As before, this is in fact another statement that indicates no checks are to be written.

The purpose is probably the hope that it be read as a statement of support which will facilitate continued funding of Greek debt.

It is a clear statement that no funding is available until Greece fails to find funding elsewhere. However, understood but unstated, is that the process of finding funding is necessarily that of price discovery. Greece, like all borrowers, simply offers securities at ever higher rates until it finds the needed buyers. Failure, in theory, is defined as the rate reaching infinity with no buyers. At that time, the euro members would step in with a loan offer at a non concessional rate which would then presumably be infinity.

This makes no sense at all, of course. The statement is in fact a statement that Greece must first drive rates to infinity before euro zone member loans are available. In other words, it’s a statement that says Greece is on its own, and that they will stand by without taking action as observers of the standard market default process of Greek funding rates going into double and then triple digits as happens to all failed borrowers of externally managed currencies, including nations with fixed exchange rates.

“In this context, Euro area member states reaffirm their
willingness to take determined and coordinated action, if
to safeguard financial stability in the euro area as a
whole, as decided the 11th of February.

As part of a package involving substantial International
Monetary Fund financing and a majority of European financing,
Euro area member states, are ready to contribute to coordinated
bilateral loans.

This mechanism, complementing International Monetary Fund
financing, has to be considered ultima ratio, meaning in
particular that market financing is insufficient.
disbursement on the bilateral loans would be decided by the euro
area member states by unanimity subject to strong conditionality
and based on an assessment by the European Commission and the
European Central Bank. We expect Euro-Member states to
participate on the basis of their respective ECB capital key.

The objective of this mechanism will not be to provide
financing at average euro area interest rates, but to set
incentives to return to market financing as soon as possible by
risk adequate pricing. Interest rates will be non-concessional,
i.e. not contain any subsidy element. Decisions under this
mechanism will be taken in full consistency with the Treaty
framework and national laws.”

5 Responses

  1. I don’t know Warren.

    My reading of this is that if Greece gets no bids at “reasonable” interest rates — maybe 5%, 6%, 7% — then IMF and EU will kick in loans at what “reasonable” rates are decided. I would guess maybe 100 bps over eurozone average but not too much more.

    It is certain that Greece will not offer infinity interest rate, get no taker, and then IMF and EU will lend at infinity of course.

  2. they’ve already been paying over 6%, so we know it’s a lot higher than that?

    point is, the implied process makes no sense to me at all

  3. So my understanding of International Monetary policy is vey simple. Each nation faces a so-called ‘trilemma’. There are three items on the menu, but a nation can only choose two:

    1. Fixed Exchange rates

    2. Self determined Monetary and Fiscal Policy

    3. No Capital Controls

    Greece (and every other Euro zone state) chose 1. and 3., and now Germany is deciding what 2. will be.

    Good luck with that.

    Eventually Greece will decide it wants 2 and 3, and give up on 1.

  4. Warren

    Given that the other members of the European Union won’t budge, if you were advising Greece what would you tell them?

  5. 1. champion my per capita 1 trillion euro distribution proposal

    2. announce in the default clauses of greek debt there will be a provision that says the defaulted bonds can be used to pay greek taxes at par plus accrued interest.

    3. let it be know that all new govt hires would be paid with Greed tax credits.

    4. work to have the ecb fund a eurozone wide elr proposal.

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