Tuesday, March 15, 2011
By Grant de Graf
WSJ reports: "Euro-zone finance ministers reached no agreement Monday on precisely how the bloc's 17 members will share the burden of enlarging bailout funds, and put off discussions until next week.
"But despite the unresolved details, markets reacted warmly to Saturday morning's announcement of a pact to expand the euro zone's current bailout capacity. In trading Monday, the prices of Spanish, Portuguese and Greek bonds jumped, bringing down their interest rates and reflecting improved investor confidence."
The market's positive response to Greek bonds is attributable to the new deal that Greece has secured with the Euro Union: namely, restructuring the loans that have been extended to that country, with a reduction in long-term borrowing costs. Greece has in turn agreed to dispose of some significant parcels of real estate owned by the government, in the open market and apply further measures of austerity. Neil Ferguson would argue that this is in effect a default, merely packaged in an attractive wrapper. Still, I am left scratching my head as to how long the Greek community will tolerate the austerity measures, which are bound to exacerbate rising unemployment.
WSJ reports: "The pact is "particularly positive for Portugal," said economists at Danske Bank in a research note, since it expands the ability of euro-zone policy makers to come to the country's aid. Portugal's persistent deficits have led investors to believe it is likely heading for a bailout."
The EU has always shown a commitment to come to the assistance of ailing member countries. Unity within the union has never been stronger. With the comfort of a Big Daddy in the waiting room, I am puzzled as to why the market even priced in the bonds that Portugal issued, at the price that it did. Portugal has always indicated a commitment to austerity and provided projections indicating positive growth. If ever there was an arbitrage opportunity it was here: the buy Portuguese and sell German bond trade. Clearly, the spread should be expected to narrow.
Ireland has rejected the EU's demand for that country to increase corporate tax. That meant that the EU refused to restructure the terms of its loans to Ireland. There is always a danger that the EU oversteps its mark in dictating policy to its members. However that is a consequence of being part of a union. You lump it or leave it.
In the long term it is difficult to envisage an EU that succeeds in sustaining member loyalty and attachment to the Euro. Currently, the Euro impedes the weaker countries from any meaningful recovery through imprisonment with the Euro straight-jacket. Effected countries are being held to ransom by the bailout rescue packages the EU can offer. In the end Germany and France will pay dearly. The price will be a withdrawal of support for those governments. If the EU is unable to change its terms of membership to the union, it is probable that the political map will look very different in the not too distant future and that both Merkel and Sarkozy will be serving their countries in different capacities, that they are today.