Thursday February 11, 2010 - 15:35:14 GMT
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Forex Blog - Greek Rescue Package Short on Details...Deliberately So
Greek Rescue Package Short on Details...Deliberately So
Due to legal constraints â€“ namely there is no legal basis for any bailout of a recalcitrant member of the Eurogroup (EMU) â€“ and national politics, there should be little surprise that the European heads of state summit today were not able to present markets with a detailed plan for rescuing the beleaguered Greek government from a deficit-debt default spiral. Germanyâ€™s coalition government too stands in the way of an explicit bailout using state run banks to buy and guarantee Greek bonds (KfW) â€“ minority coalition party must sign off on this approach and there could be legal challenges (why the decision to use a state-run bank). Surely this is a way around future possible failed auctions.
But there are other equally important reasons why Europe chose not to be more explicit and less conditional in offering Greece a helping hand. Moral hazard comes to mind â€“ Ireland that has really bitten the bullet with harsh fiscal cuts (tax hikes and spending cuts) must be asking why pay the price when likely Greece may not have to? And Portugal which has yet to produce a confidence boosting set of fiscal adjustments may now think why not let things slide forcing a bailout like Greece rather than taking the Irish path.
And then there is the most often overlooked reason for being purposefully vague on a bailoutâ€¦the declining euro. Why clear up uncertainty entirely with a specific and comprehensive rescue plan when the by-product of uncertainty has been to produce a much desired decline in the euro? Surely the calculus the Euro Zone included considering how to take default and contagion off the risk list but not entirely ending uncertainty just for the very reason to leave the EUR decline intact. That said, one could argue that an expensive and comprehensive bailout for Greece (and assumptions of more for other states if the need arises) would at the end of the day be negative for the EUR as it dilutes the fiscal balances of the strong members while shoring up weakest membersâ€¦might help Greece CDS come in but also push German and French CDS out.
It would appear that the European Council President van Rompuyâ€™s statement on behalf of the European heads of state does just that â€“ takes the worst case scenario off the table for Greece, but also leaves plenty of room for anxiety in markets and this will surely keep the EUR depressed.
Van Rompuy statement reads â€śEuro-area members will take determined and coordinated action if needed to safeguard the financial stability in the euro area as a whole. We fully support the efforts of the Greek government and their commitment to do whatever is necessary including adopting additional measures. The Greek government had not requested any financial support.â€ť
Market participants would do well to start pricing in a weak EUR policy, the mirror image of the US strong dollar policy and act accordingly.
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