Friday, 16 April 2010

Greeks have gone to the IMF

So Greece has today gone cap-in-hand to the IMF, just like the UK back in 1976 when Harold Wilson did the walk of shame. The UK was forced to devalue sterling although Wilsom claimed, "The pound in your pocket will not be affected." Wilson borrowed £2.3bn; the Greeks want €45bn. Of course Wilson lied, the pound in your pocket lost nearly 20% of its buying power and was very much affected. The Greek PM George Papandreou can quite honestly tell his people that the euros in their pockets will not be affected.

Greek sovereign debt was recently downgraded to BBB-, which is the rung above "junk bond". The government has been financing its day-to-day operations by selling bonds at a 7.1% yield (compared with 4% in the UK, 3% in Germany) and also using the ECB special liquidity scheme. It has taken some arm-twisting to persuade the ECB to accept bonds rated as low as BBB-.

Anyway that's all over. The Greeks have thrown in the towel and said, just give us the money. An IMF team will visit Athens next week to tell Papandreou how far over the barrel he's got to bend. Papandreou will then publicly blame the IMF for any hardship experienced by the Greek people. That's the unwritten purpose of the IMF - to take the blame.

The IMF will tell the Greeks to sack public sector workers; lower salaries; postpone retirements and maybe they'll even get creative and order the sale of some of those idyllic Greek islands.

All done and dusted? No, not quite. There's a fly in the ointment. Where's the bailout money going to come from? Well, Germany actually. German Chancellor Angela Merkel was flipping mad when she realised she'd be forking out billions of euros to support a bunch of feckless Greeks living the high life. Germany will need to have a special budget to find the cash, but eventually she knuckled under and agreed.

Unfortunately a German law professor has decided that the bailout is illegal under the Maastricht Treaty and is taking out a court injunction to stop it happening. The courts in Germany do have the power to bind the government in this manner so the injunction is by no means certain to fail. And even if it does fail it will sway public opinion, and, oh dear, Germany has regional elections on May the 9th. The Greeks should hold off counting their free money for the moment.


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