Thursday, October 27, 2011
The EU's Big Fat Greek Bailout
The EU leaders, led by Germany's Chancellor Angela Merkel and France's President Nicholas Sarkozy have reached a deal for a second Greek bailout.
The deal involves a new €130 billion bailout of Greece by the European Union and the International Monetary Fund (which means American taxpayers are going to take a bite of this particular sandwich), and acceptance by current Greek bond holders of fifty percent of face value and a increase in the EU's bailout fund to over €1 trillion.
As Chancellor Merkel announced with a straight face, the goal of all this manipulation is to get Greece's debt down to - wait for it - a mere 120% of the country's gross domestic product by 2020.
President Sarkozy announced that he would hit up the Chinese to see if they're willing to pony up any cash to help in supporting the fund.
A number of details remain deliberately vague, which was probably the intent to get some kind of consensus and just try to muddle through somehow.
For example, under the terms of the deal, Greece agreed to pay €15 billion back into the EU's bailout fund, the European Financial Stability Facility(EFSF). The money is supposed to come from additional revenues raised by a vast Greek privatization plan, which would see a lot of functions currently run by the government go into private management.Unfortunately, the international monitors have already reported that Greece isn't going to be able to come up with the €50 billion for the EFSF from privatization it already pledged earlier this year, and this new €15 billion is supposed to come on top of the money the Greeks have already been unable to pay back.
The most inadvertently hilarious quote on this particular item came from Yves Leterme, the Prime Minister of Belgium, a country not exactly noted for its sense of humor. When he was asked by reporters whether adding another €15 billion to Greece’s expected pay back to the bailout fund out of expected revenues from privatization was realistic when the Greeks couldn't come up with the €50 billion from privatization they'd already committed to, he replied: “This element was not a necessity for Belgium.”
Another interesting bit that promises future fireworks came from George Osbourne, Britain's Chancellor of the Exchequer, the equivalent of America's Secretary of the treasury.He's claiming that Britain (which is already in financial straits) won't pay into the bailout fund out of its its IMF contributions. Moreover, he doubled down and is insisting that the IMF's mandate doesn't allow any cash to go into the bailout fund. Since there's no other place the money can conceivably come from except perhaps the Chinese, this is another of those little details that looks like it's being left to work out later.
Another problem with all this has to do with the internal problems of Greece itself.The EU has apparently realized belatedly that the country is one of the most corrupt in Europe, has a poisonous investment climate, a government fully prepared to cook the books and and little besides tourism as a source of revenue. So Chancellor Merkel is demanded the EU put what she describe as 'monitoring' in place to try and make some kind of order out of this.
"There will be a reinforced monitoring regime in connection with the fulfillment of the Greek obligations," she said.
"That will be anchored in a memorandum of understanding. There will be a permanent presence there. It will be possible to monitor the measures taken by Greece. I think that this is better than when every three months a 'troika' travels there and back, a permanent system of supervision."
Viel glück damit, Madame ReichsKanzler.
If this all seems like simply kicking the can down the road, I couldn't agree more. And that's going to become even more obvious when further bailouts are needed for countries like Spain, Ireland and Portugal, among others.