As a third day of nationwide strikes this month cripples Greece again, EU leaders agreed to a financial aid package, involving the International Monetary Fund (IMF). Greece was facing default on some 20 Billion Euros (about $27 Billion dollars) worth of government bonds, maturing in April and May. The European Central Bank (ECB), supported by France, had been pushing for an all-EU solution. But German Chancellor, Andrea Merkel, facing ‘mid-term’ local elections, stood firmly opposed to the plan, as polls of German voters wanted her to do. This game of chicken ended with Germany winning, and the people of Greece, and possibly the EU in general, losing.
The approved plan still has many details to be hammered out. As in America, it appears that Europeans leaders are now also deciding on legislation without knowing what’s in the bills. But the gist of the plan is simple, EU nations will pay off 2/3rds of the Greek bonds approaching maturity, with the Washington/Wall Street based IMF handling the rest. Normally, the IMF rescues developing nations, always imposing harsh economic medicine. This is why France and the ECB fought against IMF intervention in Europe. ECB President, Jean-Claude Trichet, say of the IMF having any role to play, “…would obviously be very, very bad.” The door is now open for future IMF involvement to Euro Zone economic policies.
With Sarkozy losing local elections in France, Germany’s resistance and time running out, a compromise was finally reached. But even with this plan, the situation is only briefly extended. Greece still faces an uncertain future as severe austerity measures cause civil unrest. The road to recovery is a long one, and there are no guarantees. The Euro Zone, itself, still faces uncertainties of their own. Portugal and Ireland have had the bond ratings downgraded earlier this week, just prior to the start of the EU’s annual summit in Brussels.
In 2008, at the start of the financial crisis, the ECB lowered bond rating requirements for EU member nations from A- to BBB-. In January of this year, the ECB announced intentions to revert back to the A- status for nations to meet collateral debt requirements. Greece was rated at BBB+, and this began a chain of events leading to the discovery of just how bad their finances really are. Much of their debt was ‘papered-over’ by foreign securities that had less value than previously reported.
Greece’s short-term debt exposure ballooned from $38 Billion dollars in early 2009 to $85 Billion this past February. The cost of insuring their debt, through credit default swaps and other mortgage-back derivatives (mostly from Wall Street, i.e. Goldman Sachs), doubled in one month’s time. The speculators attacked Greece, financially, pushing them rapidly into a new, higher level of crisis. German banks jacked up the interest rates they were charging Greece. The Greek government, only in office a few months, was forced to initiate severe cuts in wages, pensions and services. This sent the citizens of Greece into the streets to protest the austerity moves.
Greece’s total sovereign debt load is just over $300 Billion, mostly held by French, Swiss and German banks. In February, France and Germany proposed a bailout, but their conditions were extremely harsh. Yesterday’s decision by the EU to offer some relief in conjunction with the IMF, should buy Greece an extra 60 days to get it’s house in order. Meanwhile, the strikes and protests continue. The patience of Greek citizens is wearing thin. Something for our leaders in Washington to think about.