Greece Gets Pounded Before Further Bailout?
By Staff News & Analysis - May 20, 2011

European Central Bank threatens to pull the plug on Greek lending … The European Central Bank has threatened to stop lending to banks using Greek government bonds as collateral if Athens changes the terms of the debt, a move which could bring down the country's banking system. The central bank is vehemently opposed to a restructuring of Greek debt, worried about a possible chain reaction through Europe's financial system and the losses it would face on the up to US$80bn of bonds on its own books. – UK Telegraph

Dominant Social Theme: The Greeks need to tighten their belts or things will get even worse. The disciplined and morally upright mavens at the European Central Bank and the International Monetary Fund are making that clear to all lazy and feckless Latins.

Free-Market Analysis: It was a bad end-of-the-week to be Greek. Both the IMF and the ECB metaphorically jumped up and down on Greece, stomping that tiny nation into rubble with rhetorical severity. (See excerpt above.) The idea perhaps is to sound tough before offering additional relief.

It is hard in fact to avoid the idea that some sort of game is being played, though bond markets don't seem in the mood for such diversions. The constant cries of "crisis" as regards the Southern EU PIGS, combined with tough rhetoric that is later contradicted by EU actions that are considerably more generous, can give rise to the idea that much of what passes for alarmism is actually for show. Seen from this perspective, the severity of the warnings may only have been meant to provide a cover for yet another deal.

Here's a thought: Was it a coincidence that both the IMF and the ECB threatened Greece at approximately the same time? And this just before further "crisis" talks commenced. We would tend to believe that the soft restructuring has already been worked out (though the markets may not like it, or even tolerate it).

The larger problem that the Eurocrats are having has to do with what we've mentioned previously: the "immovable rigor" of the EU's position has now run directly into the reality of Greek bankruptcy. And since the bankruptcy was not negotiable, it was the Eurocrats who ended up giving way. But since the initial bailout was illegal and the subsequent soft restructuring even moreso, the rhetoric preceding the climb down must be appropriately cataclysmic.

The ECB first. ECB honchos maintained yesterday that if Greece restructured, they might stop lending to Greek banks, Since Athens owes about €340bn, any lending disruption would surely wreck the Greek financial system. The ECB's statement was purportedly a response to proposals EU officials have been floating about a restructuring of Greek debt.

This entails extending terms of payment. Juergen Stark, ECB chief economist, has claimed as a result that any alternation of Greek bonds would result in a likely termination of ECB loans. "A sovereign debt restructuring would undermine the eligibility of Greek government bonds," he claimed. "A continuation of liquidity provisions would be impossible."

Supposedly, the ECB is worried about losses it might take on the €50bn of Greek bonds it has now acquired as a result of trying to staunch Greek bleeding. Would the ECB really stop lending to Greek banks? Wouldn't that only make things worse? Ironically by making its statement, the ECB only deepened the sense of confusion surrounding the issue.

A new proposal emerged. Holders of Greek debt could be asked to "roll over" bonds, purchasing new bonds as old ones mature. This would provide a substitute for a frank revaluation, but presumably the debt holders would have to cooperate. But even Herman Van Rompuy, president of the European Council, seemed dubious about these plans. He was quoted as saying that a new IMF chief to replace Dominique Strauss-Kahn – in legal trouble over an alleged rape – must be found at once. "We are feeling the lack of leadership in solving the Greek crisis," he said.

Perhaps trying to impress, despite the resignation of DSK, Poul Thomsen, IMF representative for Greece, warned Greece to move more quickly on its privatization program. He claimed that May's 2010 bailout was failing. "The view that seems to be taking hold is that the government program is not working," Thomsen reportedly said, adding that what was needed was a "determined reinvigoration of structural reforms."

Giorgos Papakonstantinou, the Greek finance minister, said Greece would respond to Thomsen's demands. Two ways that Greece is working hard to justify its US$150 billion bailout is by selling off "assets" and by tightening the investigation of tax dodgers. Thomsen himself was said to give priority to privatization; Papandreou apparently doesn't see it that way – as he intends, according to the Guardian newspaper, to launch a "fully fledged attack on tax evasion." (Funny, we already thought he'd done that.)

We remain of two minds about the current EU sovereign debt crisis. On the one hand, we believe the crisis was certainly provoked by sloppy lending to the Southern PIGS. This lending might have been, in fact, pre-planned to provoke a situation where Eurocrats would need to tighten economic surveillance on all countries. In fact, this is exactly what has happened.

Another idea is that the crisis has been heightened in order to produce a true world currency. This is also a possibility given that those who control the EU also control central banking around the world. The money under control of powerful banking families is said to number in the trillions or even tens of trillions of more. It is hard to believe that such monied parties could not find the money necessary to assuage Europe's difficulties if they wished to.

The only way to resolve these speculations in our view is by continued scrutiny of the actions and rhetoric of EU leaders. Hardly anything that is said by such individuals is truthful on its face. One must constantly scrutinize actions and statements in search of a deeper context.

But there is another point to consider as well, one we have made before. In the 21st century, given the broadening of available communication-technology, it is not power elite "leaders" who may decide the future but the broader populace who are moving the Internet Reformation forward. Those at the top of the EU may come up with solutions that they consider adequate one way or another only to find that voters are dismissive of them.

As voters continue to elect anti-EU politicians – and they have done so in Finland and are getting ready to do so in Germany and elsewhere – even workable solutions may not prove adequate. Those in charge of the EU anticipated that a financial "crisis" would allow them to ignore provisions of EU law that put up barriers to bailouts. Already, many such provisions have been abrogated. But reformers are noticing and seem to us increasingly peeved. Spain and Italy were both hit by protests yesterday. As temperatures climb, so does activism.

After Thoughts

The twin pressures of anti-EU elections and anti-austerity protests may result eventually in one or more weak states leaving the EU. It will be then, as that occurs, that we shall find whether the EU can survive with a core group of healthier states or whether such a state of affairs will constitute a "catastrophe" as one EU officials said recently. Believing as we do that the EU is an authoritarian disaster, we wouldn't mind the latter.

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