Monday, May 9, 2011

Euro Intrigue

. Monday, May 9, 2011

Now this is interesting. Apparently some folks in Europe are questioning the Der Spiegel reporting that I linked to over the weekend. There are accusations that the German report was unsourced, unsubstantiated, and possibly designed to scare markets enough to kick off a self-fulfilling prophecy. This continues a recent pattern that included Nouriel Roubini as the proverbial canary in the coal mine. See, e.g., this report from Parisian periodical LIBÉRATION:

Washington, 17 April. A session held by The Institute of International Finance — which brings together banks, investors, monetary and financial institutions — was marked by major rumours. Their source, American economist Nouriel Roubini — the man that rose to fame when he successfully predicted the subprimes crisis who is also the President of RGE, an analysis firm that provides (expensive) advice to investors — was at pains to convince everyone that an imminent restructuring of Greek debt was on the way. ...

It took several days to calm the ensuing storm on the capital markets. On Friday 6 May, the same process began all over again when the website of the German weekly Der Spiegel "revealed" that a ”secret meeting” of Eurozone finance ministers was to take place on the same day in Luxembourg. On the agenda, discussions of “Greece’s request” to exit the euro. No sources were cited, but that did not prevent press agencies from taking up the story, or a subsequent slide in the euro. ...

But who stands to gain from the crime? Investors who are currently holding anti-Athens positions. Especially those who have bought Greek credit default swaps (CDS), who will lose their investment if default does not happen. Or those who are indebted in Greece or who have withdrawn money from the country, who have every interest in a return to the drachma. The rumour mill is set to keep on turning.

And Tyler Cowen points to this longer discussion of the weekend's "news". The gist:

It is my considered opinion that Der Spiegel, in consultation with certain circles within the German government (in particular the Finance Ministry) was trying to send a message to the German Chancellor but also the Greek Prime Minister. And what is this message? That there are far worse things than a debt restructure, the worst being a step-by-step dismantling of the euro that will begin once a country like Greece is forced into an impossible situation. And that continuing to live in denial, and to peddle blatant lies about the sustainability of the present course will no longer be tolerated.

It's no secret that investors will try to move markets in ways that are advantageous to them, nor that political elites will try to turn public opinion through the media. But in this case basically everyone agrees that Greece is insolvent, and that some form of restructuring is all but inevitable. That doesn't mean that the terms of that restructuring, nor the political implications for the eurozone, are assured. These might be examples of certain investors, government officials, or policy entrepreneurs to influence the timing of the restructuring, as well as the political response to it. That's interesting. I don't know quite what to make of it yet, but I'll be paying attention in the coming weeks and months. As always, whatever is decided there will be winners and losers.


Euro Intrigue




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