by Jerome a Paris
Wed May 19th, 2010 at 11:15:35 AM EST
1) "markets" suddenly start worrying about Greek public debt, after years of being oblivious to a well known phenomenon;
2) they start betting on a Greek default (by playing on secondary market debt and CDS); prices duly move and generate excitement and "panic," and, naturally, calls (by market players reacting to market players selling Greek debt and the euro) for Greece to tighten its budget;
3) the budget tightening is not deemed sufficient, so calls are made (by market players reacting to market players selling Greek debt and the euro) for other, stronger European countries to "save" Greece (meaning, really, allowing those that bet on Greece not defaulting while claiming that default is inevitable to make money on their bets);
4) to make sure this call is heeded, we get ominous warnings (by market players or clueless pundits) that the euro is doomed and will unravel (how and why that would happen is never ever explained); politicians, who should know better, panic. They first ignore the situation, then bluster, then pontificate and finally capitulate by actually promising to put money on the table; Germany, by dragging its feet, makes the whole thing look 10 times worse by slowing things down, creating appearances of division and offering a perfect scapegoat; the money virtually put on the table ends up being an ever larger pot;
5) markets cash in that promise, and restart the cycle by making it clear they don't actually believe it; the cycle restarts; they make their bets again and cash in again;
6) once actual money is put on the table, and after severe tightening by Greece (ie what markets supposedly called for), markets decide that this, in fact, is bad, as it will not save Greece and is making things worse for other European countries. Now they can rinse and repeat with several more countries, in a never ending cycle.
As a result, we give public money to holders of Greek bonds who should have known better; we end up in a situation worse than before, with the inevitable endgame being savage cuts to the European social safety nets. European is even more Doomed than before (if that were possible) and European leaders get blamed for it.
But they get blamed for not listening fast enough to the markets. Maybe someone should tell them to STOP LISTENING to the markets - the very markets that brought us the boom'n'bubble and the biggest recession in decades, and already made us pay to clean up their mess.
And nobody has explained to me so far how a Greek default would have any kind of practical consequence for the euro...