ECB – Time for Nuclear Option on Greece?

Given that it appears the EU had long ago come to the conclusion that they were potentially better than anyone else handling ugly situations that emerged and that 12 years after it was founded ECB authorities responsible for the Euro currency management thought that it infrastructure was now so strong that it could sort out and withstand any problem that arose without help from outside it would nice if I was able to say that as Greece is a European problem it is also one that the Europeans could easily sort out!

We and they well know better than that now though which is why belatedly the EU authorities were eventually forced to bring in the International Monetary Fund to provide the planned additional bailout assistance for Greece. Too little and by then, too late was the answer from markets – too much damage had already been done. None of this was helped of course by the inability of the authorities involved to agree let alone speak with one voice. Not then and not now could the various European authorities have ever sorted a situation like Greece out on their own. Meanwhile despite the ECB meeting in Portugal today and that may just find a method that provides a degree of short term stability for the Euro I take the view that even if they do also decide by majority to make use of the so-called nuclear option – a kind of ECB style quantitative easing buying up Greek bonds that had so appalled the ECB when US and British governments began the process back in 2008 – we should not expect all EU and Euro member states to play ball. Here and now I do not pretend to even know the rules by which the ECB might just arrive at such a nuclear option solution but I will tell you this for nothing – I doubt that Germany will acquiesce to a plan that is only based on the ECB picking up busted Greek bonds!

Whatever, it seems to me that the stage is set for something to occur over the next twenty four hours and it just may be that the pressure from Euro governments is such that the ECB is now forced to put forward the nuclear option plan. Having been so critical of what US and British governments did in their respective forms of quantitative easing this will not be an easy pill to swallow. In fact it may not actually be swallowed today but if not now my guess is that it will not be that long before the Euro authorities realise that to salvage the Euro they in fact have little choice.

Of course, with so much damage done to market confidence even if the ECB does choose the ‘nuclear option’ there can be no guarantee that markets will buy into it. But it seems to me that there is now little other choice if further contagion and maybe terminal damage to the European currency is to be avoided. Such a move may not help Portugal or even Spain from suffering further humiliation and it doesn’t alter the bottom line problem that needs to be resolved in Greece – bring the deficit back into some kind of order and authority. In the meantime the Greek situation appears to be going from bad to worse and it may yet bring down the government. We must hope not because as far as I can see no other political party in Greece is prepared to even address the deficit issue. It is no use the population blaming the banks either – this is a clear cut matter of for far too long Greece living beyond its means paid for by cheap Euro money.

The proposed domestic solution to bringing down the Greek government deficit is by slashing expenditure and raising some taxes. Clearly such measures will slow consumption to the point of making a bad situation even worse. As we know pensions will be seriously hit, ridiculous bonuses paid on the basis of 13th and even 14th month payment to workers will end, tax increases imposed and retirement dates pushed forward by two years. That may not be enough in the medium and long term but it is enough for now in my view – if a democratic government system is to be retained in Greece. But all measures must be implemented and the Greek government must do a lot more to convince the population of the need. It must sell itself better to the population and it must also sell the idea that walking away from the Euro is no solution even it would be music to the ears of many fellow Euro member states.

Back to today and given that this appalling situation has been allowed to fester for far too long not surprisingly currency, bond and stock markets have already lost confidence in the ability of not only the Greek government to carry out its share of the bargain but also for the EU in conjunction with the IMF and ultimately the ECB to sort out the mess. Germany, the engine of the Euro based economy, remains crucial to this and particularly to the nuclear option. For now it has chosen to put national interest effectively saying that enough was enough demanding greater protection for any part that it would be forced to play in the affairs of a neighbour EU state with whom it has rarely enjoyed perfect relations. To gain its fulsome support and that would allow the German leader to go into the regional elections holding her head high Angela Merkel wants the Greek government to tighten the spending screws further. Politically for a nation such as Greece and that has essentially lived off the spoils of being part of a currency union let alone the EU as a beneficiary state [arguably it should never have been allowed to join either] we should not be surprised that workers would revolt on hearing and indeed, already feeling the level of pain that they must endure.

Thus, with global market confidence all but gone, the Euro suffering severe pain from which there may be no repairable option, Greeks themselves rising to what is an unsatisfactory situation by striking we are now dealing with a political and financial situation seemingly out of control. Given the damage already done and the perspective that this situation needs to be resolved very quickly the financial and currency aspects of this crisis need to be resolved quickly. Thus and despite of the risks, I take the view the sensible option now can only be the nuclear one – quantitative easing – and by the EU giving greater responsibility for the required discipline that the Greek economy needs to the IMF.

Two months ago I and others – including my great chum Anthony Peters at Swissinvest – made clear views that suggested the only way to sort the Greek deficit and debt problem out was to hand the whole thing over to the IMF. Like the IMF or hate them they are the only competent global authority to handle a situation such as this and that has sufficient mechanisms in place that avoid delay. Above all it should be remembered that the IMF is in fact independent of national politics and a situation such as this is exactly the reason that the IMF was established. Is Greece any different than Argentina was twelve years ago? No. Both are nations that have lived beyond their means and as we know, they are not alone. Overall despite the odd mishap the IMF has an almost unblemished record of achieving the required mission success. Perhaps the real point though is that because the IMF is independent and without the burden of civil servants it is able to command a very different authority and respect – not only from governments but also from the population of each and every country it assists.