Merkel says Nein to Greece: IMF option now almost inevitable

 

So, now we know. No bail out of Greece, no bailout of anybody. Angela Merkel decided that the bailout rule needs to be applied strictly, and that Greece should go the IMF if it needed help. The decision provoked strong reactions and unsettled markets.    

The political roller coaster is likely to continue at least until next week’s summit meeting. A Greek bailout is not on the agenda for the moment, but the pressure is rising. The eurogroup is deeply split over the issue. While an IMF solution would find support with the Netherlands, Finland and Italy, the majority behind France is still against it. The IMF option was dismissed by French President Nicolas Sarkozy and European Central Bank President Jean-Claude Trichet, who said it would show the EU can’t solve its own crises.

 

Markets reacted with caution. The euro dropped as much as 1.1 percent to $1.3587,  and the extra yield that investors demand to hold Greek 10year bond rose 18 basis points, CDS rose to 295bp. Bloomberg quotes George Papandreou saying that Greece can’t afford to hold out much longer at current market rates. His government still needs to raise another €20bn to repay bonds maturing on April 20 and May 19.

 

Papandreou meanwhile appealed to European politicians saying that the Greeks, who are ready to make sacrifices, deserve better treatment.   He reiterated his threat that Greece may turn to the IMF unless EU leaders agree to set up a lending facility at a March 25-26 summit. The FT calculated that given the current rate for IMF loans of 1.26%, Greece would be better off than the current market rate even if there were a surcharge.

FT Deutschland said that so far Greece is not an official item on the EU summit’s agenda. Should that changed, the paper writes, Angela Merkel wants to discuss a change in the Treaties to harden the sanction mechanism of the stability pact and to allow a forced eurozone exit as a last penalty.

 

 Why did she do it?

The most cited argument in the press is that Germany wants to avoid any legal ambiguity over whether the no- bailout clause is violated or not.

Another political argument is that Germany could then use its current position ahead of the European summit to argue that if a European bailout were to be discussed so must be a treaty revision including a sharpening of excessive deficit rules and euro exit. In that scenario, Germany’s refusal to bail out is not so much a final decision, but an opening gambit for a negotiation.

Les Echos suspects that Angela Merkel is doing this because of the elections in North-Rhine Westphalia but the French still have hopes in Wolfgang Schäuble, who excluded the IMF scenario only last Sunday.  

 

 

Eurozone’s debt rollover risk

The FT’s Lex column warns that “the combination of the eurozone’s fixed exchange rate, gaping deficits and skittish capital markets looks like the makings of an old-fashioned emerging markets debt crisis.”  EU countries have almost doubled their amount of short-term debt since 2007. Rolling over such debts, worth more than €800bn this year, increases the chances of a blow-up. The article goes on saying that it is not the usual suspects that are to worry about most, but Belgium, Italy and Ireland.

 

European Parliament determined to push ahead with capital adequacy rules

Europe’s banks are aghast at the prospect that the European Parliament is intent to implement the new capital adequacy rules by 2011, at a time when the US banks are not compelled to do likewise. The new rules would force banks to increase their capital backing for their proprietry trading by four times. For Deutsche Bank, this would amount to an increase in capital of €4bn.

 

 

---