Greek Socialism Crumbles

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Greece’s second rescue package is now proceeding apace. After a meeting in Berlin, the leaders of Europe’s two most viable economies, Germany’s Angela Merkel and France’s Nicolas Sarkozy, have resolved one of the principal disputes surrounding the new bailout: private bondholders will not be forced to participate, but may do so on a voluntary basis. This action follows Greek Prime Minister George Papandreou’s cabinet shake-up last Friday, which resulted in the replacement of his finance minister with a Socialist Party colleague capable of delivering the votes necessary to pass the latest austerity package, even as rank-and-file Greeks despise the latest combination of higher taxes, budget cuts and the sale of government-owned assets.

“The country must be saved and will be saved,” said new Greek Finance Minister Evangelos Venizelos, whose own track record of financial acumen is questionable. From 2001-2004, he was in charge of getting Athens ready for the Olympic Games, and the $15 billion spent did less than expected to modernize Greece’s post-game infrastructure. Yet it is likely that Mr. Venizelos’s financial qualifications are a side issue. As a loyal member of the same Pan-Hellenic Socialist Movement (Pasok) party as Prime Minister Papandreou, as well as being Papandreou’s chief rival during the 2004 general election, Mr. Venizelos’s support of the latest package is critical within a party where the defection of only six members could derail approval of the additional funding and/or the current government itself.

According to Jose Vinals, director of the monetary and capital markets department of the International Monetary Fund (IMF), any action taken by Greece as well as other countries mired in government debt (including the United States), must occur sooner, rather than later. “You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire,” said Vinals. “We have now entered very clearly into a new phase which is, I would say, the political phase of the crisis.”

Thus, Germany and France have come together, despite Germany’s original insistence that the banks and other private creditors holding Greek debt incur losses as part of the new rescue plan. This was a natural reaction by Merkel to the German public’s well-publicized disdain for underwriting Greek profligacy. Merkel herself expressed that disdain to German national news agency DPA on May 18th. “It’s not about whether people in Greece, Spain, Portugal can’t retire earlier than in Germany, it’s about everyone pulling their weight equally. We can’t have one currency, and one gets a lot of vacation and the other very little.”

The French, on the other hand, are ostensibly more pragmatic. “France is a Latin country that feels closer to the Greeks,” said Philippe Moreau-Defarge, researcher at the French Institute of International Relations. “They also feel it could happen to them,” he added. A survey by the Greek newspaper Ethnos taken in March last year, bears this out: 69.6 percent of French respondents are willing to help Greece, while only 2.7 percent of Germans feel the same way.

Yet such pragmatism may be buttressed by the sobering reality that no other developed country has incurred greater risk with respect to a Greek default than France. French bank exposure is $56.7 billion, versus $33.97 billion for German banks, and last Wednesday, Moody’s Investment Service warned that the country’s three largest banks, BNP Paribas SA, Société Générale SA, and Crédit Agricole SA, may be facing a ratings downgrade. This follows Standard & Poor’s lowering of Greece’s credit rating to CCC, as there is “a significantly higher likelihood of one or more defaults,” the agency said in a statement released on June 13th.

briefing paper circulated by the European Commission reviewed by the Financial Times proposed three options for dealing with Greek debt. One would have been a voluntary debt exchange, which would extend the maturity date on Greek government bonds, giving Athens more time to repair its debt crisis. German finance minister Wolfgang Schäuble suggested a seven-year extension, which was completely rejected by the European Central Bank (ECB) and France, due to the fact that such a move would likely be considered a “structural default.” Andrew Bosomworth, head of Munich portfolio management at Pimco explained. “An extension of the maturities will not solve Greece’s income and debt imbalances. It will leave the country’s debt stock unchanged and thus the reluctance of the market to buy into the IMF/EU debt program will not change,” he said.

Options two and three involved a voluntary rollover of current bonds, which was seen as less likely to trigger a ratings downgrade. The first rollover would be a coordinated one, likely organized by the Greek government, and designed to encourage the greatest level of private participation, while the second would be an informal rollover, which would likely keep most private investors on the sidelines.

Thus, France and Germany have agreed to make any private participation voluntary without a clear indication of whether option two or option three is the preferred choice. This was reflected in the reality that even this latest package, characterized as a “breakthrough” by Mr. Sarkozy, must still be approved by the ECB and win the favor of private creditors, a process likely to take several weeks. And the lack of clarity remains troubling. “Under certain conditions, a rollover could be viewed as not truly voluntary by the rating agencies and therefore subject to selective default,” wrote Gavan Nolan, director of credit research at Markit. “Getting the balance right between enticing participation at a cost that is reasonable will be difficult,” he added.

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  • Steve

    Complete financial and moral bankruptcy is always the way Socialism ends…now just add a pile of skulls and you get Marxism/Fascism.

    • Bobby Feltersnatch

      Yeah I like what we have here in America better. I'm really hoping we get really crazy and go for a corporate theocratic state. That would be so amazingly good for us.

      You know, because, morals are important. And you can only obtain them through religion, specifically Christianity. If you are a Republican or Conservative, it usually makes the pot even sweeter.

      Oh, sorry, I am holding up the next guy from denouncing the evils of the Obama admin. and why our country was so much better under Bush and Reagan.

      Carry on.

      • Scott

        Yep, nothing like being preached to by a guy who glosses himself "Bobby Feltersnatch".

  • Cephas

    What of the USA? We have a national debt that's eating up our GDP, and 40% of that debt is held by a hostile power (China).

  • davarino

    We have to get our fiscal house in order now. Cut spending, change the tax code so it is fair (ie. everybody pays taxes, including GE, but effectively lowering taxes).

  • Amazed

    The USA "guys with the checkbook" are addicted to their spending in Congress. We have a President and his cabinet, the DOJ and HS who answer to "someone" other than the American People (can you say UN)?

    It is not by accident that this article quotes Jose Vinals, director of the monetary and capital markets department of the International Monetary Fund (IMF), “You cannot afford to have a world economy where these important decisions are postponed because you’re really playing with fire,” said Vinals. “We have now entered very clearly into a new phase which is, I would say, the political phase of the crisis.” I hear in this remark a well defined and apparently PLANNED Process of which we are now in the Political Phase. Although we do have an international economy, why are we having our local economies hijacked from us?

  • Amazed

    The Federal Reserve has been bilking money for decades, recently a Treasonous Shakedown of the US Taxpayers with billions and billions of dollars looted and sent to Unions and overseas monetary institutions; much of it is missing . Paper money has been printed (against the laws), and Hyperinflation is already started. Obama wants to be the Director of the UN. The banking Cartels just might let him as he is doing such a great job for them already.

  • Amazed

    Divide and Conquer! That is what is happening. Confound the people with confusion about their social fabric, the family and healthy norms; drug them, public school them into taught submission and fearful of independent thought, sell goods along with the ideas of sex, get gender confusion into the mix by kidnergarten, run up the credit cards, mandate the housing bubble…rob the people blind and accuse them of being racists, bigots and terrorists if they challenge the social engineering and flagrant diregard of our Constitutional Rights and Laws.

    We are on the Precipice of a great change. Will the People of the USA Defend our Constitution or have we become too fractured idealogically and/or too ignorant of our heritage? Can we afford the legal fees if our Courts are corrupted to the core as well?

    • Jim_C

      Congress is full of magicians: these are people whose job it is to take a $25,000 in donations into millions of dollars in contracts for their sponsors.

  • AntiSharia

    I remember about a decade ago, when I was in college, I got into frequent arguments with a student from the Netherlands. He kept insisting that the EU was the way of the future, and the US system was finished. I pointed out that there was no way such a system of multi national, multi- ethnic, socialism could work. It always ends in collapse. I said give it 20 years at most and it will come crashing down. The EU was always doomed because it was built on a fairy tale, were having trouble in America not because the American system is flawed but because President Obama bought into the same fairy tale.

  • Amazed

    One of the stalwart hurdles is the dominating tyranny of the media – it's psychological warfare against the middle class and corporate sponsors and manipulative LIES

  • RatkoMladicFan

    I fear that Albanian islamic terrorists will use this chaos and try to take part of Greece, like they did with Serbia (Kosovo). Albanian illegal imigrants are threat to all countries that border with Albania, since they go there with one reason: Kill local population and claim their land for "Greater Albania". They did it in Serbia, they are doing it in FYRoM, they will do it in Greece and Montenegro.

    And they also stole George Bush's watch.

  • Terry

    Socialists always promise more of other peoples' money to those who vote for them.

    Now other people have run out of money for the left to waste. Greeks have voted for such profligacy at home, so they will now suffer its consequences. They can riot all they like, the cupboard is almost bare.

  • Alycia Jergen

    Maybe it might help to suggest your proposal to other economies around the world. Since most all use a credit money system maybe they might be more receptive and have less institutional resistance to change.