Wow. Who missed out on getting involved in this one? From the WSJ:
FRANKFURT—The European Union’s agreement Thursday to set up a safety net for Greece as it weathers its debt crisis boosted the country’s government bond prices Friday, paving the way for a new bond issue as early as next week.
The rescue plan, which will involve assistance from the International Monetary Fund and provides Greece with a system of standby credits to guard against threatened insolvency, also brought down the cost of insuring Greek debt against default.
So we have the IMF and the Eurozone working together to provide what exactly? Let’s look at the draft of the release (hat-tip: alea):
As part of a package involving substantial International Monetary Fund financing and a majority of European financing, euro area member states are ready to contribute to coordinated bilateral loans.
This mechanism, complementing International Monetary Fund financing, has to be considered ultima ratio, meaning in particular that market financing is insufficient. Any disbursement on the bilateral loans would be decided by the euro area member states by unanimity subject to strong conditionality and based on an assessment by the European Commission and the European Central Bank. We expect euro member states to participate on the basis of their respective ECB capital key.
The objective of this mechanism will not be to provide financing at average euro area interest rates, but to set incentives to return to market financing as soon as possible by risk adequate pricing. Interest rates will be non-concessional, i.e. not contain any subsidy element. Decisions under this mechanism will be taken in full consistency with the treaty framework and national laws.
So let me get this straight. Not only is the IMF going to come to the table with financing that they can’t specify, but the Europeans will finance a part (my guess will be banks buying debt on the open market), but also bilateral loans to Greece from the EU with some sort of sovereign wrap guarantee. This is a Keystone Cops deal if I’ve ever heard of one.
To me, the real issues are what’s going on beneath the surface. The Euro, ECB liquidity, and the use of Greek bonds as collateral.
From a structural/macro point of view, this does very little to shore up the Euro. Greece is a small economy that has lived on borrowed money for way too long. It’s not like anything has fundamentally changed the issues I’ve pointed out already here, here, and here. I remain very skeptical of the forecasts they’ve baked into their austerity measures, and I’m very skeptical of their accounting/reporting of official statistics. The FT calls Greece the “sovereign Lehman,” but I’m sticking with my “sovereign Enron” moniker. It has 80% more snarkiness and just like the company it pokes fun of, it’s completely synthetic. So while we saw a relief rally in the EUR/USD rate, I just don’t see how this can be viewed as a sustainable move especially given Portugal’s downgrade (the bonds fared better since they were issued in dollars – not Euros) and the forward debt calendar of European debt scheduled to roll from Spain and Italy as well.
The last two are intertwined together and, in my view, reinforce my overall Euro bearishness. On one hand, we saw Euribor rates move a bit higher across the curve. The common view was that the Greek situation made the ECB’s plan to withdraw liquidity problematic. That part makes sense. What’s odd is that the ECB also postponed normalizing its A- collateral requirement until 2011. This was obviously done to signal to the market they will still take Greek debt as collateral for ECB loans, even while banks in the Eurozone will not. So while you have normalizing liquidity conditions on one hand, you have unorthodox collateral/credit conditions being extended on the other. And so with Spain, Portugal and Italy on deck for a possible ratings downgrade, you’re looking at a less liquid central bank balance sheet that is taking on more credit risk.
So while the ECB suffers a setback because the IMF ended up getting involved in this ordeal, the kicker comes from a quote in the FT article from ECB Executive board member Bini Smaghi:
“Those who continue to bet on Greece exiting the euro will lose money.”
But those who bet on the Euro getting clubbed like a baby seal seem to be doing just fine.
So, Messrs. Trichet, Bini Smaghi, we have your reservations confirmed for the Failboat. Thank you for your reservations.