It’s hard to see how this deal fixes the Greek crisis.
Postpones the day of reckoning, sure.
News that members of the European Monetary Union have agreed to provide up to $41 billion in loans to Greece over the next year will almost certainly allow the country to refinance the $40 billion or so in debt that comes due in 2010. And at a lower 5% rate of interest than the 7.45% the market was demanding on 2-year Greek bonds last week.
But provide Greece with a long-term path to solvency? No.
The country faces draconian spending cuts and higher taxes that are almost certain to prolong the Greek recession. That will further reduce government revenues and increase the deficit. The Greek economy is fundamentally uncompetitive in the world right now. If the country wasn’t part of the euro, Greece could depreciate its currency, making its goods cheaper and its industries more competitive. But Greece doesn’t have the option. That leaves cuts to real wages as the only alternative and I don’t see that Greek politics will let any Greek government deliver the kind of pain to the average Greek worker that this “solution” would require.
Worst of all, this deal makes the fundamental problems in the European Monetary Union worse.
The Greek crisis revealed that the union has no bureaucratic mechanism for dealing with this kind of crisis and no political will to tackle the big discrepancy between wealthy and globally competitive northern members such as Germany and poorer and globally uncompetitive members in the south such as Greece and Spain.
The monetary union is waiting tensely to see what kind of austerity program Spain comes up with to fix a deficit that at 11.2% for 2009 was only marginally worse than Greece’s 12.7% deficit. (The European Union target is a 3% deficit.)
Spain’s first austerity plan, introduced back in January, was derided by economists and financial markets as inadequate. The cuts in government spending proposed, the near freeze in government hiring, and a few tax increases seemed inadequate to the job at hand. At the same time, the plan immediately ran into opposition from labor unions and Spain’s powerful regional governments. With Spanish unemployment near 20%, it was hard to see how the government could deliver even the plan it proposed.
Will the Greek loan deal make the Spanish government more determined to fix its own problems? Or will it now decide that Spain can count on a loan deal too?
I think you know the answer to that one.
It looks like the smoke and mirrors bounce the Euro picked up over the last few days from the “rescue” announcement is clearing. Just put on a position of EUO (double short the Euro). Spreading the problem within the monetary union doesn’t seem to be a solution to me. I’m thinking “whack a mole” is the operative investment perspective with respect to the Euro zone, and leverage is the way to play it. I’ve been wrong before, and could well be again. This is a short term trade for me, I’m sure they haven’t run out of smoke or mirrors.
not clear how it’s in greece’s interest to stay as part of the euro zone but maybe they have decided that short term pain is worth longer term benefits. that’s highly unusual behavior in a representative democracy and as the pain intensifies i can see a greek nationalist party gaining power and taking themselves out of the euro zone. any time you make a country’s population feel picked on it’s a great unifying effect.
I do wonder what it will mean for the USD. The EUR has beeen rallying in all of this and some are predicting it will rally to 1.40 over the dollar. But even though the EUR rallied the past several days, oil has rallied too. it’s usually been the opposite. i don’t know i”m perplexed..everything seems to be whaco right now.
Does this mean we will see a higher dollar ? With it a fall in the usa stock market, higher demand for dollars, lower usa interest rates, and a fall in commodity prices ?
i actually don’t see it as bad, this gives Greece some time to see and plan what they will do (buying some time).
but i would like to know is what would happen if they dont give the loans and the financial market stopped buying the bonds and Greece defaults. how would that effect the Euro,,
this is not trick question, i actually don’t know
Personally I think this is like I said. To the politicians in the stronger EU countries this is about proving the union is strong and will stand together (i.e. they are right about forming the union).
The other wild card though is the people, how long will the German people put up with this? They already see Greece and others as irresponsible, and hate the idea of bailing them out.
To the people in Greece and such they simply blame it all on their politicians, and see no reason that they should pay for the problems.
My biggest problem with this is just how do you use this to invest? I guess you can bet on a stronger dollar, at least for the time being.
The loan package is just “kicking the can down the road”. It does not address the systemic problems with the Euro Zone. The Euro Zone will need to strengthen the political and economic ties or face eventual breakup.
The loan package further demonstrates the Euro Zones limited tool kit and highlights their inability to resolve internal competitive disadvantages (trade imbalances).
The game will be over when Germany is holding all the Euro’s….
I guess the euro will be doing the “Limbo Rock” soon: How low can you go…
For Germany and EU, these cases are like ‘Damned if you do and damned if you don’t”..isn’t it?
If they don’t bailout, then it will have ripple effects and whole EU will go for a spin due to the Euro and everything.
If they bailout, that sends a message of complacency and is politically a suicide for the well performing nations such as Germany.
All is well during good times, European economy is doing great, Euro is soaring, everyone is happy. But times such as this is when the strength of the union is tested. And my guess, it’s not holding up pretty. Is this the beginning of the end of the union?
Even thought I thought EU would work out some kind of rescue, I’d rather EU kick Greece out. Greece never really qualified anyway. EU should forget about eastward expansion.
Politicians, at the end will ALWAYS do whatever is good for them, not the taxpayers. All politicians want bigger power, not smaller one. German and French leaders just can not sit there and watch themselves becoming a second or even third tier players on international stage. They have to keep EU big, not small. I could not see for any other reason why they bailout Greece.
Ed, all the more reason for Spanish politicians to sit back and wait for the rescue. If the EU won’t let a light weight like Greece pay the price, then it’s even less likely to get tough with Spain.
Jim,
The only problem with that comparison is it’s like comparing a hangnail to a broken leg.
Greece: $338 billion GDP
Spain: $1.466 trillion GDP
(according to the 2009 CIA World Factbook, via Wikipedia)
And we still have Italy and the U.K. waiting in the wings, each with over $2 trillion in GDP.
Fasten your seat belts. We’re in for a bumpy ride…
The ECB and Jean Claude Trichet have opened the valves. Let the gravy start flowing now!