Wednesday, February 17, 2010

ECOFIN stands firm (for the time being)

As the Wall Street Journal reports, ECOFIN or the EU Finance Ministers as the article calls them, is standing firm on the Greek question. Well, kind of. Germany is certainly unhappy at the thought of providing the lion's share of whatever enormous sum Greece will need to be pulled out of this morass only to fall into the next one. After all, this was not supposed to happen. The German people were told quite distinctly that by abandoning their beloved DM they would not find themselves in the position of having to rescue various other countries such as .... Greece.

European finance ministers Tuesday stood firm in their position that Greece must work to narrow its budget gap before they would discuss aid to the country, while Greek workers launched strikes and protests against government austerity plans.

Olli Rehn, the European commissioner for economic affairs, said after a meeting of EU finance ministers Tuesday that commission officials, along with delegations from the European Central Bank and the International Monetary Fund, would be "on the ground in Athens" in coming days to examine Greece's budget measures.

Mr. Rehn also pledged more scrutiny of financial transactions that Greece may have used to mask its debt burden.

The ministers endorsed a decision Monday by members of the euro zone that Greece be given until March 16 to show progress toward a goal of slicing the equivalent of four percentage points of gross domestic product from its budget deficit this year. Last year's budget shortfall was around 13% of GDP. The EU limit, which Greece has observed just once in the past decade, is 3%.

If Athens doesn't show enough progress by March 16, the EU will demand specific changes, such as new taxes on luxury products, such as expensive cars.

This does not answer certain questions, the most obvious one being how are all these organizations going to enforce their demands in a country whose government either cannot or will not listen to instructions. Another question is whether the bail-out will be limited to eurozone countries or will other EU member states required to play their part "in a spirit of solidarity" as required by Article 122 in the Treaty on the Functioning of the European Union, which is part of the Constitutional Lisbon Treaty.

Ambrose Evans Pritchard says in a relatively sensible piece in the Daily Telegraph (though the title and the last sentence are silly) that Greece will not be allowed to vote in the next meeting of ECOFIN when she will be required to report back on the austerity measures and how far they have worked. That will show them! He also adds an interesting comment that bears out this blog's interpretation of Article 122 and the importance of the "spirit of solidarity".
Jean-Claude Juncker, head of the Eurogroup, hinted that ministers have already agreed on a support mechanism, should it be necessary. It will most likely involve by bilateral aid by eurozone states. He said proposals for an IMF bailout - backed by Britain - were "absurd" and would shatter the credibility of monetary union.
That "spirit of solidarity" will probably mean just that: bilateral assistance from other member states under pressure from the Commission. The question still remains: just the eurozone countries or all others on whom the Article in question calls?

I am delighted to point to one journalist who has remembered that much of what is happening now in the eurozone was predicted at the time countries were playing ducks and drakes with their budgets and debt ratios in order to set up that entirely political project. Everyone else, as Allisteer Heath said in his editorial in yesterday's City AM seems to be suffering from collective amnesia.

Even the latest twists – Goldman Sachs helped Greece push some debt off balance sheet and JP Morgan did the same with Italy – are old stories. The Italian transaction dates back to 1995; it was first revealed in 2001 by Gustavo Piga, professor at the University of Rome. A row ensued, with the European establishment cracking down on anybody who dared talk about this; but the full details soon emerged. Italy miraculously cut its deficit from 6.7 per cent of GDP to 2.7 per cent in 1996-97; and the establishment, desperate to pretend that the euro was on track, turned a blind eye to the shameless window-dressing.

Greece’s equally controversial swap trade was first revealed by Risk magazine in 2003. The deal, completed in 2002, allowed Greece to borrow €1bn without adding to its public debt. Goldman sold the swap to National Bank of Greece in 2005. Other banks and countries were involved in similar schemes. Goldman last year tried to sell Greece a different type of plan based on securitisation but this was turned down.

Everybody has also forgotten (so let me “reveal”) how in 1996 the French government was desperately asking every bank for help in “cutting” its deficit. It subsequently grabbed £4.7bn from France Telecom – in return for the transfer of its pension liabilities to the public sector budget. The accounting switch was worth 0.5 per cent of GDP and allowed France to join the euro. The UK government has also long been an expert in camouflaging its debt, thanks to the private finance initiative (PFI) and the ability to keep massive pension liabilities away from the main accounts. At least Gordon Brown never used Greek-style currency swaps; and securitisations were done transparently.
What could I possibly add to that, having written thousands of words on the subject at the time? Oh yes, I know: told you so.


  1. The Swedish minister of finance, Anders Borg, seems to be of the same opinion. Swedish taxpayers may have to help bail out Greece. Well, they did not allow us to vote on the Lisbon treaty. General elections will be held in September. Quite a few of us remember.

    Also, one should note that the German Constitutional Court has said no to suppport for ailing euro countries, and a motion was passed in the Dutch second chamber expressly forbidding monetary support to Greece (according to AE-P). If two of the richest euro countries refuse to chip in I don't see how we can be forced to do so.


    PS: Sweden was the first country to suggest IMF handing over Greece to the tender loving care of IMF. The fact that ECOFIN refuses to even consider this should really give us as good reason as any to refuse help with a bail-out.

  2. There is also the problem that Article 125 expressly forbids any bailing out. I guess that applies to the EU. That is why they are going down this route of bilateral aid in the "spirit of solidarity".