Group Therapy Report For
Patients: Southern Europe, EU, and Global Economic Leaders
Service: Marital, Debt Counseling
Status Report:Patients Display Passive Aggression, Denial
Members of the European Union announced today that they have reached an accord on Greece, but alas, neglected to provide details. Markets interpreted this omission to mean there WERE no details, and EU was basically just attempting spin control while it continues to dither.
Specifically, the EU said only was that they will confer with the ECB and IMF on the next steps for Greece.
To add to the tragicomic irony, the announcement noted that Greece was not asking for aid. In psychology they call this passive aggressive behavior – the patient feigns helplessness with the knowledge that their passivity inflicts suffering on the other party and pressures that party to take action. In other words, the Greeks are forcing the world to help them by not helping themselves and risking a global credit crisis through their default. But hey, no one is forcing the world to help them.
As we've noted before, we suspect EU leaders will continue to withhold concrete support because they would be committing political suicide by telling their already pressed electorates that they must pay for PIIGS mismanagement. If they get the rest of the world to share the burden, then these leaders can face their citizens and argue there was no alternative, as the world's financial support would show.
Until the EU succeeds in scaring the rest of the world into sharing the burden by legitimately threatening global credit crisis, the Euro, stocks, and other risk assets will be trending down, except for days like the past few in which markets grasp at unsubstantiated rumors.
Markets are rightfully scared.
· If the eventual support program isn't painful enough – moral hazard goes the way of Greek fiscal responsibility. Greece and ultimately the rest of the PIIGS will continue their irresponsible behavior and most likely be squealing for their trough to be filled yet again from the savings of responsible country's taxpayers.
· If the EU does nothing (its own passive aggressive behavior toward the rest of the world's leading economies), then:
o Investors yank cash out of the EU
o Greece defaults by spring time as it is unable to raise the 30 bln Euros to pay off maturing bonds
o A confidence crisis causes PIIGS bonds prices to collapse, the rest default in a matter of months
· All government debt sees falling prices, rising yields, risking further defaults and global economic crash.
Some kind of bailout or bond guarantee will eventually be arranged, probably with all of us footing the bill. It may just delay the day of reckoning, but that too beats imminent collapse.
In sum, the PIIGS have a gun pointed at the head of the EU, which in turn has a loaded pistol pointed at the heart of the global economy, the credit markets.
Like President Obama did with the US banks, moral hazard or not, we can't allow a credit seizure to kill the global economy and need to buy time.
The PIIGS know it, the EU leaders know it, and every leader from Washington to Beijing knows it.
Given that it's getting towards the end of the week, the temptation to take further profits will be considerable in the final days of the week unless some seriously concrete steps or firm commitment is demonstrated by the above parties in this increasingly scaring game of chicken.
Disclosure: Long US Dollars.