Greek Bailout “Backstop” Confidence Trick Already Backfiring

Greece paid a stiff premium to raise €5bn on Monday, signaling that the EU announcement last week of a possible rescue package has done little to lower the troubled country’s high cost of borrowing. Several politicians have expressed the hope that the “backstop” bailout arrangement would persuade the market to offer lower rates, but this could only ever succeed if the markets had some clarity on the likely interest rate of the “backstop,” and a firm political commitment for a bailout at that rate.

“The market are beginning are beginning to realize that the “backstop” is not an actual guarantee.”

Econotwist

The Wall Street Journal reports that Greece paid a stiff premium to raise €5bn on Monday, signaling that the EU announcement last week of a possible rescue package has done little to lower the troubled country’s high cost of borrowing. The market are beginning are beginning to realize that the “backstop” is not an actual guarantee.

Compared with Greece’s two previous bond issues in 2010, demand was relatively subdued. Greece is paying a coupon of 5.9% on the new bond, 3.34 percentage points above what Germany pays to borrow money.

The new €5 billion bond issue means Greece has now sold about €20 billion of bonds, or 43% of its 2010 target.

Backstop Trick Not Working

The “backstop” confidence trick is already backfiring, the Eurointelligence writes.

Several politicians have expressed the hope that the backstop bailout arrangement would persuade the market to offer lower rates, but this could only ever succeed if the markets had some clarity on the likely interest rate of the backstop, and a firm political commitment for a bail-out at that rate.

The German propaganda has been that those interest rates would be close to market rates. But since the market always supplies finance at market rates, the only conceivable circumstance of a Greek bailout would be a situation in which the markets would offer Greece finance, say at 6% or thereabouts, but the Greek government refused to take it, or were unable to service the debts. But in that case, the German “backstop” would be worthless.

The market are beginning are beginning to realize that the “backstop” is not an actual guarantee.

The Pending End Of The Euro Area

Gideon Rachman of the FT has been what we would consider a moderate eurosceptic, and it is no surprise that the euro crisis is capturing his attention.

In his latest column, he made compared the euro area to the film The Big Fat Greek Wedding. He makes one important point about the politics of it.

The EU is in the process of wasting a crisis:

“When the euro was launched, leading German politicians used to argue, with evident relish, that monetary union would eventually require political union. The Greek crisis was precisely the sort of event that was expected to force the pace. But, faced with a defining crisis, Ms Merkel’s government is avoiding airy talk of political union – preferring instead to force harsh economic medicine down the throats of the reluctant Greeks.”

The Monetary Union has been an imperfect project all along. This imperfection is not Ms. Merkel fault. But now comes the existential crisis, and the political reaction is to refuse to fix the system.

Auerback’s Conspiracy Theory

Any rational explanation of last week’s European Council agreement would have to come to the conclusion that Germany wants to drive the euro area into the ground.

“…it finally gave Berlin the leverage to fully impose its version of hair shirt economics on those allegedly lazy southern Mediterranean scroungers. Left conveniently unstated is the idea that the longer the PIIGS are forced to wallow in stagnant growth, the more persistent will be the very budget deficits and the larger the public debt to GDP ratios for which they are now being punished. It’s akin to someone having a high temperature because he/she is suffering from influenza and therefore denying that person medicine on those grounds. Trying to work against the automatic stabilizers with austerity programs will be futile unless you start dismantling some of the automatic capacity, which gives rise to these stabilizers.”

IMF Does Not Accept Any E.U. Leadership

This is going to be interesting (and another signs of the incredible incompetence of European leaders):

When they decided the formula of burden sharing with the IMF, but with EU leadership, they forgot to clear this with the IMF beforehand.

Oooops!

“…If, and it’s a big if, Greece asks for support, we will provide support for Greece as one of our members, as we do with any other member,” Bloomberg quotes Strauss-Kahn. “it will be an IMF program decided by the IMF as it happens with each and every country. The IMF will define the conditionality, as we do with any country.”

So from his point of view, Greece is another Romania of Hungary (or more likely another Latvia).

Ireland’s “Bad Bank” Starts Operating

NAMA – Ireland’s “bad bank” – starts its operations today with €81bn in bad property loans left over from the financial crisis and is set to reveal larger-than-expected “haircuts”on €17bn of loans, the Financial Times reports.

The announcement will have direct implications for the level of capital the banks will need in the future.

Irish bank shares fell sharply on Monday amid fears that the new financial requirements could prove crippling.

Related by the Econotwist:

Markets To Test Greece

Greece Wants E.U. To Use Old Latvia Fund For Bailout

G7-Countries In Deep Trouble

Merkel: Kick’em Out!

Force The Rich!

E.U. Defends Hedge Fund Plans after Geithner’s Warning

Sarkozy, Brown Fails To Agree On Hedge Fund Rules

Is Europe’s Debt Crisis Over?

Greece: “Exploiting The Fear”