Wednesday, February 10, 2010

Denials Over Greek Bailout!

Highlighted yesterday: More On The Greece Crisis

Yesterday the markets recovered. Everything hinged on Greece. On CNBC:
Stocks Close Up Broadly On Hopes for Greece and on Edge Financial Daily: Wall St gains on reports of help for Greece

Is everything A OK now?

On Times Online:
Storm over bailout of Greece, EU's most ailing economy

  • Angela Merkel tried to calm fevered speculation in financial markets yesterday that Germany was preparing to lead a bail-out of Greece amid a split in the EU on how to handle its most ailing member.

    The German Chancellor denied reports that her Finance Minister was conducting secret talks with Jean-Claude Trichet, head of the European Central Bank, and with other capitals on an EU rescue fund for Athens.

    Mrs Merkel has staunchly resisted suggestions that the EU must swallow its pride and turn to the Washington-based IMF for a solution to the growing economic turmoil in Greece, with fears that its troubles in international finance markets will trigger a domino effect, toppling other weak members of the eurozone such as Ireland, Portugal, Spain and Italy.

    But last night there were signs of a developing European split over calling in the International Monetary Fund, a move also strongly opposed by Brussels, with suggestions from Sweden’s Finance Minister and other officials that this might be better than the EU programme outlined last week.

    Mrs Merkel has repeatedly rejected the idea that the 16-nation eurozone would need to look to the IMF, which is already overseeing recovery efforts in Latvia and Hungary — both EU members outside the single currency. Her insistence that the eurozone can keep its own house in order led to market speculation yesterday that an EU bail-out was imminent.

    There were also reports yesterday that Wolfgang Schäuble, the German Finance Minister, was working bilaterally and at the European level on putting together a package to help Athens.

    A strong rally on Wall Street went into reverse when a spokesman for Mrs Merkel said flatly that this was “wrong”.

    The crisis in Greece that is putting the euro under its biggest strain in the ten-year history of the single currency has forced its way on to the agenda of an economic summit for the 27 EU leaders in Brussels tomorrow. It is the first extraordinary meeting called by the new EU President, Herman Van Rompuy, and was supposed to be a relaxed day of long-term thinking about job creation over ten years. Instead, the prospect of a Greek default triggering a wider crisis in other weak economies such as Portugal and Spain will hang over the leaders.

    The split emerged when Anders Borg, the Swedish Finance Minister, said that “the IMF has the technical knowledge” to resolve the Greek economic crisis, breaking the careful EU public consensus that the eurozone can cope. Mr Borg insisted that discussion of an IMF role in resolving Greece’s crisis should not be ruled out.

    An EU official added: “There have obviously been discussions going on at an EU level about what the options are. There is a feeling that the IMF could offer a better course of action. The IMF has precedents or doing this, it has a system with measures in place.”

Denials, denials and more denials!

But Houston, they do know that the problems are real, clear and presently undeniable, yes?

So what exactly is EU going to do about it?

BUT what about Spain?

Here's Paul Krugman's editorial written a day earlier on NY Times. Anatomy of a Euromess

Euromess? Cute but precise! (DO click on the above link to see the charts posted!)

  • Most press coverage of the eurozone troubles has focused on Greece, which is understandable: Greece is up against the wall to a greater extent than anyone else. But the Greek economy is also very small; in economic terms the heart of the crisis is in Spain, which is much bigger. And as I’ve tried to point out in a number of posts, Spain’s troubles are not, despite what you may have read, the result of fiscal irresponsibility. Instead, they reflect “asymmetric shocks” within the eurozone, which were always known to be a problem, but have turned out to be an even worse problem than the euroskeptics feared.

    So I thought it might be useful to lay out, in a handful of pictures, how Spain got into its current state. (All of the data come from the IMF World Economic Outlook Database). There’s a kind of classic simplicity about the story — it’s almost like a textbook example. Unfortunately, millions of people are suffering the consequences.

    The story begins with the Spanish real estate bubble. In Spain, as in many countries including our own, real estate prices soared after 2000. This brought massive inflows of capital; within Europe, Germany moved into huge current account surplus while Spain and other peripheral countries moved into huge deficit:

    These big capital inflows produced a classic transfer problem: they raised demand for Spanish goods and services, leading to substantially higher inflation in Spain than in Germany and other surplus countries. Here’s a comparison of GDP deflators (remember, both countries are on the euro, so the divergence reflects a rise in Spain’s relative prices):

    But then the bubble burst, leaving Spain with much reduced domestic demand — and highly uncompetitive within the euro area thanks to the rise in its prices and labor costs. If Spain had had its own currency, that currency might have appreciated during the real estate boom, then depreciated when the boom was over. Since it didn’t and doesn’t, however, Spain now seems doomed to suffer years of grinding deflation and high unemployment.

    Where are budget deficits in all this? Spain’s budget situation looked very good during the boom years. It is running huge deficits now, but that’s a consequence, not a cause, of the crisis: revenue has plunged, and the government has spent some money trying to alleviate unemployment. Here’s the picture:

    So, whose fault is all this? Nobody’s, in one sense. In another sense, Europe’s policy elite bears the responsibility: it pushed hard for the single currency, brushing off warnings that exactly this sort of thing might happen (although, as I said, even euroskeptics never imagined it would be this bad).

    Am I calling, then, for breakup of the euro. No: the costs of undoing the thing would be immense and hugely disruptive. I
    think Europe is now stuck with this creation, and needs to move as quickly as possible toward the kind of fiscal and labor market integration that would make it more workable.