The vaporware rescue plan
announced on March 29 2010 fell flat, failing to prevent a sustained huge 400+ basis point spread of Greek government bonds over German government bonds,
inaugurated on April 7 2010.
Jean-Claude Trichet has the unenviable position of the ECB not being parastatal enough for his statements to have teeth:
Two weeks ago, he said he was still assuming that there would be no need to keep the ECB’s relaxed collateral rules in place beyond the end of the year, and that it would be “very, very bad if the IMF or any other entity exercised any responsibility in the place of the euro group” in rescuing Greece.
Almost immediately afterwards, the euro-zone governments decided to ignore him and let the IMF shoulder as much of the burden as possible. But they did so without convincing the markets that Greece could be kept out of a crisis. That has now necessitated another embarrassing volte-face.
The bank has indeed kept to its intention to stop accepting lots of types of collateral that it only started accepting due to the crisis: foreign-currency debt, subordinated debt, debt that trades on unregulated markets — all of it will no longer be eligible at the ECB window from Jan 1, 2011.
By far the most substantial slack that the ECB is still cutting from that date is to sovereign bonds with ratings below BBB+. Who could he possibly mean? Greece, possibly? So much for not bending rules for individual countries.
No other euro zone state is within two notches of that rating. Either it’s another climb-down, or it’s an implicit forecast that credit ratings across southern Europe and Ireland are on a slithery slope to BBB+ and below. Even at the cost to his pride, Trichet must surely acknowledge that the first explanation is better than the second.
There is, of course, the question of whether Germany's analog of the U.S. Supreme Court will (or will not)
rule that the bailout is simply illegal for Germany to participate in:
Direct loans to Greece will require the endorsement of Bundestag, Holland’s Tweede Kamer, and the Irish Dail — which will have to vote for fresh debt of €450m under Ireland’s burden-sharing quota that it can ill afford . This will be no cake-walk.
The rescue has not yet been activated. It has become firmer, but remains talk.
The moment it is activated, it is likely to face a court challenge from the eurosceptic professors in Germany for breaching the `no-bailout’ clause of Article 125 of the EU Treaties. Germany’s man at the European Central Bank, Jurgen Stark, has already paved the way for this by stating that Greece does not qualify for an emergency waiver of this clause because the country spent itself recklessly into its current predicament. This crisis was not an earthquake, an Act of God, or the result of an asymmetric shock. It was home-grown, long-coming, and long-predicted.
The Bundesbank has furnished them with ample ammunition by leaking an internal memo that slams the rescue as a threat to economic stability and a violation of the no bail-out clause. It said the joint EU-IMF operation would turn the bank into a “money printing” machine and fiscal reflator. ” Currency reserves from the Bundesbank cannot plausibly be made available for such purposes,” it said.
The Latin and Anglo-Saxon media have underplayed or ignored altogether the importance of a challenge at the Verfassungsgericht. So have market analysts. There seems to be a collective failure to understand that certain things cannot be “fixed” by the usual methods of EU alchemy.
I recommend reading the
court’s thunderous ruling on the Lisbon Treaty in June 2009, a cannon shot warning to Brussels and the EU elites that it will no longer be pushed around. It states that the EU is “an association of sovereign national states (Staatenverbund)” and that states are “Masters of the Treaties” and not the other way round.
The EU’s fundamental order is “subject to the disposal of the Member States alone and in which the peoples of their Member States, i.e. the citizens of the states, remain the subjects of democratic legitimisation.”
It constructs a line of defence against infringements of German sovereignty, stating that certain fields “must forever remain under German control.”
Read it and judge whether you think this court will let any German government disregard Article 125 of the EU Treaties, and allow Germany to be dragged illegally into an EU debt union that profoundly changes the nature of Germany’s role in Europe.
'states are "Masters of the Treaties"', of course, is a clear statement that the European Union's foundations are strictly like the U.S. Articles of Confederation, rather than the U.S. Constitution.
It is ironic that other members of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) will be asked to
contribute bailout funds, should anything be activated.
Also, even the official EU predictions
indicate growing out of this is not a plausible option:
The most worrisome thing to me in the report, however, was something else:
"The real GDP growth assumption which is used for each of the three baseline scenarios is based on the path for the real potential growth rate of the euro area, as underlying the baseline long-term projections in European Commission and Economic Policy Committee (2009). According to this source, real potential growth gradually declines from 2.2% in 2011 to 1.5% in 2030." (My emphasis added.)
That's a shocking prediction. It's basically saying that Europe's economy will shrink, not grow in the next 20 years. I knew that Europe had terrible economic growth demographics -- and older population, no path to citizenship for immigrants in many countries, no ability for each country to set their own monetary policy because they all use one currency -- but I didn't see the future as being that bleak.
In the U.S., growth is expected to be a modest-for-us 2.5 percent or so gain in GDP this year. But if unemployment begins to drop, U.S. GDP should start rising back toward its more-normal 5 percent clip. That's one way you work off the big debts you've incurred, and as we have incurred.
Portugal's situation doesn't look that much better:
Next on the radar will be Portugal. This nation has largely missed the spotlight, if only because Greece spiraled downward. But both are economically on the verge of bankruptcy, and they each look far riskier than Argentina did back in 2001 when it succumbed to default.
Portugal spent too much over the last several years, building its debt up to 78 percent of G.D.P. at the end of 2009 (compared with Greece’s 114 percent of G.D.P. and Argentina’s 62 percent of G.D.P. at default). The debt has been largely financed by foreigners, and as with Greece, the country has not paid interest outright, but instead refinances its interest payments each year by issuing new debt. By 2012 Portugal’s debt-to-G.D.P. ratio should reach 108 percent of G.D.P. if the country meets its planned budget deficit targets. At some point financial markets will simply refuse to finance this Ponzi game.
I don't see an effective IMF aid program for Greece, as I don't see why the current regime should terminate itself by inciting civil war. (Do we really think the violent protests would stay within Greek-legal limits when 50% of the welfare net implodes, most government officials take a 25% pay cut, and the retirement age is instantly boosted from 59 to, say, 63?). The scheduled discussions (rescheduled to Wednesday April 21 2010 from April 19 2010 thanks to an Icelandic volcanic eruption) between Greece and the IMF may make sense as a last-minute effort to avoid triggering a bailout.
