Tuesday, March 30, 2010

Greece bail out ! We have not learned from the past.

From the book this time it is different " Eight centuries of financial folly" An empirical study and database of financial crisis. From the preface.

"From 1800 until well after World War 2 Greece found itself virtually in continual default of its sovereign debt obligations"

The book discus's that many countries that have previously been in default end up in the same place again as the lending is justified as "this time it will be different". How many times have we heard that before? I wonder if that is why there is a saying "Beware of Greeks bearing gifts"?

Europeans Agree on Bailout for Greece.

From left to right: French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Zapatero, Greek Prime Minister George Papandreou and German Chancellor Angela Merkel arrived for a working session of the EU summit at the European Council headquarters in Brussels on Thursday.
.BRUSSELS—Leaders of the 16-nation euro zone, bridging sharp philosophical divides that tested the decade-old currency bloc, backed a deal under which they and the International Monetary Fund would jointly bail out Greece should the country's debt troubles intensify.

The agreement won't immediately trigger a Greek rescue, but it lays the groundwork for both the first intervention by the IMF in a euro-zone country and a major relaxation of the tight restrictions on country-to-country bailouts that have been a feature of the currency union since its birth. The accord suggests Greece's financial travails are forcing the euro zone further along a path to greater economic coordination that has been resisted by national governments.

France gets on board for a possible Greek aid package as a senior Chinese central bank official criticizes the handling of the Greek debt crisis.
.The European Union has been riven for weeks by disagreements over how to handle the troubles with Greece, which is running heavy budget deficits and struggling to refinance its hefty debt.

Germany, Europe's largest economy, made the IMF's involvement a condition of its own participation in any Greece bailout. Voters and lawmakers in fiscally frugal Germany are loath to open their wallets to bail out more free-spending peers, and the IMF would absorb a chunk of the cost. France saw turning to the IMF—normally a route for developing nations—as an embarrassment to the wealthy bloc, but it dropped its objections in exchange for Germany's agreement to lay out explicit arrangements for a rescue.

Only one western European nation—Iceland, in 2008—has received aid from the IMF since 1976, when the U.K. took a humbling loan from the fund.

French President Nicolas Sarkozy and German Chancellor Angela Merkel hammered out the compromise here Thursday just hours before a meeting of all 27 EU nations. Under the terms of the deal, EU nations would direct any bailout—and provide a majority of its funding through direct loans—and the IMF would play a supporting role. The Franco-German accord was backed later in the evening by all 16 members of the euro zone.

Mr. Sarkozy said the agreement "represents an insurance policy for Greece, allowing it to implement the courageous reforms that it has entered into without being penalized by speculation and irrational behavior by the markets."

In unusually frank acknowledgments, EU leaders said the inclusion of the IMF was a practical necessity. "It was the only way to reach consensus," European Commission President José Manuel Barroso said.

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.The European portion of the aid for Greece wouldn't be automatic, the text of the accord said, and would come only as a last resort, in the vaguely defined event that "market financing is insufficient." Greece has more than €20 billion ($27 billion) in debt coming due in April and May, and Greek officials hope they'd be able to get access to at least that much.

The Franco-German compromise gives Greece long-sought specific assurances of European aid—but also preserves for Ms. Merkel a veto over pulling the trigger: Euro-area countries must agree unanimously before dispensing any aid, according to the agreement.

Greece has argued for weeks that the interest rates of more than 6% that it must pay to borrow money from bond markets are unacceptable. Prime Minister George Papandreou has been pressing his EU peers to help reduce Greece's borrowing costs.

But a senior German official said high borrowing costs wouldn't be enough to trigger the package. "'Insufficient' [market financing] should not be understood to mean 'uncomfortable' or 'burdensome,'" the official said.

"The fact that the euro group and the IMF are saying that they are guaranteeing that they will not abandon Greece should be enough to lower spreads," EU President Herman Van Rompuy said.

European Central Bank President Jean-Claude Trichet continued to voice reservations about a prominent IMF role in a Greek rescue. "If the IMF or another body exercises responsibilities in place of the Eurogroup or governments, this would obviously be very, very bad," he said in an interview with Public Senat television. Later, Mr. Trichet described himself as "extremely happy" that the euro zone reached a deal.

After his initial comments were reported, the euro slipped below $1.33, touching new 10-month lows, a sign that the leaders' agreement may not immediately restore financial-market confidence in the euro zone.

Loans from EU countries would be at rates high enough to prod Greece to raise money in the capital markets, according to the agreement, which gave no figures and said nothing about the size of any financing package. The IMF, which lends under its own rubric, would almost certainly provide better terms for its tranche. The IMF on Thursday declined to comment.

Earlier Thursday, several European leaders, including Spanish Prime Minister José Luis Rodríguez Zapatero, the prime minister of the Netherlands and the finance minister of Austria, had signaled they'd be open to a joint EU-IMF plan.

While aid is deeply unpopular in Germany, others, like France and Luxembourg, which regard the euro as the bloc's greatest creation, see defending the currency's stability as an end worth paying for.

The Greek turmoil and Europe's slowness to stem it have raised questions about the currency's future.

Euro-zone countries have struggled for more than a month to figure out the means of providing aid, after saying, vaguely, in February that they would do something if necessary.

There is no instruction manual for rescuing a euro-zone country nearing default, and the EU's treaties contain provisions restricting countries from assuming their troubled peers' obligations.

Those provisions were installed at the common currency's birth largely to placate Germany, which worried that it might one day be pressured to use its hard-won economic muscle to help a less-frugal peer.

Precisely that situation came to pass this year when it became clear Greece, saddled with mounting debt and deficits, might not be able to refinance its heavy debts.

.Germany, reluctant to risk its taxpayers' money for financially wayward Greece, held out against aid. But it signaled last week that it would lend support to a last-resort system of loans from stronger countries to Greece. Its price: The IMF had to be involved, too.

A month ago, that was anathema to many on the continent—particularly the French, who saw it as an admission that the euro zone couldn't handle its own affairs. Luxembourg premier Jean-Claude Juncker, president of the council of euro-zone finance ministers, called the idea of IMF involvement "absurd," hypothetically comparing it with the U.S.'s turning to the fund for a bailout of California.

But in a sign of Germany's economic sway over the bloc, Berlin got its way.

Ms. Merkel, before leaving for Brussels Thursday morning, told the German parliament that she was in favor of an aid plan that "in an emergency" would include both loans from EU countries and "substantial" help from the IMF.Ms. Merkel, before leaving for Brussels Thursday morning, told the German parliament that she was in favor of an aid plan that "in an emergency" would include both loans from EU countries and "substantial" help from the IMF.

Ms. Merkel also said that after Greece's debt woes have abated, the euro zone must reopen EU treaty negotiations to impose tough new measures and sanctions to prevent such problems in the future.

"We've seen that the euro zone's current instruments are inadequate," Ms. Merkel said.

Greece's government deficit hit nearly 13% of gross domestic product last year, way over the 3% limit prescribed by euro-zone rules. Its debt was 113% of GDP, against a 60% limit. Years of efforts by EU officials to nudge Greece into changing its ways have had little effect.

Ms. Merkel said she supported German Finance Minister Wolfgang Schäuble's proposal for a European Monetary Fund, and the power to exclude profligate countries from the common currency bloc—both radical new measures that would require a lengthy ratification process and the approval of all 27 EU member states.

"I will also champion the necessary treaty changes," Ms. Merkel said.

The troubles in Greece, which represents just 2% of the EU's economy, have weighed heavily on the common currency. The euro is off about 7% against the dollar since the beginning of the year.

—Andrea Thomas and Adam Cohen contributed to this article.

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