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Markets call euro zone’s bluff on Greek aid
The surge in the spread of Greek bond yields over German ones since European leaders issued a promise of emergency loans to Greece last month indicates financial markets do not believe the pledge of euro zone support is anything more than a bluff.
And they are itching to call it.
Euro zone leaders have been betting that a promise of loans to Greece and strong words of political support will be enough to calm markets and allow Athens to borrow at more reasonable rates, therefore rendering any real aid — the dreaded bailout — unnecessary.
That seems to be the reason why the details of the support mechanism — the interest Greece would be charged, the duration of the loans, the conditions attached, the exact way the aid would be triggered — have been left undecided. A verbal intervention was supposed to be enough, with no real money committed. Keep it vague but strongly worded and hope the Greek ship of state rights itself.
But markets are not so easily convinced. They are not buying the rhetoric. They want to know the nitty-gritty of any aid package. As a result, the spread of Greek 10-year paper over equivalent German bonds surged to a record 463 basis points on Thursday, some 100 basis points more than when the euro zone leaders made their promise.
The vagueness of the terms the euro zone is offering is most likely the result of political differences between major states, which makes the offer even weaker. Germany, in particular, is known to have deep reservations about helping Greece out at all, and Germany has to be part of any deal.
The lack of euro zone detail could be a way of keeping markets guessing about where any intervention on the Greek bond market would come — similar to the calculated vagueness authorities employ when they verbally intervene in foreign exchange markets.
But that’s a very risky game, given that the stakes in the gamble include the real possibility of a Greek default and the ripples that would send through the whole euro zone and beyond.
While the technicalities of the intervention may be sorted out by euro zone finance ministries and central bank experts in the coming days, the damage to market confidence may already have been done.
If the euro zone had come up with a precise plan on how to help Greece a month or two ago, saying how much it was prepared to lend, at what rates, for how long and under what conditions, markets might have calmed.
They would have known that if a certain yield threshold was passed, Athens would get money from somewhere else. But the vagueness of the promised support serves only to increase market concern, rather than alleviate it. And if there’s anything that markets are good at exploiting, it’s uncertainty.
Then again, perhaps major euro zone countries like Germany have in mind a Polish proverb that states: “He who gives quickly, gives twice.”