Thursday, June 9, 2011

A Greek Bailout Still Doesn't Seem Plausible

Last Thursday there was a rumor that a Greek bailout was agreed to "in principle", something vehemently denied by the powers that be.  This Thursday we are getting some color of what the bailout might look like.  60 billion Euros from the EU and IMF (which means US taxpayers will be on the hook for billions), 30 billion coming from Greek privatizations (oh yeah, I'm sure they'll be able to raise that money quickly as the country is throwing molotov cocktails on all the assets) and 30 billion from the private sector (bondholders). 

This proposal seems so not serious that I almost suspect that it was leaked to deflect attention from the Troika Report on Greece which said that Greek reforms were at a "standstill".  Why is the proposal not serious you ask?  I dealt with some of the issues last week, but in short trying to get 30 billion from bondholders through some sort of restructuring will be impossible without Greece being in technical default on their debt.  This default of a sovereign nation in the Euro region will have dire consequences, some that can be foreseen and some that can't.  Remember how AIG got into so much trouble selling default insurance on mortgage debt?  Guess who sold tons of insurance on Greek sovereign debt?  European banks.  Also, guess who tends to hold the most Greek sovereign debt?  European banks.  And don't forget that many of them also hold the debt of Greek banks who will almost immediately become insolvent on a Greek default.

Another issue which could put a kabosh on the whole process is that there is a July 5th hearing at the German constitutional court as to whether a German bailout of Greece is a violation of European and German Basic Law.  Officially, bailouts are banned by the EU treaties, which Germany has signed, so there is a not insignificant chance that the court may rule that the bailouts are illegal.  We shall have to see.  Given that European politicians have a history of bending the rules when it suits them, especially EU rules (remember the 3% deficit limit in the Maastricht treaty?) which limit their freedom to do whatever they want to do.

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