Common sense sometimes turns up in unexpected places, in this case, Estonia.
The economy minister of Estonia, member of the euro area since January, said it was “illogical” to exclude the possibility of bankruptcy, in an interview published Friday.
“I still do not understand how a failure to pay (heavily indebted countries) can be avoided,” said Juhan Parts in German daily Financial Times Deutschland. “In a market economy, this should be an option. It is illogical to want to avoid this issue,” he added.
His comments came as doubts about the ability of Greece to implement promised reforms, and on which the financial assistance of its partners are increasingly keen among Europeans.
Estonia, which had to implement stringent economic reforms in the past, has the lowest debt level in the EU, 6, 6% of gross domestic product (GDP) in 2010.
M. Parts rejected the idea of an economic government of the euro area, put forward by French President Nicolas Sarkozy and German Chancellor Angela Merkel. “What is it is supposed to be?” He asks. “With the Stability and Growth Pact, there is already a clear agreement. And we do not know how we can force the Italians to apply [comply],”.
I applaud the comments on market forces as opposed to illogical demands and statements from ECB president Jean-Claude Trichet.
Given the size and economic unimportance of Estonia, one’s first thought might be to exclude anything they say regarding Eurozone matters. However, sentiment is important. One by one, countries will embrace the obvious (Greece is bankrupt), because there simply is no other choice.
Finland, Austria, Slovakia, and the Netherlands have all raised collateral concerns. Given the market has priced in virtual certain bankruptcy for Greece, one would have to be nuts to not demand collateral. Do German banks need more defaults (or German taxpayers more transfer payments?) That is guaranteed to happen unless Germany too demands collateral.
Looking ahead, Estonia makes a general case for bankruptcy, not just a “Greek bankruptcy”. This is not the kind of talk Trichet, the ECB, the IMF, or the EU wants to hear.
Tough luck Mr. Trichet. Market forces have overpowered your blind arrogance and untenable dogma.
At this stage, the only conceivable reason for the EU or IMF to pay Greece the next tranche of money is to give the EU another month trying to figure out the aftermath of default.
The critical mission for the EU is to put in place a mechanism for exit in general, before the market itself forces it.
Mike “Mish” Shedlock
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