Beware of Eurozone Plans for Greek Debt Bailout

Keith Fitz-Gerald

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.

[Editor's Note: Money Morning's Keith Fitz-Gerald has a gift. A veteran trader, skilled analyst and noted market tactician, Fitz-Gerald is able to see through the confusing haze of today's quickly changing markets to visualize and understand what the market really holds. This ability to see into the future, predicting looming changes - while also divining the profit opportunities those changes will create - is one of Fitz-Gerald's greatest strengths. It's a big reason that he's a perfect 22 for 22 with his Geiger Index advisory service. If you would like more information about the Geiger Index, please click here.

Also, watch Money Morning for a new interview with Keith Fitz-Gerald. During the lengthy question-and-answer session, the market strategist and best-selling author will detail his expectations for U.S. stocks, the U.S. economy, and for other key markets around the world. He will outline opportunities investors should capitalize on, and highlight areas of caution.]

News and Related Story Links:

• MarketWatch:
  Greece worries resurface as Athens eyes IMF.
• MarketWatch:
  S&P takes Greece's credit rating off CreditWatch.
• MarketWatch:
  Swiss franc rises anew amid confusion over currency policy.
• Wikipedia:
  European Union.
• Wikipedia:
  Eurozone.
• About.com:
  22 Countries Use the Euro as Their Official Currency.
• International Monetary Fund:
  Official Web Site.
• Phrases.org:
  Beware of Greeks Bearing Gifts.
• Barron's:
  Greek Equities Face More Battering.
• Money Morning:
  Eurozone Announces Greece Rescue Plan To Encourage Investor Confidence .
• Wikipedia:
  Trojan War.
• Futures.Mag.com:
  The Euro's Greek Tragedy.
• Reuters:
  Euro ministers discuss Greek standby aid planning.
• MarketWatch.com:
  Merkel says IMF aid not ruled out for Greece: WSJ.

Keith Fitz-Gerald

About the Author

Browse Keith's articles |

Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.

… Read full bio