Germany, Greece & Interpreting the Bailout

Some great threads here this week, reminds me of 2008 ...

There are a couple of important additional points to make. Firstly, with adroit financial engineering - and access to some AAA muscle - it is always possible to defer a problem. Enron did it many times (AAA provided by banks); British Energy in 2002 (HMG); and now the PIIGS (Germany). The term in vogue is 'kicking the can down the road', but a better one is that used by Enron: it's a snowball, getting bigger and bigger, going downhill at an ever-increasing rate but, for the time being, gathering up all the snow in its path. And its principle tool is 'blend & extend' - in this case, averaging down the PIIGS' interest rates and extending repayment to infinity and beyond. Simples, when you know how. Sometimes it works, sometimes ...

For the second point we start with the bailout document itself + a little interpretation. Of course, it's a blend-&-extend snowball alright:

"We have decided to lengthen the maturity of future EFSF loans to Greece to the maximum extent possible from the current 7.5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years … We also decided to extend substantially the maturities of the existing Greek facility … The EFSF lending rates and maturities we agreed upon for Greece will be applied also for Portugal and Ireland"

It's also a chest-beating exercise to warn off the wicked speculators with the usual battle-cry: our pockets are deeper than yours

"to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States … we will provide adequate resources to recapitalise Greek banks if needed … Member States and the Commission will immediately mobilize all resources necessary … We are determined to continue to provide support to countries under programmes"

There is also a warning-shot across the bows of the rating agencies. Of course, Soros et al have heard this all before. They - and some altogether nastier people, more in a later post - are rolling out their strategies for all this even as we write. But fair enough, Germany is a pretty ugly gorilla in its own right.

Then there are the pieties:

"All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms ... All euro area Member States will adhere strictly to the agreed fiscal targets"

Yeah, yeah. This, of course, is the classic formula of blend + extend + pretend: readily more available to governments than to businesses, who must observe less forgiving disciplines. But then we come to a really important bit, & my second point.

"We call for a comprehensive strategy for growth and investment in Greece … We will mobilise EU funds and institutions such as the EIB towards this goal and relaunch the Greek economy. Member States and the Commission will immediately mobilize all resources necessary in order to provide exceptional technical assistance to help Greece"

This, dear readers, is the thing we don't really grasp on this side of the Channel: Euro-solidarity. And this is where the German takeover comes in, albeit with a slightly (only slightly) different perspective to the 'they couldn't do it by force so they're doing it by stealth' line. Because we (they) have been here before, most notably the re-unification project. The Deutsche Einheit is a lesson in what Germany will do, when mobilised under the banner of solidarity (if you don't believe it, read this): and Greece is a commensurate task.

Solidarity comes with sticks as well as carrots. So the document also contains a warning-shot across Ireland's bows on the subject of Corporation Tax rates (paying attention, Salmond ?). Which leads us neatly to the sinister stuff.

"To improve the effectiveness of the EFSF and of the ESM and address contagion, we agree to increase their flexibility linked to appropriate conditionality, allowing them to act on the basis of a precautionary programme, finance recapitalisation of financial institutions through loans to governments including in non programme countries (and) intervene in the secondary markets: ... to improve working methods and enhance crisis management in the euro area ... our determination to reinforce convergence, competitiveness and governance"

Increase flexibility ... precautionary programme ... intervene ... convergence ... governance ... the sound of Emergency Powers being devised. They ain't gonna brook much opposition within the wider EU.

It's going to get ugly for Cameron.

ND