Now that the framework of the Greek bailout is public, the issue is what will the Eurozone do with the time it buys?

Europe in Deal on Greek Debt in Bid to End Currency Fears

By STEPHEN CASTLE

Published: February 11, 2010

BRUSSELS — European leaders, facing a crucial test for the credibility of their common currency, said Thursday that they had reached an agreement aimed at persuading jittery bond market investors that Greece would not be allowed to default on its government debt.

The president of the European Council, Herman Van Rompuy, confirmed that the leaders, gathered here for a summit meeting, had agreed on a political statement to deal with the crisis. They said they would leave the details to be worked out among finance ministers on Monday.

The emerging plan, said Werner Faymann, Austria’s chancellor, called for the countries of the euro zone to finance any loan to Greece but that they would draw on the expertise of the International Monetary Fund to implement it and impose conditions on the Greek government in Athens.

“It is important to have solidarity,” Mr. Faymann told the Austrian broadcaster ORF ahead of the summit meeting that was just getting under way here at midday. “It is a situation where the countries of the euro zone can work together — can find solutions together also with the International Monetary Fund.”

The plan still depends on the willingness of each country to extend credit, he said, while adding that “we are not going to give the money as a present, it will be as loans.”

Thursday’s meeting of the 27 leaders of the European Union member nations began two hours late, ostensibly because of the cold weather in Brussels. The delay, however, also gave additional time for the prime minister of Greece, George Papandreou, to talk with his French and German counterparts before the meeting.

European officials face greater urgency to devise a bailout for Greece after fears its government might default caused a recent slump in financial markets worldwide.

The Europeans are held hostage by the finance markets which is what happened in the US beginning in 2008. To quiet the markets and buy some time, the Euro ministers have agreed to lend some IMF money to Greece.  What’s next?

If the Europeans follow the example of the Americans, the answer is nothing. 

The Europeans are missing the point just like the Americans. Their crisis – and ours – is an energy crisis not so much a credit crisis. 

An immediate issue is whether there will be a ‘Hard(ish) Euro’ or a ‘Soft Euro’? Unless funds are put into the hands of some of the Greek citizens – a soft euro – the time to act will shrink fast. A hardish euro is powerfully deflationary, the arrangement just made might as well not have been made at all.

Ironically, a hard euro really isn’t all that hard because the Euro holders abandon it for the dollar at the drop of a hat. The dollar is hard because the Saudis have pegged it to oil. The euro floats and creates an arbitrage opportunity that is fatal to it. This is the dilemma facing Brussels; to hold the euro to oil parallel to the dollar and freeze out its weaker member nations, or assist its members and watch oil prices rocket out of sight. 

Additionally, the compact being hammered out doesn’t solve the fundamental split between Euro monetary policy and national politics. That the IMF is part of the compact means the arrangement is simply a stage set behind which Europeans have the IMF do the heavy lifting in Greece, Portugal and Spain – and have any deflationary blame fall on that organization rather than on Brussels.

The soft euro is bad news for German debt. That might be the price the Germans are willing to pay in order to stimulate some more exports. The Germans willt not like the sharp rise in oil prices that will accompany the soft euro. The Europeans will have to start buying dollars in order to afford crude as the Middle Eastern suppliers will not fix an accommodating euro price that differs from the dollar/crude relationship. Anti- western politics have been purged out of crude oil business, all that matters is value, now. 

The Saudi pursuit of value is damaging enough to western ‘interests’. 

What this means is the window of opportunity – to come up with an energy policy that reduces use without price driven demand destruction – is small and closing fast.

The hardish euro equals an accelerating deflation in Europe that continues until the euro compact dissolves. Brussels cannot come up with an ‘American Solution’ which supports bondholders and nobody else … and expect something different from an American outcome. 

Right now the major trading blocs – US, China, SE Asia and Japan, as well as the Eurozone – have not come to terms with the new Super Hard Dollar. The US cannot avoid deflation as currency becomes king and all other assets expendable in exchange. China’s currency is pegged to the dollar and the ‘Niewe Superhard Yuan’ is starting to manifest itself as banking convulsions in China. It is hard to see the Chinese standing by idly while this unforeseen outcome blossoms into a credit bubble deflation.

While a hard yuan would stifle inflation pressures, the Chinese establishment will more likely choose to ‘float’ the yuan – the other direction from what the American establishment desires and expects. China will risk hyperinflation and the ire of the US by cheapening the yuan and flooding the country with it in order to keep its incredible growth machine churning. Even if oil and oil products become very expensive, the Chinese have lots of dollars and dollar- denominated securities to exchange for fuel.

Don’t look for China to dump dollars or US Treasuries, either. They aren’t stupid. Look for dollar flows to reverse as time passes away from China and toward the US, nonetheless. 

In the Eurozone, cooperation from the ‘streets’ is needed and can only be bought. As a consequence, look for more and more euros in circulation – at least for a little while. 

Brussels has bought itself about six months.