As work on Greece’s bailout package continues, Brussels has arranged for the country to receive bridge financing in order to, well, the Financial Times explains:
Formal approval for the loan will ensure Athens does not default on a €3.5bn bond payment to the European Central Bank due on Monday. It must also pay arrears to the International Monetary Fund. If Athens failed to make its ECB bond payment, the eurozone central bank would be forced to withdraw or severely curtail €89bn in emergency loans that are keeping the Greek banking sector afloat.
In a nice twist, the money will come from the European Financial Stabilisation Mechanism (EFSM), a bailout fund that was supposed to have been mothballed.
Dan Hannan explains;
In 2010, the EU agreed that the European Financial Stability Mechanism, to which the UK had contributed, would not be used to bail out the euro. Instead, a new pot was created, filled only by states within the single currency. David Cameron didn’t just get a gentlemen’s agreement; he got a binding, written guarantee. Yet, the moment that guarantee became inconvenient, Jean-Claude Juncker and his fellow Commissioners – to say nothing of the other heads of government – tore it up.
No, no, no Dan, Valdis Dombrokvskis, the EU Commissioner who is “Vice-President for the Euro and Social Dialogue” (yes, really) has explained that while, yes, it had been agreed that the EFSM would not be used to “safeguard the financial stability of the eurozone as a whole”, it could still be used to help just one country.
So what is the rationale for ‘saving’ Greece on the dream on (more on that later) basis that is now planned? I seem to remember quite a bit of chatter about the need to preserve the euro, but that was a week ago.
As the former prime minister (and a good one) of Latvia a country occupied by the Soviets for decades, Dombrovskis ought to understand the importance of the principle that the rule of law runs up to the very top. Instead he appears to have to have signed up for the legally corrosive “whatever it takes” to save the single currency.
In the end, as the FT explains, the concerns of non-eurozone countries (including, but not just the UK) that they might end up on the hook if Greece defaulted on the bridge loan will be addressed by guarantees based on “part of the €3.6bn in profits from Greek bonds owned by the [European Central Bank]” bringing a nice touch of irony to an arrangement that has already transcended satire.
The FT also notes this:
The legal manoeuvre by the European Commission to use the EFSM worked around a formal decision between EU leaders — the kind of formal decision covering EU reform Mr Cameron will need to defend as legally watertight in Britain’s in-out [2017?] referendum.
That task just got quite a bit more difficult, and the only alternative (essentially: There is a twist, which I will spare you) is a ‘full’ Treaty change, a Pandora’s box of a process that the UK’s EU partners will not want to go near.
But that’s a crisis for another time.
For now, the trudge to Greece’s Ponzi-plus (third) bailout continues, despite IMF disapproval and the absence of much conviction that it will do the trick.
The Wall Street Journal highlights one prominent un-enthusiast:
German Finance Minister Wolfgang Schäuble said Thursday he didn’t see how a bailout plan for Greece that he helped negotiate could work. Hours later, he asked parliament to pave the way for it anyway.
Oh well.
Schäuble still thinks that Grexit would be a sounder starting point, but, writing for Bloomberg View, Ashoka Mody (Princeton, ex-IMF) has another view:
Now that the idea of exit is in the air, though, it’s worth thinking beyond the current political reality and considering who should go. Were Greece to leave, possibly followed by Portugal and Italy in the subsequent years, the countries’ new currencies would fall sharply in value. This would leave them unable to pay debts in euros, triggering cascading defaults. Although the currency depreciation would eventually make them more competitive, the economic pain would be prolonged and would inevitably extend beyond their borders.
If, however, Germany left the euro area — as influential people including Citadel founder Kenneth Griffin, University of Chicago economist Anil Kashyap and the investor George Soros have suggested — there really would be no losers.
A German return to the deutsche mark would cause the value of the euro to fall immediately, giving countries in Europe’s periphery a much-needed boost in competitiveness. Italy and Portugal have about the same gross domestic product today as when the euro was introduced, and the Greek economy, having briefly soared, is now in danger of falling below its starting point. A weaker euro would give them a chance to jump-start growth. If, as would be likely, the Netherlands, Belgium, Austria and Finland followed Germany’s lead, perhaps to form a new currency bloc, the euro would depreciate even further.
A new currency bloc?
Hmmm, that sounds a lot like our old friend, the Northern Euro, to me, an idea that should not, I would stress, necessarily be seen as the final stage in the unraveling of today’s dysfunctional currency union.