Lurching to a Solution for Greece

Let me start this week’s Outside the Box by venting a little anger. It now looks like almost 30% of the Greek financing will come from the IMF, rather than just a small portion. And since 40% of the IMF is funded by US taxpayers, and that debt will be JUNIOR to current bond holders (if the rumors are true) I can’t tell you how outraged that makes me.

What that means is that US (and Canadian and British, etc.) tax payers will be giving money to Greece who will use a lot of it to roll over old bonds, letting European banks and funds reduce their exposure to Greece while tax-payers all over the world who fund the IMF assume that risk. And does anyone really think that Greece will pay that debt back? IMF debt should be senior and no bank should be allowed to roll over debt and reduce their exposure to Greek debt on the back of foreign tax-payers.

I don’t think I signed on for that duty. Why should my tax money go to help European banks? This is just wrong on so many levels and there is nothing seemingly we can do. Oh, well. Thanks for listening.

John Mauldin Via Paul Kedrosky

Mauldin has a point. Kind of makes the reticence of the Germans to enter into this Faustian bargain a little bit more understandable, doesn’t it? Also, are you surprised that once again a bank bailout is behind wrapped inside a bailout that is advertised as something else?

The latest news is that the Europeans are going to announce some sort of stabilization fund tomorrow. As usual there’s a lot of chest thumping but few details. I find it doubtful that anything short of a move towards zero interest rates and aggressive quantitative easing on the part of the ECB is going to put out this fire. By aggressive QE I mean actively purchasing Greek debt and the debt of any other EU country that encounters similar problems.

It’s a short-term solution but the U.S. experience of the past few years would indicate that while it solves no fundamental problems, it does effectively quell the immediate crisis. It permits a return to the status quo ante thus relieving the political class of the need to make difficult decisions.

If anything, the situation in Greece and probably one or more of the other sick economies of Euroland cries out for a debt restructuring. The failure of the various schemes to quell the crisis so far demonstrates the disdain that the market has for the political promises of austerity as well as support from the richer European countries. Emulating the American response to its crisis will no doubt calm the markets but it will not cure the underlying rot.

Once the Euros go all in on this one — which they will — the fire will die. Debt markets will slowly open back up to the Greeks and others who have been teetering on the proper assumption that no one will be allowed to fail. The Greeks will make a show of imposing some paper austerity measures but any real reform will quickly vanish and all will be well once again. One more can successfully kicked down the proverbial road.

Maybe time which is going to come at a high price will allow healing. We should hope so for, if it doesn’t, the next explosion might not be at all containable.

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