Europe’s rescue plan for Greece is now back at square one. The reason the plan failed is there never really was a plan to begin with, just bazooka talk.

Please consider Greece May Be Heading Back to ‘Square One’ on Aid as Bonds Fall

Europe’s week-old rescue plan for Greece has so far failed to do what its leaders predicted: reduce borrowing costs for the region’s most indebted country.

The yield on 10-year Greek government bonds has increased 24 basis points to 6.522 percent since EU leaders agreed to the aid blueprint on March 25. That’s the highest in a month and more than double the rate paid by Germany. Seven-year bonds sold by Greece on March 29 fell for a second day yesterday.

“What they were hoping for was to set up some sort of arrangement that never has to be used,” said Phyllis Reed, head of bond research in London at Kleinwort Benson, which manages about $32 billion. “The markets have sniffed that out and it seems like we’re heading back to square one.”

IMF Managing Director Dominique Strauss-Kahn said on March 30 the lender would set the terms of any loans to Greece just as it does with other countries. Trichet said before the summit that ceding control to the IMF would be “very, very bad.” He later changed his tone to say he was “pleased” with the outcome.

“It’s supposed to be a joint EU-IMF thing, but it sounds like the IMF have plans of their own,” said Reed. “There are still a lot of question marks.”

With investors keeping up the pressure, Greek opposition politicians are criticizing the EU plan. Coalition of the Left deputy Dimitris Papadimoulis yesterday mocked Finance Minister George Papaconstantinou for comparing aid to a “loaded gun” that would threaten markets.

“The gun,” he said, “has proved to be a water-pistol.”

Waterless Water Pistol

Rising Greek bond yields suggest that the EU’s loaded gun was not a bazooka but a water pistol without water.

That will remain the case as long as Germany and France argue about what needs to happen.

German Chancellor Angela Merkel even asked for EU treaty changes so that serial violators of EMU rules could be expelled from the euro. For details, please see Battle in EU Erupts Between Germany and France Over the “Club Med” Nations and Germany’s Export Policy

Few seem to believe Greece can carry out the necessary budget reductions. The situation is further complicated by the fact that France does not want any major role for the IMF, and preferably, no role at all.

The crucial question however, is “How much longer will it be before the market starts focusing on Spain as an even bigger problem?”

Flashback March 13, 2010: The Wall Street Journal is reporting No Need for Greek Bailout Now, France’s Lagarde Says

Credible efforts by Greece’s government to clean up its finances have so far negated the need for any bailout from the European Union, French Finance Minister Christine Lagarde said Friday.

Ms. Lagarde said that “technical experts” at the EU have been working on a contingency plan, so that if the need arose, “all we would have to do is press the button.”

Show Me The Button

Ms. Lagarde said that if the need arose, “all we would have to do is press the button.” That is the “I have a bazooka in my pocket” ploy.

The need has now arisen, and the market says “show me me the button.” So where is it? It’s pretty hard to press a button when it does not even exist.

Mike “Mish” Shedlock
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