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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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Capitalism and Freeedom
  • Europe Is Holding A Bake Sale For Greece 0 comments
    Sep 25, 2012 4:14 PM

    A month ago I posed the question "Will Greece blow up before election day?", and answered no. I said no because the consequences of Grexit are unknown, and the cost of endless bailouts is cheaper than default, repudiation and general chaos. No one wants Greece to blow up, not now.

    I said that the facts would be fudged and the bailout would be provided on the basis of meaningless Greek promises (redundancy). I also said that the IMF will be harder to "fix" than the ECB or the EU, since the IMF is not controlled by the EU, notwithstanding the woman who heads it.

    That remains my prediction. However, pulling off this trick won't be easy. Everyone agrees that Greece must be bailed out, but that is where the agreement ends. It appears that there are at least three flies in the ointment: the IMF team, which has not been co-opted by Lagarde; the Bundestag, that won't give Greece with any more money; and the Greek people, who are going on strike tomorrow to demand free money from the sky.

    A Grexit can only be prevented by forgiving Greece its sins, "extending" all of its deadlines, and throwing in another EUR 20 billion to keep it afloat until the next bailout. It is easy to forgive sins and extend deadlines; it is not so easy to come up with another twenty billion in bailout money. The IMF has said no to any more money. The EFSF/ESM can't provide it unless the IMF is on board (so they say), and unless the Bundestag authorizes it. The ECB can't provide it, because Greece is noncompliant with the Troika. And the Greek government will not agree to the latest austerity plan unless they are paid twenty billion to do so.

    What's a mother to do? Merkel will have to figure out a way to get her coalition to approve the new money, which it is loathe to do. We are witnessing the consequences of the constitutional court's decision to give a veto to the Bundestag. All additional EU bailouts must be approved by the Bundestag, which is not made up of Brussels bureaucrats or French socialists. The elected German politicians must either approve all future bailouts, or must be responsible for the "End of Europe".

    This would all be easier to handle if Greece were located on the southern border of the US, because then it would have full American support, as Mexico did in 1994. Without American leadership and support, the financial geniuses on the Continent must solve this crisis on their own. They will solve it, but they haven't yet figured out how.

    In any case, Europe is doing its small part to re-elect the president by ensuring that this crisis will drag on past the November election. The Dow must not be allowed to crash for the next six weeks!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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