A crazy 24 hours in Europe

Another crazy 24 hours for Europe. It would seem that Angela Merkel is trying to muster some form of actual leadership and set a direction for Greece. Her first step was to tell her counterparts in German parliament to stop talking to the media because every time they do the market blows up. Her second was to inform everyone else that Greece was doing its job and that Germany would support them on that path because Europe couldn’t afford anything else.

German Chancellor Angela Merkel sought Tuesday to calm market fears that Greece is heading for a chaotic default as Europe struggles to contain a crippling financial crisis.

Merkel rejected the notion that a Greek bankruptcy – a possibility raised a day earlier by her deputy that spooked markets – would provide a quick solution to the eurozone debt crisis.

She argued that Europe instead needs to stick to its efforts to cut budget deficits and improve its competitiveness, and that resolving the crisis would be “a very long, step-by-step process.”

Her comments came ahead of a teleconference Wednesday with French President Nicolas Sarkozy and Greek Prime Minister George Papandreou.

Fears of an imminent Greek default pushed interest rates on the country’s 10-year government bonds up Tuesday to a new record of over 24 percent, although Merkel sounded optimistic regarding Greece’s chances of getting the next batch of bailout cash from the so-called troika – the European Commission, the European Central Bank and the International Monetary Fund.

Representatives from the three organizations are due back in Athens soon.

“Everything that I hear from Greece is that the Greek government has hopefully understood the signs of the time and is now doing the things that are on the daily agenda,” Merkel told rbb-Inforadio. “The fact that the troika is returning means that Greece has started doing some things that need to be done.”

Merkel also sought to defuse comments by Vice Chancellor Philipp Roesler that there should be “no bans on thinking” in the euro crisis. By raising the specter of an “orderly insolvency” at some unspecified point, Roesler’s comments Monday reinforced concerns that Greece will default.

The tone of that message is encouraging, it suggests that Merkel will stand by Greece as long it continues to enact the austerity budget and, if it does, the next tranche will be paid. Obviously I have a problem with the logic, but it is a more positive message than the one we have heard recently. The same cannot be said for the Finance Minister who continues to make it abundantly clear that he is trapped in an ideology that means that Greece and other periphery nations must continually punish themselves in order to meet an unreachable goal:

German Finance Minister Wolfgang Schaeuble Thursday reinforced a warning that Greece would be denied the next instalment on its 2010 financial aid package unless it complies with its reform agreements to the letter.

“There is no way around this,” Schaeuble said in German parliament. “This must be adhered to and will be, in keeping with the payment of every tranche.”

Schaeuble emphasized the link between approval of the EFSF expansion and the stability of the euro, but that such aid would only “buy time” to allow indebted countries to make more structural reforms in their monetary policy.

Last Friday, bailout fund talks between Greece and its international creditors, the EU, the IMF and the European Central Bank, were suspended after a dispute over reconciling austerity measures with economic growth.

Schaeuble said the resumption of the talks was necessary for further Greek aid.

“As long as [the troika] cannot confirm that Greece has met its requirements, the next tranche for Greece cannot be paid,” he said. “The situation in Greece is serious, given the interruption of the troika talks and there can be no illusions about that.”

The finance minister said Germany was willing to provide funds that would help Greece, but that countries embroiled in debt “must also learn to help themselves.”

“We can help member states to buy time to solve their problems, but the root of the problems must be solved by member states themselves” he said.

The US market also lost ground when it was reported later that he had said that Greece should not get any additional aid beyond what has already been agreed upon. So much for keeping quiet.

Also in the markets, Greek bonds shot ever higher with the 1yr hitting 136.5 overnight.

Turning to Italy and the rumour mill is in full swing. Yesterday it was China who was coming to save Europe, the latest is Russia and Brazil. Whoever it is they didn’t bother to turn up for the latest auction:

Italian borrowing costs jumped at a 6.5 billion-euro ($8.8 billion) bond auction as contagion from Europe’s debt crisis leaves investors shunning the region’s most-indebted nations.

The Rome-based Treasury sold 3.9 billion euros of a new benchmark five-year bond to yield 5.6 percent, up from 4.93 percent when similar-maturity securities were sold on July 14. Demand was 1.28 times the amount offered, down from 1.93 times at the last sale. The Treasury, which fell short of its maximum target of 7 billion euros, also sold 2.6 billion euros of bonds maturing in 2018 and 2020.

The European banks also had a bit of a rally after the CEO of SocGen gave an interview claiming the bank has sufficient capital and liquidity, and that its balance sheet is solid. Whether that is true or not will surely be tested in the months to come, but it did completely fly in the face of a report from the Wall street journal which quoted someone from BNP Paribas saying the exact opposite.

‘We can no longer borrow dollars. U.S. money-market funds are not lending to us anymore,” a bank executive for BNP Paribas, who declines to be named, told me last week. “Since we don’t have access to dollars anymore, we’re creating a market in euros. This is a first. . . . We hope it will work, otherwise the downward spiral will be hell. We will no longer be trusted at all and no one will lend to us anymore.”

As I said, it was a bit of a crazy 24 hours.

The Greek Prime Minister George Papandreou is reportedly scheduled to hold a meeting today with Angela Merkel and French President Nicolas Sarkozy. Given Ms Merkel’s renewed vigour I am hopeful that we will see something a little more constructive than the last meeting between heads of state.

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  1. Merkel will stand by Greece as long it continues to enact the austerity budget

    Great, except austerity won’t solve Greece’s problems. The austerity-induced recession in Greece is shrinking government revenue and blowing out welfare spending.

    Here’s a nice chart from Kohler last night illustrating this.

    Greece can only solve its problems by exiting the Euro and rebuilding its competitiveness by returning to a massively devalued Drachma. Everyone knows this. Everyone. Do Eurozone leaders seriously expect they can lock Greece into a terminal death spiral of austerity forever? Surely they realise the Greek people will revolt at some point!

    • The drachma alone won’t save Greece. They must default first. However, Germany and France is not going to let Greece simply walk away from their debt that easily. Furthermore, imagine if you’re a Greek citizen. What would you have in your wallet : drachma? or Euro?

      The only solution is for Greece to dissolve itself as a country.

      • Well that’s a bit extreme!

        If I was Greek citizen I’d be moving my savings off shore pronto. Which makes me wonder why there hasn’t been a run on Greek banks yet.

        If Greece reverts to the Drachma if nothing else their tourism industry will go berzerk. Holidays in the Greek islands at Bali prices! Can you imagine how many Poms would be down there next summer? Greece would certainly be on my itinerary for my next trip to Europe.

        • I read the http://www.spiegel.de article earlier and it seems to suggest Spain, Ireland and Portugal may be turning the corner. Spain and Ireland particularly seem to have been out of the headlines for a while now, does anyone know how they are travelling or has anyone read anything?

          • Ireland is out of the spotlight because it is close to comatose – a ludicrous budget deficit, some zombie banks, punters migrating, strong currency kneeing its import competing/exporting sector in the nuts. They will be watching to see what unfolds with Greece.

            Spain is keeping its profile low, and has done a lot of work on trimming outlays (as well as employment prospects for its younger workers), and starting to round up its building society (cajas) market. But it hasnt gone within a bulls roar of doing something about all those houses, villas and apartments that nobody really wants, and has the Euro related nut kneeing that Greece, Ireland etc have. It isnt in the spotlight this week because everyone has their eyes on the Greek melee down the members wing.

            Once the umpires bring the game back under control, you can be sure the Spanish and Irish will be looked at (Along with the Italians, Portuguese etc)

            And anyone looking for a tip about which country goes first from the Eurozone, get your hard earned on Cyprus – banking sector 9 times the GDP, heavily exposed to Greece, channeling funds for shonky Russians, and with a tourism sector bruised in the nether regions by the Euro.

          • The Lorax quoth:

            “Don’t tell me we agree on something Fanboy!”

            Truly, this is the end of days. 😉

          • The NY piece you are talkintg about is authored by Martin Hutchinson…from Prudent Bear. He is an Austrian economist…people are starting to listen to the Austrians more and more…and not before time!

      • I can’t believe that someone is honestly suggesting that national sovereignty (albeit they gave up important parts of it to join the Eurozone) and the very identity of millions of human beings – one stretching back thousands of years – would ever be dissolved to pay creditors.
        You’re joking, right?

          • Yeah but Sparta was a sovereign identity.

            If a nation state were dissolved in a non-military conquest fashion and everything sold off to pay creditors, how would the buyers of all the countries farms, factories, roads, ports, bridges, islands, the Acropolis itself etc, know that they actually owned anything? Under whose law would the property be theirs? The dissolution of a nation state would imply the dissolution of all laws that defined it, including who legally owns what. Who would own everything that physically used to be Greece? French and German banks?

            Any demand by creditor nations themselves – such as Germany – that a nation state dissolve itself from existence to pay what thou owest, would be tantamount to an act of war.

        • The foundation of Greece was a mistake from the beginning. It was originally created as a way to unsettle the Ottomon Empire, so the border ropes together a bunch of ethnically different people and call them ‘Greeks’. Consequently, the only way to keep the nation together was by military force or massaive bribes.

          It would be better for Greece to dissolve itself and start from scratch with more sensible boundaries.

          • Which gets me thinking……is it even possible for an elected government to simply declare the nation dissolved?

            The sovereign nation of Greece is NOT the private property of the Greek government. It’s prime minister Papandreou, not emperor Papandreou. To regard Greece as a house and the Greek government as the landlord who owns it and has property rights to it, including selling it in it’s entirity and passing title deed to someone else would be simply false. As far as I’m aware, elected government simply does not posess any such authority so that we might wake up one morning, switch on the tv and see Gillard say: “my fellow Australians – I’m afraid you’re no longer Australians. I don’t know what you are now or what laws you’ll live under but I have dissolved the country and am selling everything in it to pay debts to fat bankers that we the government foolishly accrued.”

            For the Greek government to dissolve something it does not own and then sell it off does not sound possible to me. And any attempt would certainly see blood on the streets.

          • A country can be dissolved via a referendum.

            Under this scenario, there is no ‘selling off’. The various provinces will break away and declare independence, and Macedonia will most likely reunite with their northern neighbour. A ‘shell country’ 1 meter square in size will be left to take on the entirety of Greek government debt. This allows everyone to start anew.

          • Which is what I just said – the Greek government does not to my knowledge, posess the authority to simply declare the country dissolved at will. It must be sought and approved by a majority.

            I think we’re arguing past each other here. You’re saying that they should dissolve themselves as a nation in order to – among other things – prevent Germany and France from continuing to pursue them after they have already defaulted?

  2. It’s quite funny that when someone has money problems, they can’t get a cheap loan… The rates on those bonds are insane, if they suck at money management, do people really think they will repay 136% of a loan in 1 year? Seems a bit backwards to offer high rates when youre poor!

  3. I dont understand the distinction between an orderly default and disorderly default…and a catastrophic default?

    Can someone enlighten me? Does have to do with how the creditors behave…or the Greeks?

  4. Greece is gone, and if you look at the numbers how long before Ireland and Portugal go the same way?

    I’d like anyone to tell me in a contracting global economy how these countries can survive. I know sovereign debt will just be written off, bur even if you start from scratch, the standard of living has to drop dramatically for them to be successful.

    You can see why Europe other than Merkozy have had enough of funding Greece etc.

  5. European empire by strategic default of smaller member states??

    Didnt the Dutch representative say recently all struggling states must cede power to the EU commission/parliament or face expulsion?

  6. This isn’t a bailout of Greece.
    Call it for what it is – It is a bailout of German and French bankers, using German and French taxpayers money + IMF’s money + money from the fire sale of some hard assets from the Greek taxpayers themselves.
    This is a backdoor liquidation of a nation state to pay back the banksters.

    • Aye, and there’s the rub.

      The money (well, the original bits prior to the bailouts) was loaned by (presumably) well educated, well informed and ‘rational’ investors. Unfortunately it was loaned to a disfunctional Greek economy plagued by low productivity. That’s actually not the fault of the Greeks (caveat emptor?). That’s the fault of the investors, who should lose their money. End of story.

      As for sovereignty – the sovereignty of a nation state is derived from the courage and will of the people. I watch with interest to find out whether the Greeks have lost the courage that let them resist the Persians so long ago…

    • Calling it a bailout of Greece is irritating. But I guess that’s because they are just trying to con the general public.

  7. Have you guys forgotten about Iceland? Their’s prime minister was brave enough to default. You can look at Iceland to find out what Greece might expect in case of default.