Weekly Market Drivers: It's All About the Bondholders (Not Greece), Stupid [View article]
I think you are right and were it only Greece the EU and ECB may be taking a different course. But this is not the case and the involved parties are desperately searching for time and money under the delusion banks will build larger capital buffers and that neighboring peripherals (Italy, Spain and Portugal) will reduce their respective structural debt burdens.
An additional perspective, is that the EU and ECB are frantically seeking a means to hold together patchwork of countries together as a union when none of the essentials for a union are in place. The design of the EMU was flawed at the outset as the EMU has never fully satisfied the conditions for an optimal currency area: Synchronized economic activity and growth rates; a high level of labor and capital mobility; fiscal federalism allowing the fiscal risk sharing of idiosyncratic national shocks; and a significant degree of political union. Instead it’s a patchwork of seventeen countries with a shared monetary policy but different languages, different cultures, different ethics and different fiscal and budgetary policies. It’s an illusion of a union.
The only real solutions are massive debt restructurings and/or a break up of what is clearly proving to be a dysfunctional union. But politicians and bureaucrats have vested interests which they place above the public good; officials never want to admit mistakes; and bureaucrats do not want to lose their jobs as they are equipped to do little else.
So the obvious solution is to paper over fundamental solvency problems with more liquidity, piling debt upon debt. This keeps the EMU alive and conveniently protects the interest of rentiers and financiers and imposes upon the public the costs of the inherently flawed union and all of the debt being issued to keep it afloat until it implodes.
Weekly Market Drivers: It's All About the Bondholders (Not Greece), Stupid [View article]
Interesting article.
Most of the chatter and noise last week was about the final tranche of the original bailout package of 110 billion euro which now appears to be a done deal. Late last week the IMF agreed to extend its portion of of the 12 billion euro loan notwithstanding that Greece is technically in default of the original agreement having failed to institute all of the promised reforms.
This will buy a bit of time but the larger battle will be over the second bailout package which will be 105 billion to 150 billion euro or more, which will simply buy more time by kicking the can down the road. Notwithstanding Merkel's backing down from insisting that bondholders take a haircut, the private sector will be asked to make "voluntary" concessions in the form of maturity extensions along the lines of the Vienna initiative.
With bonds rated as junk, 18% on five years bonds, entrenched corruption and a totally dysfunctional economy dominated by unions and gilds and a culture of entitlement its most unlikely Greece will get its financial house in order and revive what could be generously be described as moribund economy. Assuming the second package is extended, most believe it will take Greece through 2012 or maybe into 2013 when the same problems will resurface when Greece will be unable to rollover its debt.
It's at this point Greece is likely to formally default on its projected sovereign debt of around 500 billion euro. Given the toxity of the PIIGS debt and the unlikelihood of meaningful reform inside of Spain, Italy, Portugal and France, the risks of contagion must be viewed as being very high.
Weekly Market Drivers: It's All About the Bondholders (Not Greece), Stupid [View article]
An additional perspective, is that the EU and ECB are frantically seeking a means to hold together patchwork of countries together as a union when none of the essentials for a union are in place. The design of the EMU was flawed at the outset as the EMU has never fully satisfied the conditions for an optimal currency area: Synchronized economic activity and growth rates; a high level of labor and capital mobility; fiscal federalism allowing the fiscal risk sharing of idiosyncratic national shocks; and a significant degree of political union. Instead it’s a patchwork of seventeen countries with a shared monetary policy but different languages, different cultures, different ethics and different fiscal and budgetary policies. It’s an illusion of a union.
The only real solutions are massive debt restructurings and/or a break up of what is clearly proving to be a dysfunctional union. But politicians and bureaucrats have vested interests which they place above the public good; officials never want to admit mistakes; and bureaucrats do not want to lose their jobs as they are equipped to do little else.
So the obvious solution is to paper over fundamental solvency problems with more liquidity, piling debt upon debt. This keeps the EMU alive and conveniently protects the interest of rentiers and financiers and imposes upon the public the costs of the inherently flawed union and all of the debt being issued to keep it afloat until it implodes.
Weekly Market Drivers: It's All About the Bondholders (Not Greece), Stupid [View article]
Most of the chatter and noise last week was about the final tranche of the original bailout package of 110 billion euro which now appears to be a done deal. Late last week the IMF agreed to extend its portion of of the 12 billion euro loan notwithstanding that Greece is technically in default of the original agreement having failed to institute all of the promised reforms.
This will buy a bit of time but the larger battle will be over the second bailout package which will be 105 billion to 150 billion euro or more, which will simply buy more time by kicking the can down the road. Notwithstanding Merkel's backing down from insisting that bondholders take a haircut, the private sector will be asked to make "voluntary" concessions in the form of maturity extensions along the lines of the Vienna initiative.
With bonds rated as junk, 18% on five years bonds, entrenched corruption and a totally dysfunctional economy dominated by unions and gilds and a culture of entitlement its most unlikely Greece will get its financial house in order and revive what could be generously be described as moribund economy. Assuming the second package is extended, most believe it will take Greece through 2012 or maybe into 2013 when the same problems will resurface when Greece will be unable to rollover its debt.
It's at this point Greece is likely to formally default on its projected sovereign debt of around 500 billion euro. Given the toxity of the PIIGS debt and the unlikelihood of meaningful reform inside of Spain, Italy, Portugal and France, the risks of contagion must be viewed as being very high.