Has Europe finally solved its debt-crisis problem? Well, that depends on who you talk to. Yesterday, hot on the heels of the announcement that European financial leaders had labored into the wee hours to finally get their act together to rescue Greece and save the Euro, I heard an economist say she was pleased that Europe had finally agreed on a plan...to agree on a plan!
Yeah, not exactly a ringing endorsement of Europe's ability to right its listing ship of states.
Meanwhile, around the blogspshere, various voices weighed in. At Reuters, Felix Salmon took a deep dive into the matter of credit default swaps (CDS) on Greek debt (although it wasn't nearly as deep as some). You're not going to want to wade into this debate unless you're prepared to induce a pounding financial headache, but the topline summary is fairly simple.
Greek bonds that are currently trading at 40 cents on the dollar would be exchanged for bonds with a new face value of 50 cents on the dollar (and who knows where they'll trade, as Salmon pointed out to me in a brief email). The holders of those bonds would be forced to take a "haircut" on the bonds' original value, but you can see why it might be in their interest to take 50 cents if those bonds are currently at 40 cents and falling. However, this maneuver could trigger a "credit event," in the technocratic parlance of the bond markets, which would in turn trigger CDS payouts. Or not, if the agreement on Greek debt restructuring is classified as "voluntary."
At one level, there's worry that a credit event will set off a nightmarish cascade, with all these CDS kicking in and making it feel like 2008 all over again, with Lehman Brothers going bankrupt, taking AIG with it. Felix and others argue that it won't happen. For one thing, Greek CDS may only amount to $3.7 billion, according to the International Swaps and Derivatives Association. But if the fundamentals of this market get rearranged, banks may no longer fully trust CDS to hedge their exposure to soverign debt. Felix rightly trashes that concern by pointing out that CDS aren't used so narrowly, and backs up his case with fundamentals:
[T]he market in Greek CDS has been pretty efficient when it comes to this role. As Greece has got ever riskier, the price of buying credit protection on Greece has risen, and people owning that protection have made money. That’s the way it’s meant to work.
OK, now that the credit event is out of the way, we can consider whether this deal should produce much celebrating. At the Atlantic, Megan McArdle says meh and provides a "Groundhog Day" analysis:
They make a deal, the market rejoices, and then everyone notices that they still aren't an optimal currency union, and they haven't done many of the things that would help ease those tensions, like deepening fiscal integration. Nor have they credibly guaranteed all of each other's debt. At which point spreads begin to rise again on the debt of the shaky countries, and there we are again, watching Europe go through the motions of making yet another deal.
She makes a critical point: 17 separate agendas does not cooperation create. Because the Eurozone is a currency union, with everyone using the Euro, but not a fiscal union, with everyone agreeing on the same taxation and spending policies, it's just going to "solve" Greece-like problems over and over again. Or Greece-Italy-Spain problems over and over again.
Megan doesn't come right and say it, but she implies that maybe the Euro isn't such a great idea anymore. What lies in its future, if it endures, is the increasing marginalization of countries like Greece and Portugal and even Spain and Italy. This is the exact opposite of what the Euro was supposed to do, which was create a powerful international currency that could impove the lot of all Europeans, rich and poor.
She's in alignment with the New York Times' Paul Krugman, who has more overtly given up on the Euro — even before yesterday's plan was announced:
The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.
At Naked Capitalism, Yves Smith zeroes in on where the money is actually going to come from to pay for all this. Right now, it's looking like China, with maybe Brazil and India kicking somthing in (these countries all have big currency reserves that they need to put to work, lest they cause trouble at home, in the form of inflation, something that all the rapidly developing economies are trying to combat). But why would China bother?
Japan was the dumb money in its bubble era. But at least they had an excuse: they yen was super high so everything looked cheap. At least the foreign exchange part of the equation worked in their favor, but they had insufficient knowledge of foreign investments to make good picks. The Chinese may be shrewder about their targets, but they seem woefully in denial on the magnitude and inevitability of foreign exchange risk on some of their plays. So they may rescue the Europeans and continue to resent funding their trade partners, just at the Germans do.
Yves wasn't trying to make this her main point, but she ended up doing it anyway. When you look at the Eurozone crisis in all its ugly, operatic overwroughtness, you keep coming back to Germany. The Germans could have fixed this problem months ago, through decisive action — pumping money into Greece, with no austerity strings attached. In September, the Financial Times' Martin Wolf argued that this should have been the game plan from the get-go:
German policymakers persist in viewing the world through the lens of a relatively small, open and highly competitive economy. But the eurozone is not a small open economy; it is a large and relatively closed one. The core country of such a union must either provide a buoyant market for less creditworthy countries when the latter can no longer finance their deficits, or it has to finance them. If the private sector will not provide the needed finance, the public sector must do so.
I find myself agreeing with everybody. The credit event is no big deal; the Euro may have been a bad idea; China would be nuts to get involved with this mess; and Germany is ultimately to blame for its failure to lead.