Sorry I haven’t written much recently.? The recent snowstorms have tossed me around, as I care for my family, and those around me.? It is amusing in a backwards way, to see Washington, DC frozen at a time when there is so much volatility in global finance.? Yo, Treasury, make sure the skeleton crew on international finance gets in, regardless.
The incentives are perverse in every way in Europe.? If Germany, France, and the Netherlands don’t bail out Greece, then what will become of Portugal and Spain?? And later, Italy and Ireland?? In aggregate, this is big.
But, if Germany, France, and the Netherlands do bail out Greece, then will Portugal and Spain be next in line?? And later, Italy and Ireland?? In aggregate, this is big.
Perverse, indeed, and I criticize my own thoughts on the Euro that I thought would die from inflation.? No such thing.? The Euro is strong –? So strong that marginal nations were able to borrow at rates lower than they ever dreamed imaginable.? The debts built up like mad, ignoring the day when the inevitable weakening in aggregate demand would come, and debts of marginal, overindebted nations would prove weak.? The EU is validating the idea that currency union requires political union.? We learned that in the US 200 years ago, but the youngsters in the EU have to learn that lesson the hard way.
This is an ugly situation, as ugly as China forcing exports into the rest of the world, or the US Government continuing to borrow with abandon.? What seems to have no limit may find the limit more rapidly than one anticipates.
Just be aware that sovereign volatility has negative impacts on asset prices.
The goal of the Germans IS political union. So far things are going by plan.
One facet of the PIIGS crisis that I am very interested in is how Germany, the EU’s biggest surplus nation, fares to the extent that the EU forces austerity upon troubled members. Similar to how I view these early sovereign crises on the EU periphery to be a potential dry run for more substantial crises in nations such as Spain, UK, Japan, and ultimately the US, I think that the fate of Germany in an austerity scenario would be a precursor to what China might face down the road. As an American, I take odd comfort in the fact that we will likely not be on the forefront of cascading sovereign debt crises. Hopefully we can learn some lessons from what unfolds abroad before it reaches our shores.
Germany is the only part of the “EU” that has any money to do a bailout if the group decides “together” to do one. France has little money, and they haven’t exactly been supportive of expanding the EU outside subordinate European countries — even Eastern Europe has rubbed France the wrong way. So the relevant question is what does Germany want to do.
Germany has a lot of internal political groups that were opposed to the whole idea of a Euro. Protect the Deutchmark and purchasing power is an idea burned into every German psyche. Memories of the Wiermar Republic (and what came out of it) explain why Germany insisted on the Maastrict treaty having restrictions on budget deficits and debt.
Word in Germany is that Goldman Sachs helped Greece circumvent those rules using complex currency swaps… Greece got itself into problems on purpose.
Germany probably doesn’t have the money to bail out Greece — at least not without committing 99% of its resources. Germany knows that its own banks need help, as do German trading partners in Poland, Netherlands, etc. If Germany bails out Greece, it would have essentially nothing left for its economic allies or itself
And everyone knows Greece is just the first domino to fall — Spain, Italy, Portugal, etc. If Germany bails out Greece, those other countries will be next and Germany will be out of resources long before it is out of bailout candidates. Everyone knows this, both inside and outside Germany.
A bailout of Greece means the German currency gets trashed — exactly as Euro opponents had predicted. And lots of other bailouts will follow suit — Germany will have to say no at somepoint, its only a question of when.
The obvious solution for Germany is to let Greece go. Say no right upfront. Keep Germany’s financial resources “on reserve” to help German companies and banks survive the collapse, and as much as possible help Germany’s economic trading partners (mostly Netherlands, Poland and other Eastern European countries).
Let the unelected bureaucrats in Brussels fend for themselves
Wall Street has become too dependent on never ending bailouts — and they can no longer see any other outcome but the one they want to see.
Germany will cut Greece loose, or they will get dragged down with them… pretty easy choice
Article 104 of the Maastricht Treaty prohibits the EU from bailing out member nations — by gift or via loans.
Article 21 of the Statute establishing the European Central Bank forbids the ECB from bailing out member states with gifts or loans.
There is no legal basis for a bailout of Greece or Spain or any of the other basket cases.
Greece is allowed to fail or the rule of law is allowed to fail – but either way the EU is dead.
And not incidentally, several German law makers were quoted on Reuters saying ?If Greece gets aid, it will only happen under strict conditions and if the Greek government undertakes far-reaching state reforms.?
In other words: if Greece gets a loan, it will have to surrender power of the purse (aka Greece’s sovereignty) to Berlin. Germany will be annexing Greece by economic fiat instead of Panzer tanks.
Brussels is now a paper charade — Berlin is the de facto capital of any GU (German Union) that survives this mess
Could you explain in a post why a minor EU member defaulting would be such a problem for the Euro? I just don’t see it. Would it lead to a few days of high volatility? Sure. Maybe some spreads widen, and then stay wide for an extended period. But I just don’t see how it would be that giant of an issue.
RS — because of the leverage inherent in EU banks, a default in Greece would make Greek banks insolvent, it would lead to contagion effects on Spain, Portugal, Ireland and Italy — and their banks. At such a point, virtually every major bank in Europe is mark-to-market insolvent, which means that a rush for liquidity (bank runs, should they happen) would make them genuinely insolvent.
The EU will stand up to protect their own banks, at a cost of moral hazard. All that said, political opinion toward bailing out Greece in most of the EU is decidedly negative, much as the bailouts were viewed negatively in the us in late 2008, and even now.
Contagion meaning investors will flip out and sell at huge discounts the debt of the PIIS countries, and that would cause the mark to market insolvency of the PIIS banks? Or contagion meaning the PIIS countries’ banks own so much of the Greek debt that we would see M2M insolvency and so on?
If it’s the first, the problem is inevitable anyway; if that’s all it takes, you can’t stop it short of the ECB pushing up inflation a lot. If it’s the second, it seems like it could be fixed more easily and cheaply in other ways.