Now we help, now we don’t –

 

Another fine mess. The EU’s handling of the Greek debt crisis took another step for the worse yesterday, when a German official quoted by Reuters as confirming that a technical agreement has been reached about how to aid Greece should it fail to refinance its debt. The news was later denied  by Angela Merkel’s spokesman. The confusion greatly exacerbated worldwide market swings, and left a lot of people confused.

FT Deutschland goes a step further with a report that the German government would not even exclude bilateral aid, though the article said that Germany preferred a European solution.

(It seems to us that the original Reuters story is essentially correct – a deal has indeed been agreed at technical levels, but it is not yet a political deal. This will have to wait until Thursday. Germany in particular is also unsure about the public reaction, as the German news media dig up ever more aspects about what happened in Greece. See below the Spiegel story that Goldman Sachs helped Greece present false accounts.)

The FT adds in its report that both the UK and Sweden favour an IMF-led bailout of Greece, but this is firmly denied by the eurozone.

In another story, the FT writes that the European Investment Bank has rejected any involvement in a rescue deal. (Though it is not up to the EIB to decide, but to the European Council).

 

Olli Rehn, the new European economics commissioner, has also confirmed that support for Greece will be on the summit agenda, according to a report in Bloomberg, while Michael Meister, a German Christian Democrat MP, is quoted as saying that the Bundestag was considering financial assistance.

The rumours of bailout help the euro recover some lost ground against the dollar,

 

How Greece managed to present fraudulent accounts– with the help of Goldman Sachs

Der Spiegel has a cracking news story about how Greece managed to cheat on its Maastricht debt.  Goldman Sachs set up a highly intransparent currency swap through which Greece was able to hide its true deficit. Here are the relevant bits of the story:

“Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

Such transactions are part of normal government refinancing. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.

 

Van Rompuy’s plans

Herman van Rompuy, the permanent Council president, laid out his plan in a note sent to the head of states in preparation of the informal summit on Feb 11. Le Monde has some details, according to which Rompuy wants a Lisbon strategy with max 5 objectives and a positive incentive scheme (priviledged access to EIB credits), and should be integrated with the stability programmes to give a more complete picture for evaluation.

 

Wolfgang Munchau on the need for a crisis resolution framework

In his column in FT Deutschland, Wolfgang Munchau says the eurozone’s governance framework has essentially failed. It is urgent that the Thursday summit agrees on an immediate crisis resolution decision, to be followed by an amendment to the governing rules to incorporate a solid frame for crisis resolution. Otherwise the eurozone risks becoming subject to a massive speculative attack that won’t be confined to Greece, but affect Spain, Portugal, Austria, and Belgium, and possibly Ireland and Italy.

 

Paul Krugman on the eurozone

At least Paul Krugman is not calling for the  breakup of the eurozone. He says it would be too costly. (we could think of one or two other reasons as well!). But he says that having got into this mess, which is worse than even the eurosceptics ever imaged, now requires a full fiscal and labour market union. (On this point, we agree with him. Lose policy co-ordination has failed and is unlikely to work. Without common labour and fiscal policies, the eurozone will be stuck in a permanent crisis, with no chance that the present imbalances are ever corrected.

 

Dominique Moisi on France’s depression

Dominique Moisi has a good comment on the French state of mind in the Financial Times. He writes objectively France has done relatively well, yet the country is totally depressed at the prospect of a loss of global influence and the rise of Asia in global power politics.

“The French are deeply uncertain about their individual and collective future. They had briefly felt they were riding the waves of globalisation. Now they are not so sure. Yesterday some equated globalisation with the Americanisation of the world. Today most see it as translating into the “Asianisation” of a global economy in which France’s traditional cards seem no longer to work. The result is a loss of belief in the competitiveness of French technology and culture. “

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