Wednesday 15 February 2012

European ambivalence

It is is crunch time for Europe. It also crunch time for the ECB and Greece. Time is running out not just for Greece and the March bond maturity but for Europe too. There are plenty of signs that many European governments are having second thoughts about the PSI and the second rescue package for Greece. This is not entirely surprising. The attitude of the Greek government was not exactly encouraging for Europe. Watching the live debate one could not help but despair. Speaker after speaker, minister after minister spoke of how bad the new MOU is for Greece. They only vote for it to get the money and avoid exit from Europe. Even the finance minister Mr Venizelos called it a choice between a bad and something worse. It was left to the PM Papademos to carry the burden of defending the positive aspects of it, which Greece needs to reform in order to survive. One can be cynical and say that this is just political posturing and that once they get re-elected they will follow Troika’s orders. This is not how democracy is supposed to work. This is exactly the kind of attitude that brought Greece to the brink of collapse. It does not instil confidence to the political system. 
As such many European governments are coming to the conclusion that they should let Greece go. 
In order for the PSI to proceed with some degree of success then certain things must happen:
  • Parliaments must vote for the funds needed to execute the PSI 
  •  Europe must relieve ECB from their GGB bonds 
Without these two preconditions in place the PSI would fail. Greece would fail too and pay a heavy price. However, Europe’s ambivalence would be a very bad precedent. Committing 73billion (the loans thus far) and then changing your mind does not enthuse the markets. There is a very tight time schedule and many believe that the money would not be in place before the bond swap process begins. If that is the case then how on earth a bondholder can commit to the swap? Is this why the March 2012 bond is finding a new life? Are the markets betting on Greece not getting the PSI and Europe giving a bridge loan? Maybe.
Many ask the question, is the 130billion enough? Can Greece achieve the targets of 120% debt to GDP by 2020? Even if they succeed would that mean another bailout later on? One cannot know the answer to this unless it happens. Truth is that it would be very hard to achieve these targets unless the reforms kick in fast. The alternative of not giving the money and producing a failed state in Europe however is not ideal either. Proponents of this scenario should know that history does not move according to plans and conspiracies.
Some time ago we proposed an improved version of the PSI that would give Greece and Europe a better fighting chance. We proposed that: 
  •  Greece is given a loan to buy out the ECB at COST 
  •  Then add to the PSI bond swap the option to cash out at around 30cents. 
Doing so would reduce the Debt/GDP to 100% from day one. Allowing for discrepancies the target of 120% by 2020 would be easily achievable. It requires though a bold move by the European leaders and a vision for the future. Instead of a European vision we get populist and dangerous ideas.
It is not news to say that anti-European forces are on the rise both in Greece and in other countries. We also witness anti-Greek feelings to be on the rise. Already we see the worse kind of yellow press from a variety of Greek and European trash papers. Germans depicted as Nazi’s and Greeks as lazy pests. The descendants of Joseph Goebbels are in full swing. Many European leaders are sensing the mood and are silently encouraging it. Europe must put an end to this. It poisons Europe and endangers the future.