Euro Bailout: When Even the Good News is Bad News
"The deal is a good result for Greece, the euro zone and for the markets -- we hope."
-- Italian Prime Minister Mario Monti talking to reporters upon leaving a 12-hour negotiation session among European leaders, lenders and international aid organizations.
Greece is aiming to be the General Motors of nations – dump its private debt through a government intervention, receive an infusion of taxpayer money and then start operating under a new model established in cooperation with their political benefactors.
But there is a key difference: power. When the Obama administration took over GM and Chrysler and told their creditors and bondholders that they were going to take a brutal beating, the president did so after getting permission from a federal bankruptcy judge. While many in the legal community said it was an abuse of judicial and executive authorities for a judge to grant a president permission to absolve a private company of private debt, the complaint was about too much power, not too little.
As was said seven times in a famous round of Washington testimony, when it comes to the Greek deal, there is “no controlling legal authority.”
The size of the Greek deal sounds impressive, even by American standards: $172 billion. Though it’s not the $700 billion cashier’s check our government wrote itself during the Panic of 2008, it still sounds pretty big.
But $141 billion of that sum isn’t a bailout at all. It’s an orderly default. Under pressure from European central banks, governments and their own investors, the major private lenders who got themselves over a barrel on Greek debt are expected to agree to accept less than half of their due in order to get something at all.
Remember that the looming threat was that Greece would debauch: drop out of the euro and start printing drachmas at a fever pace in order to pay back its debts with worthless currency. The threat of that makes 46 percent cents on the dollar sound pretty good.
The danger here, though, is that not all of the creditors will play along. When Obama stripped GM and Chrysler’s bondholders of their notes and repaid them in stock worth a small fraction of their due, he was doing so under authority of a bankruptcy judge. The automakers’ lenders sued, but were turned back in federal court. The Greek lenders are volunteers. Yes, they’re making out better than the GM and Chrysler creditors, but what they’re getting is an as yet unseen new kind of Greek bond. The words “Greek bond” do not exactly inspire confidence these days. Not even Jon Corzine is left to sing their praises.
If lenders don’t agree, Greece has threatened to pass retroactive laws that will change the terms of the original borrowing -- a coercive restructuring. If you want to know how that would go over, try it with your mortgage and see what the banks says. This would be a very disorderly default. Greece would be unable to borrow money at any rate and would rely on their cash-strapped fellow Continentals for enough money to keep the lights on.
The Greeks can count on what’s in the government side of the package. There are lower interest rates from European central bank lenders from its first bailout in 2010, worth almost $2 billion. There is also a plan to allow Greece to keep the interest on existing debt held by other European nations.
But that’s all just refinancing.
More than $25 billion of the package is the real bailout part – the carrot that has allowed the new Greek government to get its citizens to submit to the stick of draconian austerity measures. That’s money intended to help modernize Greek institutions, stimulate growth and do something about the country’s 21 percent unemployment rate.
While $25 billion sounds like chump change to Americans whose government borrows almost that much money in a week, that’s a lot of money for a country with a population about the size of Ohio’s and an economy more than a third smaller than the Buckeye State. They would probably be rocking pretty hard in Martins Ferry if there was $25 billion headed their way.
And here’s where Americans come in. As was with the case in the $145 billion 2010 bailout, the International Monetary Fund is expected to kick in much of the actual cash. U.S. taxpayers fund more than 17 percent of the IMF, but abstruse banking policies make it hard to discern exactly whose money funded which bailout. It’s like sorting out Planned Parenthood’s abortion funding.
This complexity will limit, but not eliminate, the political exposure of the president for helping to fund a bailout of formerly spendthrift foreign nations. You can expect that the Republican nominee will find ways to tweak the president for his bank-shot European bailout.
It’s not clear how much the IMF will be chipping in and how much the remaining solvent, creditworthy euro nations (essentially Germany and the Netherlands) will be sending in this aid package/bailout loan. The IMF will make its decision in a few weeks – after the creditors have had time to mull the Greek offer and after German, Dutch and American voters have marinated in the idea for a while.
So, other than funding the IMF, which partly funds the bailout, what does it have to do with Americans?
If the plan works, it could become a model for the other debt-stricken European nations, particularly the teetering Italians: a mix of austerity, refinancing, stimulus and outsourcing fiscal functions to the Germanic-minded EU in Brussels. If the Greek experiment is successful over the course of the next year, it could point the way for Europe for a climb of five or seven years out of its current debt strangulation and recession.
That would be good for America since Europe is our largest trading partner.
If the plan doesn’t work, and a combined $317 billion in fiscal bombardment in the span of two years has still left Greece in a state of fiscal and economic necrosis, it will be very dire indeed. The current European recession would certainly deepen. It would speed the demise of the euro and might set off a crisis in Italy and other grossly indebted nations.
There would be some upside for the U.S. since the main thing keeping our government’s staggering debt load affordable is the low interest rate at which Uncle Sam can borrow. Compared to Europe and much of Asia, Treasury notes still look like blue chip investments, even with $16 trillion in red ink sloshing around.
But keeping bond rates low would hardly be worth the cost that would come from having Europe sucked into the vortex. Who would be left to buy new, extremely small GM vehicles and other exports? China sales are dwindling and domestic markets certainly can’t absorb the nation’s current manufacturing output.
In the short term, just word of the agreement will deal a blow to those pessimistic investors who have consistently been looking to short Europe. But the smart money has discounted the deal for a long time. Once the Greek parliament picked solvency over sovereignty, it was clear that something would be done to avert immediate default.
Once this present excitement has full passed, though, will come a very terrible realization: Europe’s best-case scenario is a forecast even gloomier than the unhappy years of trudging seen ahead for the U.S. economy. Both the U.S. and Europe face a similar path if conditions are good: digging out of massive debt amid weak economic growth and a stagnant job market as compared to previous recoveries. Hooray.
Power Play suggests that you may want to put a little ouzo in your coffee this morning.
Chris Stirewalt is digital politics editor for Fox News, and his POWER PLAY column appears Monday-Friday on FoxNews.com.
Chris Stirewalt joined Fox News Channel (FNC) in July of 2010 and serves as politics editor based in Washington, D.C.