World View: Europe Announces €44 Billion Bailout for Greece

This morning's key headlines from

  • Europe declares victory with another hopeless bailout payment for Greece
  • After Greece's deal, Ireland looks for a better deal
  • Huge anti-Morsi demonstrations fill Cairo's Tahrir Square
  • Hamas chief Khalid Mashaal says he supports Thursday's Palestine U.N. bid

Europe declares victory with another hopeless bailout payment for Greece

IMF chief Christine Lagarde at Tuesday 2 am press conference
IMF chief Christine Lagarde at Tuesday 2 am press conference

Over a year ago, I proposed the "Kick the Can Theory," which says that if you want to predict what Europe is going to do, just assume that they'll the bare minimum possible to get through the current crisis, but leave the basic underlying problems unchanged, so that the next crisis will be much worse -- in other words, "kick the can down the road," and lie about it.

Around 2 am, Tuesday morning, after a 12 hour meeting, the Europeans declared victory, giving Greece a new 44 billion euro bailout loan, enough to meet commitments through the end of the year. According to Greece's prime minister Antonis Samaras:

"A very grey, a very dark period for Greece officially ended yesterday and it has ended for good. We Greeks were made for tough times, and when the going gets tough, it brings out the best in us."

And here's the statement of Jean-Claude Jüncker, chairman of the Eurogroup finance ministers:

"This is not just about money. This is the promise of a better future for the Greek people and for the euro area as a whole, a break from the era of missed targets and loose implementation towards a new paradigm of steadfast reform momentum, declining debt ratios and a return to growth."

Wow! I'm surprised he could mouth all those long words at 2 am. As usual, I have to remind readers that when reporters caught Jüncker in a series of lies in May, 2001, in the same Greek debt crisis, he replied, "When it becomes serious, you have to lie." Well, this situation is pretty serious, so we can assume that Jüncker has to lie.

Actually, this "new paradigm" is no different than the previous temporary bailouts. It depends on two things:

  • During the next month, Greece will have to initiate a "bond buyback" program, where they'll ask private investors holding Greek bonds to sell them back to Greece at 28 to 30 cents on the dollar -- a 70%-72% haircut. Recall that we went through this a year ago and it was a nightmare, with investors taking a 74% haircut, where most of the investors were banks that governments could force to go along. A lot of private investors didn't go along with the plan and refused to sell at a 74% loss, and now we're going through it again.
  • The entire plan assumes that Greece will soon emerge from recession and start growing rapidly. Politicians have been assuming for five years that the financial crisis would end "next quarter," and that we'd return to the credit and real estate bubble of the mid-2000s decade. That is literally impossible. The credit and real estate bubbles still have far to go before they'll be fully deflated. Growth will not begin again until well into the 2020s.
The interesting character in all this is Christine Lagarde, head of the International Monetary Fund (IMF). Last week she had a raucous open confrontation with Jean-Claude Jüncker, when she refused to go along with his plan to allow Greece two extra years to meet their austerity commitments. At first I thought that Lagarde had completely caved in during last night's negotiations, but apparently she did only partially. The IMF will not release its share of the 40 billion euro bailout loan until the bond buyback plan is completed.

And sooooooooooooooo, Dear Reader, if you've waded through all the above, then you know that even with the bailout payment, Greece will be in more serious trouble before long, but in fact the bailout payment itself is not even firm.

As one analyst put it:

"The latest Greek rescue deal will buy the country a bit more time. But unless the economy stages a miraculous recovery, the rest of the euro-zone will soon be forced to make much more difficult decisions over just how far it is prepared to go to keep Greece inside the euro."

Kathimerini and EurActiv and WSJ

After Greece's deal, Ireland looks for a better deal

Now that Greece has been given extra time to meet its austerity commitments, as well as other sweeteners, Ireland is thinking about asking for a better deal as well. Part of the package announced last night was that the interest on Greece's loans from the European Central Bank (ECB) will be reduced and partially deferred. It looks like Ireland's Minister for Finance Michael Noonan will be asking for similar treatment. Irish Times

Huge anti-Morsi demonstrations fill Cairo's Tahrir Square

A major political confrontation is growing in Egypt, as over 100,000 defiant protests filled Cairo's Tahrir Square on Tuesday, demanding the cancellation of president Mohamed Morsi's constitution decree last Thursday, when he gave himself dictatorial powers. Thousands also took to the streets in mostly peaceful rallies in major cities across Egypt. Morsi still has strong support among members of the Muslim Brotherhood, of which he was a former leader. The Brotherhood had originally planned to hold counter-demonstrations on Tuesday, but canceled them to avoid violence with with anti-Morsi protesters. Morsi has stated that he will not yield to demands to cancel the decree. There are unconfirmed reports that Morsi is considering measures that might be taken to appease the protesters, but none has been announced so far. Al-Ahram

Hamas chief Khalid Mashaal says he supports Thursday's Palestine U.N. bid

Hamas chief Khalid Mashaal has notified Palestinian Authority president Mahmoud Abbas that he intends to support the latter's bid for recognition of a Palestinian state by the United Nations General Assembly, to be presented later this week. This is a complete turnaround, as Hamas has previously strongly opposed Abbas's plan, because the recognition of a Palestinian state could imply officially giving up the "right of return" for Palestinians to the homes in Israel that their ancestors owned prior to the 1948 partitioning of Palestine and the creation of the state of Israel. Ma'an News Agency (Bethlehem)

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