Nurse Merkel Offers More Bandaids

At the European Summit, Italy, France, and Spain did their best to gang up on Germany, but didn’t get much in return.  Merkel is still vehemently opposed to euro bonds, and I don’t see that changing, no matter what.

Italy and Spain will find it easier to get aid from the European bailout fund (the European Stability Mechanism or ESM), but the ESM didn’t get any more money.  Its maximum is still about $633 billion, when Italy and Spain owe about five times that amount.

The ESM will put money directly into Spanish banks rather than using the Spanish government as a pass-through.  And private bondholders of Spanish banks won’t be subordinate to government bond holders.

Such tiny steps have failed to satisfy the markets in the past.

By refusing to “go big,” Europe’s leaders are setting up the euro zone to go bust.

 

Different Approaches, Same Result

If the far-left Syriza party had won in Greece, they were going to tell Angela Merkel where she could stick the harsh terms of her bailout.  The conservative New Democracy party, which will form a coalition with the Socialist PASOK for 162 seats in the 300-member Parliament, will tell Merkel they support the bailout, but ask “pretty please” if she can just ease the terms.

Different approaches, but the same result.  Merkel isn’t going to save Greece.

Greeks hope the election results can lead to further negotiation because they fear the unknown of leaving the euro.  Bad as things are, they fear making them worse, although worse seems unavoidable.  But trying to negotiate with Merkel fiscally is like trying to negotiate with Hitler militarily.  The only way Merkel will help is if Greece completely cedes its fiscal sovereignty to the EU Germany.

It seems inevitable that at some point soon Syriza will take power.  It finished a close second to New Democracy with 27% of the vote, having won only 12% in the May election.  New Democray and PASOK, the “mainstream” parties, have brought Greece to her knees and five years of recession.

Spain Is the Big Story

I know everyone’s focused on Greece, but today’s big story really is Spain.  For the first time, the interest rate on its ten-year bonds went over the magic number, 7%.  That’s the point at which Greece, Ireland, and Portugal had to get bailouts.  Spain’s economy is bigger than those three combined, so bailing out Spain would be a huge deal.

Italy’s interest rate went over 6% today.  Bailing out Italy, whose economy is bigger than Spain’s, would probably be impossible.  Italy is the third largest economy in Europe, after Germany and France.

Do Greece’s Election Results Matter?

New Democracy’s Antonis Samaris has won in Greece, a victory for the pro-bailout forces.

I think this may delay, but won’t prevent, Greece’s exit from the euro.

Piecemeal Approach to Euro Cuts Europe to Pieces

For a quick and clear explanation of the mess that is Europe, check out “Why the Bailout In Spain Won’t Work,” Andrew Ross Sorkin, NYT.  Some excerpts:

“By now, it should be apparent that the [Spanish] bailout has failed — or is at least on its way to failing.

“Indeed, it now appears that the bailout could make things in Spain worse, not better.  And market indicators for the next domino in line for a bailout, Italy, point in the wrong direction.

“This was bound to happen.  That’s because bailing out the banks in each European country individually is a fool’s errand.

“Experts often cite — wrongly — that TARP, the Troubled Assets Relief Program that pumped $700 billion into the banking system in the United States, arrested the financial crisis in 2008.  TARP, to some degree, has become the model for Europe.

“But we forget history:  TARP was only one component of the bailout.  Perhaps more important — consider it the unsung hero of the financial crisis — was the government’s unilateral moves to raise the amount of money the Federal Deposit Insurance Corporation could insure, increasing the account limit to $250,000 from $100,000 and fully backstopping the entire money-market industry.

“Investors and bank customers who were considering taking their deposits and running in 2008 no longer had reason to do so….

“That is not the case in Europe.  Customers of Spanish banks still have reason to worry about the solvency of their banks — and their country — making it reasonable for them to take their money from Spanish banks and send it to banks in safer countries like Germany.  Indeed, the bailout makes it less likely Spain can pay back its debts because the new loan of up to $125 billion was just added to its huge debt pile.

“As a result, it could be argued that it would be irresponsible for an individual or company, which has a fiduciary duty to shareholders, not to move its money out of Spanish banks.

“Ultimately, the only real way to begin to ensure the safety of the banks in Spain — and all of Europe — is to create a euro zonewide deposit guarantee system….

“Oddly enough, such a deposit guarantee would probably be pretty cheap.  The psychological effect of such a guarantee would most likely insure the solvency of more banks than the guarantee would ever have to pay out.

“Of course, there a catch.  A euro zonewide deposit guarantee would require agreement from all 17 member countries, which is something the leaders there seem incapable of reaching….

“And here’s another problem with a euro zonewide deposit guarantee:  Unless you believe the euro is going to remain the standard…even the guarantee might not be enough, unless the guarantee holds for all currencies.  For example, if a Spanish bank customer is worried that his euros might one day turn into pesetas — even with a deposit guarantee in place — he might well move his money.”  Emphasis added.

I encourage you to read the whole column.  I think we know whose side Mitt is on here.

We’re going to look back and wonder why solutions like this weren’t put in place before everything fell apart.  In hindsight, it will look so obvious and so easy compared to all the fallout.

 

 

 

Explain This, GOP

Mitt and the GOP keep scaring people by saying that we are like Greece.  If that’s true, why is it that the U. S. can borrow for ten years for less than 1.75%.  Greece can’t borrow at all except from bailout funds and some very high-flying hedge funds.  Meanwhile, Spain is paying more than 6% to borrow for ten years, and Italy is paying 5.6%.

The rest of the world has much more confidence in us than our own Republican party.  Yet they say Obama is “un-American.”

Timing Is Everything

The big fear in Europe now* is that Greece will leave the euro zone at the same time that Spain’s banking system has a meltdown.  The European bailout fund of about $1 trillion couldn’t handle both these events.

The big fear at the White House has to be that the great unraveling in Europe, which seems inevitable and will cause our financial markets to panic at least short-term, will happen so close to the election that Americans freak out and Mitt wins before our markets settle down.

The European death spiral and our election seem to be on a collision course.  Obama needs it either to happen soon or wait till after November 6.  We know it won’t happen in August because they’re all on vacation.

Merkel would much rather have a President Romney to share her gospel of austerity.  I’m guessing she will do what she can to help him, just as the Iranians helped Reagan get elected back during the hostage crisis.

*See “Europe’s Worst Fear:  Spain and Greece Spiral Down Together,” Landon Thomas, Jr., NYT

Greece’s Game of Chicken

It is almost certain that Greece will hold another election to try to form a government and that the leader of the Coalition of the Radical Left known as Syriza, Alxis Tsipras, will get more votes than anyone else.

So, in effect, Greece will have a communist government.  I don’t believe the Greek people have suddenly become communists, but they reject the harsh terms of the bailout deal supported by the two major mainstream parties.  Those parties got less than 40% of the vote on May 6.  The Greeks want to re-negotiate that deal for less onerous terms, and think that they can do so without being forced to leave the euro.  They are convinced they can have their baklava and eat it too.  They believe they have leverage with the IMF, the European Community, and the European Central Bank, none of which wants to see Greece default.

Angela Merkel is saying they don’t have any leverage and the deal can’t be renegotiated.  But she is in a weaker position than just a few weeks ago.  She has lost her French ally Nicolas Sarkozy, and has to deal with the Socialist Francois Hollande, who is more sympathetic to Greece.  She just lost a German regional election to the Social Democrats, who also are more sympathetic to Greece.  Her rigid policies are under attack both at home and abroad.

So we’ll see who blinks first, the Greeks or their lenders.   But the harsh terms of the loan agreement approved in February make it look more and more like the Treaty of Versailles, which also seemed like a good idea at the time, but led desperate people to support extreme leaders and ultimately to World War II.  The Germans, of all people, should understand what happens politically when you try to get blood from a stone economically.

Having defeated fascism, the U. S. was appalled at the possibility that Greece might go communist, so we gave them tremendous amounts of aid, first under the Truman Doctrine and then under the Marshall Plan, to prevent that from happening.  Almost 70 years after that successful effort, the communists are on the verge of victory in Greece.  Heck of a job, Angela.

Mitt Hopes Michigan Will Bail Him Out

Mitt is running ads and campaigning in person in Michigan, taking time and money away from what are commonly viewed as plausible swing states.  Michigan has not gone for a Republican for president since Bush 41 in 1988.  And no GOP candidate since had the baggage of opposing a bailout for the auto industry as Mitt does.

I had been wondering why Mitt is so aggressively lying about his past stance on the bailout — falsely saying that President Obama followed his advice on dealing with the auto industry, when Mitt of course opposed any government help and said, “Let them go bankrupt.”

Maybe his people think he really needs to win Michigan to get to 270, and the bailout is popular there.  Maybe they believe it’s better to take their chances that enough low-information voters will buy Mitt’s revisionist history.  But it’s makes Mitt look craven and dishonest to voters all across the country who pay attention.

 

 

 

The Phony Shock at Greece’s Referendum

Markets and governments are shocked — shocked — by the Greek government’s announcement that it will hold a referendum on the euro zone bailout plan being forced on them by France and Germany.

But given that Greece lied about its financial condition to get into the euro zone when it wanted in, why is it surprising that Greece will now do what it takes when it wants out?

The Greek people would be better off returning to the drachma, they will suffer less hardship than under the bailout plan.  Their interests don’t coincide with the rest of Europe, which fears the possible domino effect of a Greek default on much larger economies like Italy’s.

It’s hard to feel sorry for the other Europeans.  They did nothing when they discovered Greece had lied to join them.  And their response to the crisis of the last two years has consistently been too slow and too little, they’ve never gotten ahead of it with a serious, bold plan.