Greece Hits the Panic Button

Rebel Traders reports that Greece Hits the Panic Button.

(emphasis mine) [my comment]

Greece Hits the Panic Button


… just three weeks ago Greece was claiming that a bailout would not be necessary. How quickly things have changed.

Sinking under the weight of its own debt and shunned by international investors, Greece on Friday asked fellow euro-zone members and the International Monetary Fund to bail it out, a humbling step that reshapes the rules of the currency union and, for Greece, augurs years of economic pain.

Financial markets had concluded days or even weeks earlier that the country would need a rescue, and attention turned to what comes next—how fast the money can be disbursed, if the IMF would demand tougher economic sacrifices than Greece has already made, and, crucially, whether the roughly —‚¬45 billion ($60 billion) on offer would solve the country's problems or just delay a reckoning.

Many of those answers remain unclear. The euro rose against the dollar. But Greek bonds lost some early gains, with prices indicating investors think that even with a bailout, Greece may eventually default on its debts. Those fears raise the odds that Greece's new lenders will lean harder on the country to slice its deficit.

Investors have been walking away from Greek bonds all year, under Athens' darkening budgetary cloud and persistent worries about the accuracy of its financial reports. That exit turned into a lathered gallop Thursday after the European Union's statistical arm said Greece's budget deficit was even wider than believed. Ten-year bond yields shot to nearly 9%, almost triple what Germany pays to borrow.

"The time has come," Prime Minister George Papandreou told his country in televised comments from the Mediterranean island of Kastelorizo, just off the Turkish coast. "It is a necessity. It is a national and pressing necessity."

Greece's finance minister, George Papaconstantinou, sent a one-sentence letter to EU authorities around midday asking for help. He said aid could come within days.[…]
(WSJ)

A one sentence letter, probably "HELP" is all it said.

So now that the panic button has been pushed, and nearly $60 billion has been asked for in order to keep the nation afloat will now come the real test. Will fellow European nations that pledged support actually come through with it.

The concept of how to bailout Greece was formulated by various financial ministers from the European Union. Now it has to be approved by government leaders in each of the nations that will be required to contribute money to the rescue fund. Germany may be the toughest battle of them all.

Friday, April 23, 2010 2:21:49 PM

German Fin Min Schaeuble: Reiterates that no German budget funding will be used to bail out Greece

German Academics to challenge Greek aid package in constitutional court; Says aid violates EU's Maastricht Treaty — Greek aid would constitute an illegal subsidy.

The battle to secure the funding that Greece is now asking for may be just getting started. I'm quite sure this situation will continue to have twists and turns in the days ahead.

German Financial Aid Highly Doubtful

Businessweek reports that Germany could say no to Greece aid.

Minister: Germany could say no to Greece aid


German Finance Minister Wolfgang Schaeuble says that Germany has not yet decided whether it will agree to Greece's request for financial aid.

Schaeuble told weekly Bild am Sonntag the fact that neither the European Union nor Germany have made a decision regarding Greece's aid request until now means that the answer could be either positive or negative.

The Financial Times reports that aid might come from the IMF rather than Germany.


Greece must refinance —‚¬8.5bn in bonds that mature on May 19. Interest rates on Greek debt reached cripplingly high levels on Thursday and remained high yesterday in spite of some market relief that Greece had requested the bail-out.

Negotiations with a team from the Commission, ECB and IMF are due to be completed on May 6, but much uncertainty surrounds the disbursement of the loans. Germany's centre-right coalition government faces a difficult state election in North Rhine-Westphalia on May 9 and is sensitive to the risk of a backlash from voters angry that German taxpayers should bail out profligate Greeks.

Some German politicians said that it was therefore possible that the first tranche of aid might come from the IMF rather than Germany, whose final contribution could go as high as —‚¬8.4bn.

IMF (US) aid virtually guaranteed

The Wall Street Journal reports that the IMF speeds up Greece efforts.

APRIL 25, 2010, 10:49 A.M. ET
IMF Speeds Up Greece Efforts
By ADAM COHEN

WASHINGTON — The International Monetary Fund is speeding up efforts to deliver funding help to Greece, IMF Managing Director Dominique Strauss-Kahn said Sunday, following a meeting with Greece's finance minister.

The Greek government on Friday formally asked euro-zone countries and the IMF for help. Euro-zone states have pledged to loan Greece up to —‚¬30 billion in the first year of any aid program, while the IMF is expected to provide a further —‚¬15 billion.

"Since we received the request for financial support last Friday, our discussions with the authorities have accelerated," Mr. Strauss-Kahn said in a statement.

"I am confident that we will conclude discussions in time to meet Greece's needs," he added.

CBC reports that IMF seeks to soothe Greece over fiscal crisis.

IMF seeks to soothe Greece over fiscal crisis
Last Updated: Saturday, April 24, 2010 11:56 PM ET
CBC News


The Mediterranean country on Friday formally asked the IMF and the European Union for the bailout cash after weeks of speculation.
Greece has to come up with at least $8.2 billion by May 19, its next credit due date, or it could become the first euro country to default on debt.


But discord rages in Greece over whether to accept outside meddling.
Germany is demanding major budget cuts and tax hikes from Athens as a condition of any loans, while the IMF has a reputation for requiring austerity measures that suggests it would echo that [IMF's reputation doesn't apply here. The IMF is a proxy for the US, and the US will never allow a Greek default]. Thousands of public servants' jobs are at risk.

Asked at a news conference Saturday whether he was concerned that the IMF was being "demonized," Strauss-Kahn said it would not be the first time that the global body, which often delivers harsh economic remedies, has been cast as the villain.

But he maintained that
today's IMF is a changed institution from the agency that generated anger in countries around the world for its devastating austerity programs in previous crises.

IMF officials have said its current remedies are crafted with an eye to protecting the most vulnerable. In the past, such organization policies as requiring countries to privatize their water systems have unleashed mass protests.

Greek Default would be a disaster for the US

Money Morning reports that spreading sovereign debt issues.

http://ads.moneymorning.com/www/delivery/lg.php?bannerid=
Sovereign debt issues have already spread to other Eurozone nations and are escalating with Greece's situation. Spain, Portugal and Ireland already faced increasing bond yields this week, strengthening the argument that Greece is the start of a debt contagion spreading through Europe to the United States.

"[T]his crisis has moved beyond being just a Greek crisis. It is a sovereign risk crisis stemming from the collapse of the traditional G7 growth model of high indebtedness and a low share of exports in the economy, which affects not just Greece but also countries such as Spain, Italy, the UK and the US," Lena Komileva, head of G7 market economics at Tullett Prebon, told the Financial Times.

My reaction: Greece hit the panic button last Friday.


1) Greece on Friday asked fellow euro-zone members and the International Monetary Fund to bail it out.

2) Investors have been walking away from Greek bonds all year. Greece's ten-year bond yields shot to nearly 9%, almost triple what Germany pays to borrow.

Greek Default would be a disaster for the US

1) The Greek debt crisis highlights the collapse of the traditional G7 growth model (ie: the US growth model) of high indebtedness and a low share of exports in the economy.

2) A Greek Default would be a disaster for the US. It would be the first confirmed sovereign default of a Western US-style economy, and it would send investors running from the debt of all similar Western economies, especially US treasuries.

German Financial Aid Highly Doubtful

1) According to German Finance Minister Wolfgang Schaeuble:

A) Germany has not yet decided whether it will agree to Greece's request for financial aid.
B) No German budget funding will be used to bail out Greece.

2) German Academics will challenge any Greek aid package in constitutional court as violating the EU's Maastricht Treaty.

3) Germany's centre-right coalition government faces a difficult state election in North Rhine-Westphalia on May 9 and is sensitive to the risk of a backlash from voters angry that German taxpayers should bail out profligate Greeks.

4) Germany is demanding major budget cuts and tax hikes from Athens as a condition of any loans.

IMF (US) aid virtually guaranteed

1) The International Monetary Fund is speeding up efforts to deliver funding help to Greece.

2) IMF officials are circulating the story that "today's IMF is a changed institution from the agency that generated anger in countries around the world for its devastating austerity programs in previous crises." This suggests that IMF officials are embracing to the idea of aid without demand tough economic/fiscal demands attached.

3) Given the vital importance to the US of preventing a Greek default, the first tranche of aid will probably come from the IMF (the US) not Germany.


Conclusion: I haven't been focusing on the "Greek debt crisis" because I believe it is a non-event in the grand scheme of things. As I have written before, it wouldn't be a problem that can be solved by printing money which will bring down the global financial system. In the case of the "Greek debt crisis", the US will cave, and the IMF will provide enough money to bailout Greece for a couple of months. Before Greece has the chance to run out of money again, the 2010 food crisis will begin this summer, leading to the default of all countries with the US growth model of high indebtedness.

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3 Responses to Greece Hits the Panic Button

  1. rokakoma says:

    I have to disagree with you. It's many western countries' interest to let Greece default. Especially Germany's.

    If they bail it out, then all the rest of the PIIGS countries will stand in the line for the same aid package. But have no doubt, there isn't enough money to bailout Spain/Italy!

    On the other hand, no this cannot be solved by printing money. ECB didn't print a single euro cent since recession strarted, and it is not allowed to do anything like that!

    3rd, Greece has 54B euros maturing just this year, add an about 20B euro deficit and it's clear that a 45B aid package is all but enough. They should get about 100B at least with drastic austerity measures to be able to beleive in this package.

    Germany/France may suffer quite a hit from a default, but it's still smaller than a possible domino in PIIGS countries asking for aid. That would risk Germany as well.

    Summary: If they let it go default it may trigger a Lehman like liqudity dry up event again. We all know what that means. If they bail it out, than it might bring down the whole world in 2 years, since as you wrote, the US growth model will go into further debt which will be clear for everyone is not sustainable anymore.

  2. Sebastian says:

    The talk about PIIGS is nonsense. CA and UK makes Greece look good.

    And who will bail out the $ one quadrillion derivative market?

  3. Trader says:

    Why can't everybody just pretending all is fine????? This plan works so well until now!

    Just don't talk about those trilion trillion money please! Believe me, then all will be fine...... :)

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