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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.
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  • Europe Flinches At A Greek Default 0 comments
    Aug 22, 2012 11:56 PM

    ATHENS, Aug 22 (Reuters) - Eurogroup chief Jean-Claude Juncker kept alive Greek hopes of winning more time to push through austerity cuts but warned the country was staring at its "last chance" to avoid bankruptcy.

    Mired in a fifth year of recession, Greece has been lobbying for two more years to hit budget targets promised under its second, 130-billion euro bailout from the European Union and International Monetary Fund.

    Juncker said a decision to grant more time would depend on the findings of a review by EU and IMF lenders on the country's progress in fulfilling its pledges. He accompanied that with a warning to Greece to shore up its dire finances, saying the country's next tranche of aid would depend on it producing a credible strategy for austerity cuts. "As far as the immediate future is concerned the ball is in the Greek court," Juncker said. "In fact this is the last chance and Greek citizens have to know this."

    Right now, two members of Club Med are calling Europe's bluff.

    Spain is refusing to apply for aid until it is told what conditions it will have to meet and how much aid it will get. Europe wants to offer loans from the EFSF and limited bond-buying by the ECB. Spain demands unlimited bond-buying in order to bring down its bond yields.

    Because Spain is about as TBTF as you can get, Europe cannot allow her to default and Spain knows that. By threatening to default, Spain has leverage with Europe. Since ex ante we know that Spain is TBTF, we know that she won't default and something will be worked out. Spain may even get what she is demanding.

    Similarly, Greece continues to defy Europe in an in-your-face manner. Her long-standing negotiating strategy has been to agree to everything and then do nothing. This has expedited negotiations: the Troika presents its demands, Greece agrees, gets her money, and goes back to protesting austerity and calling the Germans nazis.

    One might think that this game would run out, and that Europe would realize that Greece has not implemented any of the agreements to which she has agreed, in writing. (It's touching the way the Germans think that having the Greeks sign the agreement makes it more binding.)

    Well, Europe is quite aware that Greece has cut nothing, restructured nothing, laid off zero workers, collected no additional taxes, and has sold no state assets. Those things are hard to miss. But Europe, despite all of its confident bluster about a Greek exit being manageable, is afraid of a Greek default. They are worried that a Greek exit would be a black swan that would throw the eurozone into chaos. And so they prefer to paper over Greek defiance and pretend that everything is going according to plan.

    Antonis Samaras, the Greek PM, is aware that Europe will tolerate almost anything to avoid a crisis. So, instead of saying "Because you have failed to comply with the agreed fiscal strategy, there will be no more money", Europe says that the country's next tranche of aid will depend on Greece "producing a credible strategy for austerity cuts". And then, of course, the big threat: "this is the last chance and Greek citizens have to know this." We first heard this recording played two years ago; we may hear it again in the future.

    It is interesting that Dutch and Finnish officials seem much more angry at Greece than the Germans are. My guess is that this is because they are free to say what they really think, while Germany is thinking beyond its understandable anger. Germany knows that the fuse that lights in Athens leads ultimately to Paris.

    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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