Greek Crisis: Confusion And Paranoia

The major central banks of Europe seem to have reached a stage of confusion and paranoia as the Greek borrowing costs reaches another record high. Jean-Claude Trichet at the ECB doesn’t seem to know what to do, and the German Bundesbank are afraid the Greek government will ask the IMF for more money – money that eventually the Bundesbank will have to come up with.

“I’m not sure whether it’s possible for a human to cope with the tensions in the topics we’re discussing at this stage.”

Silvio Peruzzo


Since February when politicians began squabbling over how to rescue Greece, the euro has lost 4.1 percent against the dollar and the extra yield demanded by investors to hold Greek debt rather than German have increased to a record high 4.68 percentage points. ECB-boss Jean-Claude Trichet, who was supposed to spend his final year in office nurturing the region’s nascent recovery, finds himself powerless to resolve the crisis because he has no control over fiscal policy.

Jean Claude Trichet struggled to answer reporters’ questions at the ECB’s press conference about the interest rates that Greece would have to pay for emergency funds and explain his stance on the IMF’s role in a bailout, Bloomberg reports.

Trichet argued at one point that lending to Greece without a subsidy element could simply mean at rates no lower than those at which creditor countries can finance themselves. He then retreated behind the argument that the decision rests with the governments.

But Trichet also clarified that government bonds would not be affected by the new graduated haircuts system for collaterals, implying that in fact the change will help and not damage Greece.

(Also, interest rates have been left unchanged at 1%.)

“Trichet is essentially an observer in the current crisis,” says Colin Ellis, an economist at Daiwa Capital Markets Europe Ltd. in London and a former Bank of England official. “He does not hold the levers of power.”

“He’s one of the brightest central bankers out there, but it’s getting too complex,” Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc, says. “He has to fit into a political world and that’s what he’s uncomfortable with.”

“The communication exercise here becomes a monstrous problem,” says Peruzzo.

“I’m not sure whether it’s possible for a human to cope with the tensions in the topics we’re discussing at this stage.”

Greek CDS At Record 468,5 bps.

Credit-default swaps on Greece surged to an all-time high of 468.5bp, and the spread between Greek 10-year bonds and German bunds jumped to 439bp, the most since the introduction of the euro in 1999, according to Bloomberg News.

It now costs more to protect against a default by Greece than Iceland.

Market participants are concerned that Greece ability to borrow is becoming “untenable” and that the European Union will be forced to lead a bailout.

(Source: FT AlphaVille)

IMF staffers have come to Athens for a two-week to offer technical help with fiscal policy, according to Le Monde, but this has very much the feel of a first stage of an IMF-led loan to the country.

An IMF spokesman is quoted as saying that the purpose of the visit is to help with the fiscal administration.

The financial markets are now expecting that some kind of emergency assistance is likely to be called upon relatively soon.

The Germans Are Getting Paranoid

Frankfurt Rundschau cites from an internal paper, with poisonous attacks on the EU’s backstop agreement for Greece, and in particular against the IMF.

The Bundesbank is afraid of the following scenario. Greece simply calls the IMF for help, and the IMF in turns asks its largest members for money in return for SDRs. As Europe’s largest central bank, the Bundesbank would be immediately called upon to pay up.

The Bundesbank believes that the IMF will offer less conditionality than the EU, and believes that Merkel’s position on Greece is too soft.

The paper also include a more general broadside against the IMF, referring to the Washington-based institution as the Inflation Maximizing Fund, in reference to a recent proposal by Olivier Blanchard, IMF chief economist, to consider a discussion on raising the inflation targets.

Call For Immediate Help

As reported by high5finance yesterday, Fitch rating agency have called on Greece to immediately ask for help from the EU and the IMF.

The Greece expert Chris Pryce says that it is now the times to acknowledge the true extend of the crisis.

The editorial published in German edition of The Financial Times condemn such a move as arrogant and risky as it might destabilize the markets further.

The article recommends the EU governments to remain calm and wait and see until May whether markets calm down but clarify the conditions under which they would help Greece if needed, the evrointelligence.com report.

Related by the Econotwist:

Euro Zone: More Fiscal Integration Or Not?

Here Comes Another Greek Bank Meltdown

“Greece Will Default”

Greek Debt Crisis Become Critical (Again)

Fitch Launch European Loan Repayment Index

Fitch Expects More European Sovereign Downgrades

Greek Bailout “Backstop” Confidence Trick Already Backfiring

Markets To Test Greece

Greece Wants E.U. To Use Old Latvia Fund For Bailout

G7-Countries In Deep Trouble

Merkel: Kick’em Out!

Force The Rich!


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