The new Greek bailout plan, digested

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.


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