A Good Result After All

Greek Finance Minister Yiannis Stournaras and Jean-Claude Juncker.
Source: http://tvnewsroom.consilium.europa.eu

I am more than happy to see that the EU leaders have reached a decision concerning the fate of the Greek debt. Many rumors had been surrounding this Eurogroup meeting and many feared the worst when German Finance Minister Wolfgang Schäuble and Luxemburg Prime Minister and President of the Eurogroup Jean-Claude Juncker announced that a deal was close. The new deal will allow Greece to reduce its debt burden to 124% of GDP by 2020 and to "substantially lower" than 110% by 2022 as reported in the Eurogroup statement on Greece.

For once, I have to say that they paid some attention to what I had been raging about all this time. In the What will happen to Greek debt article I had posted on Thursday, on of the two possible solutions mentioned had been pausing interest payments for a period of 5 years. What they did was not the exact same as what I had proposed but very similar:

1. decrease interest rates on the outstanding debt by 1%

2. lower the guarantee fee costs paid by Greece on the EFSF loans by 0.1%

3. extend the maturities of the bilateral and EFSF loans by 15 years

4. commit the Member States to pass on to Greece's segregated account, an amount equivalent to the income on the SMP portfolio (which basically is the Greek debt the ECB holds and basically belongs to each EU nation in a specific proportion for each) accruing to their national central bank as from budget year 2013. Member States under a full financial assistance programme are not required to participate in this scheme for the period in which they receive themselves financial assistance

In addition, as soon as the the EFSF disbursements are approved by the parliaments of all Member States, Greece will receive 43.7 billion euros, of which 34.2 will be given in December and the rest in three installments during the first quarter of 2013. Thus, as Greece will need to use 23.8 billion to recapitalize banks, almost 20 billion will be left to be allocated in the nation. 

What is the most important moral of this decision is that for once a decision was made to accommodate a nation and not to punish it for what had happened. The solution, unlike the one for the bond haircut, is more likely to yield positive results both in the short run as well in the long run without having any adverse effects on any country's economy. Hopefully, this would bring an end to series of decisions which were aimed at assigning blame rather than promoting what is good for the Union. And maybe, in a few months, they will realize that inane austerity is not the solution for the problem in the EU. Bad decisions, irresponsible bankers and corrupt politicians and policymakers are.

The Politics of Credibility and Inaction

In the postscript of my last article I noted that the difference between theory and action is the difference between masturbation and sex. This was amply proven in yesterday's press conference where Mario Draghi has said that doing whatever it takes (to save the euro that is) might take weeks or months. On hearing this, world markets started moving downwards. It now seems that the ECB governor has found out the hard way that when officials with perceived credibility and a certain position of responsibility say something important, people and thus markets believe them.

Now, Draghi can say goodbye to his credibility. Who will believe a leader if all he does is promise and never deliver? Especially if the specific leader holds the key for reversing the situation in the Eurozone. In response to the recent developments even Obama started making comments about trusting the EU leaders to do what is right (hmm I wouldn't bet on that Barack). His Secretary of the Treasury, Timothy Geithner, (the guy who tried to sell his house in the midst of the sub-prime lending crisis. Now if that isn't being optimistic I don't know what is!) even came to Europe to meet with EU officials. Indecisiveness in the EU can be spotted all the way across the Atlantic and they expect us here not to notice it?

While in Europe, Tim met with my friend Wolfgang (Schäuble that is) and urged him to take immediate short-term measures to support Spain and Italy. (Obviously the Americans don't really care about Greece or Cyprus. Well if they were thinking straight they would. Here is why). Both stated that they have confidence in the member-states efforts. To be honest, I believe Tim, it's Wolfgang I do not trust.

The Germans have a history of seeking financial stability and a low inflation said Tim. I do not think that anyone would disagree on that. It's a wonderful policy and it should be pursued. Nevertheless, it should be pursued when the economic climate allows you to do so. The delay of significant measures to halt the recession will only worsen the situation. (If you don't believe me read about what happened to the Americans during the Great Depression in the early 1930's and during the same period in the UK when policy makers did not want to abandon the gold standard.)

In the end, it all boils down to credibility. A man of higher standing such as Draghi cannot make any statements concerning policy and then try to avoid implementing them. People lose their credibility much faster than they can regain it. It seems that hordes of economists all over the EU have forgotten the consequences of the non-credibility of Central Bankers. The same problem holds throughout Europe. Think about any government. Who would you believe if they said anything concerning policy? Governments in Cyprus and Greece stated that they would not need any help in overcoming their financial strains only days before applying for help. There only two kinds of officials in Europe that I would trust (of the ones involved in the crisis I mean. I have nothing against Scandinavian, Dutch or Austrian governments which are one of the most stable economies in the world): the Germans when it comes to denying any help (and not in saying that they will do anything to help the Euro) and Mario Monti who seems never to say more than is needed.

However, with credible or non-credible leaders the need for decisions remains. In a world where inertia and idleness do nothing but wrong, we have to able to move fast and without hesitation when needed. If it takes 10 summits and 100 voting procedures every time the ECB wants to pass and implement a plan of action then we are going to be forever lost in a bureaucratic troubled ocean.