France and Germany could bail Greece out

My sense is that Germany and France are cooking up some sort of bailout for Greece behind closed doors ahead of Thursday’s European leaders’ summit in Brussels.

The official position of, for example, Christine Lagarde, the French finance minister is that ‘we trust the Greek authorities to take all the necessary measures to tackle their deficits’.

You can be sure, though, that something is being concocted, they may be going all out to avoid it being termed a bailout.

So this longstanding Mexican standoff between the holders of the purse strings in the eurozone, and the club med overindebted countries, looks to be coming to a head, probably in time for Thursday’s EU Leaders’ summit in Brussels.

The end result may be some sort of rescheduling of Greece’s debt repayments, through a bilateral guarantee of portions of Greek debt.

Here is why it is important: Greece’s debt and deficit position is bad but not appalling in and of itself.

This so-called ‘ouzo crisis’ has emerged from a witches’ brew of concern about 1 Greece’s shaky political economy, including dodgy statistics and historic default record, 2 the short term nature of Greece’s debts and 3 the fact that a large proportion of its creditors are easily-spooked foreign investors.

So you can see why investors begin to get twitchy, particularly when many Greeks are predicting social disorder at tomorrow’s general strike.

Clearly there has been a lot of speculation too. The net effect is some nasty interlocking vicious circles.

Firstly the cost of borrowing for Greece shoots up, which in turn makes it more difficult to service the debt.

Then if the answer to this is some savage public spending cuts, then austerity also cuts growth, meaning there is less tax revenue, also making it more difficult to service the debt.

In this situation you would expect the men in dark glasses from the IMF. They helped out Hungary, which is in the European union, but Greece is in the elite 16-member eurozone.

It would be a total humiliation if this problem could not be sorted out within the single currency area. Besides, what will the IMF tell Greece to do with its currency, which is controlled by the ECB in Frankfurt? So the IMF is not going to happen.

So all along we have been waiting for the point at which the possible systemic damage, the contagion to the other countries would be so acute, that Germany and France would step in. We are here now.

The question is what price will Greece pay in terms of its fiscal independence?

The eurozone big guns can not be seen to allow Greece to do this again, or else the credibility of the single currency could be undermined, by the other PIIGS (Portugal, Ireland, Italy, Greece, Spain) trying the same thing  and the question for the UK is whether to participate in the rescue act for a faraway land at a time of our own difficulties.

So far the mood music from the treasury is a resounding ‘no’.