Home of the Butter Mountain Still Has Considerable Reserves of Good Old Fudge . . .


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The larger, richer countries of monetary union have everything to lose by forcing Greece, Ireland or anyone else into an early restructuring. Not only will it turn the guarantees that have been given into actual loans that need to be booked in the national accounts, it also deprives their respective banking systems of time to prepare for the writedowns that this would entail. That in turn raises the risk of needing to throw yet more taxpayer money at saving the banks.
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Some basic realities of Europe.
The essence of postwar Europe is fudge, muddle and compromise
—in short,
 all the possibilities that political dialogue allows...

Home of the Butter Mountain Still Has Considerable Reserves of Good Old Fudge .

Text By GEOFFREY SMITH
JANUARY 20, 2011.

ΠΗΓΗ:


Another day, another rumor of debt restructuring, another mini-panic.
Markets are doomed to repeat this cycle over and over again in the course of 2011 if they don't take on board some basic realities of Europe. The essence of postwar Europe is fudge, muddle and compromise—in short, all the possibilities that political dialogue allows. Markets do not need to price in a default or restructuring scenario until the EU has exhausted its very considerable reserves of fudge.
This is not denying the risk of default. The debt ratios of Greece and Ireland, at the very least, look unsustainable to most eyes under the current framework that forces them to regain competitiveness by deflation. As everyone has grasped by now, this only magnifies the debt burden. 
Rather, this is about understanding the scale of the political forces that compel reluctant sovereign states to work together, forces that will undoubtedly be mobilized to put off the final day of reckoning as long as possible.
The larger, richer countries of monetary union have everything to lose by forcing Greece, Ireland or anyone else into an early restructuring. Not only will it turn the guarantees that have been given into actual loans that need to be booked in the national accounts, it also deprives their respective banking systems of time to prepare for the writedowns that this would entail. That in turn raises the risk of needing to throw yet more taxpayer money at saving the banks.
For a struggling center-right coalition like Germany's, to give such ammunition to the left-wing opposition would be an act of political folly.
Nor is it only the legitimate left that it would be encouraging. Germany's tradition of left-wing violence has only been extinct for about 15 years, and is a far more real threat to civil peace than its analogue from the nationalist right.
No one is going to turn violent because of a rescue package. Whereas another wave of handing over billions to fat cats in Frankfurt, Düsseldorf and Munich is much more likely to revive the violent left. The same could equally be argued of France, but then the government has in any case been more sympathetic to the debtor nations.
So it makes more sense to price in a "restructuring by a thousand cuts," only the very last stage of which would actually force private-sector creditors to accept a loss of principal. To try to activate a radical restructuring before all other avenues have been exhausted would expose either debtor or creditor to very well-founded accusations of bad faith, with serious, real implications for years ahead.
The EU and the International Monetary Fund have agreed to fund Greece and Ireland, if necessary, for the next three years. Neither party can suddenly change its mind and walk away from that agreement without a terrible loss of political capital. Expect them to suggest voluntary bond buy-backs and maturity extensions and plenty more before. When German Chancellor Angela Merkel says default is a last resort, she means it.
Likewise, for all that the numbers scream that Greece must default, restructure and leave the euro, the politics won't allow it until everything—everything—else has been tried first.
Default and devaluation would jeopardize Greece's existing trade privileges with the rest of the EU; it would weaken its position vis-a-vis Central and Eastern European countries that compete for the EU's structural budget resources; it would risk another generation of brain drain; it would risk losing any leverage it has over EU policy toward Turkey. Most importantly, by slashing the purchasing power of its entire population, it would be risking civil disorder just as surely as by sticking to the IMF/EU austerity plan.
Likewise Ireland. It faces all the above risks just as much as Greece does, only for Turkey, substitute Britain. The Irish have been trying to escape Britain's sphere of influence for centuries. The EU gave Ireland a chance to escape it without even having to leave home. What price do the Irish people want to put on that?
This is what is actually meant when the politicians talk of political solidarity, ever closer union, and all the other pompous phrases that Anglo-Saxon ears, in particular, find so nauseating.
Traders and commentators in London, whose default way of thinking is to trace a direct line from the Spanish Inquisition and Armada to the euro via Richelieu, Napoleon and the Luftwaffe, are perennially in danger of underestimating how deeply the idea of "Europe" is synonymous with peace and order, and how real, how recent and how awful the alternatives are in Continental minds.
The need to understand is one of the most basic human psychological imperatives. The complexities of Europe's debt issues—all the interconnectedness, all the political implications as well as all the economic ones—may well be too much for any single human being to grasp. The temptation will therefore always be to simplify reality until it becomes comprehensible.
It may be psychologically necessary, but markets do this at their peril. The truth, as Oscar said, is rarely pure and never simple. The smart money should stay on fudge, muddle and compromise until the very last possible moment


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