In the last two days Europe’s agreement on the Greek bail-out fund and the larger, related Europe-wide bail out fund have begun to unravel. First the the in-coming, newly elected government of the Slovak republic and their likely President Iveta Radicova re-iterated her conviction that the Slovak Republic should not contribute its share of the €110 billion Greece bail out package, nor sign the larger €750 billion Europe wide, Bail-out fund agreement. It is a condition for its passge into law that the heads of all EU member nations sign it.
The whole thing begins to unwind if the Slovak Republic won’t sign. And the Slovak government is serious. At the moment the Slovaks are worried about what would happen if, after Greece, it was to be Portugal next. Would they be on the hook for more? So recently Slovak government departments have been researching all things Portuegese.
Now of course there would always be a way to sweeten the deal for them behinds the scenes. But the new President saying these ‘off-message’ things reminds me of the outburst of truthfulness that afflicted the Hungarian government a while ago. One of them felt moved to say Hungary could go the way of Greece, and the Bond market nearly bankrupted them.
At the same time Germany is also saying distinctly unhelpful things; Unhelpful to the bail-out bandwaggon that is. It was reported in Der Speigel that Merkel and some top advisers are considering what has already been dubbed the Berlin Club. The idea, is that rather than the bail out as planned Germany would prefer to see a series of new insolvency rules for nations.
In those two words ‘insolvency rules’, Berlin drives a tank over Paris’ plans. According to the Paris bail out plan there was never going to be any insolvency. Never any default. Now Berlin want rules for it. To be exact Berlin wants rules for what Paris was determined would never happen, rules for orderly insovency. The rules would specify that some of the costs would fall on private banks AND in return for EU funds and help – and here’s the best bit – The ‘tank’ bit – the insolvent country being helped, would have to ‘give up’ some of its sovereinty. In particular it would have to hand over sovereinty for its finances. The new rules would place the final and absolute say over the insolvent naitons’ finances to …yes you guessed it, the Berlin Club.
Now before we even discuss if there are good ideas or intentions in here. Sensitive? I don’t think so.
Basically Berlin has not wanted, and quite right to , to become the bail-out of last resort for every insolvent EU nation. This is why Germany has been so very relucatnt to agree to bail-out funds. This new plan would at least put Berlin in charge – despite talk of making the club ‘independent’. It would, in Belrin’s opinion be a larger stick with which to deter nations form chaeting and getting into debt.
On the other hand it can be seen as a way for Berlin to force another nation to undergo an ‘orderly’ insolvency at the cost of its own sovereinty. As opposed to staybing free and independent – though poor – if it chose a ‘disorderly’ insovency. Berlin would argue that by ‘orderly’ they mean ‘with help’ and this ‘help’ would stave off pariah status and expulsion from all access to bond markets. ‘Ordely’ could also be seen to mean, insovel;ny carefully controlled so as to hurt the debtor nation ONLY and NOT Germnay’s banks who would certainly explode if any insolvency were to be ‘disorderly’.
SO it all depends on how you look at it. Friendly help or imperial colonization.
Will debtor nations accept this plan? Oh yea sure come on in! Every Greek is going to feel sure that wealthy German bankers are going to do everything possible to benefit poor Greeks and have their besy interests at heart.=. Sadly they could only do better at helping poor Greeks than the job done by wealthy Greeks. But its just too painful to contemplate how it would be portrayed in the press of any insolvent nation.
All in all this should have an immensely calming effect on the bond markets.
Oh and never forget the obligatory Italian comedy turn. Today the CEO of Italy’s biggest most insolvent bank, Unicredit (€27 billion capital value, €1.5 TRILLION debt exposure), suggested/advocated a private fund set up and financed by Europe’s big banks to help prevent a bank in trouble from collapsing. This would be instead of the bank levy being debated by the EU as a way of funding an EU run fund. I am sure Unicredit would stump up a few tens of billion from their ‘assets’ to help.