Tuesday, 7 February 2012

A Bridge (loan) Too Far?

Bridge at Arnhem.
In September 1944, the allies had a daring plan. They would try to force an entry into Germany by overrunning the bridges of the Maas and Rhine River with airborne forces. If successful, the end of the war would be sped up, possibly to Christmas 1944. Thus the legend of Para Lt Colonel John Frost and the sacrifice at Arnhem was borne. Operation Market Garden as it was named ultimately was a failure. The Hollywood film was not. Incidentally, the film’s title apparently comes from Gen. Browning comment “I think we might be going a bridge too far”.

Moral Hazard
As the maturity of the March 2012 Greek bond nears, the question is still hanging. Would the EU provide a loan to avoid a disorderly default by a European country or would it be simply a bridge loan too far? The PSI started its life in July 2011 and it was barely three months old before it was scrapped for a newer and more severe version in October 2011. Tons of cookies (ammunition) have been consumed in the meeting rooms and possibly a million air-miles have been awarded (Distinguish Service) to the Troika and Greek officials. And yet it seems that we are not nearer in producing a viable solution.
The latest spat is not between the IIF and Greece with regards to the coupon structure of the new Greek bonds but between the Greek politicians who refuse to implement what they have agreed too and Troika. The logic is simple and it involves the moral hazard of reducing ones debt without removing the causes of producing it the debt. It is not a secret that the unscrupulous Greek politicians are mainly responsible for the mess Greece is in. 
For decades, many mismanaged public finances for their personal good or re-election prospects. After all, the money flowed from the equally moronic EU with no strings or safeguards attached. So here is the main problem. If the debt of Greece is halved or becomes a minor nuisance while keeping the same policies and politicians in power then the risk of a repeat crisis in a few months from now is great. 
The EU is locked into negotiations with a Greek political establishment that regards ignorance, irresponsibility, corruptness, being incompetent and self-centred as a comparative advantage. To deceive is a quality worth defending. It took the EU a couple of years to figure it out and now they are asking for pre-PSI written commitments and legislation by the Greek political parties. This is a double whammy for the Greek people who have no means of escaping either their politicians or the wrath of the EU policies. Many see the EU money as effectively sustaining the same politicians in power in an analogous way that buying Libyan oil propelled Gaddafi and his regime.
Escrow Account-Bridge Loan
In that respect the latest idea of having an escrow account controlled by the EU that pays only the maturing bonds could be of use. It is clearly much better than the sick and abortion of an idea of a fiscal commissar. How would it work? Simply, the Troika would provide the money with the debt service as a priority. It resurrects the idea of a bridge loan should the PSI talks fail. As it is not called a bridge-loan but an escrow account it also semantically bypasses the Merkel comment of no-bridge-loan.
Would this idea be enough to avoid a Greek disintegration or would it be a bridge-loan too far? My guess is that unless there is political catharsis in Athens nothing would work. In many ways this is what the EU is trying to do in a clumsy sort of way. 
Like in Operation Market garden, the EU badly mismanaged the bailout and the reaction of the opposition. Papademos the modern John Frost parachuted in and managed to partially dislodge PM Papandreou. However, it has few troops. Frost at Arnhem Bridge[1] had 740 when 10,000 were promised. The reinforcement never arrived and after it was held for double the predicted time of 4 days he surrendered. This could be the fate of Papademos too. The main reason is that the Greek people are lost, disappointed and bewildered. Their political parties and system are incapable of making the transition to civilization but are more than capable at surviving the attack.  Hope is dying fast in Greece and desperation is taking its place. Greece like Germany in 1944 may have to wait for another year until the regime collapses amid the total destruction. Until then Europe would be throwing good money after bad, or as in Arnhem good men to their death.

[1] The bridge war renamed to John Frost bridge in 1978. Frost published two autobiographies "A Drop Too Many" and "Nearly There".