Friday, February 12, 2010

Greece bites the hand that feeds it

Well, I feel even more confident today in predicting that Greece will default. The prime minister made a public statement that is guaranteed to enrage German taxpayers. At the same time that Germans are being asked to bail out Greece, George Papandreou is blaming the EU for Greece's fiscal crisis. 

From today's FT:
Mr Papandreou blamed the European Commission for failing to crack down on the previous conservative government’s “criminal record” in falsifying statistics. “This has undermined the responsibility of the European institutions with international markets,” he said.

Papandreou continues to maintain that (1) Greece does not need assistance; and (2) that Greece has not requested assistance. This is the kind of behavior that is unlikely to induce the Germans to whip out their checkbook. 

On top of the domestic political issue, here is an interesting question: Who in the EU has the authority to bailout Greece? Is this a purely German matter, or does France have to concur, or the Commission, or the ECB, or the entire eurozone, or the entire EU? Not only did Maastricht make no provision for such an event, it was intended to prevent a bailout of a member state. There are no rules for this. 

It looks like the first crunch will come when Greek paper is no longer eligible at the ECB due to rating downgrades. Moody's has said that it expects the ECB to lower the rating threshold, but there will be limits to how low the ECB will go. There are Germans  on the ECB's board. 

It seems to me that, eventually, the ECB will draw the line and the world will end, in the absence of a bailout. Why Europe has outsourced discount eligibility to the rating agencies is an interesting question, but they have. So keep your eyes on Fitch and S&P (who have the lowest ratings on Greece).

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