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Friday, November 4, 2011

The ongoing saga in Europe

I simply do not get what is going on in Europe. I get that the Greeks are broke and I understand that there is no easy way for them to dig themselves out of the hole they have dug. From what I can glean from the the many pieces written on the situation is that someone is going to take a haircut. The initial plans were that bondholders,  including many banks as well as small investors, were going to take a modest haircut but as things unwound, the losses they were to face were much greater than what was first imagined.

The latest deal proposes that bondholders will lose about half of their investment, with questions still being whether this is still not sufficient to make the deal work. Even at this substantial discount, the long term outcome is workable only if the Greece imposes an austerity program which will be onerous and long in duration.

Here lies the rub. If the Greeks agree to this (which they may or may not), how can any agreement be binding an the next government which may come to power in the coming years (or months)? While there is a great desire to come to some sort of agreement because there is a belief that this will bring some sort of closure, nothing could be farther from the truth. Greece will require ongoing infusions of capital and with each agreement comes only the opening of the next round of negotiations and posturing.

This is like budget negotiations in the US. The sequence is negotiation, agreement, money transfer, and then failure to meet negotiated goals, followed by the cycle all over again. The only way this can work is if the sequence is altered to negotiation, agreement,  meet negotiated goals, and then money transfer. It will never happen.

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