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Wolfgang Münchau, a genuine insider when it comes to the great European experiment, counsels us not to worry too much about moral hazard as the surreal discussions over the non-bailout rescue of Greece continue. He says the conditions Greece is forced to sign up to on condition of any aid or guarantees will see to that.
For Otmar Issing, however, it is simply the case that Europe cannot afford to rescue Greece. Says this former member of the European Central Bank's executive board:
It is certainly true that this is a decisive moment for Emu "“ but for the opposite reason. Greece will continue to receive support from several European Union funds. But financial aid from other EU countries or institutions that amounted, directly or indirectly, to a bail-out would violate EU treaties and undermine the foundations of Emu. Such principles do not allow for compromise. Once Greece was helped, the dam would be broken. A bail-out for the country that broke the rules would make it impossible to deny aid to others.
John Kemp of Reuters, meanwhile, has come at the issue from another direction:
Most commentators have concentrated on the need for the EU to bail out Greece. But in reality any rescue would be another subsidy for excessive-risk taking by the country’s bankers and the institutions that have sold credit default swaps (CDS) on Greek debt.
Forcing the country into an austerity programme and arranging an emergency loan from other EU members or the IMF would ensure the bankers got their money back (again), but inflict years of misery on the country’s households and businesses.
If market discipline is ever to be re-established after the boom and bailouts of the last five years, it is imperative creditors face the real prospect of making losses if they extend large loans and fail to price the risk on them properly. The sellers of CDS insurance must face up to making real payouts in return for all the premiums they pocket.
Which is rather saying it like it is: that this is not about the eurozone’s credibility, it’s about the rampant moral hazard in financial markets; it’s about slipping off the hook, while losses get socialised and taxpayers foot the bill.
Kemp reckons Greece can do everyone a favour by declaring a moratorium on the debt and negotiating rescheduled terms – forcing international financial markets to price risk correctly once more:
Bailing out Greece so everyone can pretend the country can remain “current” on its loans when it patently cannot would simply deepen the moral-hazard crisis. If market discipline is ever to be re-established (something which everyone agrees is desirable) then at some point creditors must take a loss. Greece is a good place to start.
One other point from Kemp, this time on the hypocrisy in all of this:
The other slightly Alice-in-Wonderland aspect of this crisis is the long list of banks, countries and institutions demanding Greece undertake brutal budget cuts to honour the bankers’ loans and before any emergency assistance can be pledged.
These are the same banks, countries and institutions that urged pro-growth policies in response to the subprime and banking crisis to avoid a deflationary spiral and widespread default. It seems shock therapy is appropriate for Greek households (“pour encourager les autres”) but not U.S. homeowners or the banks themselves.
After bailing out American homeowners and the banks themselves in 2008-2009 with vast quantities of cheap money, fuelling moral hazard, governments and financial markets have suddenly discovered a new commitment to fiscal rectitude — mostly someone else’s rectitude.
Related links: Brussels seeks tougher steps from Greece – FT Traders focus on Europe's fiscal problems – FT Global Overview
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