Europe Finance Ministers Face Pressure for Greek Deal (Update1)

By Emma Ross-Thomas
Feb. 15 (Bloomberg) -- European finance ministers meet today under pressure from investors to spell out the concrete measures they will take to rescue Greece if the nation fails to convince markets it can control its swelling debt burden.
Finance chiefs from the 16 nations sharing the euro meet at
5 p.m. in Brussels, where they also may decide who will replace Lucas Papademos in June as vice president of the European Central Bank. Jean-Claude Juncker, who leads the group of euro- area ministers, will hold a press conference after today’s meeting. They will be joined tomorrow by their colleagues from the rest of the 27 European Union countries.
After European leaders made pledges of support for Greece last week that stopped short of committing public funds, investors are looking for greater detail, as well as clues to whether an agreement on Greece could also be applied to Portugal or Spain. Even as the risk premium on Greek debt fell last week on the prospect of European support, the euro weakened on concerns the plans may fall short.
"People will be looking for a roadmap for other crises,"
said Stuart Thomson, who helps oversee about $100 billion at Ignis Asset Management in Glasgow, Scotland. "What you want is almost full commitment from the core countries that they will provide loans to cover the Greek funding gaps."
The euro, which has weakened 5 percent against the dollar since the start of 2010 in part because of concerns over the euro zone’s stability, fell for a fourth day today and slipped 0.2 percent to $1.3608 at 8:13 a.m. in London.

‘Determined Action’

German Chancellor Angela Merkel and her counterparts pledged "determined and coordinated action" on Feb. 11 to support Greece’s efforts to rein in the largest budget deficit in the EU. No concrete details were given on how they would help if Greece has problems selling the 53 billion euros ($72
billion) of debt it needs this year. Greece ran a budget gap of
12.7 percent of economic output in 2009.
Aid to Greece could go beyond loan guarantees, German Finance Minister Wolfgang Schaeuble said, according to a lawmaker who attended a Feb. 10 briefing. Another option is a lending facility with proportionate contributions from each country, an EU official said, adding that it’s premature for a European bond.
The treaties underpinning the euro forbid bailouts by the ECB and make clear that nations are not responsible for each other’s debt. Still, EU rules on aid are more flexible than the German government first thought, Schaeuble told lawmakers at the briefing.

Highest Unemployment

The extra interest investors demand to hold Spanish and Portuguese debt also fell last week on anticipation of a rescue package for Greece. Portugal’s deficit was 9.3 percent of gross domestic product last year, and Moody’s Investors Service said on Jan. 13 that the economy, like that of Greece, risks "slow death" as increasing amounts of wealth are needed to pay off debt.
Spain, which is suffering from the highest unemployment in the euro region and remained in a recession last quarter, had a 2009 deficit of 11.4 percent of GDP, prompting the government to raise the value-added tax and create a 50 billion-euro cost- cutting plan. Spanish Prime Minister Jose Luis Rodriguez Zapatero on Feb. 11 distanced his country’s situation from that of Greece, saying Spain had "solid" public finances and stood ready to help its Mediterranean neighbor.
"An important part of this issue is how ad hoc it turns out to be: it’s not only Greece facing potential difficulties,"
said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. "This whole thing needs to be institutionalized."

‘Flawed’

Merkel may struggle to convince her Free Democratic Party coalition partners of that. Carl-Ludwig Thiele, the FDP’s financial-policy spokesman in parliament, said on Feb. 11 that Germans shouldn’t pay for the "consciously flawed fiscal and budgetary policies" of other countries. Former ECB Chief Economist Otmar Issing said last week that German taxpayers could not be expected to support Greece’s pension system, which he called "one of the most luxurious" in the world.
Fifty-three percent of Germans say Greece should be forced to leave the euro-area should its debts endanger the currency’s stability, the Bild newspaper reported, citing a poll.
Last week’s commitment to defend Greece and the euro area as a whole came a day before data showed the region’s recovery almost stalled in the fourth quarter. Further pressure on the euro may help convince Germans that a rescue is in their interests.
"Markets never accept the first solution," said Thomson at Ignis. "They know that they can always get a better solution, that they force greater surety for themselves."

Lab Rat

Greek bonds have slumped since November on concerns the government in Athens would struggle to pay off its debt. The extra interest investors demand to hold Greek 10-year bonds instead of German equivalents is nine times what it was two years ago. Amid expectations of European aid, the spread fell to 293 basis points on Feb. 12 from a high of 396 point at the end of last month.
At the same time, Greece is signalling there are limits to how far it will go after strikes paralyzed Athens last week.
Prime Minister George Papandreou said Feb. 12 that Greece has become a "lab rat" in the EU’s battle with markets and the bloc "hasn’t yet understood its strength to shape policies and rules to deal with the ailments of international markets."
The decision on who replaces Papademos as ECB vice president may be key to the question of who succeeds Jean-Claude Trichet when he steps down as head of the central bank next year, with an appointment of Vitor Constancio potentially paving the way for Bundesbank President Axel Weber to take over as president.
Constancio, the Portuguese central bank governor, has a reputation as a policy maker who pays more attention to economic growth than some of his ECB colleagues. That could make it easier for Germany to argue that Weber, who is seen as being at the opposite end of the policy spectrum, should become president. Appointing Luxembourg governor Yves Mersch, who is also seen as one of the ECB’s toughest inflation fighters, to the second-most senior job could increase the chances for Italy’s Mario Draghi.

Good editorial Via FT Alphaville. I do agree with Mr. Otmar Issing's sentiments. Bailing out Greece goes against rules the EU was built upon.


====================================


In praise of market discipline


Posted by Paul Murphy on Feb 15 20:37.


Wolfgang Münchau, a genuine insider when it comes to the great European experiment, counsels us not to worry too much
about moral hazard as the surreal discussions over the non-bailout
rescue of Greece continue. He says the conditions Greece is forced to
sign up to on condition of any aid or guarantees will see to that.
For Otmar Issing, however, it is simply the case that Europe cannot afford to rescue Greece. Says this former member of the European Central Bank’s executive board:

It is certainly true that this is a decisive moment for
Emu – but for the opposite reason. Greece will continue to receive
support from several European Union funds. But financial aid from other
EU countries or institutions that amounted, directly or indirectly, to
a bail-out would violate EU treaties and undermine the foundations of
Emu. Such principles do not allow for compromise. Once Greece was
helped, the dam would be broken. A bail-out for the country that broke
the rules would make it impossible to deny aid to others.

John Kemp of Reuters, meanwhile, has come at the issue from another direction:

Most commentators have concentrated on the need for the
EU to bail out Greece. But in reality any rescue would be another
subsidy for excessive-risk taking by the country’s bankers and the
institutions that have sold credit default swaps (CDS) on Greek debt.

Forcing the country into an austerity programme and
arranging an emergency loan from other EU members or the IMF would
ensure the bankers got their money back (again), but inflict years of
misery on the country’s households and businesses.

If market discipline is ever to be re-established after
the boom and bailouts of the last five years, it is imperative
creditors face the real prospect of making losses if they extend large
loans and fail to price the risk on them properly. The sellers of CDS
insurance must face up to making real payouts in return for all the
premiums they pocket.

Which is rather saying it like it is: that this is not about the
eurozone’s credibility, it’s about the rampant moral hazard in
financial markets; it’s about slipping off the hook, while losses get
socialised and taxpayers foot the bill.
Kemp reckons Greece can do everyone a favour by declaring a
moratorium on the debt and negotiating rescheduled terms – forcing
international financial markets to price risk correctly once more:

Bailing out Greece so everyone can pretend the country
can remain “current” on its loans when it patently cannot would simply
deepen the moral-hazard crisis. If market discipline is ever to be
re-established (something which everyone agrees is desirable) then at
some point creditors must take a loss. Greece is a good place to start.

One other point from Kemp, this time on the hypocrisy in all of this:

The other slightly Alice-in-Wonderland aspect of this
crisis is the long list of banks, countries and institutions demanding
Greece undertake brutal budget cuts to honour the bankers’ loans and
before any emergency assistance can be pledged.

These are the same banks, countries and institutions
that urged pro-growth policies in response to the subprime and banking
crisis to avoid a deflationary spiral and widespread default. It seems
shock therapy is appropriate for Greek households (“pour encourager les
autres”) but not U.S. homeowners or the banks themselves.

After bailing out American homeowners and the banks
themselves in 2008-2009 with vast quantities of cheap money, fuelling
moral hazard, governments and financial markets have suddenly
discovered a new commitment to fiscal rectitude — mostly someone else’s
rectitude.