FT columnist Wolfgang Münchau finds that last Thursday’s “emergency funding agreement” for Greece resolves nothing, and is “mostly smoke and mirrors”.
The aspect that puzzled me most was the announcement that a rescue would come in the form of a loan at market interest rates. This surely must imply that the market would not be willing to lend money to Greece at market interest rates. That is an absurd proposition.
In fact, it is hard to imagine even a hypothetical scenario in which the European Union would disburse the emergency aid. Greece would have to be cut off from the capital markets; in such a situation it is difficult to imagine that a loan from the EU – at prohibitively high interest rates – would solve any problems. ….
When a country adopts an austerity package … it needs some form of relief, simply to make it through the recession. This would normally come either through devaluation or from a low-interest loan, … or ideally both. Greece will have neither.
Under these circumstances … default is the financially superior option, especially since 70 per cent of Greek debt is held by foreigners.
Wolfgang Münchau, “Europe has resolved nothing over Greece”, Financial Times, 29 March 2010.
Mr Münchau’s conclusion is “the politics of smoke and mirrors cannot fool all the people all of the time. This will not end well.” He thinks that Greece will default.
My fear is that Germany, with help from other eurozone countries, will lend money to Greece at “market rates”, but at market rates for German bonds, not market rates for Greek bonds. This would constitute a bail-out, and quite possibly the end of monetary union. Whatever happens, it is very clear that this will not end well. The only way to contain the damage is for Greece to leave a monetary union that it should never have joined in the first place.
Tags: exchange rates
[...] days ago, FT columnist Wolfgang Münchau wrote that the European Council’s rescue package for Greece solves nothing. Martin Wolf [...]