First, a Roman mythology lesson. Janus, the Roman two-faced god – so appropos for politicos worldwide – is alive and well. In today’s Financial Times and Bloomberg, the debate over a European vs. IMF-crafted bailout intensified.
Several countries (the Netherlands, Finland, and most interestingly Italy) favor an IMF package. On the other side, Spain and France are leading the charge for a pan-European solution that leaves the IMF out of the equation. It’s curious that Italy and Spain are taking the opposite sides of this debate. Probably because it reflects each government’s assessment of getting their own debts rolled later this year without paying a visit to a payday lender or a pawnbroker. Italy seems less confident than Spain of getting reasonable pricing and doesn’t want to take chances with a European-backed bailout fund.
The analogy between the EU supporting Greece and the US government supporting California is flimsy, to say the least. Nobody on the continent looks at Brussels the way our folks look at Washington. We’re much more condescending and derisive. Comes with a federal government at work in a republic. Plus, when you’re the birthplace of Stella Artois, you score some points. D.C. has to import its best epicurean delicacies. From Maryland.
But Germany is still at the crux of the debate. Chancellor Merkel doesn’t want to be “overly hasty,” hoping the Greeks will solve this on their own. Meanwhile, German finance minister Schaeuble – who also believes Greece needs to resolve things on its own – favors a Eurpoean solution over an IMF solution, believing an IMF solution would be looked upon as a failure of the EU to solve problems on its own. In one sense, he’s right. It would be a failure. But in another sense, he’s wrong. The failure won’t be in crafting a bailout. In reality, the failure occurred when Brussels, et. al. let profligate countries become part of the union without adhering to the Maastricht Treaty. But that was years ago and nobody can change that.
Which brings us back to Greece. With news today showing unemployment in Greece being worse than expectations, the forecasts baked into the austerity packages to date are chasing economic reality – to the downside. We’ve already seen Greek GDP come in worse than forecast once, it will probably do so again the next time they report as well. From a sovereign debt perspective, I’m inclined to thinking we see yields leak higher. And the euro will grind lower as a result.
So much for the success of that 10yr auction a mere two weeks ago…