Tag Archives: greek debt crises

The Mosler Plan for Greece

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The Mosler Plan, as previously posted on this website, is now making the rounds in Europe as an alternative to the French Plan that is currently under serious consideration:

Abstract
The following is an outline for a proposed new Greek government bond issue to provide all required medium term euro funding for Greece on very attractive terms.

The new bond issue includes an addition to the default provisions that eliminates the risk of loss to investors. The language added to the default provisions states that while in default, and only in the case of default, these transferable securities can be used directly, by the bearer on demand, at face value plus accrued interest, for payment of any debts, including taxes, owed to the Greek government.

By eliminating the risk of loss, Greece will be able to independently fund all required financial obligations in the market place for the foreseeable future. The immediate benefits are both reduced interest costs that substantially contribute to deficit reduction, and the elimination of the need for the funding assistance from the European Union and the IMF.

Introduction- Restoring National Sovereignty
Current institutional arrangements have resulted in Greece being faced with escalating interest costs when it attempts to fund itself in the market place, to the point where timely funding is not currently available without external assistance. This requirement for external assistance to avoid default has further resulted in a loss of sovereignty, with the EU and IMF offering funding only on their approval of deficit reduction plans by the Greek government that meet specific requirements. Compliance with these demands from the EU and IMF not only include tax increases, spending cuts, and privatizations, but also include aggressive time lines for achieving their deficit reduction goals. It is also understood by all parties that the immediate near term consequences of these imposed austerity measures will include further slowing of the economy, and rising unemployment.

Greece will restore national sovereignty, and regain control of the process of full compliance with the general EU requirements for all member nations, only when it restores its financial independence. Financial independence will allow Greece to again be master of its own destiny, on an equal basis with the other EU members. And the lower interest rate that result(s) from this proposed bond issue will itself be a substantial down payment on the required deficit reduction, easing the requirements for tax increases, spending cuts, and privatizations.

While this proposal restores Greek national sovereignty, and eases funding burdens, we recognize that it is only the first step in restoring the Greek economy. Even with funding independence and low interest rates the Greek government still faces a monumental task in bringing Greece into full compliance with EU requirements and restoring economic output and employment. However, it should also be recognized that financial independence and low cost funding are the critical first steps to long term success.

The Bond Issue- No Risk of Financial Loss
Market based funding at the lowest possible interest rates requires investors who understand there is no ultimate risk of financial loss, and that the promise to pay principal and interest by the issuer is credible. To be credible, a borrower must have the means to meet all contractual euro obligations on a timely basis. For Greece this has meant investors must have the confidence that Greece can generate sufficient revenues through taxing and borrowing to repay its debts.

The credit worthiness of any loan begins with the default provisions. While there may be unconditional promises to pay, investors nonetheless value what their rights are in the event the borrower does not pay. Corporate debt often includes rights to specific collateral, priorities in specific revenues, and other credit enhancing support.

The new proposed Greek bond issue, with its provision that in the event of default the bonds can be used at face value, plus interest, for the payment of taxes by the bearer on demand, gives the bond holder absolute assurance that full maturity value in euro can always be achieved. And with this absolute assurance that these new securities are necessarily ‘money good’ the ability to refinance is established which dramatically reduces the risk of the default provisions actually being triggered. And, again, should there be a default event, the investor will still get full value for his investment as the entire euro value of the defaulted securities can be used at any time for the payment of Greek taxes. So while this discussion concerns the case of default, the removal of the risk of loss means there will always be demand for them at near risk free market interest rates, and that the default discussion is, for all practical purposes, hypothetical.

These new Greek government bonds will be of particular interest to banks, which, again, encourages bank ownership, which makes default that much more remote a possibility. This is because, in the case of default, a bank holding any of these defaulted securities will be able to use them for payment of taxes on behalf of bank clients (using that bank for payment of their taxes). Under these circumstances, a bank depositor client making payment of euro would, in effect, simultaneously buy the defaulted securities from the bank and use them to pay the Greek government taxes due. Again, the fact that the bank would be fully paid for its defaulted securities in the process of depositors paying their taxes means there will be no default in the first place, as these favorable consequences mean there will be continuous demand for new securities of this type at competitive market interest rates, to facilitate all Greek refinancing requirements.

The new ‘money good’ Greek bonds will be attractive to all global investors, both private and public. This will include international banks, insurance companies, pension funds, and other private investors, as well as sovereign wealth funds and foreign central banks which are accumulating euro reserves.

Fiscal Responsibility
As a member in good standing of the European Union, Greece, like all the member nations, is required to be in full compliance of all EU requirements. Therefore, while this proposal will restore national sovereignty, financial independence, and lower interest rates for Greece, austerity measures will continue to be required to bring Greece into EU compliance. However, Greece will gain substantial flexibility with regard to timing and other specific detail, and will be able to work to achieve its goals in an organized, orderly manner, without the continued pressures of default risk and without the specific terms and conditions currently being demanded by the EU and the IMF. Nor will the ECB be required to buy Greek bonds in the market place, obviating those demands as well.

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Hanke on Greece

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Hate to criticize someone proposing a payroll tax holiday- darn that Lerner’s law!


A Big Bang for Greece

There is a way out of the debt trap for Athens.

By Stece H. Hanke

June 30 (WSJ) — How did Greece get into the death spiral that it’s in? Unfunded entitlements. In other words, promise somebody something, don’t come up with the financing for it, and pretty soon you find yourself in a fiscal/debt crisis.

Yes, happens to those who are not the issuer of their currency all the time, including those with fixed fx arrangements. EU members, US States, corporations, households, Russia when fixed to the dollar, Mexico when fixed to the dollar, etc.

But never with issuers of the currency. They can always make payments as desired.

This is where Greece ended up, and in February, the Greek government called in some outside advisers (Joseph Stiglitz for one), and the blame game began. Prime Minister Papandreou, who is also president of Socialist International, started blaming everyone. First, it was the speculators. Then he went on a tear against his own colleagues in the European Union. The Germans really got whacked­ according to Mr. Papandreou, they were a big cause of Greece’s troubles.

Never would have happened under the drachma. Just would have been the usual inflation and currency depreciation.

But Greece is a user of the euro, not the issuer like the ECB is.

Ironically, after blaming outsiders for all their problems, the Greeks have called in the foreign doctors. In this case it isn’t just the IMF, but also the EU politicians and bureaucrats who are involved. But this may ultimately be a case in which the doctors kill the patient.

The problem ended for Greece and the entire eu in general only after the ECB agreed to ‘write the check’ and started buying greek bonds.

There was no other way.

To address the moral hazard issue that comes with ECB support, the ECB insisted on the ‘terms and conditions’ to contain inflation possibilities

They haven’t started with what they should be doing, but with a standard IMF-type austerity program. The government has promised to cut public expenditures. It has also raised taxes. Unlike neighboring Bulgaria, which did exactly the right thing by refusing to increase its VAT, Greece has increased its VAT twice since the crisis.

What should Greece have done? It should have started with a Big Bang, doing a number of things simultaneously a la New Zealand. In 1984, New Zealand elected a Labor government after Robert Muldoon’s National Party governments had made a complete mess of the economy. The Muldoon governments introduced, over the course of almost a decade, a socialist-style system in New Zealand. Labor, under finance minister Roger Douglas, introduced structural reforms centered on deregulation and competitiveness. As a consequence, New Zealand had a massive economic revolution after the ’84 election. Greece should adopt a New Zealand-type Big Bang.

The NZ gov was the issuer of its own currency and therefore didn’t face the solvency problem Greece did. otherwise it would have been an entirely different story.

As part of its Big Bang, Greece should have begun by rescheduling its debt. But it also should have implemented a supply-side fiscal consolidation. That means cutting government expenditures, but also changing the tax regime.

Without the ECB writing the check, that would have resulted in a systemic collapse of the euro member national govts and the payments system in general.

With the ECB writing the check there are other options.

Right now, Greece has very onerous payroll taxes that are paid by employers and, ultimately, labor. As part of a Big Bang, Greece should eliminate the employer contribution to payroll taxes, which is currently 28% of wages (employees pay a further 16% rate directly).

With funding entirely dependent on the good will of the ECB, those decisions are up to the ECB, not Greece. If they cross the ECB they get cut off and again face default.

At the same time, Greece should make its VAT rates uniform. Right now, there are three VAT rates in Greece. This is typical in Europe. You have the regular VAT, a VAT that is reduced by 50% for other categories, and, finally, a super-reduced VAT. I would eliminate the reduced and super-reduced rates, and just have one, uniform rate for the VAT one set below the current top VAT rate of 23%.

If Greece did those two things, it would end up generating more revenue than it is generating right now. Even when based on a static, simple-minded analysis, that would put Greece ahead of the revenue game.

At the macro level for the EU it’s about the right fiscal balance needed to sustain growth and employment, which is probably a deficit higher than the growth rate. But at the micro level it’s about credit worthiness which means a deficit lower than the growth rate. So the members need to be tighter than the union needs to be. This requires a central govt/ECB that runs the needed deficits to make it all work efficiently. Much like the US states balance and the fed govt runs the deficits.

But more importantly, it would also substantially reduce its economy’s labor costs overnight. Employers’ social security contributions are about 7.8% of GDP. Eliminating the employer contribution would yield about a 22% reduction in the overall Greek wage bill as a percentage of GDP. This would make the Greek economy more competitive­ without the currency devaluation that some commentators claim is necessary. These changes would also, obviously, reduce consumption, increase savings, and reduce the level of debt in the country.

Allow me to make a comment about devaluation. There are some people who are wringing their hands and saying, “Well, the problem with Greece is that it put itself into a euro straitjacket and it can’t devalue the drachma anymore. So, Greece is in a trap. There’s nothing it can do!”

Yes, but note devaluing was never a policy tool. It was the consequence of policy. Today the consequence of the same policy is default rather than currency depreciation.

But there is something the Greeks can do. They can reduce the economy’s total labor cost by 22%, simply by eliminating the employer contribution to payroll taxes. To see what the size of a devaluation would have to be to generate a positive competitiveness shock of this magnitude, let’s assume that 50% of a devaluation would be passed through to the economy in the form of increased inflation­ reasonable assumption about a small, open economy like Greece’s.

In this case, Greece would have to have a 44% devaluation to be equivalent, in terms of competitiveness, to the positive shock that would accompany the elimination of the employer contribution to payroll taxes.

So, with the elimination of the employer contribution to the payroll tax, Greece would enhance its competitiveness. The enhancement would be equal to roughly a 44% devaluation. Moreover, the supply-side generated competitiveness would not be accompanied by the inflation and widespread private-sector bankruptcy that a devaluation would provoke.

Needless to say, neither Greece nor its international partners are contemplating a voluntary debt restructuring,

That would also require a restructuring of the banking system as the loss of capital would require some kind of adjustment as well.

let alone a supply-side Big Bang, which makes it more likely that Greece will remain stuck in a trap. But don’t let anyone tell you there’s nothing Greece could do. It’s not too late to change course. What’s more, other countries in Europe that are facing down a possible debt crisis could likewise try a similar approach­reschedule debt, cut taxes on labor to improve competitiveness and spur job creation, while raising some consumption taxes to keep the revenue coming in. There is a way out of the Greek trap.

Mr. Hanke is a professor of applied economics at the Johns Hopkins University in Baltimore and a senior fellow at the Cato Institute in Washington, D.C. This article is adapted from remarks made at the Cato Institute’s Policy Forum, “Europe’s Economic Crisis and the Future of the Euro,” on May 11, 2010, Washington, D.C.

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Marshall’s latest

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REPEAT AFTER ME: THE USA DOES NOT HAVE A ‘GREECE PROBLEM’

By Marshall Auerback

To paraphrase Shakespeare, things are indeed rotten in the State of Denmark (and Germany, France, Italy, Greece, Spain, Portugal, and almost everywhere else in the euro zone). An entire continent appears determined to commit collective hara kiri (link), whilst the rest of the world is encouraged to draw precisely the wrong kinds of lessons from Europe’s self-imposed economic meltdown. So-called respectable policy makers continue to legitimize the continent’s fully-fledged embrace of austerity on the allegedly respectable grounds of “fiscal sustainability”.

The latest to pronounce on this matter is the Governor of the Bank of England, Mervyn King. This is a particularly sad, as the BOE – the Old Lady of Threadneedle Street – has actually played a uniquely constructive role amongst central banks in the area of financial services reform proposals. King, and his associate, Andrew Haldane, Executive Director for Financial Stability at the Bank of England, have been outspoken critics of “too big to fail” banks (link), and the asymmetric nature of banker compensation (“heads I win, tails the taxpayer loses”). This stands in marked contrast to America’s feckless triumvirate of Tim Geithner, Lawrence Summers, and Ben Bernanke, none of whom appears to have encountered a banker’s bonus that they didn’t like.

But when it comes to matters of “fiscal sustainability” King sounds no better than a court jester (or, at the very least, a member of President Obama’s National Commission on Fiscal Responsibility and Reform). In an interview with The Telegraph (link), the Bank of England Governor suggests that the US and UK – both sovereign issuers of their own currency – must deal with the challenges posed by their own fiscal deficits, lest a Greece scenario be far behind:

“It is absolutely vital, absolutely vital, for governments to get on top of this problem. We cannot afford to allow concerns about sovereign debt to spread into a wider crisis dealing with sovereign debt. Dealing with a banking crisis was bad enough. This would be worse.”

“A wider crisis dealing with sovereign debt”? Anybody’s internal BS detector ought to be flashing red when a policy maker makes sweeping statements like this. The Bank of England Governor substantially undermines his own credibility by failing to make 3 key distinctions:

1. There is a fundamental difference between debt held by the government and debt held in the non-government sector. All debt is not created equal. Private debt has to be serviced using the currency that the state issues.
2. Likewise, deficit critics, such as King, obfuscate reality when they fail to highlight the differences between the monetary arrangements of sovereign and non-sovereign nations, the latter facing a constraint comparable to private debt.
3. Related to point 2, there is a fundamental difference between public debt held in the currency of the sovereign government holding the debt and public debt held in a foreign currency. A government can never go insolvent in its own currency. If it is insolvent as a consequence of holdings of foreign debt then it should default and renegotiate the debt in its own currency. In those cases, the debtor has the power not the creditor.

Functionally, the euro dilemma is somewhat akin to the Latin American dilemma, such as countries like Argentina regularly experienced. The nations of the European Monetary Union have given up their monetary sovereignty by giving up their national currencies, and adopting a supranational one. By divorcing fiscal and monetary authorities, they have relinquished their public sector’s capacity to provide high levels of employment and output. Non-sovereign countries are limited in their ability to spend by taxation and bond revenues and this applies perfectly well to Greece, Portugal and even countries like Germany and France. Deficit spending in effect requires borrowing in a “foreign currency”, according to the dictates of private markets and the nation states are externally constrained.

King implicitly recognizes this fact, as he acknowledges the central design flaw at the heart of the European Monetary Union – “within the Euro Area it’s become very clear that there is a need for a fiscal union to make the Monetary Union work.”

This is undoubtedly correct: To eliminate this structural problem, the countries of the EMU must either leave the euro zone, or establish a supranational fiscal entity which can fulfill the role of a sovereign government to deficit spend and fill a declining private sector output gap. Otherwise, the euro zone nations remain trapped – forced to forgo spending to repay debt and service their interest payments via a market based system of finance.

But King then inexplicably extrapolates the problems of the euro zone which stem from this uniquely Euro design flaw and exploits it to support a neo-liberal philosophy fundamentally antithetical to fiscal freedom and full employment.

The Bank of England Governor – and others of his ilk – are misguided and disingenuous when they seek to draw broader conclusions from this uniquely euro zone related crisis. Think about Japan – they have had years of deflationary environments with rising public debt obligations and relatively large deficits to GDP. Have they defaulted? Have they even once struggled to pay the interest and settlement on maturity? Of course not, even when they experienced debt downgrades from the major ratings agencies throughout the 1990s.

Retaining the current bifurcated monetary/fiscal structure of the euro zone does leave the individual countries within the EMU in the death throes of debt deflation, barring a relaxation of the self-imposed fiscal constraints, or a substantial fall in the value of the euro (which will facilitate growth via the export sector, at the cost of significantly damaging America’s own export sector). This week’s €750bn rescue package will buy time, but will not address the insolvency at the core of the problem, and may well exacerbate it, given that the funding is predicated on the maintenance of a harsh austerity regime.

José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, angered his trade union allies but cheered financial markets on Wednesday when he announced a surprise 5 per cent cut in civil service pay to accelerate cuts to the budget deficit.

The austerity drive – echoing moves by Ireland and Greece – followed intense pressure from Spain’s European neighbors, the International Monetary Fund on the spurious grounds that such cuts would establish “credibility” with the markets. Well, that wasn’t exactly a winning formula for success when tried before in East Asia during the 1997/98 financial crisis, and it is unlikely to be so again this time.

Indeed, in the current context, the European authorities are simply trying to localize the income deflation in the “PIIGS” through strong orchestrated IMF-style fiscal austerity, while seeking to prevent a strong downward spiral of the euro. But the contradiction in this policy is that a deflation in the “PIIGS” will simply spread to the other members of the euro zone with an effect essentially analogous to that of a competitive devaluation internationally.

The European Union is the largest economic bloc in the world right now. This is why it is so critical that Europeans get out of the EMU straightjacket and allow government deficit spending to do its job. Anything else will entail a deflationary trap, no matter how the euro zone’s policy makers initially try to localize the deflation. And the deflation is almost certain to spread outward, if sovereign states such as the US or UK absorb the wrong lessons from Greece, as Mr., King and his fellow deficit-phobes in the US are aggressively advocating.

There are two direct contagion vectors off the fiscal retrenchment being imposed on the periphery countries of the euro zone.

First, to the banking systems of the periphery and the core nations, as private loan defaults spread on domestic private income deflation induced by the fiscal retrenchment. Second, to the core nations that export to the PIIGS and run export led growth strategies. So 30-40% of Germany’s exports go to Greece, Italy, Ireland, Portugal and Spain directly, another 30% to the rest of Europe.

These are far from trivial feedback loops, and of course, the third contagion vector is to rest of world growth as domestic private income deflation combined with a maxi euro devaluation means exporters to the euro zone, and competitors with euro zone firms in global tradable product markets, are going to see top line revenue growth dry up before year end.

Let’s repeat this for the 100th time: the US government, the Japanese Government, or the UK government, amongst others, do NOT face a Greek style constraint – they can just credit bank accounts for interest and repayment in the same fashion as if they were buying some helmets for the military or some pencils for a government school. True, individual American states do face a fiscal crisis (much like the EMU nations) as users of the dollar, which is why some 48 out of 50 now face fiscal crises (a problem that could easily be alleviated were the US Federal Government to undertake a comprehensive system of revenue sharing on a per capita basis with the various individual states). But, if any “lesson” is to be learned from Greece, Ireland, or any other euro zone nation, it is not the one that Mr. King is seeking to impart. Rather, it is the futility of imposing arbitrary limits on fiscal policy devoid of economic context. Unfortunately, few are recognizing the latter point. The prevailing “lesson” being drawn from the Greek experience, therefore, will almost certainly lead the US, and the UK, to the same miserable economic outcome along with higher deficits in the process. As they say in Europe, “Finanzkapital uber alles”.

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Moody’s likely to downgrade Greece and Brazil buying more $

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Seems no one wants a strong currency anymore, but instead wants to keep their real wages down.

So fears of a dollar crash seem again to be overblown.

Nor is there any immediate risk of inflation from excess demand.

The cost push risk from the Saudis hiking prices remains, and so price is unpredictable with demand relatively flat

The situation in Greece seems to be binary, based on political decisions.

Also markets are already discounting maybe a third of what happens if they get it wrong.
So betting one way or the other has a lower risk/reward than a few weeks ago.

US economy looking internally ok with risks remaining external- greece, china, etc.

On Thu, Apr 29, 2010 at 3:09 PM, EDWARD wrote:
BBG:
‘ Moody’s said it has previously indicated that a “multi-
notch downgrade” is likely and the specific lowering “will
depend on the level of ambition of the multi-year economic and
fiscal program.”’

BRL:
*BRAZIL’S TREASURY DOLLAR PURCHASES HINGE ON REAL STRENGTH
*BRAZIL’S TREASURY MAY DOUBLE DOLLAR PURCHASES TO PAY DEBT
*BRAZIL DOLLAR PURCHASES TO STEM CURRENCY’S RALLY, AUGUSTIN SAYS
*CORRECT: BRAZIL TREASURY MAY STEP UP DOLLAR PURCHASES
*BRAZIL SOVEREIGN FUND TO BE USED WHEN NECESSARY, AUGUSTIN SAYS
*BRAZIL SOVEREIGN FUND MAY BUY FOREIGN CURRENCY, AUGUSTIN SAYS

It appears that the sovereign fund will be used as a mechanism to affect the BRL and thus policy tool of the government from these headlines (which seems a little odd for sovereign wealth fund whose assets were acquired by foreign exchange policy implementation, unless they are talking about investing in USD assets along with USD buying). More details/clarification to follow.

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Greece is offered 30bn euros loan

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Yes, this is the first ‘real’ offer, with a rate and a quantity.
I heard it requires approval of all 16 member nations.

This could initially stabilize the bond markets if/when approval is discounted, with short covering in the euro as well.

The terms and conditions include IMF ‘austerity’ measures which will act to slow the economy of Greece and the entire EU, which is already dangerously weak to the point of promoting higher budget deficits through low tax revenues and high transfer payments, all of which serves to further weaken the credit worthiness of all the member nations. It also increases the euro debts of the other contributing nations. While this is a very modest amount, the implication of the same type of ‘rescue’ for the larger euro nations that might go the way of Greece is for much higher levels of stress for the remaining euro member nations presumed to be ‘strong.’

The euro should therefore fundamentally remain on the weak side as the high levels of euro national govt deficits are adding the non govt sectors holding of euro denominated financial assets, with the austerity measures likely to add to euro govt deficits and euro weakness.

Greece is offered 30bn euros loan

April 11 (BBC) — Leaders of the 16 eurozone nations have agreed to fund up to 30bn euros in emergency loans for debt-hit Greece, if the country wants the cash.

The price of the loans will be fixed using IMF formulas, and be about 5%.

Luxembourg Prime Minister Jean-Claude Juncker, speaking for eurozone finance ministers, said there were no elements of subsidy in the loan proposal.

“The total amount put up by the eurozone member states for the first year will reach 30bn euros,” he said.

Mr Juncker added that the financing would be “completed and co-financed” by the International Monetary Fund.

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Text of Greek Deal

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As before, this is in fact another statement that indicates no checks are to be written.

The purpose is probably the hope that it be read as a statement of support which will facilitate continued funding of Greek debt.

It is a clear statement that no funding is available until Greece fails to find funding elsewhere. However, understood but unstated, is that the process of finding funding is necessarily that of price discovery. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity.

This makes no sense at all, of course. The statement is in fact a statement that Greece must first drive rates to infinity before euro zone member loans are available. In other words, it’s a statement that says Greece is on its own, and that they will stand by without taking action as observers of the standard market default process of Greek funding rates going into double and then triple digits as happens to all failed borrowers of externally managed currencies, including nations with fixed exchange rates.

“In this context, Euro area member states reaffirm their
willingness to take determined and coordinated action, if
needed, to safeguard financial stability in the euro area as a
whole, as decided the 11th of February.

As part of a package involving substantial International
Monetary Fund financing and a majority of European financing,
Euro area member states, are ready to contribute to coordinated
bilateral loans.

This mechanism, complementing International Monetary Fund
financing, has to be considered ultima ratio, meaning in
particular that market financing is insufficient. Any
disbursement on the bilateral loans would be decided by the euro
area member states by unanimity subject to strong conditionality
and based on an assessment by the European Commission and the
European Central Bank. We expect Euro-Member states to
participate on the basis of their respective ECB capital key.

The objective of this mechanism will not be to provide
financing at average euro area interest rates, but to set
incentives to return to market financing as soon as possible by
risk adequate pricing. Interest rates will be non-concessional,
i.e. not contain any subsidy element. Decisions under this
mechanism will be taken in full consistency with the Treaty
framework and national laws.”

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yet more on greece

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Gets stranger by the day:

Broke? Buy a few warships, France tells Greece

March 23 (Economic Times) — In a bizarre twist to the Greek debt crisis, France and Germany are pressing Greece to buy their gunboats and warplanes, even as they urge it to
cut public spending and curb its deficit.

Indeed, some Greek officials privately say Paris and Berlin are using the crisis as leverage to advance arms contracts or settle payment disputes, just when the Greeks are trying to reduce defense spending.

“No one is saying ‘Buy our warships or we won’t bail you out’, but the clear implication is that they will be more supportive if we do what they want on the armaments front,” said an adviser to Prime Minister George Papandreou, speaking on condition of anonymity because of the diplomatic sensitivity.

Greece spends more of its gross domestic product on the military than any other European Union country, largely due to long-standing tension with its neighbour, historic rival and NATO ally, Turkey.

“The Germans and the French have them over a barrel now,” said Nick Witney, a former head of the European Defense Agency.

“If you are trying to repair Greek public finances, it’s a ludicrous way to go about things.”

France is pushing to sell six frigates, 15 helicopters and up to 40 top-of-the-range Rafale fighter aircraft.

Greek and French officials said President Nicolas Sarkozy was personally involved and had broached the matter when Papandreou visited France last month to seek support in the financial crisis.

FRIGATE PURCHASE

The Greeks were so sensitive to Sarkozy’s concerns that they announced on the day Papandreou went to Paris that they would go ahead with buying six Fremm frigates worth 2.5 billion euros ($3.38 billion), despite their budget woes.

The ships are made by the state-controlled shipyard DCNS, which is a quarter owned by defense electronics group Thales and may have to lay workers off in the downturn.

Greece is also in talks buy 15 French Super Puma search-and-rescue helicopters made by aerospace giant EADS for an estimated 400 million euros.

The Rafale, made by Dassault Aviation, is a more distant and vastly dearer prospect. There is no published price, but each costs over $100 million, plus weapons.

Germany is meanwhile pressing Athens to pay for a diesel-electric submarine from ThyssenKrupp, of which it refused to take delivery in 2006 because the craft listed during sea trials following a disputed refurbishment in Kiel.

Payment would clear the way for ThyssenKrupp to sell its loss-making Greek unit Hellenic Shipyards, the biggest shipbuilder in the eastern Mediterranean, to Abu Dhabi MAR, industry sources said.

ThyssenKrupp Marine Systems last year canceled a Greek order for four other submarines over the dispute, in which it said Athens’ arrears exceeded 520 million euros.

Witney, now at the European Council on Foreign Relations, said German officials were embittered by Greek behavior in the long-running dispute, as well as previous payment problems over the purchase of German Leopard II tanks.

Greek Deputy Defense Minister Panos Beglitis told Reuters the dispute was on the brink of settlement but denied the timing had anything to do with Athens’ bid to clinch German backing this week for a financial safety net for Greek debt.

“(The submarine) Papanicolis has been carefully inspected by German and Greek experts. It has been greatly improved and declared seaworthy. We will take it, sell it and make a profit,” he said in an interview.

“We are paying 300 million (euros) and we will sell it for 350 million,” Beglitis said. Witney questioned Greece’s chances of turning a profit on a second-hand submarine.

NO LINKAGE?

Asked whether big European suppliers were using the crisis to press arms sales on Athens, he said: “This has always been the case with these countries. It is not because of the crisis, there is no link.”

Beglitis said this year’s defense budget was set at 2.8 per cent of GDP, down from 3.1 per cent in 2009. Non-government sources say the real level of military spending may be higher.

“Our strategy is continuously and steadily to reduce spending. This is also in line with the Greek stability and growth program,” Beglitis said. The program, submitted to the EU, pledges to reduce the budget deficit from 12.9 per cent last year to below 3 per cent by the end of 2012.

Western officials and economists have advocated a radical reduction of the armed forces as a long-term way of reducing structural spending, but Greek officials say that would require a real improvement in relations with Turkey.

Despite warmer ties, the two countries remain in dispute over Cyprus and maritime boundaries and have sporadic aerial incidents over the Aegean Sea.

French economist Jacques Delpla said Greece could reap big savings if it moved jointly with Turkey and Cyprus to settle disputes in the Aegean and Eastern Mediterranean and engaged in mutual disarmament.

“Unlike Portugal or Ireland, Greece could benefit from significant peace dividends to reduce its titanic fiscal deficits,” he said.

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Germany Considers Loan Guarantees for Greece, Other Euro Partners

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Looks like another trial balloon.

Might mean German CDS gets hit.

All the national govs are subject to liquidity risk.

Just like the US States

Except the eurozone debt ratios are over 10 times worse.

If the world economy is improving at a fast enough rate all they probably need to do is buy some time.

No visibility on how this gets resolved.

Germany is considering a plan with its European Union partners to offer Greece and other troubled euro zone members loan guarantees in an effort to calm market fears of a default, according to people familiar with the matter.

The proposed plan would be done within the EU framework but led by Germany. German Finance Minister Wolfgang Schaeuble has discussed the idea in recent days with European Central Bank President Jean-Claude Trichet. Greece is the hardest hit of several countries, including Spain, Portugal and Ireland, that have recently seen their bonds come under pressure amid concerns that they will have difficulty repaying their debts.


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Eurobond Being Mulled Again Amid Fears Over Greece

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Looks like it’s serious enough for this, thanks.

And anything done at the national level serves to weaken the group as a whole.

Eurobond Being Mulled Again Amid Fears Over Greece>

2009-12-15 15:40:15.949 GMT

PARIS (MNI) – Eurozone leaders, reacting to worries about the situation in Greece and its potential fallout are looking at the option of a special fund to provide emergency aid, a well-placed monetary source told Market News International.

The source, who is familiar with the ongoing discussions, said that if a eurobond proposal ended up being nixed, “there is also the option of a solidarity rescue fund to which all eurozone countries can contribute.”


It’s not quite clear how the EU or eurozone would get around the so-called “no-bailout clause,” but there is a sentiment among many EU leaders that the clause has lost credibility because the political and economic costs of letting a member state fail would be too high.

The no-bailout clause, in article 103 of the EU Treaty, says that neither the EU, the ECB nor any national government “shall…be liable for or assume the commitments” of a member state.

A eurobond, depending on how it was structured, could be a hard sell in this regard. However, some sort of fund that loaned to a country – but did not take on any burden associated with its debt – might just pass muster.

It’s unclear what such a fund might look like, since one has never been attempted. But one option might be for large EU countries or the EU to create a special facility through which it borrowed money in the bond market to help the member in trouble.

Such an arrangement might be similar to the bonds that the European Commission has already issued for the emergency facility from which Hungary and Latvia have been borrowing. Under current rules, these particular EU Commission bonds can’t be used to help eurozone members.

Some observers have warned that any arrangement smacking of a bailout – whether a eurobond or “solidarity fund” — could potentially be regarded as unfair by countries such as Ireland, which has already announced stiff spending cuts to try and put its fiscal house back in order.

However, proponents of doing something would argue that Ireland is not yet out of the woods and could be submerged again in the market undertow should the situation in Greece lead to a more generalized selloff of peripheral EMU sovereign debt.

So far, other peripherals have been largely spared in the recent tumult surrounding Greece, which is by far the worst performing among sovereign eurozone issuers.

The spread on Greek bonds widened Tuesday by 24 basis points to 253 points above the benchmark German Bund, on market disappointment over a paucity of budget balancing details contained in the speech Monday night by Greece’s Prime Minister George Papandreou.

By contrast, Ireland’s sovereign paper was unchanged at a spread of 165 points above Bunds; Spain widened just 1 point to a spread of 62 basis points; Portugal widened 2 points to 67 bps above Bunds.

Papandreou pledged to bring Greece’s deficit back to within the Maastricht limit of 3% of GDP within four years, but some of the other details were sketchy. On the revenue side – Greece’s government has promised a hefty 40% increase – Papandreou mentioned a new progressive tax on all sources of income, as well as the abolition of certain tax exemptions, a new capital gains tax and a stiff tax on bonuses. He also promised new revenue from a reinvigorated fight against tax evasion.

On spending, he pledged a freeze on public sector wages above E2,000 a month; a 10% cut in supplemental wages; a hiring freeze in most sectors for 2010; and a 10% cut in social security spending next year.

Reaction was lukewarm not only in markets but also at the European Commission, which in each of the past 5 years has registered dissatisfaction with spending and revenue estimates posited by Greece, calling them overly optimistic.

“It’s not just a question of words but also deeds,” the spokesperson for European Monetary and Economic Affairs Commissioner Joaquin Almunia said Tuesday, adding that the Commission wants to see “concrete measures” to get [Greece’s] budget deficit “moving downwards as soon as possible.”

Greece is expected to submit specific proposals to the Commission shortly after the New Year.

Meanwhile, the ECB is expected on Thursday to consider the possibility of further ratings downgrades on Greek debt.

“In the case of a further downgrade, we must be prepared, as it could have a domino effect on other eurozone countries,” the central banking source asserted. “That in turn would put pressure on the euro and the euro is a prime concern.”

The source also seemed to hint that Greek debt, if hit by additional downgrades, could have trouble staying on the list of eligible collateral at ECB refinancing operations after next year, when
the current acceptable minimum rating of BBB- will revert to the pre-crisis standard of A-.

“We will have to take under consideration what will happen after 2010, when the temporary and more lenient stance of the ECB will stop,” he said.

“I don’t say that Greece is heading towards losing its eligibility for collateral,” he continued. “However, we always plan and assess how a situation will evolve in the medium-term, and there is a risk that some countries might be facing much more expensive borrowing conditions in the next two years, because of market conditions.”

The official added that, in the case of Greece, “if borrowing becomes even more expensive, it will create problems in its efforts to combat high debt and deficit.”

But he waxed optimistic, nonetheless. “Despite the fact that rating agencies are downgrading Greece, we do not believe that there will be a borrowing problem,” he said.

“We believe that the Greek government will adopt all necessary measures to satisfy not only the markets but also its EU allies and the ECB and work towards fiscal consolidation within the next four years.”


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