At long last the EU, the IMF, and Greece come to terms on a bailout package. Here is a recap of weekend news.

Greece Gets $146 Billion Rescue

Please consider Greece Gets $146 Billion Rescue on EU, IMF Austerity Package

Euro-region ministers agreed to a 110 billion-euro ($146 billion) rescue package for Greece to prevent a default and stop the worst crisis in the currency’s 11-year history from spreading through the rest of the bloc.

The first payment will be made before Greece’s next bond redemption on May 19, said Jean-Claude Juncker after chairing a meeting of euro-region finance ministers in Brussels yesterday. The 16-nation bloc will pay 80 billion euros at a rate of around 5 percent and the International Monetary Fund contributes the rest. Greece agreed to budget measures worth 13 percent of gross domestic product.

“It’s an ambitious program, it’s austere but it’s absolutely necessary,” Juncker told reporters. European Central Bank President Jean-Claude Trichet, speaking at the same press conference, said Greece’s plan will “help to restore confidence and safeguard financial stability in the euro area.”

Support for Greek Banks

Inquiring minds note Greece Bailout Plan Includes Support Fund for Country’s Banks

Greece’s international bailout plan will include a 10 billion-euro ($13.3 billion) support fund for the nation’s banks, which may face rising bad loans as the economy shrinks.

“The objective of the fund will be to ensure that the Greek banks are well capitalized at all times,” Servaas Deroose, deputy director general of the European Commission’s economic and financial affairs department, said in Athens yesterday. “Injections will, as always, be subject to tough conditions.”

The so-called financial stabilization plan is part of an unprecedented 110 billion-euro bailout from the European Union and the International Monetary Fund. The commission, the EU’s executive arm, estimates Greek gross domestic product will shrink about 4 percent this year and by almost half that amount in 2011, before growing in 2012.

“The Greek banking system is actually quite well capitalized,” Poul Thomsen, the IMF European Department deputy director, said in Athens. “But clearly, with this dramatic program, the contraction in nominal GDP, we do expect to see an increase in non-performing loans.”

Well Capitalized?

The entire global banking system is insolvent. Talk of well capitalized banks at a national level is a joke. The only pertinent question is “What order do various countries implode?”

The market seems to think Greece is a good candidate and I see no good reason to argue.

$146 Billion Bet to Avert Contagion

Bloomberg notes the EU Bets $146 Billion Greek Bailout to Avert Contagion.

Euro-region governments are betting $146 billion in economic medicine for Greece will be enough to inoculate the rest of their region from contagion.

Finance ministers yesterday approved the unprecedented bailout for Greece after a week that saw the country’s fiscal crisis spread to Portugal and Spain. At the same time, they refused to say how they would help other indebted nations if the need arose, saying that Greece is a “special case.”

The risk is that investors will shift attention to other euro nations in the absence of a clear aid plan for the 16- nation bloc’s weakest members. The extra yield investors demand to buy Portuguese debt over German bunds surged to the highest since at least 1997 and Spain’s IBEX 35 stock index fell the most in three months last week. The euro slid in Asia after the Greece announcement. “It is far from assured that this program will forcefully counter contagion risk,” said Mohamed El-Erian, co-chief investment officer at Pacific Investment Management Co. in Newport Beach, California, which runs the world’s biggest bond fund. “Heavily exposed creditors” may try to head off potential losses and sell bonds, “increasing the pressure on core European governments to also provide a backstop for Portugal and Spain.”

“I don’t think the markets will put Portugal and Spain under attack because their situation is in no way comparable to Greece,” Luxembourg’s Jean-Claude Juncker said yesterday after chairing the talks. French Finance Minister Christine Lagarde said “Greece was a special case, because it reported special numbers, provided funny statistics.”

The IMF’s Poul Thomsen, who heads the mission to Greece, said the austerity plan was designed to “shock and awe markets and re-establish confidence.”

Shock and Awe Coming

Shock and awe is coming but not as envisioned by the IMF. Smack in the face of the bailout announcement the US dollar is up.

Please note that one evening or even one week does not a trend make. However, those expecting a quick “shock and awe” certainly did not get that reaction.

Today the EU made a $146 billion bet to avoid contagion. What will the EU do tomorrow when Spain and Portugal start imploding?

Just to be clear, I used “tomorrow” figuratively. Shock and awe is far more likely to be PIIGS contagion than “everything is fine”.

The EU will be put to a test. Perhaps not tomorrow, but more likely sooner than later. The hubris by Poul Thomsen at the IMF and various officials at the EU is quite telling.

Mike “Mish” Shedlock
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