Tuesday, February 16, 2010

Germany Growls As Greece Balks

Germany Growls As Greece Balks At Immolation

EU Orders Greece To Cut Deeper
Greece Tells Eurozone It Needs Time
Britain And The 'PIGS'

By Ambrose Evans-Pritchard, Telegraph.co.UK | 14 February 2010

Holland's Tweede Kamer has passed a motion backed by all parties prohibiting the use of Dutch taxpayer money to bail out Greece, either through bilateral aid or EU bodies. "Not one cent for Greece," was the headline in Trouw. The right-wing PVV proposed "chucking Greece out of EU altogether". Germany's Bundestag has drafted an opinion deeming aid to Greece illegal. State bodies may not purchase the debt of another state, in whatever guise.

The EU is entering turbulent waters by defying these irascible and sovereign bodies. It had no choice, of course. Europe's banking system was— and is— at imminent risk as Greek contagion spreads across Club Med. The danger of a "sovereign Lehman" setting off a chain reaction is very real, with Britain too in the firing line. I find myself in the odd position of backing drastic EU action, for fear of worse. We all go down together if this escalates.

The last two weeks have cruelly exposed the Original Sin of monetary union: that EMU was launched without an EU treasury or debt union. This will be tested again and again by bond vigilantes until such a mechanism is created. Europe's hope of fending off markets with "constructive ambiguity" must fail, as will become obvious this week if EU finance ministers fail to flesh out rescue details.

German Chancellor Angela Merkel did not look happy as reporters reminded her of the Bundestag's injunction when she announced that Greece would be saved from the wolves. The Frankfurter Allgemeine summed up German feelings when it asked why taxpayers should bail out a country that thinks it an outrage to raise the retirement age to 63. "Should Germans have to work in the future until 69 instead of 67 so that Greeks can enjoy early retirement?"

No wonder Mrs Merkel refused to discuss details of a rescue in Brussels, let alone offer hostages to fortune. Yet if she blocks Europe's leap to fiscal union at this fateful moment, she dooms monetary union to failure. Such is the Hobson's Choice that has awaited Berlin ever since Maastricht.

Global bond markets are watching in fascination. They spotted the contradiction in last week's message: that 'Greece will not be left to default'; yet aid is conditional on 'full Greek compliance'. So what if Greece does not— or cannot— comply? It is a fair bet that China's reserve fund (SAFE) will not invest a single yuan of its $2.4 trillion stash on Greek or Club Med bonds until this ambiguity is replaced by a clear guarantee.

We can deduce this from events last year when SAFE liquidated holdings of Fannie Mae and other US agency bonds because they lacked explicit backing from Washington. It switched to US Treasuries. Russia did likewise, though at a more delicate moment in the crisis, and with "hostile intent", according to Hank Paulson's memoirs. The US Federal Reserve averted a mortgage bloodbath by purchasing $1.5 trillion of housing debt.

Who will do likewise for the Greek state, or for Italy? The European Central Bank is banned by the Treaties from buying EMU sovereign debt. Europe's leaders still refuse to face the awful truth: that monetary union is unworkable as constructed. That different labour markets, different sensitivities to interest rates, different economic structures, have caused the gap between North and South to grow ever wider; that a chunk of Europe is priced out of EMU by 30%, has swung from boom to bust, and is on the cusp of a debt-deflation spiral.

Spanish unions have accepted a 1% pay deal this year, only to be undercut by reports that Germany's IG Metall may accept zero. Must Spain slash wages to close the gap? What would that do to a country with 19% unemployment and total debt near 300% of GDP? It is easier to restrict talk to Greece, to insist that Athens cut its deficit by 4% of GDP this year even as the slump grinds deeper— an 'IMF-style' austerity package, without the IMF cure of devaluation.

Can such a policy work with public debt nearing 125% of GDP this year? It may tip Greece into a debt-compound trap and prove self-defeating. But there is a broader point. If every Club Med state— plus Britain soon, and [even] France— squeeze fiscal policy at the same time they may bring about Phase II of our depression.

Greek premier George Papandreou is already chafing in any case. His country has become a "guinea pig". Rival EU factions are "playing doctor" and pursuing their own agendas. Brussels was "complicit from the start" in Greece's tragedy, he told his cabinet, and has since "created a psychology of looming collapse, that [has] risked becoming self-fulfilling".

Does this sound like a man ready to immolate his country to please Germany[!?!]


EU Orders Greece To Cut Deeper
Brussels Has Given Greece Two Weeks To Answer Allegations That It Used Complex Derivatives Earlier This Decade To Mask Its Public Debt, And Called For Even Tougher Austerity Measures To Bring Its Budget Deficit Under Control.

By Ambrose-Evans-Pritchard | 15 February 2010

Public sector strike in Athens— EU orders Greece to cut deeper Photo: Sipa Press/Rex Features

The escalating demands came as Greek finance minister George Papaconstantinou bared his soul in Brussels, confessing that public finances were out of control. "We are trying to change the course of the Titanic, it cannot be done in a day," he said. Ollie Rehn, the EU's economics commissioner, said Greece must brace itself for yet more retrenchment, despite the risk of pushing Greek society to snapping point. "There is a clear case for additional measures," he said.

EU officials doubt whether cuts announced so far can reduce the deficit from 12.7% to 8.7% of GDP this year,. especially after fresh data showing a sharper economic contraction last year than expected. A briefing note by the European Central Bank for EU ministers meeting last night calls for a rise in VAT, fuel duties, and luxury taxes, as well as extra spending cuts. Jean-Claude Trichet, the ECB's president, said the whole Greek nation must understand that the country has been on an "aberrant trajectory".

However, there is a risk that too much fiscal tightening could prove self-defeating. "Greece needs to adjust, but the starting point is awful and truly threatens an economic collapse," said Kevin Gaynor, head of credit at RBS. Mr Papaconstantinou said last week's show of support by EU leaders was not enough to "stop markets attacking Greece". He called for a clear rescue mechanism, though EU finance ministers and officials seemed unwilling on Monday to offer more than 'tough love'.

While Greece's PASOK government still enjoys sympathy, this has begun to erode after premier George Papandreou lashed out at Brussels last week. He said his country had become a "guinea pig", and that Europe's own credibility was on the line. The mood has been soured further by claims in the New York Times that Greece used currency swaps and sold off future fees from airports, roads, and the lottery to mask liabilities. Some transactions— mostly in 2001, but also later— were organised by Goldman Sachs. While legal [at that time], they may not have been revealed to the EU's data office Eurostat.

Volcker Wissing, finance committee chief in Germany's Bundestag, called the deals a grave breach of trust. The affair may make it less likely that the Bundestag will endorse a debt guarantee or loan package for Greece. Germany's Constitutional Court has already issued rulings that prohibit— or complicate— any bail-out for EMU states.

"German opinion polls suggest that any government-led bailout would be political suicide," said BNP Paribas. The bank said the EU is incubating a "deflationary shock" for all Europe by forcing Club Med to tighten fiscal policy in a slump without enough monetary stimulus to offset the effect. There is an eery parallel with the early 1930s.


Greece Tells Eurozone It Needs Time: 'We're Trying To Change The Course Of The Titanic'
Greece Faces Down Pressure From Euro Zone Peers To Step Up Budget Cuts And Stem A Looming Crisis In Its Debt Markets On Monday, As The Brussels Again Questions Its Past Reporting Of Public Finances.

By Reuters | 16 February 2010

A carnival float in Patras depicts Greek anger at eurozone austerity demand. It shows EU officials pulling receipts out of a Greek Presidential guard. Photo: Reuters

The country is the first in the euro's 11-year history to require an emergency statement of political support from other European countries as it struggles to weather pressure from financial markets worried about its massive debt. But Finance Minister George Papaconstantinou warned against asking the government, which faces growing public dissent over budget cuts, to do too much too fast. "We're trying to change the course of the Titanic, it cannot be done in a day," Mr Papaconstantinou said ahead of meeting with euro zone finance ministers in Brussels.

"If additional fiscal measures are needed, we will take them. Today it is Greece, tomorrow it can be another country. Any European country can be prey to 'speculative' forces."

Bonds To Refinance

Greece faces two major hurdles in the coming months, with two lots of more than €8bn of government bonds to refinance in April and May. Markets had hoped last week that meetings this week might generate commitments of actual financial aid. But European Monetary Affairs Commissioner Olli Rehn suggested that the talks in Brussels, which officials said were not aimed at producing a concrete rescue plan, would focus on demanding more of Greece than it has announced.

Mr Rehn said ministers backed Greece's three-year plan and this year's target of a four percentage-point cut in the deficit— to 8.7 percent of gross domestic product from 21.7 percent of GDP in 2009— but that it might be hard to achieve. "We expect that in due course the Greek government will take necessary additional measures to reach that target. Our view is that risks related to the implementation and macro-economy and markets are materialising," Mr Rehn said. "And therefore there is a clear case for additional measures."

Still In Recession

Greece confirmed last week it was still in recession in the last quarter of 2009. The euro zone as a whole barely grew as German economic growth halted and Italy and Spain also registered drops in GDP, making both deficit reduction and the provision of aid politically all the more challenging. Jean-Claude Juncker, chairing Monday's talks, echoed Mr Rehn's remarks and noted that European leaders had pledged support at a summit last Thursday on the condition that Greece stuck firmly to viable plans to fix its finances. EU leaders are hoping that pressure and a concerted effort by Greece will be enough to get on top of the country's deficit and debt problems and assuage markets.

Euro Suffers

The lack of specifics has left markets with a reason to discount both Greece and the euro. The premium investors are demanding to hold 10-year Greek government bonds rather than benchmark German Bunds rose to 302 basis points on Monday, from 275 bps late on Thursday, and the euro was trading down at 1.3610 to the dollar. Concern is growing about how the market is 'exploiting' Greece's weakness, and by extension, that of the euro. One source said eurozone finance ministers could also discuss measures to restrict short-selling of Greek debt via credit default swaps.

Derivatives Contracts

Adding to Greece's woes, a European Commission spokesman said on Monday clarification was being sought on media reports that Athens in the past resorted to derivatives contracts that helped lower the level of debt and deficit it reported. Greece had not informed EU statistics agency Eurostat of any dealings with Wall Street banks of the kind reported by German and US media over the weekend, European Commission spokesman Amadeu Altafaj said. "I want to state that Eurostat was not aware of such transactions," he said.

"We need the information on what kind of transactions took place, if they did, and what was the effect on the government accounts of Greece," he said. Responding to the reports, Mr Papaconstantinou said: "The kind of derivatives contracts reported by some newspapers were legal at that time. Greece was not the only country to use them. …These kind of more exotic operations were completely legal. They were [subsequently] made illegal; we have not used them since then."


Britain And The 'PIGS'

By Ambrose Evans-Pritchard, Telegraph.Co.Uk | 16 February 2010

Under pressure: a disorderly fall in sterling would be disastrous (Photo: Alamy)

As of today, the British government must pay a higher interest rate to borrow money for ten years than either the Italian or the Spanish governments, despite the extraordinary ructions going on within the eurozone. The yields on 10-year British Gilts have risen to 4.06%, compared to 4.05% and 4.01% for Spain. So if international bond markets are turning wary of Club Med sovereign bonds, they seem even more distrustful of British bonds.

Eurosceptics should resist any Schadenfreude over the unfolding EMU drama in Greece. (Not to mention the huge exposure of British banks to Club Med). The Greek crisis is a dress rehearsal for attacks on any sovereign state with public accounts in disarray.

While Britain went in to this crisis with a much lower public debt than Greece or Italy (though higher total debt than either), it now has the highest budget deficit in the OECD rich club— and perhaps the world— at 13% of GDP. I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending.

Of course, bond yields do not tell the whole story. Credit Default Swaps (CDS) measuring bankruptcy risk are much lower for the UK than for Greece or Spain. Bond yields capture the risk of devaluation and inflation, where CDS measure pure default risk (or do in theory— though they are also speculative tools).

Britain may engage in stealth default by monetizing debt and inflating, but that does not count for CDS contracts. Countries in a fixed exchange system with loans in somebody else's currency— the Gold Standard in the 1930s, EMU today— can indeed default. Britain's current account deficit is down to 1.4% of GDP, much better than Club Med.

Still, It would be unwise to count too much on this distinction. Devaluation has acted as a shock absorber for Britain in this crisis, but it is no cure. It is a necessary condition for recovery, but it is not sufficient and it creates its own dangers. A disorderly fall in sterling at this stage (i.e., a 'collapse') could prove as traumatic as default.

Like many Telegraph readers, I am quite angry that neither Labour nor the Tories seem willing to grasp the nettle. They absolutely must map out systematic and draconian cuts, stretched out over four years in an orderly way, leaving it to the Bank of England to offset fiscal tightening with an easy monetary policy. The Tories were complicit in Labour's fiscal madness (3% deficit at the top of the cycle, compared to a surplus of 2% in Spain and 4% in Finland) since they pledged to match to the spending programmes. They are now repeating the error by ring-fencing the lion's share of the welfare state.

David Cameron views the NHS as sacrosanct, but that is precisely what must be cut. It is anachronistic that you cannot obtain prescription drugs without going through a doctor— wasting everybody's time— as if doctors these days reach a better decision in two minutes than well-informed patients with an acute self-interest in getting the matter right. It is precisely this edifice that needs to be hacked down with a machete in a revolutionary rethink about the functions of the state.

And not just the NHS either. I suspect that if the Tories came out swinging, they could win an election that promised nothing but 'blood, toil, sweat, and tears'. The new taste for austerity was amply demonstrated in the Massachusetts' Senate election. Having got that off my chest, I will return to Greece.

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