When all else fails blame the speculators and the shorts. That is the action the Greek Prime Minister George Papandreou, French President Nicolas Sarkozy, and German Chancellor Angela Merkel took today.

Let’s kick the discussion off with a rant from the Greek Prime Minister. Please consider Papandreou Warns Crisis Could Spread Unless Speculation Curbed.

Greek Prime Minister George Papandreou said his country’s fiscal crisis could spread beyond Europe unless “unprincipled speculators” and “ill- regulated” financial markets are reined in.

“Europe and America must say ‘enough is enough’ to those speculators who only place value on immediate returns, with utter disregard for the consequences on the larger economic system,” he said in a speech text today in Washington. “An ongoing euro crisis could cause a domino effect, driving up borrowing costs for other countries with large deficits and causing volatility in bond and currency rates across the world.”

Papandreou called the market for credit-default swaps a “scourge” that “haunts Greece and all of us.” U.S. and European regulators need to bolster regulations to curtain such activities, he said, or “a small problem could be the tipping point in an already volatile system.”

Without identifying any firms, Papandreou said “the same financial institutions that were bailed out with taxpayers’ money are now making a fortune from Greece’s misfortune” and “unprincipled speculators are making billions every day by betting on a Greek default.’

“If the European crisis metastasizes, it could create a new global financial crisis with implications as grave as the U.S.-originated crisis two years ago,” he said.

French President Sarkozy Says EU Must Support Greece

Please consider Sarkozy Says EU Must Back Greece or Jeopardize Euro.

French President Nicolas Sarkozy said the European Union must support Greece or risk destroying the euro as Prime Minister George Papandreou heads for Paris to lobby support for the debt-laden country.

“If we created the euro, we cannot let a country fall that is in the eurozone,” said Sarkozy yesterday before a meeting with Papandreou in Paris today. “Otherwise there was no point in creating the euro. We must support Greece because they are making an effort.”

German Chancellor Angela Merkel is rebuffing any talk of a rescue even as EU nations are said to be working on a contingency bailout plan for Greece to be funded by member governments. Her finance minister, Wolfgang Schaeuble, told Welt am Sonntag today that officials should work on creating a European organization similar to the International Monetary Fund to prevent a repeat of the crisis.

Papandreou is indicating that Greece may still need financial support and is prepared to turn to the IMF if necessary, calling it a “final resort” on March 3.

That prompted a rebuff from European Central Bank President Jean-Claude Trichet a day later because finance officials fret such a move would signal the EU isn’t capable of solving its own problems. Italian Finance Minister Giulio Tremonti is nevertheless refusing to rule out a role for the IMF in any aid package.

“The IMF should act as a bank” in any rescue, he told reporters in Venice yesterday. “We finance the IMF so it can use the funds around the world. Why not use that capital with the IMF acting as a bank with its know-how?”

As Greece calls for more help, Merkel on March 5 turned her focus to restricting the use of derivatives to halt “speculators” from exploiting countries’ budget deficits.

The Greek prime minister said he will fight to ensure speculators don’t undermine his push to restore order to the country’s economy. It’s unjust and undemocratic that his efforts are being undermined “by some ‘kids’ in New York and elsewhere sitting in front of a computer,” he said yesterday.

Euro Zone Ready to Help Greece If Needed

In what is surely news to Germany, Sarkozy Says Euro Zone Ready to Help Greece If Needed.

French President Nicolas Sarkozy said the euro region is ready to rescue Greece should the government struggle to fund its budget deficit, arguing that the country is “under attack” from so-called speculators.

“I want to be very clear: if it were necessary, the states of the euro zone would fulfill their commitments,” Sarkozy said in Paris yesterday after a meeting with Greek Prime Minister George Papandreou. “There can be no doubt in this regard.” While Greece doesn’t need assistance now, “we have measures, we are ready, we are determined,” he said.

“Speculators and the markets should know that solidarity means something and that, if there’s a problem, we are there,” said Sarkozy. “The sooner we say that and the more firmly we say that, the more rapidly we settle the problem.”

Sarkozy wouldn’t say what steps the EU would take and German Chancellor Angela Merkel, who runs Europe’s largest economy, has so far refused to give the green light to any aid package. Merkel said after meeting Papandreou on March 5 that the question of a bailout “‘absolutely doesn’t arise.” Her coalition partner, Guido Westerwelle, said he won’t sign a “blank check” for Greece.

German Finance Minister Wolfgang Schaeuble indicated his government is already thinking about how another Greek crisis can be avoided, saying the euro region should consider creating an institution similar to the International Monetary Fund.

Flaws in the euro region’s governance were also indentified by former Federal Reserve Chairman Paul Volcker, who said in an interview on March 6 that the lack of a political union to back up the European Central Bank is a “structural crack.”

Did You Catch The Bazooka Theory?

In case you missed it here it is: “Speculators and the markets should know that solidarity means something and that, if there’s a problem, we are there,” said Sarkozy. “The sooner we say that and the more firmly we say that, the more rapidly we settle the problem.

Supposedly yapping at speculators and threatening speculators means you won’t have to take action.

Bazooka Theory vs. Actual Results

If you have a bazooka in your pocket and people know it, you probably won’t have to use it.” Paulson said at a July 15, 2008 Senate Banking Committee hearing. The reference was in regards to Fannie Mae and Freddie Mac.

Paulson believed that if he had the power to bailout Fannie Mae, the market would react to that possibility and no bailout would be necessary. Was that a blatant lie to get Congress to commit funds or was Paulson simply stupid?

Since then both Paulson and Bernanke have tried various bazooka ploys. The results have been less than spectacular except for spectacular failures.

IMF Scorecard

  • Jean-Claude Trichet says using the IMF would signal the EU isn’t capable of solving its own problems.
  • Italian Finance Minister Giulio Tremonti will not rule out a role for the IMF in any aid package.
  • Greek Prime Minister George Papandreou has not ruled out the IMF, perhaps as a ploy to get money from France and Germany.
  • German Finance Minister Wolfgang Schaeuble indicated his government says the euro region should consider creating an institution similar to the International Monetary Fund.

That’s quite a collection of diverging views.

Greece, EU Need To Look In Mirror

What hurt Greece was Greece, yet the Goldman Sachs witch hunt is on. Bear in mind I have many issues with Goldman Sachs, but arranging credit default swaps for Greece so that Greece could hide its debts and get into the EU is not one of them.

Moreover, one should not just blame Greece, but the EU itself for not looking into the finances of Greece better. Indeed it is highly likely the EU purposely overlooked problems in Greece in order to expand the EU. The EU is also responsible for structural problems as Volcker pointed out.

Now, as bear markets expose and magnify structural issues, Greece and the EU are blaming everyone else for problems they caused.

Finally, when the finger point starts and denial sets in, what’s simmering below the surface is usually messier than appears in public. The EU desperately wants to contain this crisis to Greece, but as with subprime rot in the US, I think problems are highly likely to spread to Portugal, Italy, and especially Spain, given the structural problems in the EU.

Mike “Mish” Shedlock
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