Posted on 08/29/2011 8:04:02 AM PDT by Kaslin
Once again the bond markets have spoken, and once again the message is the same: default. Greek two-year bonds are near 44%, having touched as high as 46%. The interest rate on 1-year Greek government debt is a stunning 59.8%.
Greece Not Saved
Supposedly "Greece was Saved" on that blue circle when yet another bailout (throwing more good money after bad) was approved.
The deal unraveled for numerous reasons but demands by Finland for collateral are at or near the top of the list. Austria, Slovakia, and the Netherlands now want collateral as well.
Under great pressure from Germany, the EU, and IMF, Finland allegedly dropped those demands. It was a lie. Finland did not drop demands for collateral, and that shows you the effect of multiple veto points where such decisions must be unanimous or they fall apart.
Greek 1-Year Government Bonds
Greek 2-Year Government Bonds
44% a year, for two years or whopping 60% for one year, unless of course there is a default.
Not only does the bond market say Greece will default, but the implied haircuts are huge given those interest rates.
17 Veto Points
Please consider A Small Country Finland Casts Doubt on Aid for Greece
Finland is just one of 17 euro zone countries whose parliamentary approval is needed for the expanded bailout fund and whose domestic politics could upset the process. The case of Finland points to a bigger governance problem in Europe, said James Savage, a professor at the University of Virginia who has published a book on European monetary union.Greece Has Failed
You have all these multiple veto points, so they cant come to a reasonable conclusion, at least not easily, Mr. Savage said. You have increasingly less efficient decisions that are being made.
Officials from European Finance Ministries spent much of Friday in long- distance negotiations about the collateral issue but did not reach an agreement. Conflicting reports about the negotiations have fed market confusion. The news media in Germany and other countries reported Friday that Finland had dropped its demands, but the reports were swiftly denied by Finnish officials.
The climate created by the collateral dispute could make it more difficult for the European Central Bank to continue to defend Italy and Spain in bond markets and contain their borrowing costs. This month the E.C.B. has spent €36 billion, or $52 billion, intervening in debt markets in an effort, so far successful, to cap bond yields for the two countries.
The E.C.B.s task could prove more difficult when trading volume picks up, especially since both Spain and Italy are scheduled to try to sell debt this week. A litmus test for the effectiveness of the E.C.B.s bond-buying program is in the cards, Rainer Guntermann, an analyst at Commerzbank, wrote in a note.
We have to listen to the people of Finland, said a government official, who requested anonymity because of the sensitivity of the issue. Collateral is an absolute condition for Finland to be involved.
The collateral dispute is not the only threat to the bailout package. The plan that leaders worked out in July also calls for banks and other investors to swap some of their existing holdings for new bonds that would be worth less but carry guarantees. The plan is designed to cut Greek debt by €37 billion.
But on Friday, in what was probably a tactical move to put pressure on bond holders to accept the deal, Greece said it would back out of the debt relief plan unless 90 percent of investors agreed, Reuters reported.
Greece should be allowed to fail, Robert J. Aumann, who has a Nobel in economics, said at a recent conference in Lindau, Germany, according to a text of his remarks. They should repay the debts they feel able to pay and not pay the others.
In a cannon shot across Europes bows, he warned that Germany is reaching bailout exhaustion and cannot allow its own democracy to be undermined by EU mayhem.Kiss a Larger EFSF Goodbye
I regard the huge buy-up of bonds of individual states by the ECB as legally and politically questionable. Article 123 of the Treaty on the EUs workings prohibits the ECB from directly purchasing debt instruments, in order to safeguard the central banks independence, he said.
Mr Wulff said the ECB had gone way beyond the bounds of their mandate by purchasing €110bn (£96.6bn) of bonds, echoing widespread concerns in Germany that ECB intervention in the Italian and Spanish bond markets this month mark a dangerous escalation.
The blistering attack follows equally harsh words by the Bundesbank in its monthly report. The bank slammed the ECBs bond purchases and also warned that the EUs broader bail-out machinery violates EU treaties and lacks democratic legitimacy.
The combined attacks come just two weeks before the German constitutional court rules on the legality of the various bailout policies. The verdict is expected on September 7.
The tone of language from two of Germanys most respected institutions suggests that both markets and Europes political establishment have been complacent in assuming that the court would rubberstamp the EU summit deals in Brussels.
Nobel laureate Joe Stiglitz told the forum that the euro is likely to fall apart unless Germany accepts some form of fiscal union. More austerity for Greece and Spain is not the answer. Medieval blood-letting will kill the patient, and democracies wont put up with this kind of medicine.
Mr Wulff rebuked Chancelor Merkel, saying political leaders should not break their holidays every time there is trouble in the markets. They have to stop reacting frantically to every fall on the stock markets. They mustnt allow themselves to be led around the nose by banks, rating agencies or the erratic media, he said.
This strikes at the very core of our democracies. Decisions have to be made in parliament in a liberal democracy. That is where legitimacy lies.
Even my people don’t charge that much. Its criminal! /sarc
The PIIGS do not have the internal political will or the support of the people to become fiscally prudent.
So, as happens when people lack self-control, reality ends up doing the dirty work in the end.
60% ???
A shame they cant just set their own interest rates like we do. Pretty handy when the country borrowing money can control what they are charged and still get loans(hint :US just loans itself money like with the SS trust fund.) . Go try this with your CC company.
Even worse, the pols get the Fed to loan them money (through banks mostly) so they can make our inevitable inflation or default (or both) more and more spectacular.
The only reason loan sharks can make money with rates and risks like that is they can break your limbs to motivate you to pay, Loaners should demand an Med Island for collateral or the 60% is meaningless.
“California here it comes!”
I see, it doesnt say what Finland would accept as colateral or if the idea would be considered by Greece who would rather default(until they realize the price of that maybe too late) .
It is interesting that the other UE nations want Greece to be lent money with little chance that they will pay it back. Without colateral it is just a make believe game.
Super-duper-subprime loan.
As we follow Europe down the drain China is colonizing Africa for it's own gain becoming the modern British Empire.
44%!!!???? Where can I get some of those bonds?
You probably won't get your principal back.
And forget about the interest too...
Yes...but at 44% how can I turn it down! O.k., it’s an attempt at lame humor.
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