Beware of Eurozone Plans for Greek Debt Bailout

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An old proverb dating back to the Trojan War tells us to "beware of Greeks bearing gifts."

Today, with the fate of the European euro and perhaps even the entire Eurozone region hanging in the balance – and Greece needing a bailout to avoid default on its massive public debt – a more-appropriate warning might be: "Beware of Greeks seeking gifts."

Unfortunately, European finance ministers are looking at a bailout proposal that would amount to little more than an outright gift.

And it's a gift that – in my opinion – should never be given.


Rescue Plans Provide No Real Relief

My feelings about a bailout plan for Greece aren't any different than what I said about all the other financial-rescue plans that were rolled out around the world in order to mitigate, soften or draw out the fallout from the 2008 world financial crisis: If Greece can't work out its debt problems on its own, the country should be allowed to default.

Admittedly, Greece hasn't actually issued a formal request for direct financial aid from the 15 other members of the so-called Eurozone – the 16 major nations of the 27-member European Union (EU) that use the euro as their official currency.

And it insists it isn't planning to – instead hoping to rescue itself through an internal austerity program that would cut the national budget from 12.7% of gross domestic product (GDP) in 2009 to just 3.0% of GDP by 2013.

What Athens wanted – and essentially got, though without any specific details about possible debt-relief measures that might be taken – was an assurance of support that fellow Eurozone nations would be there if needed.

The assumption is that any future aid would be limited to direct loans to Greece at a preferred interest rate – but with no loan guarantees. The money would presumably come from a pool of government funds to which all the other Eurozone nations would contribute.

The Three Keys to Eurozone Support

Eurozone leaders had three reasons to make such a declaration of support:

  • First, the EU ministers wanted to safeguard the euro from further erosion against other world currencies – should problems in Greece worsen to the point of possible default. Initial reaction in the currency markets was positive, as the euro gained 0.6% last Tuesday, reducing the currency's year-to-date decline to just 4.5%. However, concerns quickly resurfaced as the lack of clarity in the EU aid plan became apparent, and the euro eased again, losing more than half a percent in last Thursday's trading, then falling to a 16-month low against the Swiss franc in Friday's European Forex action.
  • Second, the ministers hoped the pledge of potential Eurozone backing would enable Greece to get more favorable interest rates as it attempts to refinance the $27.5 billion in government debt that comes due in April and May. The initial response on that front was also positive as rating agency Standard & Poor's took Greece off its "CreditWatch negative" list on Tuesday and the yield on 10-year Greek bonds fell to 6.14%, narrowing the yield spread against the benchmark 10-year German bonds to just 300 basis points, the smallest premium in almost a month. Unfortunately, that reaction was also short-lived as the Greek-German bond-yield spread widened to 3.07% on Thursday and the cost of insuring $10 million in Greek debt against default rose from $290,000 to $296,000.
  • Third, the EU governments hoped the pledge of support – as vague as it was – would prevent Greece from approaching the International Monetary Fund (IMF) in search of a bailout – an act many of the European countries feel would be an embarrassment to the Union. European Central Bank (ECB) President Jean-Claude Trichet went so far as to publicly proclaim it would not be "appropriate" for Greece to seek IMF aid. The fear is that having a member nation appeal to the IMF for fiscal aid would damage the economic credibility of the entire European Union.

As the magnitude of the Greek problem becomes more apparent, that stance seems to be weakening. Germany, which would probably be on the hook for the majority of any EU aid package to Greece, has been vocal in its opposition to an internal (EU-funded) aid package, citing strong public opposition to the prospect. Just yesterday (Monday), in fact, German Chancellor Angela Merkel said Eurozone members should consider allowing Greece to turn to the IMF for assistance, The Wall Street Journal and MarkWatch.com both reported.

Following a meeting with European Parliament President Jerzy Buzek, Merkel told The Journal that "in my opinion, [help from] the IMF is a subject that we need to consider and that we must continue to discuss." Part of her reasoning: Greece has not yet reached a "point of no return" with regards to its debt.

It was also reported Thursday that three other Eurozone nations – Italy, the Netherlands and Finland – were leaning toward sending Greece to the IMF if it needs help.

Given this weakening resolve, it now appears increasingly possible that the leaders of the European Union, scheduled to meet Thursday and Friday of this week, might decline to ratify the finance ministers' pledge of support for Greece, an action required before any aid could actually be provided.

Personally, I believe that's exactly what the European finance ministers should do – abandon any notion of a bailout for Greece. If Europe thinks its credibility will be hurt should Greece go to the IMF – or, worse, actually default on some of its debt – I can only assure them that the damage to their credibility will be far more severe, and longer-lasting, if they do step in.

Although the ministers sternly deny the proposed aid would be a "bailout," that's exactly what it would be. "A rose by any other name would smell" … just smell – period. There's nothing rose-like or sweet about the EU's bailout proposals.

For one thing, a Eurozone aid package to Greece would violate the EU's own very specific "no-bailout rules" – and that would be far more harmful to European credibility than going to the IMF or letting Greece default. It would indicate to the rest of the world that the Eurozone lacks the resolve to follow its own rules and doesn't view itself as a leader on the world economic stage.

For another, this bailout also rewards Greece for its inept leadership, opening the door for continued mismanagement there, as well as in any other member nation that might also get into fiscal trouble before the current economic mess is fully resolved.

The bottom line is that a Eurozone bailout plan for Greece would expose serious cracks in the pact that sustains the euro, undermining the respectability that the still-young currency seeks to maintain in the eyes of the rest of the world.

Global currency traders who deal in "real" money know that taking one nation's malfeasance and forcing all the others to pony up and cover the losses is actually a losing proposition in the long run. By bundling Greece's fiscal trash in with the rest of the Eurozone's economic diamonds is a formula that will seriously weaken the euro – perhaps beyond repair.

In that context, letting Greece fail doesn't seem so bad – especially when viewed in the proper perspective. Greece crumbling would be to Europe like Montana going bankrupt in the United States. It certainly wouldn't be popular, but given that Greece and Montana each account for less than 2% of the economic output of their respective unions, it really wouldn't be that big a deal.

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  1. TARA TAN KITAOKA. | March 23, 2010

    I HAVE BEEN WORKING WITH EUROPEAN COUNTRIES FOR 21 YEARS.
    DON'T U THINK IT IS BETTER FOR ALL EUROPEAN COUNTRIES TO GO BACK TO THEMSHELVES
    AS EACH IT'S OWN COUNTRY.

    THE 3 REASONS ARE , 1). SINCE THEY BECOME ONE, THESE COUNTRIES HAVE HAD THEIR
    FILL OF UNHAPINESS BECAUSE THEY ARE COUNTRIES THAT HAVE
    INDEPENDENT THOUGHTS.
    2). PEOPLE LIVING IN POORER COUNTRIES HAVE TO WORK 3 TIMES
    HARDER.
    3). MORE FAMILY OWNED COMPANIES ARE FAILING AND IDEAS AND
    PRODUCTS ARE BECOMING NOTHING SPECIAL OF REPRESENTING
    INDIVIDUAL COUNTRIES.

    WHAT DO U THINK ???.

    WITH BEST REGARDS,

    • Michael Draut | March 23, 2010

      No way… that'd be like returning to Jurassic Park! Isolation is not a means to growth and prosperity.
      Innovation and success are the result of entrepreneurship based on a sound business strategy and financial plan.
      That to bad some people "choose" to work harder not smarter. Typically it also is because they are not motivated to change, not willing to do what it takes to earn more and are looking for their government to be their socialist keepers. And redistribution of wealth is not the answer either.
      The EU has its faults, however, it sure is a lot better than the alternative!

  2. John | March 23, 2010

    The issue is not that Greece's national budget be reduced from 12.7% to 3% of GDP, it is the national deficit be reduced from 12.7% to 3% of GDP by 2012.

  3. H. Craig Bradley | March 23, 2010

    Ironically, Montana, North Dakota, South Dakota, Wyoming and Idaho are in relativley strong fiscal shape compared to many other states, or even countries. These states still have a S&P AA Bond rating on their debt, their govt. retirement pensions are 90% funded, they have low state debt levels and even some cash reserves, and most importantly these days: all of them are fiscally solvent. Therefore, they have options- while basket case economies around the world laden with excessive debt do not have recourse.

    One such prerogative would be to simply refuse to implement the new Health Care Reform Bill once it becomes law and is tested in the Federal courts for constitutionality. All the FEDS could possibly do is deny Montana and the others Medicare money. Big Deal! There is always a cost to maintain your freedom, and a consequence if you loose it.

  4. William Patalon III | March 23, 2010

    These are all great comments…….and great observations…..please keep them coming.

    Tara, I think that you, in particular, put a lot of thought into the key points that you made…Craig, your comment about the new healthcare plan is both poignant…..and timely…..

    William Patalon III
    Executive Editor
    Money Morning

  5. John Napier-Winch | March 23, 2010

    I don't see the problem with Greece receiving a gift.
    I live in Western Australia, and we have been supporting the
    poor states of Australia for years and we are still better off than
    them
    John Napier-Winch

    • John Roach | March 24, 2010

      Good on you winch, you pay city prices for a large country town, we all pay to support your native population, a good % of your working population flies in from the east and your a tosser for comparing WA to the EU. Big finger to you Buddy!!

  6. Bogdan | March 24, 2010

    European Central Bank President maybe is not aware of Germas 3 conditions stated to support Greece. One of those was that IMF should be involved..
    EU is like a family that is not willing to help its own childrens when in need.. "no-bailout own rules".

    If one state from US would be in need, the nation would offer to help or just ask them to seek help at ECB?!

  7. Panayotis Economopoulos, MA, Ph.D | March 24, 2010

    I find your article very offending. You are very ignorant of the situation in Greece and this very unprofessional. I would like to be removed from any further e-mails and communications from Money Morning. I also want cancel my subscription to your Report because this article shows an inability to understand that an analysis should be based on knowledge of the facts and not on your reactionary ideology. I see you are busy defending the communist regime in China which is contradictory to your conservative and free market views. I have a Ph.D in economics and over the years I have taught in a number of Universities and owned/managed a number of companies in the US and Greece. Therefore, I am qualified to critisize your views especially since I know the situation first hand.

    • Les Barnette | March 29, 2010

      Dr. Economopolos,
      I would be interested in your firsthand information on the Greek situation Would you like to share it?

      • Zoraida Economopoulos | July 12, 2010

        I would also be very interested about info on the Greek situation.

  8. Sir Camelot | March 25, 2010

    It's all a matter of pride for the E.U. because to rescue Greece means they have to swallow their own pride and break their own self-made "no bail-out" rules (not to mention setting a very dangerous precedent for other E.U. countries in trouble in the future). It's like being caught in a "damn if I do and damn if I don't" situation.

    Lesson from all this? Simple: Stick to the rules! Don't be like the Americans… (whom as far as I'm concerned is "technically a Bankrupt nation") whether they like it or not… but they do have this thing called "Chapter 11"… wonder whether the U.S Govt. can use that to protect itself? (just thinking aloud) ehehehehehhe!!!! or E.U./euro is going to end-up in a much worse mess that would make the U.S. bailouts look like a walk in the park.

    But of course we must remember that in the U.S. they are actually spending those Billions & Trillions bailing out their own cronies!!! and yet they dare to talk about 3rd. World corruption!!

  9. Charles Fullerton | April 2, 2010

    In mid-2002 I was in France on vacation. I was exchanging dollars for euros at a rate of $1.02-$1.03 per euro. If I remember correctly (and I may be wrong) when the euro first came out $!.00 bought about 1.16 euros. Is that correct? Over its lifetime the euro has appreciated nicely against the dollar. So if the Greek situation causes the euro to decline it is not good but is it a major disaster?

  10. TARA TAN KITAOKA. | May 6, 2010

    DEAR PANAYOTIS,

    GOOD, SINCE U KNOW EVERYTHING. I TRUST, U WILL DONATE YR OWN MONEY AND
    SLOVE ALL GREEKS PROBLEM.

    I AM VERY HAPPY FOR U.

    PLS TELL ME , WHEN ALL THIS GREEK PROBLEM IS OVER.

  11. TARA TAN KITAOKA. | October 11, 2011

    HEY, GUYS ,
    LOOK AT EURO PROBLEMS, DO U WANT MORE DOOM BEFORE U AGREE WITH ME ???.

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