with socialism is eventually you run out of money!

Christian Conservative on February 11, 2010 at 1:56 PM

Bingo CC!

Rovin on February 11, 2010 at 2:11 PM

And some in this country want to be socialized…why?????

capejasmine on February 11, 2010 at 2:14 PM

For those countries bailing out Greece they should get to own a chunk of the country.

(Did you know the retirement age in Greece is only 57? Did you know 32% of the entire country payroll is government workers?)

albill on February 11, 2010 at 2:22 PM

For those countries bailing out Greece they should get to own a chunk of the country.

(Did you know the retirement age in Greece is only 57? Did you know 32% of the entire country payroll is government workers?)

albill on February 11, 2010 at 2:22 PM

I didn’t know their retirement age, and 32% is high. If Obama continues on his path, and I have no doubts that he will….the same is in store for our future. :( I wished November was here already.

I just heard, that the Dems are going to use some trickery, to ram thru health care. The bi partisan effort with the Republicans is just a ruse. Of that I never had a doubt, but using trickery, and admitting it, wow. Dems have no shame whatsoever, and it shows now, more than ever, they’ve gone rabid for power.

capejasmine on February 11, 2010 at 2:28 PM

Why would the Germans bailout Greece?

As Financial Times Deutschland have reported, the main reason for Germany’s likely support for a rescue package is not solidarity with Greece, but the fact that German banks hold $43.2bn in Greek sovereign debt and French banks hold around $75bn.

aengus on February 11, 2010 at 2:42 PM

And some in this country want to be socialized…why?????

When I was a wee small leprechaun, I was told many stories, “fairy tales”, some called them. (Of course we leprechauns knew that fairies weren’t real.) There are many “life lessons” in those stories. Such as “The Goose That Laid The Golden Egg”. Sadly, now, little ones aren’t told these stories. Smart People demanded children not be confused by these tales, because Smart People KNOW that all the evils in the world are caused by Greedy Capitalists. Smart People know that if they take all the resources from the Greedy Capitalists and give those things to the Needy People, the Smart People can create Heaven right here. Which is confusing too, since most Smart People don’t believe in “Heaven”, or Heaven’s best known resident, GOD. (that’s THE GOD.)

So, the answer to your question is, Smart People believe they ARE God and Socialism is their is attempt to establish Heaven by telling you and I how to live. Right down to our visits to our doctors.

oldleprechaun on February 11, 2010 at 2:44 PM

I’d like to see the Germans grow the balls they’re known for and refuse to bail out Greece (thus creating short-term pain but preventing long-term economic failure), but I doubt it’ll happen. The weird thing about socialism is the way that, when it becomes clear that it’s leading to destruction, governments hurtle toward that end rather than changing direction. Go figure.

Can I ask a simple question? Is there currently more debt than wealth in the world? It seems that every state is massively in debt, and the GDP of those who own that debt is nothing remarkable.

Animator Girl on February 11, 2010 at 2:47 PM

Maybe the Germans should just buy Greece and be done with it.

Aviator on February 11, 2010 at 2:50 PM

Europussys doing the wrong thing as usual. They’re almost as bad as the Obamites. If I were King, I’d kick Greece out on its rear and simply say they weren’t good enough to remain in the exclusive euro-club of responsible nations. Same applies to CA, NY, Spain, and whoever else wants a free ride on my back. Screw ‘em.

JiangxiDad on February 11, 2010 at 2:50 PM

Second the sentiments on Spain, Italy and Ireland being 2 seconds behind Greece.

To me the other half of this horror story is Russia. The Ukraine elections were one of many indicators that Russia is on the move to not only obtain a new seaport, but to also begin reclaiming former Soviet block countries. Heritage has for quite some time discussed their desire to trump OPEC, and for Russia to reign supreme regarding oil. Hence the intense lust for Georgia.

It seems Russia might not want to stop at just the former Soviet countries. I fear their interest might extend to the “euro zone”, and how simple would it be to pick these countries off one by one. Especially if they did manage to form a Russian oil cartel of sorts. In my mind Russia appears to have in the works their own “Iranian proxy”. Instead of Hamas you have Russian mafia types installed in each European country. But this is just me.

I have no clue how France thinks they are going to do anything when they are nearing the brink themselves. Another STRATFOR article that was out about 2 days ago said Germany did plan on placing some strings on the bailout regarding Greece, but it looks like there is not going to be a bailout period. So much for the market jump upon hearing Germany was going to aid Greece.

Whatever happens in Europe must happen quickly. This is going to get very ugly. The world appears to be on fire.

freeus on February 11, 2010 at 2:50 PM

the never ending saga of the Olympic scam…the Greeks are saddled with an annual ‘maintenance’ of almost £500million since the event.

el Vaquero on February 11, 2010 at 2:58 PM

So much for the market jump upon hearing Germany was going to aid Greece.

A further problem is that there will be hell to pay if Germany fails to deliver after its barrage of leaks talking up a bailout

aengus on February 11, 2010 at 2:58 PM

Sounds like Germany is tired of trying to prop up a house of cards. Of course, they may be staring into the abyss of their own financial problems soon.

With Greece now facing a budget deficit of at least 9.1 percent in 2010…

How big is our budget deficit?

hawksruleva on February 11, 2010 at 3:02 PM

Can I ask a simple question? Is there currently more debt than wealth in the world? It seems that every state is massively in debt, and the GDP of those who own that debt is nothing remarkable.

Animator Girl on February 11, 2010 at 2:47 PM

According to Glen Beck yesterday, just the derivitaves market is on the order of double the current annual GDP of the planet. Might have been 3 times- I think it was like $160 Trillion in deriviatives, vs. $60 Trillion in GDP.

hawksruleva on February 11, 2010 at 3:04 PM

With Greece now facing a budget deficit of at least 9.1 percent in 2010…

Greece’s budget deficit is really at 16%. They manipulated# the debt statistics.

aengus on February 11, 2010 at 3:06 PM

The Euro has decreased 10% in strength relative to the dollar in the bast couple months. SO I would guess that people that have money on the line are ahead of the curve.

WashJeff on February 11, 2010 at 1:55 PM

In fact, the crisis in Europe is causing a false sense of American financial security. It’s a bit like being in the middle of a sinking boat. Right now we’re not as close to drowning, but as the folks getting soaked scramble to safety they’re likely to pull us in with them.

Of course, we’re taking on water (debt) fast enough to sink ourselves just fine, thank you.

hawksruleva on February 11, 2010 at 3:07 PM

Wait until Spain or Ireland implode. That’s when you see fireworks.

jdun on February 11, 2010 at 2:10 PM

Ireland is a great case study. It was doing REALLY well during the tech boom. Instead of saving money and encouraging further growth, they decided to start creating a first-class welfare state. It didn’t take long for the tide to turn when times weren’t so good.

hawksruleva on February 11, 2010 at 3:10 PM

In fact, the crisis in Europe is causing a false sense of American financial security. It’s a bit like being in the middle of a sinking boat. Right now we’re not as close to drowning, but as the folks getting soaked scramble to safety they’re likely to pull us in with them.

Of course, we’re taking on water (debt) fast enough to sink ourselves just fine, thank you.

You could say the exact same thing about Islamisation.

aengus on February 11, 2010 at 3:11 PM

Greece will be bailed out, but the Euro won’t last ten years – probably not five, even.

neurosculptor on February 11, 2010 at 3:14 PM

The problem with socialism is eventually you run out of money!

Christian Conservative on February 11, 2010 at 1:56 PM

Heh. Channeling GK Chesterton?

No society can survive the socialist fallacy that there is an absolutely unlimited number of inspired officials and an absolutely unlimited amount of money to pay them – GK Chesterton

atheling on February 11, 2010 at 3:15 PM

Ireland is a great case study. It was doing REALLY well during the tech boom. Instead of saving money and encouraging further growth, they decided to start creating a first-class welfare state. It didn’t take long for the tide to turn when times weren’t so good.

hawksruleva on February 11, 2010 at 3:10 PM

I’m not so sure any EU member has any choice but go down that road. I believe they view social benefits with the same regard Americans view the Bill of Rights.

Chris_Balsz on February 11, 2010 at 3:21 PM

If this was a developing country, there’d be no doubt what would happen — Greece would be given IMF assistance in return for a plan from the Greek government to restrain government spending — but this is the Eurozone, and you cannot really do that. And finding a lender of last resort is much harder.

ZeroHedge: Papandreou Confirms He Is In Close Contact With IMF, Has Been Getting IMF “Technical Support”:

Now did anybody seriously think the Fed would avoid such a golden chance to not destroy the dollar just a little bit? In the race to current bottom and sovereign default, every little bit counts.

End the Godforsaken Fed already!

Rae on February 11, 2010 at 3:27 PM

Spain, meanwhile, still has its head in the sand. They say “the most important thing is welfare“. They rank debt reduction a close second, though. Sound familiar?

Spain, suffering from the highest unemployment rate in the euro region, had a budget deficit of 11.4 percent of gross domestic product last year, the third-largest in the euro area.

How are those green energy jobs working out?

hawksruleva on February 11, 2010 at 3:34 PM

In the old days, when a country’s treasury was empty, it got loans from powerful families who traded their money for pedigree. Another way was to sell land. Russia sold Alaska. France sold the Louisiana purchase. What they didn’t do was print toilet paper like we do now. So, let’s sell Hawaii as a start, have Germany buy Greece for holiday villas, etc. Personally, I’ve always wanted to own Lichtenstein.

JiangxiDad on February 11, 2010 at 3:40 PM

Funny recent video of my hero, Hugh Hendry, making fools out of the Spanish ambassador and Greece’s economic representative, the moronic Nobel prize winner J. Stiglitz, over the fate of the Euro, and the Greek/Spanish bailouts.

http://is.gd/89MDd

JiangxiDad on February 11, 2010 at 3:42 PM

Reminds me of the forty year old Greek that wouldn’t leave home since he didn’t want to leave his brothers behind.

Hening on February 11, 2010 at 3:57 PM

According to Glen Beck yesterday, just the derivitaves market is on the order of double the current annual GDP of the planet. Might have been 3 times- I think it was like $160 Trillion in deriviatives, vs. $60 Trillion in GDP.

hawksruleva on February 11, 2010 at 3:04 PM

I wish I could say I’m shocked.

How are there so many people on the planet who don’t understand the consequences of treating wealth like it’s Monopoly game money?

So the global depression begins in earnest when?

Animator Girl on February 11, 2010 at 4:37 PM

Socialism is a failure.

Lady Heather on February 11, 2010 at 5:52 PM

Maybe Germany has figured out what to do about ne’er-do-well nephew.

Slowburn on February 11, 2010 at 6:25 PM

How are there so many people on the planet who don’t understand the consequences of treating wealth like it’s Monopoly game money?

Animator Girl on February 11, 2010 at 4:37 PM

Because most people are taught neither logic nor economics?

Furthermore, it is so hard for the average person to get meaningful economic data (too much data, too many to complex relationships) that I suspect that even most of the people who do want to understand are quickly forced to give-up, and thereafter just go with the flow and resign themselves to accepting whatever the MSM and politicians tell them.

YiZhangZhe on February 11, 2010 at 6:28 PM

I agree with JiangxiDad — we should sell California to China. They agree to write off 100% of the Treasury securities that we sold them, plus they buy up front $1 Trillion in Treasury securities — paid in barrels of oil.

We fence off California, they get it lock stock and barrel.

SunSword on February 11, 2010 at 7:22 PM

State-managed economies and currencies don’t work?

Shocking!

Dr. ZhivBlago on February 11, 2010 at 9:36 PM

If I were Germany, I’d be rethinking that whole EU idea about now. Didn’t these PIIG countries just barely gain admittance to the Union in the first place because of their questionable monetary policies? If not for the fact that this is having a ripple effect on my retirement portfolio, I’d say they could all go pound sand.

NoLeftTurn on February 12, 2010 at 12:22 AM

Oh, btw, German economic growth for 4th Q. ’09 “unexpectedly” flat. Will Greeks be able to eat?

JiangxiDad on February 12, 2010 at 6:56 AM

It’s pretty funny how you never see trolls on threads like this. I am pretty sure I saw a couple of the regulars singing the praises of euro socialism the other day.

bitsy on February 12, 2010 at 9:13 AM