The new and improved bailout negotiations between members of the Troika are not just good news for Greece. It actually may be welcome news for Spain as the new tactic sets a precedent and an easy example to follow.
Greece circumvented the strong opposition of Germany which resulted in a refusal of any immediate haircut and instead lobbied hard with the European Central Bank and the International Monetary Fund to be rescued by the bell.
Instead of an expected haircut which would have been a windfall of 30 billion euros for Greece, Mr. Stournaras pulled an ancient Trojan horse trick with both the ECB and IMF in exchange for promises which may or may not be implemented according to a three-year standing Greek tradition.
Mr. Stournaras, Greek Finance Minister, found a way to convince the ECB to “donate” 16 billion euros in interest due and to continue to lend Greece money at lower or even zero interest for the near future.
In addition, the IMF came to its own rescue and granted Greece a two-year leniency extension to reduce its current debt/GDP ratio from 179% to 124% by 2022.
Knowing that Greece projects a ratio of 191% for 2013 and taking into consideration that even prior to the crisis Greece reported a debt/GDP of 148% in 2008, it is unthinkable to assume that such lofty promises can be delivered in ten years time.
It does however send a clear message to other Eurozone members that are struggling as well, i.e. Spain, Portugal and Ireland.
Now that the ECB and IMF have opened the gates to financial heaven, it is easy to conclude that Mr. Rajoy, Spanish Prime Minister, will be the first to take full advantage of these attractive Christmas presents. Who can blame the Spaniards for expecting the same royal treatment?
Maybe Mr. Rajoy made a very safe bet when he refused a bailout offering from the ECB on October 29 and he knew how the cards would ultimately be dealt.
The entire deal also points towards a shift in the Eurozone from liquidity solutions to artificially trying to mask the underlying solvency problems of its borrowers which will only become bigger and more acute with time.
If Greece and Spain would have healthy economies and lower unemployment rates than one could imagine that the future will look brighter and lenders can be paid back be it over a longer period of time than initially thought.
That is not the case and with Greece entering its sixth straight year of recession and negative growth, the future only looks to be come more expensive and riskier for the lenders, at least Government lenders like Germany.
Let us not be surprised if talks of another 75% haircut are again being brought to the table early next year but for now Greece will wait for the big checks to come in while Spain patiently waits for their turn.
The European Holidays will be filled with joy but the New Year will bring many unpaid bills marked as “return to sender”.
Written by Nick Doms © 2012, all rights reserved.
