it's been known to happen...
Posted on 07/23/2011 8:35:46 AM PDT by Kaslin
The EU summit hammered out yet another temporary fix today, albeit a complicated one.
The proposal involves the creation of a "European Monetary Fund" and it will require changes to the Maastricht Treaty. Paul Krugman does not like the austerity measures and ECB president Jean-Claude Trichet had to eat his words regarding defaults and acceptance of defaulted bonds as collateral. German taxpayers may potentially be screwed big time on this bailout.
Can this agreement hold together? Before deciding let's look at some details.
"European Monetary Fund" Created
In what French President Nicolas Sarkozy likens to a "European Monetary Fund", EU Leaders Offer $229 Billion in New Greek Aid
After eight hours of talks in Brussels, leaders announced 159 billion euro ($229 billion) in new aid for Greece late yesterday and cajoled bondholders into footing part of the bill. They also empowered their 440-billion euro rescue fund to buy debt across stressed euro nations after a market rout last week sparked concern the crisis was spreading. The fund can also aid troubled banks and offer credit-lines to repel speculators.
The euro strengthened as officials drew concessions from Germany, the European Central Bank and investors for a twin- track strategy to support Greece and ensure its woes don’t spread. The summit is the latest in a running-battle to resolve the crisis amid calls this week for tougher action from U.S. President Barack Obama and the International Monetary Fund.
The Greek financing package will consist of 109 billion euros from the euro region and the IMF. Financial institutions will contribute 50 billion euros after agreeing to a series of bond exchanges and buybacks that will also cut Greece’s debt load, the leaders’ communiqué said.
French President Nicolas Sarkozy compared the transformation of the bailout fund to the creation of a “European Monetary Fund.”
The pact still doesn’t “make a significant dent” in Greece’s debt and may disappoint investors by failing to boost the size of the rescue fund, said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. “We doubt that this package alone will bring an end to recent contagion effects and prevent the broader debt crisis from continuing to deepen over the coming months.”
For now, Merkel and her allies have succeeded in their drive to make investors co-finance bailouts after voters balked at the cost of saving spendthrift nations.
Banks will reduce Greece’s debt by 13.5 billion euros by exchanging bonds and “potentially much more” through a buyback program still to be outlined by governments, said the Institute of International Finance, a Washington-based group representing banks.
Trichet signaled governments will guarantee any defaulted Greek debt offered as collateral during money market operations. That may enable Greek banks to keep tapping the ECB for emergency funds. Officials said the aim would be limit any credit event to a few days.
The facility will be able to buy debt directly from investors so long as creditors agree and the ECB declares “exceptional financial market circumstances.” EU President Herman Van Rompuy said the purchases could be used to stabilize markets as the ECB was doing or to help countries retire debt at a discount.
The fund may also start passing money to countries to support banks a week after stress tests on 90 financial institutions put as many as 24 under pressure to show they can raise capital. Precautionary credit lines would allow it to lend to nations before markets freeze, mimicking a system introduced by the IMF for states that start losing investor faith even though they have relatively sound economies.
Governments will have to ratify the facility’s new powers, posing a potential obstacle given domestic critics in Germany, Finland and the Netherlands.
One Step Closer to Nanny State
If Germany, Finland, and the Netherlands foolishly approve this, it will be one step closer to the European Nanny State that Germany has feared so long.
German Taxpayers on the Hook
ZeroHedge comments 82 Million Soon To Be Very Angry Germans, Or How Euro Bailout #2 Could Cost Up To 56% Of German GDP
This is not a restructuring of existing debt from the perspective of the host country! Simply said Greek debt will continue growing as a percentage of its GDP, meaning it, and Ireland, and Portugal, and soon thereafter Italy and Spain will be forced to borrow exclusively from the EFSF.
In a just released report by Bernstein, which has actually done the math on the required contributions to the EFSF by the core countries, the bottom line is that for an enlarged EFSF (which is what its blank check expansion today provided) to be effective, it will need to cover Italy and Belgium.
[Bernstein]
An extension of the EFSF to cover Italy and Spain would require a €790bn (32% of GDP) guarantee from Germany
This strategy is not only unlikely to succeed but would also run into some serious structural difficulties. To cover 100% of the roll-over for Greece, Portugal, Ireland, Spain, Italy and Belgium as well as an allowance for bank support at 7% of the banks' balance sheets until the end of 2013, the support mechanism(s), would need to be able to deploy a total of €2.4trn in available funds.
1937 Replay
Paul Krugman is unhappy with the deal and is screaming 1937! 1937! 1937!
The Telegraph has a leaked draft of the eurozone rescue plan for Greece. The financial engineering is Rube Goldbergish and unconvincing. But here’s what leaped out at me:
9. All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest.
OK, so we’re going to demand harsh austerity in the debt-crisis countries; and meanwhile, we’re also going to have austerity in the non-debt-crisis countries.
Plus, the ECB is raising rates.
The Serious People are determined to destroy all the advanced economies in the name of prudence.
Greece Defaults
Felix Salmon has a nice comprehensive wrapup of the new agreement in his post Greece Defaults.
The latest Greek bailout is done and it involves Greece going into “selective default,” which is, yes, a kind of default.
This is a bail-in as well as a bail-out: while Greece is getting the €109 billion it needs to cover its fiscal deficit, both the official sector and the private sector are going to take losses on their loans to the country.
As such, it sets at least two hugely important precedents. Firstly, eurozone countries will be allowed to default on their debt. Secondly, a whole new financing architecture is being built for Greece; French president Nicolas Sarkozy called it “the beginnings of a European Monetary Fund.”
The nature of massive precedent-setting international financing deals is that they never happen only once. One thing is for sure: these tools will be used again, in future. They will be used again in Greece, since this deal is not enough on its own to bring Greece into solvency; and they will be used in other countries on Europe’s periphery too, with Portugal and/or Ireland probably coming next.
The Maastricht treaty will get resuscitated, with all eurozone countries except Greece, Ireland and Portugal committing to bring their deficit down to less than 3% of GDP by 2013. Paul Krugman is screaming about this, but this was a central part of the eurozone project from the get-go, and clearly the eurozone needs some kind of fiscal straitjacket for its constituent members to prevent the rest of them from running up enormous deficits and then getting bailed out by Germany.
Finally, the EU will provide “credit enhancement” for Greece’s private-sector bonds. This is a central part of the default plan, and it looks a lot like the Brady plan of the late 1980s. The official statement from the IIF, which is representing private-sector creditors in this matter, is a little vague, but essentially if you’re a holder of Greek bonds right now, you have three [four] choices.
1. You can do nothing, and hope that Greece pays you in full and on time.
2. You can extend your maturities out to 30 years, and accept a modest coupon of 4.5%; in return, your principal will be guaranteed with an embedded zero-coupon bond from an impeccable triple-A-rated EU institution, probably the EFSF.
3. You can extend your maturities out to 30 years, take a 20% haircut, and get a higher coupon of 6.42%; again, the principal is guaranteed with zero-coupon collateral.
4. You can extend your maturities out to 15 years, take a 20% haircut, get a coupon of 5.9%, and have only a partial principal guarantee through funds held in an escrow account.
There is much more in Salmon' s article regarding what exactly is happening and what the options are. It's worth a closer look. Inquiring minds may also wish to consider the Official Statement by the EU.
Three Critical Points
1. The critical point from Salmon is "The nature of massive precedent-setting international financing deals is that they never happen only once."
2. The critical point from Bernstein is the amount German taxpayers will be on the hook once Salmon is proven correct.
3. The critical point from Krugman involves short-term pain. Even if one disagrees with Krugman in the long haul (as I do), the short-term pain for Spain, Portugal, Ireland, Greece, and Italy is likely to be unbearable.
In light of the above, let's return to the question I asked earlier: Can this agreement hold together?
I don't see how it can.
GimmegimmegimmegimmegimmeortheboogiemanwillgetyouOpa!Opa!Opa!gimmegimmegimmegimmegimme
If the German people continue getting screwed as they are, they may decide to elect a ‘strong leader’ who will act to unite Europe. ;^)
bump for later.
Thanks Kaslin.
And these liberal morons think they are going to get their money BACK from Greece? From Greece? That is like saying Obama is interested in the financial stability of America....get real.
From each according to his ability, to each according to his need. So reasonable. So wise. That’s why it has to be enforced at the point of a gun.
it's been known to happen...
Here’s a novel though: Have Krugman pay for Greece’s continued bailouts.... =.=
In other words, take a 20% hit in return for a 100% return of the balance and let the taxpayers eat the other 80%.
The Euro version of the Grand Bargain. And, this one seems to be even scarier than the one Zero is trying to impose on us (U.S).
>>I can’t stand how they confuse ‘economies’ with ‘governments’, when governments have consistently been the problem to begin with.<<
Let me ask a serious question: do you think Germany is PO’d enough to convene a meeting to try to dissolve the EU?
I can’t imagine the EU lasting that much longer — but how it dissolves is the question...
Raise the retirement age to 70. Privatize every state agency. Take the pensions of every worker under the age of 50 and send them IOU’s with higher interest.
That’s about all you can do at this point.
The German people will not stand for endless bailouts and more debt...until they too are Greece.
They will not participate in a race to the bottom.
If elections will not solve the problem, a coup will.
One can only hope. As Krugman said below, it looks like Germany will be lashed with two EU whips...one that takes the German's money...the other whip forcing Germany under the same austerity controls, all for a country that can't even spell "austerity". If I were Germany, I'd refuse to agree to this as long as there was even one Greek protestor in the streets demanding an end to Greek "austerity".
OK, so we’re going to demand harsh austerity in the debt-crisis countries; and meanwhile, we’re also going to have austerity in the non-debt-crisis countries.
249 billion divided by 11,000,000 greeks = 22 636.3636 per greek
Well, yes. If the German people are forced to buy Greece, they are going to want to assert their ownership rights at some point.
Down-the-road-can-kicking is evidently just as popular in Europe as it is here.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.