Thursday, April 15, 2010

Interesting development

Greek aid in doubt as German professors prepare court challenge

The legal challenge has far-reaching implications. It threatens to cloud the issue for weeks or months and may ultimately force Berlin to withdraw support, raising the risk of wider systemic crisis in Southern Europe. Dr Karl Albrecht Schachtschneider, law professor at Nuremberg and author of the complaint, told The Daily Telegraph that he will be ready to file within days and will ask the court for an expedited procedure. A ruling could occur within a week, but may take as long as six months. "This court hearing is going to be very dangerous," said Hans Redeker, currency chief at BNP Paribas. "It could lead to Germany itself being catapulted out of the currency union. Once investors begin to fear this, there will not be single euro in further financing for the EMU periphery."

Posted by devo @ 06:49 AM (1604 views)
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3 thoughts on “Interesting development

  • Maybe Germany should leave the euro @1New D Mark = 1 euro. Then the Mark could rise, and the euro could fall, to their apprpropriate levels.

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  • A key element of the Greek rescue package were the words ‘if necessary’.

    The logic was that by offering to provide funds at 5%, the market would fall into line, stop worrying, and buy into Greek debt at the same rate, thereby avoiding the need to activate the bailout. Realistically, 5% is just about the most the Greeks can afford to pay.

    It hasn’t happened (so far) as the major bond market players are not convinced that all the other members of the eurozone will sign up to the deal. If one eurozone member dissents, the package collapses. Moreover, the legality of the package itself is not beyond legal challenge, as this article explains.

    Even if the package does get universal approval from the other eurozone members, the bond markets are likely to remain skeptical. To offer funds at 5%, you have to be very confident of getting your money back without a haircut, and the players in the bond market are currently spoilt for choice when it comes to debt instruments to buy into.

    So if Greece draws down the offered funds (assuming they really are available) what happens when those funds are fully tapped? It seems highly likely that they would have to come back for more.

    Then there is the moral hazard element. If Greece is offered a 5% line of credit, other eurozone members would expect a 5% ceiling to be placed on the cost of their own sovereign debt, and countries such as Germany would find themselves borrowing heavily to lend to other eurozone members. The markets would become concerned about such a strategy, and Germany’s borrowing costs would start to rise – possibly to more than 5%..

    The Germans are not blind to the ultimate consequences of this approach, and whilst I don’t have a data source to tell me how much debt from the PIIGS is currently held by Germans and German corporations, I suspect that the best approach from the German perspective is cut adrift those eurozone members who can’t keep up.

    This morning, Greek debt is trading at a little under 7%. The punters buying in at this rate know that if the rescue deal goes through, and Greek yields fall to 5%, they can sell at a tidy profit, so their assessment of risk is moderated by the possibility of a jackpot.

    It follows that if the rescue package founders, or is stalled by a German injunction, that rate will rise sharply. If Greece has to start paying double digit interest rates in order to sell its debt, everyone will know that the game is up, and the debt spiral will take off…

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  • Again the problem is deadwood, or rather the unwillingness to simply let it burn in hell. I can understand the German concern whole heartedly and I agree with them. Greece needs to sell those islands *lol*

    This raping of the prudent to give to the reckless is going to end in tears and will ultimately lead to us all being poor.

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