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Sarkozy Saves Greece And Launches The F.S.F.

Politics / Credit Crisis Bailouts Jul 22, 2011 - 04:10 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleIn a classic of its type, French president Nicolas Sarkozy, 21 July evening time in Brussels, gave what looked and sounded like an impromptu press conference but supposedly wasn't. In a state of high excitement he explained how almost alone, or at least with German chancellor Angela Merkel they had saved Greece. The figures thrown out by Sarkozy were part of the circus show, for example that Greek debt, in 1 year, had grown by about 100 billion euro or by nearly 40 percent of GNP, to what Sarkozy claimed was 350 billion euro, which is difficult on a GNP he also claimed as 230 bn euro this year. To be sure, 10 or 20 bn euro this way or that counts for little, in such exciting times.

Bankers and bond traders tuning in later could hear Sarkozy add that Greek debt, which he claimed at around 350 billion euro today, could grow by another 130 billion, before adding that with the help of Merkel and other key players in the Eurogroup - acting through the not yet existing EMF or European Monetary Fund modelled on the IMF - this would be prevented. Among the reasons he said this could be prevented, was "European financial integration", made concrete with the creation of a European Monetary Fund, modelled on the IMF, with the process aided by his friend, former swimming champion Christine Lagarde doing all she can to help the EMF come about.

He also added this preventive action would only concern Greece right now, but maybe could include Portugal and Ireland. Time will tell.

Sarkozy many times referred to the FSF. This still mysterious, possible but not existing and very special aid fund, not to be confused with the Free Software Foundation of Europe, would possibly be funded by a Tobin-type tax on bank and trading transactions. Germany's Merkel wanted that, but the French delegation, headed by Sarkozy, did not. The German stance before the previous Sarkozy-Merkel meeting of 20 July was this FSF could easily get its hands on 50 billion euro a year, but by 21 July president Sarkozy said this was no longer needed because banks and insurers, and other unspecified financial players would "voluntarily" cut the interest rates they apply on loans, or even renounce a part of what they are owed by the bankrupt Greek state.

What type and kind of needed "voluntary" action was not spelled out by president Sarkozy, apart from a modest amount, in his words, ranging from about 13.5 bn euros, to as much as 40 or 50 bn euro, which was needed upfront. In total, but perhaps also additionally, depending what part of the conference you took as most serious, about another 135 billion euro would be needed for Greece but this would be stretched over 30 or 40 years. Annual interest rates on this package would be soft and low, maybe 4 percent a year.

To the extent that Sarkozy was correctly briefed and the figures he put out are serious, we could construe that Greek debt would hit a high point around 480 billion euro, but not at any easily defined future date. If the debt growth number he gave for the past 12 months, of 100 bn euro is serious, Greece could or might achieve or attain 480 bn euro of sovereign debt by around 2014. In per capita debt terms, this would be a lot more than simply impressive.

Blatantly contradicting himself several times over during the press conference, president Sarkozy said the new debt bailout package for Greece would certainly not be used as any kind of precedent or model for negotiations with Portugal or Ireland, or perhaps Spain and Italy quite soon. He also said the model would be applied to Irish and Portuguese debt, possibly soon.

Nobody churlish enough to demand hard and real numbers from Nicolas Sarkozy should be surprised if they get short changed. His claim that Greece, a country of 11 million inhabitants, has raised its debt by 100 bn euro in one year was however not challenged by journalists in the audience. At that rate of debt growth, the entire Greek population can take a 1 year holiday, every year, for example in nearby Tunisia and Egypt where package tour holiday deals to admire the post-revolutionary Arab summer are sold at as little as $175 a week per person - including the airflights and food. Related to what are called, and are the runaway debt growths of other OECD countries, the USA for example, Greece is in a superclass all on its own. If the USA tried to rival Greek debt growth per capita, its would have to grow its debt by around $ 2700 billion per year. Very simply, that kind of debt growth is not possible without the aid of Goldman Sachs and other creative leading edge financial entities,

As president Sarkozy several times said, market traders would examine and accept or reject the new plan. He added they would take account of Eurozone banks, insurers and other players making "voluntarily" cuts on the rates they apply to loans for Greece - which at present and sometimes are at high double digit annual rates. Sarkozy of course repudiated the no-no words debt repudiation, what was going to happen, he said, was voluntary renunciation. Being a lawyer by training, president Sarkozy can shade meanings with creative flair but market operators and traders will find out soon what "voluntary" means.

To be sure, markets were ritually euphoric on this news, the saving of Greece being light at the end of the tunnel, and so on. Doing the math shows other, stark and sombre realities. Even thinking about them is such bad news that we have to give Sarkozy a bonus point for his circus act.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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