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Greek bailout rewrites rulebook for EU sovereign debt

Greek Financial Crisis | Greek bailout rewrites rulebook for EU sovereign debt Ian Fraser

Is the €110bn European Union and the IMF bailout of Greece a good or a bad thing? If you’re a German voter, 57% of whom reportedly oppose the rescue package (largely because they hate the idea of salvaging a profligate nation such as Greece), the answer is definitely the latter.

Others in the “bad” camp include the investor Jim Rogers, who was interviewed about it on BBC Radio 4’s “World at One” on Monday [UK only, available online until May 10]. Rogers, famous for best-selling books Investment Biker and Adventure Capitalist, described the rescue package as economic lunacy.

He cannot see how the best cure for a profligate nation that has driven itself towards the brink of bankruptcy is to allow it to get even further into debt (at artificially cheap rates). Rogers also warned that the bailout, matched by renewed support for Greek banks from the European Central bank, will weaken and ultimately spell the demise of the euro.

“You cannot solve a problem of too much debt and too much spending with more debt and more spending. It defies comprehension…”

Asked if Greece will still default, he said: “I doubt it in 12 months’ time, there’s too much money being thrown at them right now. Can they default in five years? Yes, and they probably will.”

Jeremy Batstone-Carr, director at stockbrokers Charles Stanley, said the Greek bailout rewards market speculators who were chasing ultra-high yields associated with risky bonds and therefore brings moral hazard.

“What kind of a signal does it send to the investment community and the wider public when governments and supra-government organisations come to the aid of a country which has a strong track record in accounting chicanery?

“The bottom line is that rewarding bad investment decisions is a gigantic mistake. They should have let Greece default.”

Irwin Stelzer, writing in the Wall Street Journal said, even if other PIIGS countries [f Portugal, Italy, Ireland, Greece, and Spain] avoid the risk of defaulting on their debts, “euroland is changed forever.” He said the takeout from the bailout is that every eurozone member country will now be seen by the markets as having implicit guarantees from their peers. “Basically this means that every eurozone country’s debt is on every other eurozone country’s balance sheet.”

However there a plenty of voices who support the Greek bailout, seeing it as the lesser of two evils (i.e. without it, the euro might have imploded and the Greeks would have been forced to readopt the drachma, probably with hyperinflation attached).

Will Hopper, a former director of investment bank Morgan Grenfell (now Deutsche Bank), former Conservative MEP and author of The Puritan Gift goes a step further. He believes the rescue package signals a coming of age for the eurozone. Hopper said:

“One of the problems with EMU (European Monetary Union) is that it has a monetary policy without a fiscal policy. That was always going to be unsustainable. With the Greek bailout, it seems the penny has finally dropped. I see it as the first step towards having an EU fiscal policy.”

Hopper said the EU has evolved from Jean Monnet’s original vision (a glorified customs union) into an ever-closer union (both economic and political) almost by serendipity. He said the bloc has progressed as various deficits have had to be filled, and that Greece is just the latest stage.

“The Greek bailout, which is conditional on Greece putting its fiscal house in order, is a massive step forward. The implicit message for Spain and Portugal, and indeed for other members of the EU, is that they will have to do the same.”

Basically, Hopper looks positively on a European economic area where partner nations do not just let each other hang out to dry. He also believes the austerity measures Greece must now introduce as it seeks to pay off its debts will persuade other indebted countries in the EU to introduce some fiscal discipline for the good of all.

Further reading on EU sovereign debt and the Greek Financial Crisis



Tags: central banks , EU , European Monetary Union , Greece , Jim Rogers , sovereign debt
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