Greece, Germany and Save Yourself Anarchy

May 19, 2010

Short selling blocked while Germany begins debates on Greece bailout

Tony Barber at the Financial Times in a biting commentary on how the political class is dealing with market realities:

"I didn't know whether to laugh or cry when I heard the news on Tuesday that the German authorities were to impose a temporary ban on certain types of transactions - known as "naked short selling" - in eurozone government securities.

Laugh, because it seems more than a coincidence that the announcement was made just before parliament in Berlin was due to open a debate on authorising Germany's contribution to the €750bn international rescue plan for the eurozone. The ban looks like a piece of raw meat thrown to legislators who labour under the delusion that the eurozone's debt crisis is all the fault of "speculators" and are eager for revenge.

Cry, because the German announcement underlines how the eurozone's leaders, after finally appearing to get on top of events with the financial stabilisation plan unveiled on May 10, are once again misjudging the dynamics of the crisis.

...Governments and central banks are perfectly entitled - indeed, in extreme circumstances it is their duty - to take unorthodox measures to protect the eurozone's stability. But the steps just announced mistake the symptoms for the disease itself. The disease is the mire of public and private sector debt and uncompetitiveness into which the weaker economies of southern Europe have sunk.

An external action to force "balanced budgets" might be the only way such a thing can happen in a politcally compromised environment where crisis and panic can be so closely aligned.

The German solution is to force these countries to balance their budgets and restore economic growth, while lashing out at the hated speculators.

It might be added, by the way, that the €750bn plan is as much about saving German and French banks that lent huge sums to Greece as it is about saving Greece itself - as Karl Otto Pöhl, a former Bundesbank president, has pointed out.

But as French economist Michel Aglietta wrote in Tuesday's Le Monde, the remedies proposed for Greece, Portugal and Spain look like the recipe for a vicious circle of deflation, recession and an increase in the real value of their debts."

If the plan is to only stabalize the situation and to essentially reduce borrowing costs and 'even out' government finances, but not dramatically reduce the nominal amount of debt, then the gain of "stability" has to be measured against the loss of "future debt continuing onward indefinitely".

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May 19, 2010

Short selling blocked while Germany begins debates on Greece bailout

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