STAFF NEWS & ANALYSIS
Germany Proposes IMF Greek Bailout
By Staff News & Analysis - March 19, 2010

German currency chief Ulrich Leuchtmann [voiced] an astonishing volte-face yesterday in suggesting that Greece should go to the IMF for a rescue after all … "We think the IMF is the ideal solution anyway, and would actually be good for the euro. It would establish discipline and avoid moral hazard. It is much easier for the IMF to enforce austerity conditions," he said. "The markets are still focused on the fact that we still don't seem any closer to an EU rescue for Greece, so they are treating this IMF story as negative," he said. I agree entirely with Dr. Leuchtmann. The EU top brass have of course been saying for weeks that it would be intolerable to let the camel's nose of Washington's IMF under the eurozone tent. Eurogroup chair Jean-Claude Juncker (left) said it would shatter the credibility of monetary union. But is this all EU religious stuff: ideology and totemism. Mr. Juncker, the Commission's Jose Barroso, and their allies, have been trying to exploit the crisis to advance the EU Project, pushing the boat stealthily across the Rubicon towards fiscal federalism and a de facto debt union. They hoped that the Germans would not realize fully what was being done to them until too late. Chancellor Angela Merkel appears to have balked at this – understandably — seeing a standby facility for Greece as the beginning of a slippery slope that would leave German taxpayers on the hook for €3 trillion of Club Med debts. At least that is how I interpreted her comment yesterday that one should "perhaps call in the IMF." The plot thickened when her Christian Democrat finance spokesman in the Bundestag, Michael Meister, said: "We have to think who has the instruments to push Greece to restore access to capital markets: nobody apart from the IMF has these instruments." No doubt there will be further utterings today. This morning [yesterday], Greek premier George Papandreou openly threatened to go to the IMF in an address to the European Parliament. – UK Telegraph

Dominant Social Theme: And so ends the euro, with a Teutonic whimper?

Free-Market Analysis: Here at the Bell, we have expressed our belief numerous times that the EU would not be able to resolve the unraveling of its "Pigs" nation states with its current range of options and wieldable powers. But we have also indicated that this was never expected. No, the EU elite in fact planned to continue to evolve through crisis. The idea was that each time the EU was deemed an unworkable entity, various insider maneuverings – eventually meeting a level of popular acclaim – would expand the EU's brief and allow it to move forward with significantly increased powers.

This actually worked well in the 20th century, but the 'Net-empowered 21st century has made these machinations more obvious. Of course most Europeans of any significant age and sophistication do not need a lesson in the way the world works, but the information available on the 'Net has probably helped concentrate minds and spirits. Here's some more from Greek premier George Papandreou:

"Greece, unlike Hungary does not have a free currency. We have the worst of the IMF and none of the advantages of the eurozone. This is where Europe must come in and provide what the IMF can offer. Or Greece will have to go to the IMF, we hope that will not be necessary. … I prefer a European solution as part of the eurozone, to show the world that Europe can act together. … We expect the EU to live up to the challenge facing it. We are a eurozone country. Within the eurozone, where we have one currency, we should have similar types of loans, not the same kind of loans, so we can be competitive. That is not only viable but a realistic demand. As I said, this instrument may never be used but the fact that it does exist is going to be a very important political and financial tool to support Greece in its needs for going out to the market."

And now further analysis from the Telegraph …

Is this now a dispute about the price of any loan? Or are the Greeks so angry over the barrage of insults they have been receiving daily that they would almost relish a chance to give Brussels a black eye in revenge? The Eurogroup has suggested that any rescue would come at a punitive rate above EU borrowing costs, but did not specify. Perhaps it would be around 4.5% to 5% for long-term money. Sources tell us that the IMF would lend at around 3.25%, using its SDR benchmark plus 100 basis points. So why suffer the daily abuse from Europe?

Why indeed, we ask. This is surely a nightmare for the EU monarchs who had in mind no doubt that the Lisbon Treaty itself and various others powers, seen and unseen, would result in the political latitude that was needed to resolve the Greek crisis (and others like it) within the EU family itself. It hasn't turned out that way, or certainly not yet. Brussels may believe it has been extraordinarily clever in pushing through additional powers by rewriting constitutional legislation and then demanding re-votes when it doesn't get its way. But people are not apt to enjoy such spectacles. No one likes to be pushed around, not even communitarian Europeans.

What it comes down to is this. Europe's fractious tribes (not necessarily "socialist" by any means) were happy to sign up for the EU and take EU funds at a rate that was far cheaper than what they might have received from their own stumbling currencies. The deal was attractive even if it came at a cost: German goods were to become mostly available in Europe and at a fairly high price. People borrowed as a result. Now, however, the mathematics have changed.

Many EU countries are facing a form of bankruptcy. The EU will demand "austerity" that cannot be achieved without a quick and wrenching descent into virtual poverty. In the past, countries could have devalued, but even with IMF programs, countries in trouble cannot devalue if they are inside the EU. That means these countries cannot spread the pain. Here's how the Telegraph puts it, as regards Greece:

It is quite possible that the IMF would impose more rational — ie more lenient — terms. Though how on earth IMF strategists would deal with this crisis is beyond me. They usually demand a devaluation of 30% or so to offset the pain of fiscal austerity and to allow the country to claw its way out of its hole through exports and import substitution. This is obviously Verboten in euroland.

Latvia is going through a version of this IMF-pain-without-an-IMF-cure treatment, its case to defend its euro-peg. The IMF expects the result to be a 30% contraction of GDP from peak to trough, just about a world record. Not surprisingly, the ruling coalition disintegrated yesterday, unable to agree on how to implement this euphemistically named "internal devalulation." Latvia is being crucified for the sake of EU fixed-exchange ideology. I would be cross if I were Latvian.

Needless to say, it really doesn't make any difference in the long-term whether Greece gets a bail-out or who provides the money. The country is not facing a liquidity crisis, it is facing an insolvency crisis. Stephen Jen from BlueGold Capital says the EU authorities appear to misunderstand the fundamental nature of the problem. Greece needs a "Thatcherite" supply-side revolution (good luck with PASOK) to raise its game. This cannot be done when the country is caught in a vicious circle of deflationary wage cuts and fiscal retrenchment.

This is well said, but it does not go far enough. The Bell is interested in free-market thinking and dominant social themes – and the theme presented by the EU is that bigger is better and that nation states are therefore outmoded. But is that so? Will this dominant social theme stand up to the test of time and reality? This is an important point, not only politically but from the standpoint of INVESTMENTS. If you believe the euro and the EU will survive, then your investment strategy may be a great deal different than if you decide otherwise.

We're not sure what it going to happen. But countries devalue because otherwise governments topple and people riot. Brussels Euro-crats are basically asking certain Europeans to virtually beggar themselves if there is no devaluation to be had. It is one thing to plunge into poverty over a series of years while spreading out the pain. It is another thing to have it happen in a consolidated fashion. Right now Ireland, Latvia and others are facing years of protracted poverty as a result of their EU bargains. Yes, money may still be had at a cheaper level than otherwise, but how many can afford to borrow without a job – or with several low-paying jobs that only barely keep a roof over one's head?

After Thoughts

The Eurozone is facing difficulties. It is another elite promotion that has come on hard times. Perhaps the IMF is indeed the only solution, but psychologically the repeated blows from IMF bailouts, if they are even practical, will be telling and surely cast doubt on the social and monetary compact that currently holds sway. Of course, we don't count the EU out. Perhaps a clever solution will occur to those in charge. It is also possible that the EU will lapse back into a form of the "common market" that it was supposed to be. And perhaps instead of the euro, a formal or informal gold or silver money standard might arise. Some good along with the bad.

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