The dramatic announcement by 5 major central banks about providing dollar liquidity for European banks could precede a bigger announcement about an official Greek default.
The liquidity move, similar to the one made after Lehman, could help make the default more orderly, and prevent a Lehman like turmoil. Here are 3 reasons why this move could be a preparation for a Greek default:
The dollar liquidity operation will last until the end of the year and will enable dollar funding for European banks, which were struggling. It provided a big relief for the euro and has shown that the Federal Reserve, the ECB and also British, Swiss and Japanese banks have the will and the ability to cooperate at sensitive times.
This diverted the attention from the Greek crisis.
- European banks are struggling because of Greece: This is especially true for French banks, which have the highest exposure and some are highly leveraged. US money markets shy away from European banks because of Greek “assets”. The dollar liquidity operation not only helps them in the current environment, but also provides the necessary cushion in case Greece defaults.
- There’s no orderly insolvency mechanism yet: This statement came from German chancellor Angela Merkel this week. Note the word “yet”. She was referring to the ESM mechanism due in 2013, which will allow orderly insolvencies. This move by central banks makes a mechanism ready already now.
- Geithner joining European finance ministers: US Treasury Secretary knows a thing or two about saving banks from his previous position as the President of the New York Fed during the financial crisis. He will join the European finance ministers meeting in Poland, in an unusual move. Just this week, Geither hinted that European banks wouldn’t pass the US stress tests. Geithner was probably well involved in the dollar liquidity move.
And in Greece – the limits have been reached
Greece cannot do any more: The hole in Greek budget prompted an angry departure of the EU / IMF delegation in demand for fresh austerity moves. The property tax announced hastily by the government in Athens will be collected through electricity bills in order to avoid tax evasion, but the union at the electricity company hinted it would not cooperated.
So even this desperate move by the government, which lost support, is likely to fail. The level of trust that Greece can fulfill its obligations is very low, to say the least.
Italy and Spain getting ready
The Italian parliament passed new austerity measures in parliament this week. The goal is to have a balanced budget by 2013, and to avoid an economic swirl.
Also Spain is pushing forward a new tax on the rich. This comes after the constitution was changed to place a “debt ceiling”. It’s important to note that Spain has general elections injust two months (November 20th). Such moves before elections are quite rare.
The euro enjoyed the announcement, but this was quite limited.
Do you think that this move is a preparation for The Big Greek Default? If so, will it be orderly? Or is there no such thing as an orderly default?