Monday, 29 March 2010

Greek rescue package is not what it says on the packet

At international conferences to 'resolve' tricky problems the press communique is written and agreed before any substantive discussion takes place. Such communiques are written as vague, opaque, unverifiable wishful thinking to please all parties a bit like Gord's latest five pledges. What was actually said and agreed therefore emerges in the days after the meeting ends. Thus today's piece by AEP in the business DT headlined, "Europe's summit deal was a package to rescue Germany, not Greece"

Dr Frau Merkel triumphed and there will be no EU debt union while she runs Germany good for us. Frankfurter Allegmaine's verdict on the 'deal' was "No member of the Europe's monetary union should be liable for the debts of another state. Bilateral credit from Berlin for Athens is not the same as Germany accepting responsibility for Greek debt" ie there will be no fiscal union. Aid to Greece from Germany will have to go via the IMF to avoid German constitutional court problems.

Dr Frau Merkel has much more in common with Mrs Thatcher than just their sex. Both trained as scientists, Thatcher as a chemist and Merkel as a mathematical physicist. Thatcher was a pretty run of the mill science graduate but Merkel went on to a PhD in a tough subject. Both however are driven by facts and observation not emotion, a very good thing in a politician!

JC Trichet and the ECB's future development is limited by the Dr Frau. Nevertheless the ECB say they will continue to take Greek debt as collateral in their Repo liquidity providing operations but if no one else wants Greek bonds then there will be technical problems as to how to margin such debt in which there is no other market. The ECB has currently lent a reported €59.8 bn to Greece. I opine this will have been entirely secured on Greek paper.

It leaves the Greeks still in the same pickle. They urgently need to sell more of their debt to cover bonds coming up for redemption. This means going to the market for funds and that is always the acid test of one's credit worthiness. Shades of Northern Rock, Greek banks have lost €8,4 bn of deposits since December. No wonder the Greek finance minister Papaconstantinou is not hurrying to the market. The will have to offer a very high coupon to sell their paper, more than twice what the Germans are paying. Their increased interest bill since the crisis began has already eaten up all their politically hard earned savings from public sector cuts.

The same is happening to the UK and will accelerate as the election approaches. Just as for Greece watch the Gilt Bund spread and the Sterling forex rate!

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