The next two days will be very exciting in Europe: as noted previously, tomorrow Greece will experience a general strike, another parliamentary square blockade (with or without an evacuation tunnel involved) and most importantly, an MP vote on the Troica's "bailout" measures. Yet the vote appears far from certain to pass affirmatively, just as the entire bailout hinges on some incomprehensible "voluntary" definition which may or may not trigger a "selective" rating agency default anyway. As a result the bonds of Greece, Ireland and Portugal are once again trading at all time record high yields as the market has zero confidence the Eurozone will succeed with this juggling act. In order to prevent a last minute breakdown of the Eurozone, its finance ministers are holding another emergency meeting later today hoping desperately that a deux ex machina will just fall into their laps: "Yields on 10-year Greek bonds climbed to 17.12 percent today, a record in the 17-nation euro-area's history, before an emergency session of finance ministers in Brussels. They’re seeking to narrow differences on how investors share the cost of easing Europe’s biggest debt burden and to wrap up a new financing plan at a leaders’ summit on June 23-24, a year after Greece received a first bailout." All this is just theatrics to avoid the impression, and reality, that Europe is now completely powerless: "Greece will default; it’s a question of when, rather than if,” said Vincent Truglia, managing director at New York-based Granite Springs Asset Management LLP and a former head of the sovereign risk unit at Moody’s. “It’s a basic solvency issue rather than a liquidity issue. Only a debt writedown will do." Which incidentally is as we have been claiming since January of 2010. But it seems that for the currency experimentalists, reality is something best postponed (even at a cost of trillions of taxpayer money).
For those curious, here is Goldman's Dirk Schumacher, who once used to be so cheery on the topic of Greek solvency, explaining what to look for at today's emergency ministers meeting. Dirk is no longer cheery.
Finance minister meet today in Brussels to discuss second Greek help package. The main issue is still the question of private sector participation, though there has been also no decision on the overall size of the package and how the package will be funded. Comments made by policymakers over the last couple of days seem to suggest some progress on that front but there has been no breakthrough yet.
One necessary condition for a compromise is that the Greek parliament approves the new medium-term fiscal plan. Moreover, a support for the plan by all political parties in Greece is seen, according to EU Commissioner Rehn, as crucial to reach an agreement on further financial help.
At the same time, Bundesbank head Weidmann wrote in an op-ed for Süddeutsche Zeitung that "there is nothing wrong with a voluntary maturity extension … However, the risks would outweigh the benefits in case of a forced maturity extension". The main risk, according to Weidmann, is that the funding situation of other countries might become more difficult in such a case. Weidmann, however, also stresses that "these risks would be unavoidable, if Greece were not to fulfill its part of the deal".
It is not clear why the difference between a voluntary and involuntary maturity extension is so crucial if it is indeed the contagion effect that the Bundesbank is worried about. After all, contagion reflects a herding behaviour among market participants that is not rooted in fundamental analysis and it is ex ante difficult to say what will be a trigger such an effect.
In any case, the German government is certainly aware of the ECB's stance on the question of private sector participation. Deputy finance minister Kampeter, speaking to Deutschlandradio, said that: "The fact is, we won't do anything that is against the expressed advice of the European Central Bank".