 "Problem postponed: This euro bailout solves nothing")
Equity markets are on a tear this morning following overnight news that European officials had announced a second bailout package for Greece that will halt the spread of the debt contagion.
An emergency meeting of eurozone officials announced a 109 billion euro rescue package for Greece, under which the heavily indebted country will see a “partial default”, requiring private investors will share some of the cost. (In effect, Greece became the first developed country in the West to default in more than 60 years.)
[caption id="" align=“alignleft” width=“380” caption=“Some are cautiously positive that for the first time since the beginning of the crisis, politics and the markets are coming together. Kacper Pempel/Reuters”][/caption]
The rescue plan also sought to build a wall around Italy, Spain, Portugal and Ireland (who, along with Greece, make up the infamous PIIGS, the peripheral European economies that are dragging down all of Europe) to shield them from similar trouble by underwriting their market borrowings.
Stock markets in the US overnight and in Asia this morning, which were bracing for a wider Greek default, staged a relief rally; the euro too was sharply up.
Yet, for all the momentary upsurge in investor sentiments, the sovereign debt crisis in Europe has not been solved; it’s only been postponed. And in fact, the longer a resolution is put off, the wider will be the spread of the contagion, and the more catastrophic the consequences.
Impact Shorts
More Shorts“I don’t think today’s announcement is a huge game changer,” notes economic blogger Cullen Roach, This plan essentially kicks the can by extending maturities and avoiding default in the near-term. The key is the lack of any real fix to the structural problem in the European Monetary Union."
What the fine details of this bailout package hide is that it could in fact accelerate the spread of the debt contagion into core Europe, and place an enormous burden on Germany, the only functioning engine in the Eurozone. In effect, Germany has emerged as the “ ultimate backstopper” of all of Europe’s risk: it has taken on board the entire risk associated with the failure of this “bailout” plan, which could dent its GDP by anywhere between 32 percent and 56 percent.
Perry Mehriling, a financial expert at Boston University, calls it the “Europeanization of the Greek debt… Everyone prefers to have Europe as their counterparty rather than Greece.”
Up until now, Germany has had a free pass in the Eurozone: it has enjoyed strong growth while the peripheral economies have borne the brunt of their incapacity to devalue their common currency. But it now appears likely that the costs will come home to bite. Its strong, export-driven economy has been about the only one powering the European economy, and the European Union, which is a political project.
But as Italy’s Finance Minister Guilio Tremonti said recently, Germany is like a first-class passenger on the Titanic: it may travel in relative comfort for now, but it won’t be any safer when the European ocean liner hits the iceberg.
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