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Sense of reality coming to euroland

January 30th, 2011 · 1 Comment

But we’re already on to the next crisis..
German Temper Tantrums Indicate Reduced Risk of Euro Breakup: Davos Diary
By Mark Gilbert –
Bloomberg Opinion

Greece and Ireland will default and at least one nation will abandon the euro by 2016, according to the majority of respondents in a Bloomberg Global Poll this week. I would have agreed last year; now, German anger is starting to persuade me my money might be safe in Greek debt.

When people get mad, it’s typically due to fear. Working out what’s scaring someone explains tantrums. German participants at the World Economic Forum meeting in Davos, Switzerland, are getting grumpier by the day, and I reckon I know why: They’ve realized they have to shift from doing the bare minimum to bankroll their near-bankrupt euro neighbors to spending whatever it takes. And they’re afraid of telling their taxpayers.

Germany is getting boxed into a corner. Somehow, the ideas that the bailout-funding European Financial Stability Facility needs to be much bigger, that it should buy government debt, and that the interest rates charged on aid need slashing, have all dodged Frankfurt opposition and moved to the top of the bond market’s agenda. If the European Union — meaning Germany — fails to increase the EFSF’s firepower now, investors will trash peripheral debt.

Many of the Davos meetings are off-the-record, meaning that pesky journalists aren’t allowed to report what they hear. So I can’t identify the German official who looked at the Greek official at a gathering of delegates and said, you need to introduce more parts of your economy to the concept of taxation, and you need to do more to cut your debts even if there are riots on the streets of Athens.

Exploiting the Lull

And I can’t name the Greek official who said, Germany only has a trade surplus because countries like us are buying its goods, and if you don’t convince the bond market soon that we’re all in this together, the lull that the European Central Bank has created by buying bonds will end, and it won’t end well.

And I can’t tell you which eastern European minister said, the interest rate Ireland is paying for its aid is madness, and that donor countries should put as much money as needed into the rescue fund because it will still be cheaper than bailing out their domestic banks if a euro nation defaults.

The Greek official is correct when he says time is short. The ECB has created a lacuna by putting a floor under government bond prices. The window of opportunity to convince fund managers that the political will to safeguard the euro is to be matched by funds sufficient to repel attacks, however, is temporary. The moment of truth for the euro debt crisis has arrived.

Hanging Tough

Germany is still pretending to play hardball. Economy Minister Rainer Bruederle says European leaders need to concentrate on long-term debt mitigation mechanisms before arguing about making more bailout money available. “One should only offer liquidity aid when that changes,” Bruederle told Bloomberg reporter Aaron Kirchfeld in Davos yesterday.

The political will is certainly there, including for Bruederle’s boss, Angela Merkel. “Be it Chancellor Merkel or myself, never — and listen to me carefully, here –never will we turn our backs on the euro,” French President Nicolas Sarkozy told a Davos audience yesterday. “We will never drop the euro or abandon the euro.”

Sarkozy must know that he needs to put Germany’s money where his mouth is. The angrier German officials get, the more convinced I am that they’ll foot the bill to ensure bondholders get repaid in full and on time.

Mark Gilbert, author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable,” is the London bureau chief and a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Mark Gilbert in London at magilbert@bloomberg.net

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

———[End of article]———-

Yes, putting more funds in the rescue funds is cheaper than bailing out domestic banks (as a result of sovereign debt failure in the periphery). However, too bad policymakers still don’t seem to warm to a much better solution..

See here for an extensive view of the eurocrisis.

Tags: Sovereign debt crisis