The Greek bailout: a poker game between Europe and debt holders
Posted on 03. mai, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés
The European countries announced with great pomp that the giant rescue plan for Greece has been finalized. The plan consists in 110 Bil EUR endorsed by the European countries for 80 Bil and by the IMF for the remaining part. The loans will be freed as soon as next week before the redemption of the next Greek bond on May 19.
Since January, the market has been requiring a clear resolution of the Greek situation. The European countries thought that verbal commitments would be enough to reassure investors and avoid putting money in the table, in a repetition of the aftermath of Lehman’s collapse, where governments’ guarantees on interbank loans successfully restored the frozen financing market. But this turned out to be insufficient in the Greek case as Greece, contrary to European banks at the climax of the financial crisis, is facing a solvency crisis on top of a liquidity crisis. As a result, European countries have eventually been obliged to raise unprecedented financing means to help Greece overcome the crisis.
The austerity measures imposed by the European Countries will trigger a deflationary spiral in Greece: increase of the VAT by 2 points, decrease of public wages by 10%, drastic cuts in pension plans… Such fiscal retrenchments will necessarily result in a social backlash.
This plan worsens the global European solvency problem in several respects. First, it increases systemic risk as investors are now going to question the possibility of Portuguese and Spanish bailouts. Second, the austerity measures designed for Greece are not credible since they have been imposed by constraint and not approved by the Greeks themselves. Last but not least, the European countries have not set up a global austerity plan to sort out their unsustainable public debt deterioration. If Greece is imposed such a severe austerity cure, why should Portugal, Spain, Ireland and eventually France be exempt from it?
The EUR/USD bearish trend has a great chance to speed up as the whole euro zone is weakened by this rescue. While moral hazard will prompt investors to hold again high-yield Greek bonds with the backing of the European States, the European debt as a whole will be at greater risk and will be a little more so after each future bailout.
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