NCR Handelsblatt bring an rather interesting story Tuesday, according to the German media Nicolas Sarkozy, Silvo Berlusconi and Jean-Claude Trichet ganged up on the German chancellor Angela Merkel and forced her to accept the terms for the Greek bailout plan.
“France and Italy have forged a deal on Germany that finally allowed European countries to agree on a detailed loan package for Greece.”
French president Nicolas Sarkozy and Italian prime minister Silvo Berlusconi worked out the deal with ECB-boss Jean-Claude Trichet, and then told Merkel that they would go ahead by themselves. The German chancellor Angela Merkel had also insisted on a 6% interest rate, but was in the end forced to accept the French/Italian proposal, the German media reports.
This is what ncr.handelsblatt.international writes:
“Few of the high officials of the EU’s 27 central banks and finance ministries who convened in Brussels last week knew their meeting would be yet another dramatically long discussion of the Greek problem. After two months of disagreement, even fewer figured the session would result in a promise to lend Greece 30 billion euros over 2010, at around 5 percent interest.”
“The officials’ only instructions had been to prepare the next meeting of finance ministers in Madrid, scheduled for next Friday and Saturday. The meeting’s agenda included topics such as extended financial oversight, a special banking tax and national convergence programmes on EU countries’ budget deficits.”
“But financial markets paid little heed to these proposed measures. Or perhaps increased government regulation of the financial sector inspired investors to upset those governments some more. Whatever the case, Greece took a bad beating in the market. This provided the catalyst required to reach an agreement in Brussels on Sunday afternoon, sources said. By preparing a loan package the European finance ministers effectively gave the European Commission a mandate to further coordinate matters with the International Monetary Fund, which will add its own 10 to 15 billion in loans to the package. “Fine tuning,” is what European Commissioner Olli Rehn called it. IMF-EC talks began in Brussels this Monday.”
“Last week was a rough one for Greece. Greek banks, which had come through the credit crisis relatively unscathed, got severe downgrades. It became known that Greek account holders withdrew some 10 billion euros from their accounts in the past weeks alone. The euro lost further ground on exchange markets. Fitch credit ratings agency cut Greece’s rating to BBB-. That was a two-points downgrade, with a prospect of more to come. On Thursday, Greece was paying a record-breaking 7.5 percent interest rate on treasury bonds, a rate comparable to that paid by Iraq. Fitch cited a “lack of clarity regarding the mechanism that will provide external financial support”.
“This made officials on the EU’s Economic and Financial Committee (EFC) extremely nervous, as they sat down to prepare their debate over banking oversight and convergence programmes last week. Their conversation was soon dominated by the Greek question and not much else. Southern countries had already proposed offering Athens a loan promise two months ago.”
“The sooner this would be pledged, the smaller the chance it would have to be paid out. The point was to intimidate investors. Germany and the Netherlands opposed rewarding Greece’s bad behavior and blocked the proposal. Slowly, however, investors forced their hand. On February 11, EU government leaders had declared their solidarity with Greece. When investors sunk their teeth into the weaker euro countries like Portugal and Spain, the E.U.’s government leaders announced, on March 25, they would offer bilateral commercial loans to Greece along with the IMF. This promise was more substantial than the initial support, but not substantial enough. It failed to specify amounts, interest rates and repayment plans with a clear time frame.”
“That is why several EFC officials interpreted the credit rating reductions and interest hikes of last week as a declaration of war – and called their superiors. European banks replete with Greek treasury bonds were at risk. The euro was in danger.”
“Things moved fast after this. Germany, supported by Austria and the Netherlands, insisted that Greece would only be allowed to borrow money at 6 to 6.5 percent market rates. Other countries, which found 4.5 percent more reasonable, moved quickly. Government leaders got on the phone. “Who didn’t I speak to?” was the rhetorical question the Luxembourgian prime minister Jean-Claude Juncker asked on Sunday afternoon, after he had finalized the deal in a teleconference call with all the finance ministers. “Everyone was calling everybody,” he said.”
“Between phone calls, the French and Italian presidents met face to face. They worked out a deal with ECB chairman Jean-Claude Trichet that would entail Greece paying around 5 percent interest over bilateral loans from all other European countries. This is higher than the rate the ‘super strict’ IMF usually charges, but far less than the interest Greece was paying by the end of last week. Sarkozy and Berlusconi did not want to wait any longer for the Germans who, they feared, wouldn’t start showing some leniency until May, after the German regional elections, which chancellor Angela Merkel intends to win. Merkel also objected to the 16 euro zone countries taking a decision, and kept insisting all 27 EU member states got involved. The French and Italians reportedly agreed that they could be first to offer Greece loans, granting Merkel some more time. Merkel thus lost the initiative she had held in the Greek bail-out debate for months. It wasn’t until Sarkozy, Berlusconi and Trichet sealed their secret deal on Thursday night that she understood the gig was up, and she dropped her demand for a 6 percent interest rate. To offer Merkel a graceful exit, Juncker talked down the importance of the 5 percent interest rate on Sunday, calling it “anything but a subsidy”. After all, there are a lot of Greek state bonds sitting in German banks. And Germany will have to fork over the biggest loan because of the size of its economy, if the Greeks ask for it.”
“The Greeks still haven’t asked for it. But speaking over the phone to his Spanish colleague José Luis Rodríguez Zapatero on Thursday evening, the Greek prime minister George Papandreou said it was high time to prepare a package that included some specifics on figures and dates, because Greece’s situation was dire. This also helped forge a compromise on interest rates, which had been the biggest obstacle standing in the way of a deal before Friday night. The teleconference of Sunday afternoon was limited to the question whether the sums to be borrowed should be announced for the three following years or for this year only. The ministers chose the second option. The amounts available now are meant only for 2010; those for 2011 and 2012 will be announced at a later date.”
“Many agree this deal will give Greece short term relief. And if anything, this painful episode in the euro’s history has proven the common currency needs some better crisis management. EFC officials will have their work cut out for them trying to provide it.”
Source: ncr.nl – international.com
May Still Be Vetoed By Germany
Frankfurter Allgemeine quotes German government officials as saying that the rescue agreement for Greece was not automatic, and might still be vetoed by Germany if Greece were to make a request.
The ability by the German government to confuse both the German people and its EU partners is unparalleled, and it looks Merkel got herself into a real political mess over this, by trying to juggle to contradictory message, one for domestic consumption, and one for the EU.
Judging from this mess, it looks to us that she was bounced – and unprepared for it.
German media were aghast to find out that the deal would cost Germany €8.4bn, Germany’s contribution.
Der Spiegel notes that the agreement contradicts everything Angela Merkel had promised. Merkel’ s self-styled Madame Non is no longer a credible figure.
The news magazine mocks the attempt by her desperate spokesmen to emphasize that Greece has not called for aid. Their hope that this aid might never be needed is completely unrealistic given the circumstances, and given the hectic agreement reached by finance ministers on Monday.
The Social Democrats noted with glee that Merkel would not be able to push this issue beyond the state elections in North-Rhine Westphalia.
Frankfurter Allgemeine also points out that the government was trying to extricate itself from a mess of its own making. It is very obvious to everybody that the EU is breaking the law by offering Greece subsidized loans.
Greek bonds predictably rallied on the agreement. The yield on the 10-year was down 45bp to 665bp, and the two-year was at 607bp.
The euro rose strong, but then pared some of its gain in later trading.
Goldstein Criticize The Agreement
Morris Goldstein, a former IMF deputy chief economist, criticized the deal on the grounds that the lines of responsibility were unclear.
The Financial Times writes that both the EU and the IMF would try to talk a lead.
He says the IMF would insist on playing a leading role, and impose fiscal targets, more transparency and structural reform.
“If a regional grouping can set IMF conditionality, what is the point of the fund anyway? This could create a very dangerous precedent,” he says.
Says Portugal Is Next
Greece is saved, but what about Portugal?
Peter Boone and Simon Johnson write in their blog, The Baseline Scenario, who argue that the European have now made a financial commitment but without any concrete commitment on fiscal policy (beyond the plans already announced) and structural policy.
The two things to watch out for are the strength of the global economic recovery, and the quality of the Greek austerity programme. They conclude that unless the Portuguese make a serious austerity effort, they will be subject to the next bond market assault.
The EU will then bail them out as well, but they will have reached the end of the line.
Crisis Cost Italy 6.5% of GDP
La Repubblica has a story from an occasional paper by the Bank of Italy, in which the authors calculated that the financial crisis would have lead to a 10% fall in output, had it not been for the automatic stabilizer.
The main mechanism of the crisis were the fall in global trade, but not a lack of finance, according to the study.
Skrzypek’s Eurosceptic Testament
“The decade-long story of peripheral euro members drastically losing competitiveness has been a salutary lesson. Another conclusion from the Greek imbroglio is that there is no substitute for countries’ own efforts to improve competitiveness, boost fiscal discipline and increase labor and product market flexibility – whether or not they are in the euro zone. Hard work brings its own reward. Interest rates on 10-year government debt issued in zloty are now 5.6 per cent – compared with about 7 per cent on 10-year Greek debt.”
How France Fell Out Of Love With Sarkozy
A good explanation of France’s disenchantment with Nicolas Sarkozy was offered by Dominique Moisi in the Financial Times.
They hyperactive reforming President induce angst among his countrymen in times of an existential crisis.
“…he incarnated in their eyes the last chance of seeing badly needed reforms implemented in France. But today, with the economic crisis far from over, even those who are still attached to reform want above all to be reassured. For the French, this is a president who instead induces anxiety. As they observe his nervousness and his lack of serenity, so they are in turn gripped by a sense of existential ‘angst’ and what I described on this page in February as a national mood of depression.”
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