The new Greek bailout plan, digested

by on July 21, 2011 at 7:04 pm in Current Affairs, Economics | Permalink

By now I’ve read many more other commentariesMy basic opinion hasn’t changed much, but here’s another way to frame it.  The EU pledges that Greek creditors will take a hit but that this will never ever happen again, not with Spain or Italy in particular.  That’s not a credible promise, if only because of the magnitudes involved, and so over time it shouldn’t influence the borrowing rates of those countries very much.  It’s worth a small amount to have the promise made at all, but the comparable promises made about Greece were just broken so who is being fooled here?

Behind the scenes, Merkel probably committed to a more direct German financial support of the bailout fund, although that pledge is not yet ready for public consumption.  That’s arguably the biggest event of the day.  If that’s not the case, it’s not clear where the fund gets its extra oomph from.  It’s also not clear how many other parliaments will have to approve comparable financial commitments or backstops and that is potentially a stumbling block for the whole plan.

It is also suggested that the bailout fund will be enabled to recapitalize banks in ailing countries on a preemptive basis.  If you’re pro-bailout and wish to give this a positive spin, that may be your best bet.  Private recapitalization probably isn’t in the cards; are you running out to buy equities in Greek, Irish, and Portuguese banks right now?  Spanish and Italian?  The prices have been falling but I bet you’re sitting on your hands.

There is also acceptance of Greek default, a theory (ha) that it will be regarded as temporary, and some still not yet transparent deal with the ECB, so that the ECB continues to prop up Greek banks (i.e., accept Greek government bonds as collateral for loans) post-default.

The truly credible signal is that all future EU aid will be doled out with an eeny-weeny, itsy-bitsy eye drop squeezer.  It’s an extra signal that there will be no big “step up to the plate.”

On top of that toss in a renewed pledge to contractionary macro policy, lower rates for Ireland and Portugal too, a semi-voluntary rollover of Greek debt from the private sector (twenty percent haircut?…with complicated options), and lots of empty, reassuring words, all packaged with a bunch of press releases.  I would discount the talk of a new Greek “Marshall Plan.”

The bottom line: Whatever your forecast was in the first place, this probably shouldn’t change it.

1 marshall eriksen July 21, 2011 at 8:10 pm

‘I would discount the talk of a new Greek “Marshall Plan.”’

all the talk about a marshall plan ignores that it only laid the foundations for future wealth but was not the direct cause of it. furthmore, eu funds have notoriously been misused and misallocated, there is nothing to suggest a chance.

2 Houston July 21, 2011 at 9:25 pm


What’s your take on the Obama administration’s recent encroachment into higher education and locking up swingin’ men?

Two dudes wrongfully accused in one week.

3 TallDave July 21, 2011 at 9:56 pm

More good money thrown after bad.

Greece will default. It’s only a question of how much more debt they’ll be given to default on.

Greece really needs to devalue because of their productivity problem. They can’t do that from within the euro.

4 David Wright July 21, 2011 at 10:14 pm

This already is a default. It appears that the ECB has comitted itself to pretend like it isn’t, but the private market participants are under so such obligation for self-delusion.

5 Matt Waters July 22, 2011 at 2:50 am

Supposedly a 20% haircut and a maturity extension is a “voluntary” option for creditors, to receive either a partial or full zero-coupon bond from a AAA authority for principal minus 20% haircut in exchange. A 15-year maturity only gets part of the principal backed and a 30-year maturity option gets all of the principal backed by a AAA zero-coupon bond maturing at the same time.

As Felix Salmon says, the most interesting option is the “do nothing” option. How will the EU punish creditors who take none of the options? Right now, the EU is basically saying “take a 20% haircut and maturity extension in exchange for Germany backing the other 80% of the principal.” But if the EU is so committed to preventing a true default (i.e. when the “do nothing” option is no longer an option), couldn’t creditors hold out for better terms (smaller haircuts and maturity extensions)? The game theory and negotiation strategy implications here are interesting, especially since the EU has to get any bailout approved by the Parliaments of many anti-bailout countries.

6 David Wright July 21, 2011 at 10:26 pm

Felix Salmon’s commentary, which Tyler links to, is quite good. He is also quite explicit in saying this is a default.

The ideological argument over Greece has always been between the pro-socialists and anti-socialists. The pro-socialists want the Greek crisis to set a precedent for richer european countries subsidizing poorer ones; they say “if Germany subsidizes Greece it will not default”. The anti-socialists want Greece to default and thus set a precedent that richer european countries will not spend any money to subsidize poorer ones; they say “if we let Greece default we will not have to subsidize them”. The agreement manages to get the worst of both worlds: Greece defaults and gets subsidized.

7 TallDave July 22, 2011 at 7:48 am

Yep, it’s starting to remind me of Kipiling’s poem about the Dane-geld.

I just hope Greece collapses before someone on this side of the Atlantic starts looking at CA and IL and thinking this is the solution.

8 Careless July 22, 2011 at 4:40 pm

Come on, Dave, we’re already gambling our pension money in IL, this is just getting fun.

9 a July 22, 2011 at 3:40 am

Well, all the American hedgies are getting their heads beaten in on their short selling of European bank stocks, so I’d chalk this up as a victory of the Europeans over the Americans. It’s not the end, of course, but it’s good to see so many Americans lose so much money.

10 Jeff July 22, 2011 at 7:43 am

I think you missed the part where they call on the IMF to help with funding. That means the US taxpayer.

11 E. Barandiaran July 22, 2011 at 10:05 am

Your bottom line on the Eurozone is much more optimist than my bottom line on your country — each day a step closer to Argentina (that is, to Argentina without a commodity boom).

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