Tuesday, May 4, 2010

Is TARP Greek for "Save the Bank(er)s?

There was a time when we thought that the biggest problem with bailouts was moral hazard. Like with so many things in life, the only loss is to one's innocence and only the first time.

As it is well known, the Greek government is on the receiving end of an ever increasing bailout package. In exchange, for such a ridiculous amount of money and the invaluable tutelage of the IMF, which by the way will become a super-senior creditor ahead of ALL bondholders, the Greek government promises to produce what amounts to a balanced budget.

As we know, balanced budgets are as rare as honest politicians as nobody likes to pay taxes and everyone is rather attached to their salaries and/or entitlements. In my opinion, the Greeks are as likely to deliver a balanced budget in 2013 as anyone else in Europe and beyond, which means not at all. How does anyone think that raising taxes and cutting salaries will deliver short term growth in the presence of higher rates is a mystery to me. More importantly, the market for Greek bonds seems to agree with my assessment as the curve is still inverted from 2 years onward signaling concern about default.

Yet, we still get comments from various analysts and politicians to the effect that the situation is under control and it has a fair chance of getting better (if only the market would finance Greek debt at "reasonable" prices).

In this context, it is interesting to find out that the money from the package seems to be following a familiar script. In other words, just like our TARP, the Greek package is already mutating from "fund the government" (or pay the debt, which is equivalent) to "stabilize the banking system" which means the banks will get the money and decide what to do. Maybe even pay bonuses.

The problem with this (global) crisis is that it is destroying whatever credibility we may still have on the financial/political system. Enormous amounts of public money are being doled out on an attempt to keep the party going. The tragedy is not that, if History is any guide, it will not work, but that people will feel cheated out of their hard earned taxes. Money comes and goes, however, credibility is easy to lose and hard to get back.

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