The EU Is Reportedly Exploring Making a Loan To Greece

Pressure on Greek finances continues unabated. According to European Voice this morning the EU Commission and Finance Ministers remain most reluctant to call in the IMF (which I think would be the best solution) but they are themselves actively comtemplating providing some kind of IMF-type “straightjacket loan”. My only big fear here is that they take too long to put the necessary mechanisms in place while the situation in Spain continues to deteriorate, leaving wide open a serious contagion risk.

European Union officials are exploring the possibility of providing a heavily-conditioned loan to Greece instead of seeing it turn to the International Monetary Fund. Officials are worried about the possible impact on banks elsewhere in the eurozone of Greece defaulting on its sovereign debt. But they would prefer to avoid the ignominy of a eurozone country seeking IMF assistance.

The worry is not, in fact, that Greece might leave the Eurozone, or even default in the short term, but that unless someone external takes control of the situation the Greek government will prove unable to sell those much needed competitiveness reforms to a population which will not be happy about being faced with what looks set to be quite a steep economic contraction. As Martin Wolf said on Monday:

Given these tight constraints, a big structural fiscal tightening will generate a deep recession. That is sure to increase the cyclical deficit. Assume, cautiously, that for every percentage point of structural tightening there would be 0.2 points of offsetting fiscal deterioration. Then the structural tightening needed to reduce the actual deficit to 3 per cent of GDP would be close to 12 percentage points. The Greek government would find that, for every step it takes forward, it would slip a bit backwards. So far Greece has not suffered a significant recession. That seems sure to change. The government will soon be facing miserable public and private sectors, with no policy levers.

And PNB Paribas’s Luigi Speranza remains equally unconvinced:

In sum, while ambitious, the Greek Stability Programme did not resolve the main concerns expressed by the markets. Amongst the main shortcomings are: persistent lack of credibility of Greek statistics on fiscal accounts, lack of details on the adjustment beyond 2010 and overly-optimistic growth projections. A credible long-term strategy should be focused on sharp cuts to public spending, particularly for wages and pensions. But this would probably lead to strong social opposition. Against this backdrop, markets will remain sceptical on the feasibility of the overall planned adjustment.

The big fear has to be that a “contagion process” will lead the Greek problem to become a Spanish one.

In an interview with the Wall Street Journal yesterday Spain’s Finance Minister Elena Salgado stated that the government was preparing “deep” cuts in spending, cuts which will only add to the difficulties of an economy which is already reeling under the weight of a very strong contraction:

Spain’s Socialist-led government is trying to forge a broad political consensus with the country’s regional leaders to rein in one of the euro zone’s highest budget deficits, Finance Minister Elena Salgado said in an interview. Getting bipartisan support for deep spending cuts would be a crucial step to avoid the credit ratings downgrades now plaguing Greece, which this week has been scrambling to convince financial markets that it can get fiscal imbalances under control.

She also admitted that Spain’s deficit was likely to come in above the government forecast, which makes me rather nervous about the kind of market reaction we might then see, given the nervousness which has been produced by events in Greece.

The government recently warned it would surpass its forecast of a 2009 deficit of 9.5% of GDP. “It will be a little more, we hope not too much,” Ms. Salgado said, adding the overrun is the result of a new benefit introduced for the long-term unemployed and lower-than-expected value-added-tax revenue from a still ailing real-estate sector.

Basically, what the Spanish government lacks is a credible policy not only for reducing the deficit, but also for restoring growth and creating employment. How all this will finally work out is hard to see at the moment. It is, as they say, a “developing situation”. As one Greek economist friend pointed out to me Finance Minister Papaconstantinou yesterday limited himself simply to saying “We are not expecting anyone to come to our rescue,” …he didn’t say Greece didn’t NEED anyone to come to the rescue. Reading between the lines is evidently something of a fine art in the Greek case. But then, ever since the time of Demosthenes, the art of rhetoric has been one of their strong points.

In similar vein, a spokeswoman for the European Commission, on being asked this morning by Dow Jones Wire Service about the reports said “she isn’t aware of any financial bailout packages being arranged for Greece”. Well, in the first place they may exist, even without her knowledge of them, and in the second, they would have to be total fools (which they most definitely are not) not to have any kind of contingency arrangement under the circumstances (for imminentl deployment or otherwise), and even while some degree of Euro weakening has been welcomed by some, there must be a “stop loss” button they can hit somewhere if the slide continues and if the spreads continue to rise. In Greek markets, the premium demanded by investors to buy Greek bonds compared with benchmark German Bunds rose to 311 basis points yesterday, the highest since the euro was introduced. The yield on Greek 10-year bonds is now 6.2 percent. And talk of issuing a people’s bond, or bonds in US Dollars or Yen will do nothing to calm things down. And the yield premium on ten year Spanish bonds over the German bund jumped to over 100 bps this morning, a level which hasn’t been seen since April last year. Whatever the issues of communal pride, simple damage containment considerations suggest the Greek government should be calmly told to go to the IMF, and they should be told to go now.

This entry was posted in A Fistful Of Euros, Economics and demography, Economics: Country briefings, Economics: Currencies 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".

4 thoughts on “The EU Is Reportedly Exploring Making a Loan To Greece

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  2. I think this is classic EU. You declare that the problem is severe, then you express confidence in the Greek Government to solve it, then you solve it for them with “tight constraints” and voila, you have turned an economic crisis into a mechanism for the EU to exert more control, all the while saying “Nothing to see here, move along”.

    Of course, it goes without saying that an IMF loan would come with tight constraints as well, but at least the IMF would go away in due course, when their loan, coupled with disciplines, had put you back on track. I think the Greeks will find that the EU will never go away. If the EU makes a loan to Greece, the EU will still be co-signing the cheques a decade from now.

  3. Bottom line: Help from the EU where Greece has a veto on every important issue and a vote based on her population sice: Evil power grap.

    Help from the IMF where power is solely based on money and Greece has no vote at all: No evil power grap at all!

    Lets stick to the narative: EU evil.
    Euro, evil. Germany, evil, France evil. US,UK, Singapure etc, libertarian paradise!

  4. “…Greece has a veto on every important issue…”

    Really? Does Greece have a very special kind of EU membership, then?

    Or, maybe, wait, here’s an idea; someone else decides which are the important issues. Is that how it works?

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