Monday, 12 April 2010

Another day, another Greek rescue package

Announced to another great fanfare yesterday by the Eurozone countries a €30 bn 3 year contingency loan at 5% for the Greeks if they need it with the Germans pencilled in for €6.3 bn! Plus a secret possible top up by the IMF rumoured to be €15 bn at 2.7%. All very fine, the Euro rose strongly on the Forex market this fine Monday morning by over one per cent against the dollar and sterling. But will it stick? As always the devil is in the detail and the politics.

First for Greece to draw down any of this money requires the unanimous agreement of all 16 Eurozone states. Second some of these states, the residual PIGS are in almost as bad a state as Greece and where will they get the money from. If they have to borrow it in the market they could well end up subsidising the Greeks something that is verboten under EU rules but of course J-C Juncker, chairman of the Eurogroup insisted their package does not breach the rules. Ho hum!

Well the other PIGS might just see it as useful to do this so that when their turn comes the precedent has been set.

The German contribution looks small to me. I estimate the German GDP at 25%+ of the total Eurozone GDP so they should be stumping up another €1.2 bn. Dr Frau Merkel however has a problem with important German local elections coming at roughly the same time as ours and bailing out these profligate Greeks won't play well with the house fraus. The Landesbanks were enthusiastic buyers of all American bond crap and consequently have a big hole in their balance sheets if this toxic debt ever got valued properly. Their are also a number of troublesome German economists and possibly even the Bundesbank that might say the loan was improper and take it to the German constitutional court. The Dr Frau might even tip them a wink to do this! It would save her a lot of money.

The real difficulty is its really a whole Eurozone problem. The Greeks with their €391 bn of debt, 163% of their GDP are just first up. If they are allowed to go then so goes the Euro. The Brussels 'crats will pull out all the stops to save the great project but as I noted before they then will collide with national political interests. There will be riots and protests in the cities of Greece this summer as the EU/IMF medicine is swallowed. I doubt the Greek government can survive this and then what? Don't cry for me Argentina. That was an IMF success in 2001 but had smaller debts, 62% of GDP, than Greece and devalued its currency.

Finally the great unknown is China that correctly perceive Greece as the tip of an iceberg. They have huge holdings of sovereign Eurobonds. What happens if the decide to sell? Well Eurozone interest rates start to rise. Already the Greek yield curve has started to invert i.e. short term rates are above long term rates, a sure sign of a coming recession. Hold on to your seats.

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