The deal is done – or is it?

 

The preparatory deal is done – or is it? Different news organisations have different takes no what happens this morning. Some report that there is an agreement in principle (but then, we have had an agreement in principle since Feb 11). What is new is that any aid to Greece will not come in the form of loan guarantees, as has frequently been reported, but in the form of straight loans, according to Bloomberg. (We assume this is for legal reasons. A loan guarantee is legally a bail out, while there is nothing in the Treaty that prevents governments from lending money to each other.)  Bloomberg said that aid to Greece would probably come through governments pooling funds to extend direct loans to Greece. The article also quotes Dutch interim finance minister Jan Kees de Jager as saying that any help from the Netherlands would require “an effective premium on top of the cost of funding so that there will be also an incentive for Greece to refinance through the markets.” Jean Claude Juncker and Christine Lagarde both made the point that this package would probably not be needed. The eurogroup did not sort out all the remaining technical difficulties, and the final decisions rests with the European Council.

Der Spiegel has a different take. It writes that it looks a deal, but it is not. The agreement does not say anything more concrete than the European Council’s statement on February 11. All the technical details have yet to be agreed on. Der Spiegel says this is not really a deal, but a failure to agree a deal, dressed up as a deal. The article makes the point that continued procrastination is not going to make the situation any easier.

 

 

S&P concerned about Spanish banks

El Pais has a story that S&P expressed concern over the state of Spanish banks, despite the fact that they have so far withstood the financial crisis in reasonable shape. The concern is mainly due to the secondary effects of the recession, as high unemployment and rising defaults are threatening the balance sheets of the sector. S&P says that Spain’s financial system will be affected by credit losses from a highly leveraged corporate sector, rapid credit expansion before the crisis, and significant financial exposure to the property sector.

 

Germans against Lagarde

This comment from Rainer Bruderle, the German economics minister, is very typical for the way Germans are regarding their own current account surplus. In an interview with Frankfurter Allgemeime, he said that the German surplus was not a problem for anybody, merely a sign of success, the foundation for growth, employment and well-being.  (The whole interview shows that the minister, in line with every other German politician who is publically commenting on this issue, has no understanding of what imbalances in a monetary union imply. It also shows a misunderstanding that Germans consider as their success is primarily the result of real revaluations elsewhere in the eurozone, which makes Germany’s good relatively cheaper. A first pre-requisite for the solution of any problem, let alone any problem as complex as imbalances, is the recognition that this is a problem in the first place.)

Les Echos, which reports on the same story from a French perspective, has spoken to a German exporter who also peddle the same line. Our advantage is not the price, but the quality.  

 

 

Daniel Gros on Greece

We have this from Daniel Gros, aka Fistful of Euros. He essentially argues that the fiscal adjustment now undertaken by Greece (and soon by several other countries, including Spain) will be so fierce that the only alternative to a very, very long recession is an internal devaluation.

“What can Greece do to escape the ‘Argentine’ vicious circle of higher risk premia and a worsening economic outlook? The only way to minimise the cost of the external and fiscal adjustments that are required to… make the situation sustainable is to make Greece more competitive and thus stimulate exports.

“This can be achieved only by an across-the-board reduction of wages (or rather labour costs) in the private sector of between 10 and 20%. Cuts in wages of this order of magnitude will encounter fierce popular resistance. They could come about either at the end of an extremely painful process when unemployment has reached peaks never seen before or they could come much earlier as the result of an overarching national agreement in which the government, opposition parties and the social partners agree on what is needed in the light of present circumstances. Greece thus needs a concerted effort at the national level not just a government that pushes austerity measures through Parliament.”

 

 

 

Lorenzo Bini Smaghi is in favour of explicit rules for bailouts

This is a really interesting comment by one of the ECB’s most influential insiders. Lorenzo Bini Smaghi argues, from the perspective of economic theory, that the current bailout system in the euro area – which is based on constructive ambiguity – may not be optimal.

“However, constructive ambiguity also means that, if and when needed, assistance is provided as a last resort to ensure that corrective measures are taken and contagion is avoided. If the authorities responsible for taking the decision to grant assistance are in the end not able to deliver, the whole concept of constructive ambiguity collapses. The impact on the financial markets might lead to greater instability as opportunities for destabilising speculative strategies increase.”

 

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