And It’s A Bailout…..

Well, it’s not fully official yet, and all the fine print certainly isn’t written and signed, but the will is now clearly there, and where there’s a will, there’s a way, especially when you have the global financial markets breathing down your necks. The first one out of the box was the Economist’s Charlemagne, earlier this afternoon.

In Brussels policy circles, the question asked about a bailout of Greece used to be: are European Union governments willing to do this? Now, I can report, the question among top EU officials has changed to: how do we do this?

Twice in the past 48 hours I have heard very senior figures – both speaking on deep background – ponder the political mechanics of how large sums in external aid could be delivered to Greece before it defaults on its debts: a crisis that would have nasty knock-on effects for the 16 countries that share the single currency. One figure said yesterday that heads of government could not wait “forever” to take decision. That means a decision in the next few months, at most.

By sundown the story had gotten a bit more traction, with the FT running an article under the header “EU signals last-resort backing for Greece“.

The European Union made clear on Thursday it would not abandon Greece and let Athens’ mounting debt crisis jeopardise the eurozone, even as Germany and France played down suggestions they had already formulated an emergency rescue plan.

“It’s quite clear that economic policies are not just a matter of national concern but European concern,” José Manuel Barroso, European Commission president, told reporters in Brussels. According to high-level EU officials, Greece would in the last resort receive emergency support in an operation involving eurozone governments and the Commission but not the International Monetary Fund.

And by sundown the New York Times were running the story:

France, Germany and other European countries have begun discussing privately how they can come to the aid of fellow euro-zone member Greece, as doubts intensify over the country’s ability to get its budget under control.

Despite public attempts to discourage such expectations, discussions are under way, although the shape or scale of a possible bailout package has yet to be determined, according to officials in several capitals, all speaking on condition of anonymity.

“Greece failing is not an option and lots of people think that we will have to intervene at some stage,” said a euro-zone finance official, who was not permitted to speak publicly because of the sensitivity of the matter. “It doesn’t have to happen, and we hope it won’t, but it would be better than seeing a default.”

Of course, we haven’t gotten to the actual bail out yet. Timing will depend very much on what happens in the financial markets over the next few days. The spreads on Greek bonds widened strongly again today – reaching a record 4.1 percentage points over German bunds. As the Economist puts it in another piece:

The bond market’s skittishness puts more pressure on the Greek government to come up with a credible plan for fiscal retrenchment. A pledge to follow Ireland’s example in making substantial cuts to public-sector wages may now be necessary to ensure Greece can fund itself at reasonable cost. Having raised €8 billion this week the Greeks probably have enough money to see them through until May, when a chunk of their long-term borrowing falls due. The danger now is that market sentiment spirals out of control. If that happens, only the most radical measures, or a euro-zone bail-out, will turn things around.

The bail-out will now surely come, but first it would be better to have the EU Finance Ministers meeting on February 9 and 10, and the national leaders summit on 11 February. The key now will be to see the conditions imposed, and whether they are realistic enough to bring about a return to economic growth and debt sustainability over a reasonable horizon.

Basically all these reports today only confirm the contents of my January 21 piece – The EU Is Reportedly Exploring Making a Loan To Greece – contents which were based on a report in European Voice, a report which, despite all the denials at the time, now seems to have been accurate. The decision also means that the Commission remains adamant not to let Greece go to the IMF. In this case, I do really hope they know what they are at, since failure in the Greek case would immediately expose Portugal, and more importantly Spain to massive market pressure.

Finally, having started this piece with a quote from Charlemagne, I will close it with another one. This time, though, there is a difference, in that in this extract it he who is citing me, rather than I who am citing him:

The bloggers over at A Fistful of Euros offer a view of the Spiegel leak that puts the report neatly in context:

“there would seem to be an underlying transition going on here, one which in EU terms is quite rapid. The EU’s own analysis of the problems in the Eurozone is coming nearer and nearer to that of both the IMF and the credit rating agencies. We are moving beyond short term fiscal deficit issues, and immediate liquidity issues, towards problems like competitiveness, and what was previously a taboo subject – the issue of Eurozone imbalances”

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings, Economics: Currencies, Political issues by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

22 thoughts on “And It’s A Bailout…..

  1. A very interesting article. However, I find there an assumption, that everybody else seems to make as well, but which I feel is unproved and possibly dangerous:

    I do really hope they know what they are at, since failure in the Greek case would immediately expose Portugal, and more importantly Spain to massive market pressure.

    Everybody seems to believe that these countries are dominoes and that the only way to prevent Spanish and Portugal dominoes to fall is to prevent the Greek one from falling. But maybe that these dominoes are independent. In other words, if Greece is bailed-out to safety, maybe the next morning “massive market pressure’ will move to Spain and Portugal as the next weakest player. You can put your finger in a hole of a dam to prevent it from getting bigger, but if you have several holes closing one of them will do nothing (or only add pressure) to the others.

    How could a bailout of Greece convince the markets that Spanish problems have disappeared? That is what this domino theory really boils into…

  2. Hi Perplexed:

    “How could a bailout of Greece convince the markets that Spanish problems have disappeared?”

    It couldn’t. Clearly. But it could convince the markets that the EU and the ECB had the will and the tools to act. This is what the present Eurozone contagion is all about. In my opinion Spain’s problems are worse than Greece’s, but they haven’t fully arrived yet. The Spanish spread is only breaking through 100 at this point, while the Greek one is around 400 bps.

    Unless the European institutions can successfully resolve the Greek situation (as M Trichet keeps reminding us Greece accounts for a small fraction of Eurozone GDP) how will it resolve the Spanish ones.

    Maybe the assumption I am making which irks somewhat is that these countries are now no longer able to resolve their own problems unaided. Things have gone beyond that. Two and a half years of inaction since the crisis broke out are enough time to allow people to put their own problems straight.

  3. Thanks for your fast reply. Your interesting comments generate further thoughts.

    – The PIIGS debt problems have the same origin (interest rates too low for too long), but have evolved independantly. Bailing out one country leaves the other countries problems intact.

    – ” In my opinion Spain’s problems are worse than Greece’s, but they haven’t fully arrived yet.”
    Your blog does an excellent job of demonstrating that. Greece is worse than Spain now, but in about the same way that Ireland and UK were seen as superior (economically) to France in Germany until ca. 2007… A popping bubble does change the landscape.

    – I fear that the people who accept now to pay Greece bill (bailout) will be presented with the Spanish one later.

    As a part-time taxpayer of a Vieille Europe country, I don’t really want to convince the markets that “the EU and the ECB will have the will and the tools to act”. You write extensively on Spain and on the extent and damages of their debt problems. Do you really believe that the EU has money enough to bail it out? If Spain is too big to be bailed out, then I don’t see the point in spending significant amounts of money in Greece in the vague hope that somehow the markets will be impressed enough by our resolve to do nothing when the Spanish clock chimes.

    What is frustrating here is that all ways seem awful. And it is difficult to assess which are less awful than the others. And for who.

  4. It’s telling that the Le Monde story which contributed to the frenzy included the detail than an acceleration in structural funds was being considered

    Et le versement de fonds structurels dévolus à la Grèce d’ici à 2013 pourrait être anticipé.

    That’s not an idea that would come from idle uninformed speculation — it means that discussions are taking place in high circles about it.

  5. “According to high-level EU officials, Greece would in the last resort receive emergency support in an operation involving eurozone governments and the Commission but not the International Monetary Fund.”

    That makes perfect sense, since the IMF would probably advise the Greeks to devalue to restore competitiveness. “Whaddyamean you can’t! Oh, riiiiiiight”.

    “Greece failing is not an option and lots of people think that we will have to intervene at some stage”

    That’s like saying that if I break my leg and the doctor intervenes to put on a splint, my leg isn’t broken.

    Seriously, I can see that a bail-out from EU will help in the short-run, but what does it do about the longer-term problem?

    Back in the glory days of our Labour Party, Britain got bail-out after bail-out. Some from West Germany, some from the US, and in the end a big one from the IMF.

    It was the IMF bailout – or rather the conditions that were attached to it – that worked the trick, because they forced a reduction in Government spending and paved the way for Maggie. The previous bail-outs had just been sticking plaster on the wound, because no conditions were imposed.

    If the EU imposes real conditions on a bail-out, it could help Greece in the long run, but it will signal a large step in the direction of a federal Europe in which Brussels has a much large say in national fiscal and economic policies. It will also signal an abandonment of the notion that Euro membership promotes convergence by itself. Chilling news for the other PIIGS. They are all going to be measured up for electronic ankle bracelets.

    But there are a lot of ifs there. If I had a vote, I would vote to cut Greece free right now, let them call in the IMF, and leave the Euro stronger as a result. A short period of political embarrassment is preferable to a festering wound.

  6. But is bailout an solution? I don’t think so, it is only postponing the inevitable. Because it does not solve the core of the problem, which is the incredible high level of debt of many states worldwide. The governments of the U.S.A, Great Britain, Japan, to name only a few of the more important economy’s in the world, all suffer from sky-high debts. Now the world-economy is jammed, the only way they can find the money to pay back their loans, is borrowing even more money. But there is a limit to this system; you can’t go on forever. If you do, at some point you must use more than 50% of the state income, just to pay for the interests on your loans. Another thing that is accelerating the problem, is that the more debt a county gets, the more the doubt will grow at the money providers that this country is able to pay back, resulting in higher interest rates. That’s why Greece pays now about twice at much for its loans than Germany does. Now, an considerable economic grow can be a solution, but in my opinion this will not occur. Not in the last place because, in my opinion, for actually this credit based economy (living on future income) itself, is one of the main causes of this crisis. What we see today is that the level of debt in several countries has reached the critical level, they just are not any longer capable (or willing to face the consequences) to pay back. But most of the countries that are asked to bail them out, are in an unhealthy economic situation themselves. So I predict that in the not so far future, lets say in a couple of years, some minister of finance of an important economic country with an unbearable burden of debts, will find himself in such a hopeless situation, that he is desperate enough to put the red button on the money-printing machine. But this will open Pandora‘s box. Money will soon loose its magic, and people will notice that without trust, a banknote is what you see; just paper….

  7. I’m wondering whether it is purely a coincidence that these rumors come just a couple of days after the so called ‘fiasco’ with the Chinese.

  8. Feeding Greece with accelerated money from Structural funds and Framework Programm, the biggest instruments redistributable by EC officials (contrary to agricultural subsidies which they can not redistribute), is nothing new. This occurs already from the begin of 2008. But 1) the sums are small related to the hole in GR finances, 2) Structural Fund activities must be pre-financed from national funding, so this is either costs as income.

  9. It couldn’t. Clearly. But it could convince the markets that the EU and the ECB had the will and the tools to act. This is what the present Eurozone contagion is all about.

    Or for all we know, Greece could be Bear Stearns and Spain could be Lehman Brothers. Greece’s small size is one reason why the EU could be rescuing it – it’s not going to cost them a lot. How many times larger than the Greek GDP is Spain?

    As far as Greece in general, there’s a lot of “not yet understood” items on this bailout. What’s the terms and will the Greek population that has intentionally not understood anything of this crisis up to this point accept them? This is probably the first time that the EU or its institutions will take a modicum of control in one of its member states. Are Greeks (and their politicians) going to like being told what to do by a German?

  10. “Now the world-economy is jammed, the only way they can find the money to pay back their loans, is borrowing even more money.”

    I think that is correct right now, but in the long run we have to find a way to rebalance individual economies. That means reductions in Government spending and reductions in social benefits.

    Together, such reductions, in effect, reduce the “overhead” costs in developed economies, and make their production more competitive on the World market.

    At that point we can look forward to addressing the imbalances between economies.

  11. Perplexed,
    “The PIIGS debt problems have the same origin (interest rates too low for too long)”,
    why are you so sure about this?
    I am not saying that is false, I just ask.

  12. to jon

    You have forgotten that the situation is exaggerated by the ECB not meeting its only objective – price stability – 2% annual increase.

  13. Carlos,
    The one-size-fits all interest rate policy of the ECB by definition results in an interest rate that corresponds to the average need of the eurozone (assuming a good judgement from the ECB governors). Germany is 40% of the eurozone ; the periphery country that have problems now count for a much tinier amount. Thus ECB policy was focused on the needs of low inflation core Europe (Germany, France, Netherlands, and Belgium, Austria…). This led to interest rates way too low for higher inflation PIIGS countries. When the euro was introduced interest rates (ie borrowing costs) were aligned to that of Germany and thus went sharply down in these countries. That was presented as a good thing (“Thanks to the euro you can now borrow at the same terms than the Germans…”). But the actual result was over-borrowing in these countries (from private sector, public sector or both), resulting in a huge debt that has now reached a critical level.
    Edward Hugh just presented in one of his lovely graphs the inflation rate in Spain over the last few years. It would be very interesting to plot the same for Germany (the rate is always 2 or 3% lower). Then to plot the resulting real interest rate (interest rate minus inflation). It would appear that real rates were very small or negative for PIIGS countries for most of the period since the euro apparition.
    Very low or negative interest rates generate debt and asset bubbles, which is what we see now. The usual way out is austerity and devaluation. With no devaluation possible the only way out is severe austerity, dubbed internal deflation. Economists talk cheerfully about it, but whether the people will accept it is another matter. In my opinion, the danger lies here.

  14. To Perplexed

    Your presentation, inter alia, represents only one side – the monetary – of Eurozone imbalances. Even here at afoe occured a more lengthy discussion about the other – real income side.

    On the real income side Germany’s behaviour has been very dangerous. Following 20 years of extreme wage dumping (for some segments real wages have decreased for 50%) Germany has reached extreme surpluses in trade with other Eurozone and EU countries under FTA. But this can not be a strategy for all, because Germany’s surplus will be deficit for its trade counterpartners.

    This major imbalance has decreased in the first half of 2009, but is now growing again extremely. The present growth is significantly based on lower costs for German businesses effected by lower costs of German public spending programmes, combined with extreme protectionism of these programmes even inside of the EU. The future strategy, supported by the FDP, is to continue the extreme wage dumping and to increase competitiveness by tax lowering which are able on a major scale due to low borrowing costs for German sovereign debt. Needless to say that this strategy can bear fruit only inside of Eurozone (and pegged countries) because of relative EUR strength.

    This circulus vitiosus on the real economy side is at least as destructive as the debt crisis on Eurozone’s periphery

  15. govs from Latvia:

    I agree with you. Deliberate ‘beggar your neighbours’ real income policies in Germany are the mirror of the monetary issues of the PIIGS, two sides of the same (euro) coin. PIIGS can’t devaluate, and that is now slowly killing them, while the euro has liberated Germany from the re-evaluation that would (and should) have automatically followed their wage dumping policies.

  16. Perplexed, thanks for your reply.
    So you think that the monetary policy of ECB caused high inflation in Spain, etc., and this decreased the competitiviness of these countries.
    But, even now, the cost of living in Germany is higher that in Spain. And Germany is more competitive that Spain. I do not see a direct relation “per se”.
    My opinion is, if I remember correctly, that Spain (I am spanish)has lost productivity compared with that other countries. And I think that this loss is not independient of which economic sectors and activities were the engine of the spanish growth (and who says spain, says other countries).

  17. Is this the first “sovereign debt crisis” ever in which the object of the crisis has neither a) failed to make payments b) failed to raise funds c) failed to roll short-term loans or d) had to pay more than six per cent?

    It seems a purely virtual crisis to me.

  18. To Carlos

    German wages must be viewed in context with German productivity and investment and living costs. One of the big achievements of the EU in its best days was allowing for Germany and France to build large-scale production feasible to construct only due to existence of the EU market, and gaining this way global competitiviness.

    Investment has grown due to large savings-share which is, however, selfish policy.

    And now you have in Germany a large sector of 400-EUR jobs which has exploded in last 6 years.

  19. Hi, govs.
    I have noticed that you do not like Germany (jijiji).
    Well, I think I understand what you say.
    However, wages are set by the labor market.
    You say that wages have been falling but, is it good from the point of view of the german workers (or workers in Germany, in general)?
    And low wages do not cause an increase in productivity.
    I know that labor markets things are not politically neutral. But this has to do with minimum wages and collective bargaining.

  20. A small correction – I am not very funny about the policy of the Bundesrepublik, and for me as for many of partial or full German origin here in Baltics the Germany is not the same as Bundesrepublik.

    Regarding wages in Bundesrepublik you must accept that there was some established equilibrium with higher productivity and therefore higher income of workers in Germany. That was essentially possible due to FTA in European Community. This was true until approx. 1990.

    After that competitiviness of Bundesrepublik started to vanish. The response was wage dumping which is until now the leading economic policy in the Bundesrepublik. Besides of punishing internal consumption, this is a disequilibrium policy in the EU. And it is very selfish policy during the actual crisis, because currency can not appreciate. Cf China

  21. Carlos:
    I was swamped in the last two days with limited internet access, and I apologize for this late posting.

    I agree with your comments re the structure of Spanish economy compared to that of Germany. Before the euro, these differences didn’t matter as periodic monetary adjustment would compensate. After the euro, this adjustment became impossible and the differences grew. Worse, the too low (for Spain) interest rates of the ECB pushed Spain further on the road of a bubble economy. Thus the euro accentuated the divergence between the PIIGS and Germany rather than erasing it.
    The big mistake of the euromakers was to believe that with the same treatment the patients would develop the same disease. It was called ‘convergence’. It didn’t happen. The patient for which the treatment was appropriate (Germany) became better, the patients for which the treatment was not (PIIGS) became more sick.

    Regarding the effect of low interest rates on debt and asset bubbles, I don’t think that we will ever get a better experimental proof of the link between low interest and debt and asset bubbles than the situation now in Spain, Greece, Ireland, Portugal, US, Canada, Australia, etc.

    Note that, depending on local regulations, the debt bubble in these countries may be private, public, corporate, house-related, finance economy related, or a combination of those. It is very striking to see that countries as different as Greece, Spain and Ireland got into very similar troubles. This suggests that the common point (low interest rate) is the critical factor.

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