European governments have come together to offer Greece a 45 billion Euro aid package. The package is comprised of 30 billion euros at 5% with an additional offer from the IMF of 15 billion euros. This is well below the current yield of 6.98% Greek debt had spiked to. Although this won’t solve Greece’s debt woes it will substantially alleviate the pressures that markets had been imposing on Greek debt in recent weeks. In comments eerily similar to Hank Paulson’s bazooka during the U.S. bank bailouts, Greek prime minister, George Papandreou, said the agreement is akin to a “gun on the table”:
“After the latest developments, with the terms now set, the gun on the table will be loaded. Speculators will know this. The question is whether this mechanism will persuade the markets purely as a gun on the table. If it does not, it is a mechanism that exists and could be used.”
This strikes me as an obvious near-term positive for the global economy, but does little to resolve the structural problems in Europe. While it’s great to see the nations of Europe come together and protect one of their currency brethren, they remain a currency system that is inherently flawed due to their inability to print their own currencies. They are not their own bankers and as we’ve seen throughout history with commodity linked currencies and convertible rate currencies this system is unlikely to succeed in times of severe financial distress. As we’ve seen with trade deficit nations like Greece in the last 12 months, this system imposes an inherent and potentially crippling demand on particular nations. Like most of the financial bailouts we have seen over the last 18 months, this will do much to alleviate near-term market fears, but only kicks the can down the road.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.