Wednesday, February 10, 2010

Greece and ECB Update

Yesterday saw a broad based rally on Wall Street as all three major stock indices roared up strongly...

Grease, or in this case Greece, was definitely the word of the day - The only issue that mattered and it provided quite a ride for not just US, but GLOBAL markets.

The first report which had global equity markets rallying was word that Jean-Claude Trichet, President of the ECB, we cutting short his trip to Australia in order to get back to Europe and assist with plans to bail out the debt laden country of Greece. This rallied equities as it fueled risk appetite and battered debt markets in Greece and Portugal received some relief from their recent punishment.

So what is the game plan for saving Greece?

Germany backs Greek bail-out as EU creates 'economic government'

Germany is preparing to drop its vehement opposition to a rescue package for Greece, fearing that a rapid escalation of the debt crisis in Southern Europe could endanger German banks and damage the euro.

Germany's apparent backing for a bail-out comes despite worries that it will lead to the breakdown of fiscal discipline across the Club Med region. It also raises troubling questions of fairness. Ireland has tackled its own crisis by slashing wages and going far beyond any measure so far offered by Greece, yet Dublin has not received help.

Germany's dramatic shift in policy changes the character of the euro project. It follows weeks of soul-searching in Berlin, and after increasingly loud pleas from Brussels, Paris and southern capitals. The deciding factor was concern that letting Greece fail risked a "Lehman-style" run on Club Med debt, with systemic spill-over across Europe.

So, will the bailout plan (a mere proposal for now) work? Karl Denninger doesn't think so

Is That A Bailout Or A Lit Fuse?

The rumors came fast and furious - first Greece was going to get "help" from Germany, then it was denied, and then maybe it was again. The latest?

Germany is considering assistance for Greece after the country’s deficit threatened the stability of financial markets, two lawmakers from Chancellor Angela Merkel’s governing coalition said. Olli Rehn, who takes over as European Union economic affairs commissioner tomorrow, said EU support for Greece will be discussed in coming days.

Let's not forget what we're dealing with here.

The EU is a loose confederation with a common currency. They lack common laws, they lack the ability to bind each other's economic policies, and they lack the ability to play "print money." To mount any sort of concerted rescue based on the ECB all nations must agree - that you can forget about.

Should the EU implement this with Greece they may indeed set a precedent that could easily destroy the European Union over the next couple of years. Faced with Spain, Portugal, Italy and Ireland, all of which are huge problems compared to Greece both in terms of the debt outstanding and the size of their economies Germany will find itself unable to backstop all four nations - yet it will have to, once the die is cast with Greece.

Yet unlike Greece, which has a GDP of EUR $261 billion, Spain's is EUR 1.134 trillion and Italy's EUR 1.406 trillion. Portugal and Ireland's economies are smaller, but they belie big problems, with the "best" indication being the external debt to GDP ratio.

Italy's is 127% (the US is running close to 100% at present), while Greece's is 161%. Spain's, on the other hand, is 171%. Germany, for all of its vaunted "strength", runs 178% of GDP, Portugal is at 214% and Ireland is running an unbelievable 1267%.

That's right - tiny Ireland with EUR 144 billion in GDP has well north of a trillion Euros outstanding in external debt. This, by the way, makes clear that debt service is likely compounding upon itself even now, which is a death spiral from which one cannot escape - whether it is being recognized or not.

Oh, and don't look at Great Britain as a bastion of "fiscal responsibility" - they're over 400% - nor the Swiss, at 423%.

The lesson here? We have not only fixed nothing the so-called "coordinated actions" of so-called "world leaders" have set up a potential catastrophe originating in Europe.

Neither Germany or the rest of the EU can fix this without massive reform - read that as restructuring and/or default - of the external debt in these nations, including Germany itself.

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