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Monday 12 April 2010 | Ambrose Evans-Pritchard feed
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Comments 53 | Comment on this article
Last week's rise in spreads on Hellenic two-year bonds to 730 points over German debt is proof that Greece cannot tap capital markets at bearable cost. It must spiral into default unless the EU-IMF rescue mechanism is activated. "There is no point waiting for an accident to happen," said Nomura's Laurent Bilke.
As I write, it appears that EU experts have agreed on a package of €20bn to €25bn at 350 points above the IMF tariff, or 5pc. This achieves nothing. Such wishful thinking has plagued the Greek/EMU crisis from the start. Simon Johnson, the IMF's former chief economist, said Greece needs €110bn to have any hope of pulling itself out of a tail-spin, given that the twin cures of default and devaluation are blocked. Even that may not work. Greece must squeeze a further 13pc of GDP from the budget to stabilise debt costs by 2012, and do so during a slump when every euro of tightening leads to €1.5 to €2 in lost demand. "The risk is of a viscious downward cycle," Mr Johnson wrote in the Huffington Post.
He likens the crisis to Argentina's slide before default in 2001, a fiasco that led to calls for the abolition of the IMF itself. The Fund concluded in a post-mortem that it should never again throw good money after bad to prop up an unworkable structure with an overvalued exchange rate.
EU officials react with outrage to comparisons with Argentina, but as Mr Johnson says "Greece is far more indebted, is much less competitive in global markets, and needs a greater fiscal and wage adjustment".
Argentina's public debt was 62pc of GDP in 2001: Greece will top 120pc this year. Its budget deficit was 6.4pc: Greece's was 16pc last year on a cash basis. Its current account deficit was 1.7pc: Greece's was 11.2pc in 2009.
The cleanest option for Greece is an Argentine default with a 65pc haircut for creditors, and exit from the euro. Argentina recovered fast after liberation. Greece could expect "decent growth" by mid 2011.
True, but Greece is just "the tip of the iceberg", in the words of China's central bank. The design faults of EMU have left all Club Med trapped in debt deflation or perma-slump. Europe's banks are in turn stuck with fatal exposure. You cannot safely uncork Greece without risking a chain reaction.
This has echoes of Credit Anstalt, the Austrian bank that collapsed in June 1931, exposing the underlying rot of Europe's banks. It set off an earthquake across Germany and Central Europe. Contagion spread back into the Anglosphere, snuffing out the recovery of early 1931. The global financial order came crashing down. The Great Depression began in earnest.
Liaquat Ahamed recounts in Lords of Finance how rescue talks succumbed to geo-politics. France held up a loan for Austria, using it as leverage to stop a customs union with Germany. (Paris secretly withdrew funds from Vienna to force capitulation.) Disputes over German war reparations poisoned everything. By the time France, Britain and the US could agree on anything, events were out of control.
This time Germany is proving difficult, refusing to be led by the nose into an EU debt union. Chancellor Angela Merkel cannot bend the rules even if she wants to. German professors are itching to launch a complaint at their constitutional court for breach of the EU's "no bail-out" clause the day any rescue is activated.
Yet let us be honest. This is not a bail-out for Greece. It is a bail-out for European creditors that account for most of Greece's €391bn external debt (163pc of GDP). As such it is the first line of defence against greater sums at risk across Club Med. The EU rescue shifts the debacle onto taxpayers in order to prevent a systemic crisis, just like the bank bail-outs after the Lehman failure. The question is whether German Landesbanken with wafer-thin capital ratios can withstand a second crisis after losing so much already on US subprime debt.
As for blaming Greece, let us remember that the European Central Bank stoked property booms in much the same way as the Greenspan Fed. It let the growth rate of M3 money balloon to 12.3pc by late 2007, against a 4.5pc target, pouring petrol on the fire in Club Med, Ireland, and Eastern Europe. Greece can perhaps claim its entry terms into the euro were violated by the ECB. Yet the Greeks are being singled out for punishment under the rescue terms. Mr Johnson says they will have to transfer 8pc to 9pc of GDP each year to foreign creditors from 2012 onwards. No nation will tolerate such debt servitude for long.
This crisis stems from the original sin of EMU and the collective self-deception that lured debtors and creditors alike into excess. To lecture Greece gets us nowhere. Default will happen one way or another. So will contagion.
Comments: 52
From the Irish Times today: "Irish share of EU rescue deal for Greece could be €500m ARTHUR BEESLEY European Correspondent MINISTER FOR Finance Brian Lenihan will introduce legislation within weeks to empower the Government to advance as much as €500 million in loans to Greece as part of a €45 billion package to help it overcome its debt mountain. Euro zone countries bowed to relentless market pressure yesterday to strike terms for a €30 billion credit line for Greece, a sum that would be topped up with a further €10-15 billion from the International Monetary Fund (IMF). Such loans would be granted in the first year of a three-year programme, as Athens tries to raise €53 billion to fund the running of the Greek state and to refinance existing debt. The amounts required in 2011 and 2012 would be decided later, although certain Greek sources suggest the country may ultimately need €80 billion over three years. While Greek prime minister George Papandreou has not yet asked for the plan to be activated, the deal suggests an attempt to rescue Greece may be imminent. With Athens due to auction short-term debt tomorrow as part of programme to borrow €11 billion by the end of May, the pact represents a last-ditch attempt to persuade investors to continue buying Greek debt. If market interest rates do not subside in the coming days Mr Papandreou will have to decide whether to ask the EU authorities and the IMF to trigger the rescue mechanism. Any such intervention would be the first in the euro zone since the start of the euro in 1999, something EU leaders have tried to avoid as Mr Papandreou struggles to convince the markets that his administration can borrow the funds it needs. “Ireland’s participation would require national legislation,” Mr Lenihan said after taking part in a telephone conference of euro group finance ministers yesterday. “The agreement is first and foremost about safeguarding financial stability in the euro area. This will be to the benefit of all member states, including Ireland. The costs of all countries participating, including Ireland . . . would be fully covered.” Government sources said the Minister was likely to bring forward the legislation “in the coming weeks”, adding that the State could well make a profit on any loans it extends to Athens. Ireland’s contribution – between €450 million and €500 million, according to sources – will be set in line with the State’s 1.64 per cent holding of share capital in the European Central Bank. While the Government currently borrows at about 2.35 per cent over a three-year term, the cost of a three-year fixed-rate loan to Greece under the deal struck yesterday would be about 5 per cent. This would be significantly less than the rate at which Athens currently borrows, which is in excess of 7 per cent. With Greek borrowing costs at an 11-year high, the deal meets Greece’s demand to be able to borrow at rates nearer its euro peers as it continues a big retrenchment programme." http://www.irishtimes.com/newspaper/frontpage/2010/0412/1224268138322.html
Greece debt to foreign banks in billion dollars: - (source FAZ –Finanzmarkt - 09.04.2010) Germany - 43.2 France - 75.5 Switzerland - 64.0 USA - 16.4 Great Britain - 12.3 Holland - 11.8 Others - 79.4 Total: 302.6 Billion Dollars
For FredQuimby: "gold @ $27,000" Never forget the power of governments over our lives. It just takes the stroke of a pen to make trading in, and ownership of gold illegal, as FDR demonstrated in 1933.
I wonder what the Irish will make of this "not a bail-out" package.
While some "fear" collapse is near, I hope collapse is near. The sooner corrections begin, the less costly those corrections will be. Forestalling the inevitable will only make the pain greater. The cause is government worldwide and its borrowing. This cannot continue without ever growing costs, and has been, is and will remain a Ponzi scheme until its structural collapse. Believing politicians will do something against their own personal interests is amusing at best.
Hey look - the casino's already open and the punters are at the tables. The stock market is already up a bit. All is well with the world.
Chris Card I have not seen this fractional reserve bullion market. Do you mean ETFs? Where can I read of this. Thanks
For Steve Cox: "So, Ambrose, when will you be writing an article entitled, "British savers and pensioners are being punished for Brown's and King's errors"? Or don't you care about them?" The people suffering most from the current interest rate policy of the government are those who have been careful and frugal, lived within their means, not taken chances, not overextended themselves and SAVED. Those who are benefitting most are the overborrowed, the prodigal, the greedy, the spendthrifts, the stupid, those who have lived beyond their means. Spot what's wrong with this picture. We have yet to see how the Grey Vote will go.
"The cleanest option for Greece is an Argentine default with a 65pc haircut for creditors, and exit from the euro". I thought there was no exit from the EU available...once you are in, you are in!! The only exit I can see, is a FREEGOLD event and then a massive re-evaluation of the reserves of all EU countries because of it! i.e gold @ $27,000 and no more sovereign debt! ....(unless you are the UK and someone already sold your gold reserves....
"Ambrose: Just how should one protect themselves from this slow motion international financial crisis?" Use your common sense, Derwentwater. Pay down debt. Postpone major purchases. Don't try to be clever in the property market. Avoid the stock market. Be frugal. Don't commit any surplus funds long-term. Keep them close to you and as mobile as you can. If you're worried about inflation and you have limited savings, put money into Inflation-linked Savings Certificates (you're allowed up to £15,000 in each issue). There are no safe investments. Hunker down. Hibernate.
For Chelyabinsk: "Cameron has promised the markets an Emergency budget within 50 days of being elected." Cameron won't get the chance. Gordon Brown will still have more MPs than any other leader after the coming General Election and will remain in power with Lib-Dem support. Cameron is yet another unelectable leader chosen by the useless Conservatives.
Do tell us, Ambrose, that we won't have to bear gifts to the Greeks.
reply all Greece's own fault in this episode has been well-aired for months. I don't wish to absolve Athens for its own errors, but there is blame to go all round in this. Mt point is that only one party is being singled out for punishment -- at least so far. I felt exactly the same way about the IMF rescues in Asia in 1998, which were skewed to helping banks -- not nations. I do not think that incomptetent creditors deserve any more protection than incompetent governments. Default shares the pain. This column was written before the news on Sunday came out. The rescue looks bigger than originally suggested. So my comments have been over-taken by events. I will try to return to this theme today in a blog.
"Europe's banks are in turn stuck with fatal exposure" Shhhhhhhh.....the cover-up is going so well.......
Reply Steve Cox I don't cover the UK. My views on Brown are probably rather similar to yours.
reply steerforth. Grecee's external includes the foreign borrowing of the banking sector and other private entities. It is bigger than the public debt.
"Euro jumps as traders welcome Greek rescue". Daily Telegraph 6.41am 12 April. Well that's another Greek drama that didn't turn into a tragedy. Much to the chagrin of the Eurosceptics. The real tragedy will come when the markets run out of patience with Britain. That time is fast approaching. Cameron has promised the markets an Emergency budget within 50 days of being elected. Cameron must convince the markets with real cuts that he is going to chop a massive £185bn a year off government spending within 4 years. Britain, unlike Greece, will receive no support from Europe. The only resort would be another IMF bail out for Britain. Already British Treasury officials have been over to Ireland to learn how to do cuts. California, meanwhile cannot go to the markets at all as it has a debt rating on a par with Kazahkstan, and has to rely on a whip round among its own residents.
What a pity. The Euro is back to strength against the US$ and all because a credit line for Greece has been agreed. A strong Euro is bad for exports. A Greek bailout is bad for Eurozone morale and bodes ill for the forthcoming regional election in Northrhein Westafalia early May. The spectre of a red-red-green coalition protest vote in the biggest of German Länders looms on the horizon. Let’s hope the Greek’s can hold on by the skin of their teeth until after this election before asking for the money. Of course, they will ask for it no matter how often Brussels tells us “The Greeks have not asked for the money”. Brussels knows they will, we all know they will, the Greeks know they will. The question is, when will they? As soon as they do, the German Constitutional Court should come into play and rule a bailout illegal under European law over which German Law, of course, takes precedence, just like in any other EU country. Then, with a bit of luck, the Euro will go down again to a more competitive level. Can we afford such a scenario? No, AEP is right, it will undo too many banks in not just Euroland but also the UK. The fact that UK banks already stopped giving a credit line to Greece will, of course, ensure that Greece will need the bailout very shortly. How will they prevent for this particular can of worms being opened without destroying support for the present ruling parties from the German middle classes? We live in interesting times.
This "bail out" had better not cost the British people "one Penny".
The Greek people are being punished for their government living beyond its means. This has NOTHING to do with Europe or the Euro. The EU deniers get less and less credible every time they write. If you don't believe me rewrite this article changing 'Greece' for 'United Kingdom'. Same problem except that Brown created it purely of his own accord without a finger being lfted in Brussels. BROWN IS THE ENEMY NOT BRUSSELS Twerp
"Argentina's public debt was 62pc of GDP in 2001: Greece will top 120pc this year" "This is not a bail-out for Greece. It is a bail-out for European creditors that account for most of Greece's €391bn external debt (163pc of GDP" Please explain!
@Mike a Greek citizen: "Why we talk about Greek stats and not about Eurostat ability to checking Greek stats?" Because Greece is a sovereign country. It's your job to keep your finances sound, not the EU's job. As for the German Landesbanken: they never had a working business model and should be allowed to fail the sooner the better. The only reason they still exist is that they are a place to dump over-the-hill politicians.
Well ok ... i think we'll deserve a bankruptcy because our politians is cheaters. Because they know better accounting than eurostat and hiding debts better than other countries but also because we have politicians liars that only want to say that they "taked burned earth" from the previous party and selling lies to greek citizen and EU that previous goverment debts was bigger than they said before and "we are the best goverment to save you from debt because we will take it from rich men and we pay our debts". Well you can sell 2 times the same story inside your country (We have only 2 parties. What we can do? revolution is expensive) but the others countries does not likes when they hear that you are better in accounting than they are and you can hide better the debts than they are.... because a country must bankruptcy not when they have debts like any other country but because said lies to "friends" The only truth is that. Greek citizen earned from job monthly 700€ to 900€ working 43 hours per week. They must pay 350 € for rent 150€ for electricity, water and telephone/adsl 50 € for gas and let live with 150-250 € for all other things (market private education) hoping that their 10 years old car will survive and their health will be "Mediteranean" for so long hoping that will not use poor public health sector or rich private health sector.
"My own thinking here is that this is enough to get Greece thru, so long as the "austerity package" that comes along with this does'nt result in riots & strikes that bring down the government. Germany will not agree to provide more; this simply gives Greece a few months" http://themeanoldinvestor.blogspot.com/2010/04/update-411.html
Ambrose: Just how should one protect themselves from this slow motion international financial crisis?
The original thinking was that Germany by reuniting and europe expanding,there would be no problem in "folding" the weaker areas of the "EuroZone" into a rising sea of compounded wealth.At least the French,Germans,Dutch,Austrians signed off on this vision.The French knew that short of war,The Deutschmark would rule,so that was a deal."Euro"=reunited Germany. They could not fathom that in 20 years the U.S. and U.K. would suffer what they're suffering.Whats sad,and makes the Greek ironic allusions that more disturbing,is that they,the EU, have the money,gold,resources,technology to close this up,to combat the credit contagion,but they are wholly unprepared to play the role of F.D.R.in the thirties.It would be the day the world turned upside down,AGAIN.
As long as there is at least one premise that is believable, the thundering herd of the financial markets will base their extrapolations on the believable premise(s).
The really scary thing about Ambrose is that he is almost always right. Cornering the market in tin hats and entrenching tools looks like the only realistic way to become tomorrow's Warren Buffet Charles Langley
Ah, another excellent article. I love the historical background which Credit Anstalt interjects. It shows the shenanigans going on between Germany and France even way back then. The more things change, eh? And the predictions are getting as easy for AEP as shooting fish in a barrel, can't miss. With the numbers Greece is suffering from right now, default is a mathematical certainty. And leaving the euro is very nearly a logical certainty as well.
Greece needs Japanese interest rates to have any hope of recovery. 5% is a killer, and the whole "plan" looks more like a PR stunt, rather than a real offer of help.
"Greece borrowed too much and their statistics are rubbish. They deserve all they get. I am sick of bailouts for all the incompetence in the world, while people who are responsible are getting no reward" Noble idea, but the problem is that if Greece defaults, it might take down some very big banks with it when you also consider the credit default swaps on Greece.. then we come to Greek banks, Greek cities and the CDS's and debts of these entities. If Greece does default and leave, how will affect the euro currency itself ?? If it tanks, prices go up for the average serf EU wide. It's a big, complicated mess. This was just a bandaid.
The cleanest option for Greece is an Argentine default with a 65pc haircut for creditors, and exit from the euro. Argentina recovered fast after liberation. Greece could expect "decent growth" by mid 2011. I agree but with an 80% haircut, however Greece should not be made to leave the euro. Lance the wound get on with the healing.
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