Germany and the European Central Bank are fiddling while Athens burns.
Greece is trying to negotiate a second bailout package to spare it from financial incineration, but Germany and the ECB are at loggerheads about the best way to design the rescue effort. The former is demanding that private holders of Greek bonds share some pain with taxpayers; the latter is equally insistent that any tweaking of the bond maturities, principal or yield would constitute a “credit event” — a default in other words — that could spread like wildfire throughout the euro zone.
The battle between the two is ample and distressing evidence that the plan to fix Greece and trap the debt crisis in the “peripheral” countries is far from complete and may not exist at all. If that is the case, the Greek debt crisis is not going away anytime soon, even though Athens on Friday rolled out new austerity measures that are designed to cut €6.4-billion ($9.2-billion U.S.) in spending this year alone.
Germany is bowing to domestic political pressure. The sovereign rescues have been hugely unpopular among Germans, who consider the three bailout victims — Greece, Ireland, Portugal — the authors of their own misfortunes. They want bondholders to share the bailout burden. Bowing to the crowd, Wolfgang Schauble, the German finance minister, told the German parliament Friday that he was sticking with his insistence that any new Greek bailout package provides “a fair distribution of risks between taxpayers and private creditors.”
Over my dead body, says ECB boss Jean-Claude Trichet, or words to that effect. On Thursday, he said that forcing bondholders to give up some booty for the sake of Greece would be a “terrible mistake.” Mr. Schauble has proposed the extension of Greek maturities by seven years. The ratings agencies have warned that even that sort of soft restructuring would amount to a default.
The ECB’s prediction of economic calamity in the event of a default, technical or otherwise, is worth considering. A Greek default could prove catastrophic to Ireland and Portugal and push up the yields of Spanish and Italian bonds to crisis levels.
But it is also worth considering that the ECB might be talking its book. The central bank owns an estimated €40-billion of Greek sovereign bonds, according to Barclays capital and their destruction would blow a fair sized whole in the bank’s balance sheet. The ECB is also financing Greek, Irish and Portuguese banks by providing them with unlimited loans at benchmark rates.
Who will win the standoff between Germany and the ECB?
Hard to tell at the moment, some economists think the ECB will blink first. It did so a bit more than a year ago, when it made it abundantly clear that it had no intention of buying Greek bonds to support the ailing country’s debt-market operations. The message: The ECB was not in the bailout game.
A few days later, it reversed its stance and started to load up on Greek bonds.
Will the ECB do another U-turn? A compromise may emerge as the outcome. It could for example, ask Greek bondholders to accept a voluntary — stress on the voluntary — rollover of bonds once they mature.
Whatever happens, time is running short. The Greek economy is getting worse by the day. Unemployment is at record levels — 16.2 per cent in March — and strikes and mass demonstrations are paralyzing its cities. European leaders want to unveil a new rescue package for Greece by the June 23-24 European Union summit. Greece, and the wider debt markets, will be on tenterhooks until then.
