Skip to content

Anxiously Waiting on a Trojan Horse

Guest post by Joe Joe Noory is an Architect, investor, and independent observer of news and opinion:

Somewhere between the emotional populism of wanting to burden the higher performing European states with guilt over resisting to bail out the Greek government, and the risk investors are being offered to take are the hard truths of bailing out of the broke Greek government by investing in their bonds: they might not just default on ?8,5 billion in obligations to bond purchasers due on 19 May, but run the risk of never being paid back for future bond offerings (of perhaps two years or less), much in the way depositors in an uninsured failed bank will never see a red pfennig of their invested savings on a default.

Ifo's Hand-Werner Sinn indicated that very same sentiment on Wednesday morning, according to this wire piece:

The warning came as a new poll showed nearly two-thirds of Germans were opposed to helping Greece, with a majority believing that membership of the EU brought more disadvantages than advantages. Asked on MDR radio if Berlin would ever get its money back, Sinn, who heads the Ifo institute and is one of the top economic advisers to the government, said: "To tell you the truth, no."
Greece "will not be in a position to carry out the necessary budgetary rigour" and will eventually have "to ask for Germany to waive the debt," he said.
He warned that bailing out Greece could set a precedent for other euro area countries labouring under high debt and public deficits. "It would be understandable if the Italians or the Spanish put pressure on us to pay up now because it is an important precedent for them," said Sinn.

Before you react, take the statement for what it is: a warning. It isn't a characterization of the ur-Greek citizen, or a nationalistic reflection, or a cultural issue, but a warning that the discipline to raise revenue and cut budgets in face of the street protests and strikes of civil servants and dependants on entitlements. It isn't a characterization of what they did, but a warning of future events, one which prices them and tells us what something is really worth, just as watching those who short an equity or commodity does.

The other thing these juicy spreads between German and Greek bonds of 8%, each fluctuating around 3,8 and 12,5 percent respectively (NB: the 10 year bond was offered for as high as 20%) might on the face of it to those trained into a social view of all things to be a "government giveaway to the rich", but it isn't: to the citizen not invested, high yields are sign of economic arthritis and future tax hikes. To the investing citizen, it's a rising risk proposition and foreboding for the economic future as well.

To the government treasury issuing them, it is a clear sign that the government just isn't to be trusted with your money. Otherwise a great shaker of that former trust is the resignation to the cause of this living beyond ones' means, that there is a majority in the population who can pressure or otherwise vote benefits for themselves at a punitive cost to the rest of society, and simply doesn't care. Social solidarity being a useful phase for some people and situations, but not applicable to the other half of the population without popular leverage.

Where do the German opponents of this bailout fit into this?

I think it simply a matter of seeing what it will cost them, and that their taxes are going to be shovelled into a social dynamic that has nothing to do with them, is unproductive, and will, like feeding squirrels, only attract other governments to assume that all they need is a ticket straight to Berlin, and not to London, Paris, Den Haag, or Brussels as well.

It explains the silence from those governments, and the nominal or tacit encouragement for someone (by which they mean Berlin and German investors) should do something about this. They should presumably do this before it shakes confidence any further in the continental economy and currency that THEY use too, mind you.

They appear more than willing to be generous with Berlin's tax collections in the face of the rising cost of the bailout.

Where does the emotion figure into all of this talk of bond yields and investment risk, you ask? That German people would resent being assumed to be thought of as an all-purpose rich uncle, by his almost equally rich kin should surprise no-one. Nor should it surprise anyone that the usual guilt-tripping will go ignored in Berlin, and provoke scorn in the papers or overheard in a Stube.

It doesn't stop there.

The same dynamics found in Greece are at play elsewhere on the perimeter of the EU as well:

As German Chancellor Angela Merkel delays approval of a 45 billion-euro ($59 billion) Greek rescue, the crisis is spreading. Portugal's benchmark stock index yesterday fell the most the aftermath of Lehman Brothers Holdings Inc.'s collapse, while the extra yield that investors demand to hold Italian and Irish debt over bunds remained near yesterday's 10-month high.

To be sure, the enormous gap between the German Bund and Greek bond yields reveal the presence of that fear. Having risen rapidly and quickly, the Greek bond return is rising because there are few takers. This is how the market puts a price to the doings of government, in spite of what those governments, social commentators, or those urging on governments "to be supportive in solidarity" to the Greeks would like to see take place.

In fact, the dynamic demonstrates quite plainly to people who don't like math, that Economics is a social science, and reflects on observations of social issues. With its' own set of truths and behaviors, its' maladies can't be permanently solved with a tonic from a better part of town. Fans of actively taking measures toward social harmonization should take heed in the fact that all Europeans and all EU member states being equally poor and indebted would find little more than a pyrrhic victory and even greater risks to their economy and social stability. After all, the poor aren't hiring, and those who can, individual citizen creating wealth through their productivity, are indispensable at the moment.

But to return to the matter of the German public's sentiment at this stage, it isn't just the century-old fear of inflation and turmoil that's influencing the unwillingness to be bail Greece out on the first date, but the fact that the public is keenly aware of what they have been asked to do many times before: that is, to bankroll the biggest and most difficult initiatives undertaken by any collection of nations acting as a part of Europe and the EU. Moreover, they have traditionally been more likely than any other Europeans to invest directly in the markets, and in larger numbers - and as such more aware of the immutable risks and realities of markets.

Don't look now, folks, but later in the day Wednesday and early Thursday, a similar shakiness is starting to reveal itself in Spain and Portugal, both of whose government bonds were each downgraded one step. It's wise of Berlin to ask itself how many bullets it still has, if further demands are placed on it by bond crises from excessive government borrowing emerge there as well.

What that population of silent investors know full well, is that one way or another, these intervention will harmonize Germany with southern Europe, and it won't benefit Germans much at all, but rather enfeeble those who depend on their largesse even more.

Joe Noory is an Architect, investor, and independent observer of news and opinion. He is a participant in ¡No Pasarán!, a transatlantic group blog focused mainly on the atmospheric anti-Americanism found in the European media.


No Trackbacks


Display comments as Linear | Threaded

David on :

Not sure what the point is of this muddled post. Angela Merkel has exacerbated the crisis by her procrastination. Waiting until after the May 9 NRW elections to act would be disastrous. Unfortunately, she appears to have given in the crude populism found in the Bild-Zeitung and the above post. Failure to come up with a bailout/restructuring program will result with 100% certainty in defaults by Portugal, Spain and Ireland and would weaken the euro for the foreseeable future. That is not in Germany's interest. A systemic solution is required that looks beyond the short-term crisis in Greece. I like Nouriel Roubini's "Plan B" which he put forward in the FT: “This would involve a pre-emptive debt restructuring for Greece; a strengthened fiscal adjustment plan in the eurozone periphery; far-reaching structural reforms; a larger IMF/European Union programme to help Greece and prevent contagion to others; further monetary easing by the European Central Bank; fiscal and domestic demand stimulus in Germany; and a co-ordinated effort to address the institutional weaknesses of Europe’s economic and monetary union.”

Zyme on :

I agree that in the end, Greece needs to be rescued to secure the future of the Euro. But: I also think Merkel's strategy was right. I know this is not a common opinion at the moment, but I would be the last person to complement her attitude for no reason. As everybody expects, the regional elections in North Rhine Westphalia do play a role. They are not as insignificant as seems to be believed abroad, as the current national governments majority in the upper house is at stake. But something else also was achieved by waiting and delaying effective help. Yes, it might easily forced us to pay more in the end, but it might as easily be money well spent. Helping Greece without delay would have meant to leave them off the hook too quickly. Now that they had a good taste of how things might turn out for them when nobody helps, not only will the Greek people be a lot more eager to accept budget cuts. Their government will also allow the more wealthy European partners to manage Greece in the future in an intensity no other nation would for the sake of its sovereignty. Merkel already indicated that nations with no fiscal discipline should lose their right to vote in EU affairs. Additionally Westerwelle, finally starting to act as a foreign minister again, said that there should be no limits when discussing means of how to discipline countries like Greece. I think one can see where this is heading to ;) As Schaeuble indicated today, the EU's structures might actually be strengthened by this crisis. Being the finance minister of its biggest country, he didn't have to mention who is going to benefit from that the most. Of course I admit that this strategy is far from being dead sure. To be honest, I think it is quite a bold one, but that is why I like it :)

Pat Patterson on :

It seems its only "crude populism" when the citizens simply don't want to do what their betters recommend. Even Castro admitted that sometimes the people can make mistakes and that the government will have to listen.

Add Comment

E-Mail addresses will not be displayed and will only be used for E-Mail notifications.

To prevent automated Bots from commentspamming, please enter the string you see in the image below in the appropriate input box. Your comment will only be submitted if the strings match. Please ensure that your browser supports and accepts cookies, or your comment cannot be verified correctly.

Form options