Counterparties: Why Germany’s lightening up on Greece

November 13, 2012

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In its fifth year of recession, Greece this week approved another round of massive budget cuts that would allow it to receive more aid and stay solvent. Nevertheless, on the eve of yet another general strike, Greece’s aid is caught once again in the complex game that is European politics.

In “an unusually public airing of disagreement”, IMF chief Christine Lagarde had a mini-spat with the Euro Group’s Jean-Claude Juncker. The IMF wants Greece to get its debt to a “sustainable” 120% of GDP by 2020; the Euro Group and Germany think 2022 is more realistic. Until a deal is reached, Greece won’t get an aid package worth some €31 billion.

Angela Merkel, Reuters reports, wants more time for Greece because she “is determined to avoid losses for German taxpayers before a general election in September 2013″.  This is something of a change of heart. Germany’s bad-cop act involved openly campaigning for Greece to implement crippling cutbacks; now it’s the good cop, openly campaigning for Greece to have more time to cut its debt.

Paul Murphy flags two bank research notes that help explain this. The only way for Greece to realistically meet its debt targets is by European nations taking a loss on Greek debt (this is euphemistically referred to as “official sector involvement”). Karl Whelan points to a leaked EU report on Greece’s debt that supports this view, and argues that the European saga has “turned into a full-scale farce”:

The truth is that Greece’s public debt is completely unsustainable.  One way or another, European governments are not going to get back all the money they loaned to Greece over the past few years. However, until they admit this reality, write off much of their debt to Greece, and allow that country to recover, there will be no resolution to the situation.

The Economist’s Charlemagne says that such realism on Greek debt could help: “by taking a direct hit, the countries of the euro zone would be giving a strong signal that they intend to keep Greece in the family”. — Ryan McCarthy

And on to today’s links:

Belated Realizations
Lloyd Blankfein, yesterday: “For the first time, it’s clear that size and complexity come with a higher cost” – Will Alden

Tax Arcana
“The long-term fiscal problem of the US is principally that revenues are too low” – Bruce Bartlett

A second 4-star general is being investigated in the Petraeus scandal – Reuters

New Normal
America’s problem with poverty in single-parent households – Atlantic

EU Mess
Greece avoids default by selling T-bills to Greek banks – WSJ

“It’s been a year of managing expectations” for Wall St. bonuses – Bloomberg
Hedge fund managers can’t beat the S&P 500, but they can pay themselves more – Alternative Investments

American politicians don’t like talking about poor people – Economist

Bob Rubin would rather raise taxes on 2 million Americans than cut health insurance for 150 million – NYT
The economy (probably) can’t survive a short dive into austerity crisis – Neil Irwin

Sweet (debt) forgiveness: the path to increasing growth and decreasing unemployment – Mike Konczal
Janet Yellen on the “revolution and evolution in central bank communications” – Federal Reserve

The head of Microsoft’s Windows division is leaving – NYT


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