How much is needed to bail out Greece? $159 Billion? $794 Billion? Estimates vary wildly as Greece turns Viral
by Mike Shedlock
Originally published April 28, 2010
PRESSURE IS ON GERMAN CHANCELLOR ANGELA MERKEL TO DO SOMETHING. European Central Bank President Jean-Claude Trichet is in Berlin along with the IMF to arm-twist Merkel. Meanwhile, German citizens want no part of a Greece bail. European Central Bank President Jean-Claude Trichet is on a diplomatic mission to Berlin as Germany’s reluctance to bail out Greece helps fan a fiscal crisis now burning around the euro region’s periphery.
Jean-Claude Trichet and International Monetary Fund Managing Director Dominique Strauss-Kahn will brief German parliamentary leaders in Berlin around noon today about the $60 billion aid package for Greece, which has met with opposition in Europe’s biggest economy. The joint European Union-IMF package would require Germany to stump up the biggest individual loan to Greece.
“It’s a sales pitch in front of an audience that needs it,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The lawmakers probably need it spelled out that this is not about financing luxury pensions in Greece. Not helping Greece will unfortunately have a direct impact on the euro-area economy and German jobs.”
“Why do we have to pay for Greece’s luxury pensions?” Germany’s biggest-selling tabloid newspaper, Bild Zeitung, asked on its front page yesterday. Almost 60 percent of Germans don’t want to help Greece, Die Welt newspaper reported, citing a survey of 1,009 people. German Finance Minister Wolfgang Schaeuble asked Trichet and Strauss-Kahn to speak with lawmakers to “facilitate direct insight into the actions as they stand.”
Merkel Puts Demands On Greece
Chancellor Angela Merkel’s Cabinet met to debate help for Greece as Europe’s growing debt crisis tests her refusal to rush German approval of aid. Merkel is insisting Greece commit to several years of deficit reduction as a cut in the nation’s debt rating to junk yesterday drove up borrowing costs from Italy to Portugal and Ireland and boosted indicators of corporate credit risk around the world.
Action “has to be done now, has to be done very fast,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview today with Bloomberg television in Berlin before he was due to meet Merkel. “It’s not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”
How Much is That Doggie in the Window?
International Monetary Fund Managing Director Dominique Strauss-Kahn told German lawmakers in Berlin today that Greece may need as much as 120 billion euros ($159 billion) in aid, Green Party parliamentary spokesman Michael Schroeren said by phone today. Goldman Sachs and JPMorgan economists suggest $794 Billion in aid. Greece turning viral sparks search for EU emergency solutions. European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at Goldman Sachs Group Inc., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.
Talks between the EU, the IMF and the Greek government are likely focused on assistance in the first year of between 55 billion euros and 75 billion euros with an announcement by early next week, Michael Schroeren said yesterday. “That would ensure Greece doesn’t have to access the market for the next year or so,” he said. “It is perhaps time to think of policy options of the last resort in the current sovereign crisis,” said David Mackie, chief European economist at JPMorgan in London.
A Greek agreement may not be enough to end a crisis that’s ricocheting through all euro region markets and governments may have to come up with a blanket plan for the bloc as a whole, said Mackie. He calculates that in a worst-case contagion scenario, supporting Spain, Portugal and Ireland and Greece may require aid worth 8 percent of the gross domestic product of the rest of the region. That’s equivalent to about 600 billion euros.
The central bank could eventually start accepting all government debt regardless of its rating and revive last year’s policy of lending unlimited amounts for periods up to a year so as to support the region’s banks, said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc.
What Cailloux calls the “nuclear option” of the ECB purchasing government bonds is also attracting attention among economists. While the central bank is prohibited from buying assets directly from authorities, it can do so on the secondary market. “We need 300 billion euros of purchases and then the problem goes away overnight,” said James Nixon, co-chief European economist at Societe Generale SA.
Obstacles to a sweeping bailout package abound. The EU’s structure means no one elected politician is responsible for ensuring Greece’s survival and Trichet, the only major official solely responsible for the euro, has no authority to disburse taxpayers’ funds. In Germany, Merkel has delayed approving the release of funds for Greece in the face of voter opposition and an election in North Rhine-Westphalia in May 9.
Eric Kraus, a strategist at Otkritie Financial Co. in Moscow, said he’s buying Greek bonds on the bet policy makers will eventually strike back. “Sooner or later those morons in Brussels and Berlin will realize that they are playing with fire, have already been burned, and will have to stop feeding the flames,” said Kraus, who works at a brokerage part-owned by Russia’s second-biggest bank. “Then we should see a very nice bounce.” Committing $794 Billion or even $300 billion to bailout Greece is economic madness. If someone is playing with fire, it’s Eric Kraus.
Spain had its credit rating cut one step by Standard & Poor’s to AA, putting it on a par with Slovenia, as contagion from Greece’s debt crisis spreads through the euro region. S&P said in a statement today that the outlook on Spain is negative, reflecting the chance of a possible further downgrade if the “budgetary position underperforms to a greater extent than we currently anticipate.” Spain was last cut by S&P in January 2009.