EU and ECB officials are scrambling like fools to come up with a “voluntary” solution to the Greek problem that will not trigger a default and spread contagion.

Please consider Juncker warns of contagion

Contagion from the Greek debt crisis could spread to at least five other European countries – including Belgium or even Italy – if it is not cautiously managed, the head of the eurozone group warned Saturday.

Jean-Claude Juncker told the German daily Sueddeutsche Zeitung that demanding that private creditors contribute to the next Greek bailout package could be considered a “default” by ratings agencies – and that would have extreme consequences for Europe as a whole.

Juncker, the prime minister of Luxembourg who also chairs the 17 eurozone finance ministers, was quoted as saying that a Greek bankruptcy “could prove contagious for Portugal and Ireland, and then also for Belgium and Italy because of their high debt burden, even before Spain.”

“We are playing with the fire,” he told the paper.

His comments came a day after Moody’s warned it may reduce Italy’s Aa2 credit rating over concerns about the country’s ability to increase growth and reduce its public debt, one of the highest in Europe. The warning followed a similar move by Standard and Poor’s, which cut its ratings outlook for Italy’s debt from stable to negative.

European officials will hold talks with the private sector – mostly banks, insurance companies and pension funds – and they will make a “substantial contribution” to a second bailout for Greece, Merkel said, according to the news agency DAPD.

But neither Merkel nor German Finance Minister Wolfgang Schaeuble have given an estimate of the private sector contribution they hope to achieve. Schaeuble told the German daily Boersen Zeitung the contribution must be “substantial, measurable and reliable” so that the burden of a new Greek aid package does not fall solely on taxpayers.

Juncker stressed that cutting spending and raising taxes alone was unable to revive Greece’s economy, and called for a loosening of EU rules to give Greece more direct financial assistance for investments that would spur growth.

Contagion is Certain

The EU is too late. Containing the uncontainable is impossible. Contagion is a certainty.

“Substantial Contribution” Nonsense

Merkel does not want the burden to fall solely on taxpayers, instead wanting banks to contribute an undefined “substantial” sum.

Why should taxpayers contribute anything? Taxpayers did not created this mess. Taxpayers did not force banks to lend to Greece. Taxpayers did not stuff their balance sheets with Greek debt.

Taxpayers did not want the ECB to buy Greek and Irish debt. Taxpayers had no say in letting Greece join the EU.

Can-Kicking Concoction

It will be interesting to see what the rating agencies say about the solution the can-kickers concoct this weekend because it is virtually impossible to structure a debt rollover in a voluntary way.

Mike “Mish” Shedlock
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