Bailout

When Germany bails out Greece

By Felix Salmon

Faisal Islam does a great job explaining the problems facing Greece, and why Germany is likely to come up with some kind of bailout:

This so-called ?ouzo crisis? has emerged from a witches? brew of concern about 1 Greece?s shaky political economy, including dodgy statistics and historic default record, 2 the short term nature of Greece?s debts and 3 the fact that a large proportion of its creditors are easily-spooked foreign investors…

It would be a total humiliation if this problem could not be sorted out within the single currency area. Besides, what will the IMF tell Greece to do with its currency, which is controlled by the ECB in Frankfurt? So the IMF is not going to happen.

So all along we have been waiting for the point at which the possible systemic damage, the contagion to the other countries would be so acute, that Germany and France would step in. We are here now.

Will Greece be giving up fiscal independence in return for bailout funds or German guarantees? I’m sure it’ll agree to stringent conditions, while claiming that it would have kept to such a plan in any case. The question is what happens when — inevitably — it ends up breaking its fiscal promises, or trying to play silly games to get around them. What will Germany be able to do, in that case, to snap Greece back into line? And do the Germans really want to play the role of Europe’s fiscal disciplinarian in any event?

It probably doesn’t matter: Greece is the Bear Stearns of Europe, seemingly too big to be allowed to falter or default, and therefore it must be bailed out somehow. Of course this sets an important precedent for when Spain and/or Italy find themselves in a similar situation — and it’s likely to make countries like Latvia feel a bit miffed, seeing how much fiscal pain they’ve inflicted on themselves with no bailout to show for it at all. The hazard here is that countries, seeing the Greek precedent, refuse to take tough fiscal steps unless the path is sweetened by Germany and France. This isn’t the end of the euro crisis: it’s only the beginning.

Full post as published by Macroprudential on February 09, 2010 (boomark / email).