Tuesday, 15 June 2010

Eurozone does not know the difference between liquidity and solvency

Greek woes continue with their sovereign bonds downgraded to junk by yet another ratings agency. The EU is treating Greek problems as a liquidity crisis. It is not, Greece is insolvent, its expenditure exceeds its income and will continue to do so for the foreseeable future. The only way out as someone remarked is for them to sell off some of their Island assets, economically sound but political suicide.

I remember talking to Richard North about the difference between liquidity and solvency during the Lehman's affair. The difference is one of time scale. If you do not have enough cash to pay bills due today but longer term your income exceeds your outgoings you have a liquidity problem. In such circumstances your friendly bank manager may give you an overdraft facility so you can pay your immediate creditors and not have them foreclose on your business. Greece's bank manager is J-C Trichet of the ECB and that is just what he has done in with credit lines provided by the IMF and the EU.

Overdrafts are as we all know short term loans. So is the Greek support package. At the current rate of money burn in Greece the much vaunted package might last 18 months or so but then what? M Trichet has tried to help out there also by buying up so called Greek assets, their bonds, but unlike Greek Islands they are not real assets only bits of paper.

So what is stopping Greece becoming solvent? In a word corruption. Moody's, the agency that downgraded Greek bonds to junk yesterday sited 'macroeconomic and implementation risks' as the reason for their downgrade. In plain English they don't believe the Greek government's actions will support their fine words, a common problem with politicians. Only if Dr Frau Merkel sends in her Wehrmacht can her iron discipline be enforced on these recalcitrant Greeks

IMF old hands know the rescue package cannot succeed without a currency devaluation, sacre bleu, and a debt rescheduling ie a bond default, sacre bleu again. So the Eurocrats attempt to shift attention and blame to ze horrible Anglo Saxon money market's many failings. The wealthy Greeks say thank you for this welcome distraction and get on shifting their money  out to Switzerland and into dollars and Swiss Francs. As Ms Zemek of the giant French financial group AXA says, ' We are looking at a noble experiment on the brink of failure'. A bit like Napoleons retreat from Moscow, n'est pas.

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