Spyns 2010 Tour de France: Questions About Greece's Non-Bailout Bailout

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Former Spyns clients have long lamented the punishing Euro-Dollar exchange rate. In terms of financial mismanagement, we could say the US dollar is the best of the worst currencies. While the United States is hopelessly in the red, Greece demonstrated that Europe has crushing debts and no mechanism to deal with them. Expect the euro to drop over the coming months.

While the media widely reported a European bailout for Greece, I was skeptical and visited the European Union's website to determine what exactly has changed. Maybe it was the sight Germany's Chancellor Merkel sprinting to her limousine after the mini-summit that made me doubt that all was well in Euroland. After weeks of deliberations and conflicting statements, Greece isn't any better off. In fact, it's unlikely Greece will receive anything. To wit:
  • The European Union didn't pass a resolution or issue a policy statement. They issued a flaccid two-page statement. Unfortunately, the statement is silent as to whether the European Commission or Parliament will vote on a formal plan. It would therefore appear to be of no legal effect. Strike one.

  • The statement speaks to "substantial International Monetary Fund financing." The ambiguity of "substantial" combined with the IMF's total silence suggests no one consulted the Fund. Strike two.

  • "Any disbursement on the bilateral loans would be decided by the euro area member states by unanimity..." Strike three. There are currently 27 member states and therefore 27 possible vetoes. This means that lowly Cyprus (pop 1 million) could thwart a bailout but it's more likely Germany will refuse to pay. To fund Greece would be political suicide for Merkel's coalition government.

Fact: Greece has overwhelming debts. Fact: the markets believe lending to Greece is risky. Fact; this risk means Greece has to pay higher interest rates. Greece somehow considers this unfair because it now has to borrow a great deal more money. Greece now has to borrow to repay loans, not repay capital. If a lowly 6% interest rate is considered usurious, things will likely get worse. Greece wants Germany's 2-3% interest rate. Welcome to wonderland.

While Europe is doing its best to band-aid the Greek problem, 2-page press releases and vague promises of support simply won't cut it. Here is what Greece should do in my opinion:

  • Stop Borrowing: Greece spends more than it makes. It will likely continue to do so. Taking on additional cheap debt is not a solution.

  • Bring in the IMF: Politicians don't come up with workable solutions (viz the EU's wonky bailout statement). The IMF's mandate is to deal with these types of issues by providing long-term solutions.

  • Declare bankruptcy: The world must accept that Greece (and many other countries) cannot meet its ongoing debt obligations. Only then can it consolidate its debts and work out a realistic repayment structure.

Greece is planning another bond auction as early as next week. This suggests two things, neither of which bode particularly well for the Euro: first, Greece is so desperate for cash that a hasty bond sale is necessary; or second, the Greeks are trying to force a bailout by confirming they can't raise money at a reasonable interest rate.

The EU has sluggishly agreed to an unworkable bailout mechanism. Their next failure will be implementing it.

Spyns is an active travel company based in Whister, BC (Canada) and Beaujolais France. Spyns offers active holidays to Europe including trips to the 2010 Tour de France. For more information about Spyns 2010 Tour de France tours, please visit http://www.tdf-tours.com/, http://www.spyns.com/, or call 1.888.825.4720.
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