Busch: 3 Debt Musketeers
Today, European finance ministers are meeting with a heavy and difficult schedule on periphery debt. While the Dominique Strauss-Kahn imbroglio/sex casemakes it way through the US judicial system, the European debt situation should not be materially changed in a negative way by the development. I would argue that the IMF will actually push harder for a deal to regain credibility and reduce the negative media spotlight.
But it won’t be a simple task.
For the EcoFin gathering, the easy part will be to approve the Portuguese bailout plan. The hard part will be coming to any agreement on Greek debt. Sadly, the options are multiple, but the outcomes are binary for the euro currency.
Here are some of the options for Greece:
- Increasing the size of its current 110 billion-euro bailout from European governments and the IMF.
- Deeper budget cuts and sales of state assets for collateral.
- “Soft” restructuring via lengthening terms for bond repayments.
- “Hard” restructuring via specific writedowns of up to 50%.
- ECB buying Greek debt at current prices and then retiring the debt.
Each proposal carries the same issue or what I call the “3 Musketeer” problem. According to Bloomberg, German Finance Minister Wolfgang Schaeuble told ARD television yesterday. “If there is an extension, then everyone has to be extended.”
It’s all for one or none for all.
Remember, the ECB has a vested interest in not agreeing to a restructuring because they own 76 billion-euros worth of periphery bonds. Any plan must have a bailout by European taxpayers for the central bank’s loss.
Since the Greek downgrade and the ECB tamp down on rate hikes, the Euro has fallen 5.8% and put in a new low todayafter the Strauss-Kahn arrest. The weak US data on Empire manufacturing has provided a boost to the Euro and we’re now up 100 pts from the lows. Market expectations are now for no deal to be met at the EcoFin meetings. I think they’ll be wrong and there’s a solid counter-intuitive thought for a deal being reached. It’ll help stabilize the Euro currency and may get the market focused back on interest rate differentials which favor the currency.
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.