German Finance Minister Warns on Greek Debt

ECB President Jen-Claude Trichet insists Greek debt will not be restructured. However, doubts persists in Germany as Finance Minister Wolfgang Schaeuble Warns on Greek Debt.

Germany warned that deficit-scarred Greece might need more financial relief, reviving European debt concerns just as Portugal seeks an 80 billion-euro ($116 billion) aid package.

German Finance Minister Wolfgang Schaeuble said it is unclear whether Greece, the root of the year-old debt crisis, will need another cut in its bailout rate or a further extension of repayment terms to return to fiscal health.

Germany’s doubts conflicted with official assertions that Greece is on the right track, defying efforts to put an end to the crisis that threatened the survival of the euro, postwar Europe’s signature economic achievement. Last week’s increase in European Central Bank interest rates for the first time in almost three years throws a further cloud over weaker economies.

Bond investors are charging Greece 938 basis points more than Germany to borrow for 10 years. The spread for Ireland, the second country to obtain aid, is 577 basis points. Portugal, aiming for a relief plan by mid-May, pays an extra 518 basis points.

Officials including ECB President Jean-Claude Trichet dismissed suggestions that Greece might not be able to repay its debt, saying budget cuts, tax increases and 50 billion euros in asset sales will bandage its economy.
‘Solid Plan’

“We do exclude restructuring,” European Union Economic and Monetary Commissioner Olli Rehn said. “We have a solid plan. It is based on a very careful analysis of debt sustainability.”

The Greek government predicts that the clampdown on spending will shrink the economy by 3 percent in 2011, the third straight contraction. EU forecasts show debt peaking at 159.4 percent of gross domestic product in 2012, the year Greece is supposed to return to the markets for financing.

Greece might need more time to pay back debts to bondholders, in a “rescheduling” that would not be classified as a default, Organization for Economic Cooperation and Development Secretary-General Angel Gurria said.

“The adjustment program of a country like Greece is a very painful program, and if a rescheduling of the payments is something which is required in order to make those difficult policies work, then that is what should be done,” Gurria told Bloomberg Television.

Trichet's "Solid Plan" in Question

Trichet may have a "solid plan" but the market sure does not think much of it.

Greek 10-Year Yield 12.859%



Portuguese 10-Year Yield 8.663%



Irish 10-Year Yield 9.24%



German 10-Year Yield 3.481%



Iceland's Common Sense Stance

The market does not seem to believe Jean-Claude Trichet and neither do I.

Moreover, if governments in Greece, Ireland, and Portugal were to put default to a vote, I am quite certain their voters would react as they did in Iceland.

For details please see Icelandic Voters Reject "Icesave" Again, Effectively Telling UK and Netherlands Banks "Go to Hell"; Iceland's Common Sense Stance

Icelandic voters want no part of "Icesave". Even the name "IceSave" is preposterous. Iceland was save by the fact voters rejected "Icesave". Icelanders would have been debt-slaves for decades had they accepted the original terms.

How many times do citizens have to say no? Hopefully voters give Prime Minister Johanna Sigurdardottir a well deserved boot in the next election.

Moreover, Iceland needs to rethink why it would want to be part of the Eurozone in the first place. I suggest Iceland put the Euro to another vote.

Finally, I am really disappointed in the wimps in Ireland. They should put Ireland's "reverse bailout" to a vote as well. I can guarantee the results in advance.

Banks that make stupid loans should suffer for them, not taxpayers. So far, Iceland is the only country that has taken this common-sense stance.

Trichet has his plan. However, the market seems to have a decidedly different plan.

The pertinent Eurozone issue however, is when the citizens of Greece, Ireland, Portugal, and Spain get fed up with austerity measures and bailouts of German, French, and UK banks, then demand sovereign debt haircuts or restructuring.

When that happens, and it will (timing is unknown), the arrogant "we do exclude restructuring" statement of Trichet will be meaningless.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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