When Greek finance minister Evangelos Venizelos met Timothy Geithner in Washington yesterday, did they commiserate about the depredations of the rating agencies which have wreaked havoc on European economies over the last months, and which are now attempting to dictate terms in Washington? Standard and Poor’s has threatened to withdraw the United States’ AAA rating unless a timely agreement is reached on raising the debt ceiling—and unless legislators agree on a $4 trillion package of deficit reduction measures. Greece has suffered repeated assaults from the three unelected Fates, which have now pushed interest payments on the country’s two-year bonds up to 27.7 percent. On Monday Moody’s cut Greece’s rating by three notches to Ca—implicit default—further dampening the squib of euphoria that greeted last week’s European summit agreement on a new bailout for Greece, along with measures meant to contain the crisis and stabilize the Eurozone.
Not that the agreement was about to save the world, though some of its terms are welcome. It does ease the pressure on Greece, Ireland and Portugal by extending the term of EU loans from four to thirty years and reducing the interest rate to 3.5 percent; it also provides for a voluntary “haircut” of 21 percent (too little and too late) for Greece’s private creditors—a victory for German Chancellor Angela Merkel, who didn’t want to hand the whole burden to German taxpayers. (An arcane mechanism is supposed to contain the rating agencies’ threat to consider such a haircut a technical default, triggering debt insurance payments across the world; it is still not clear how far this has been successful.) The agreement is also a step towards greater European fiscal union—read redistribution—with provision for the new European Financial Stability Fund to buy up sovereign debt and recapitalize the banks not only of failing Eurozone countries but of those deemed at future risk. Of course, no decision has yet been reached on how the EFSF itself is to be financed; details at eleven, or more likely in September when the Bundestag gets back from its vacation, hopefully in a more charitable frame of mind.
But the EU’s attempt, once again, to ringfence Greece as if the European debt crisis was caused by Greece alone looks doomed and dangerous: Paul Krugman responded to it with a short blog titled “1937! 1937! 1937!” After emphasizing that the haircut for private lenders applies only to Greece’s creditors, the document goes on to whistle loudly in the dark, “All other euro countries solemnly reaffirm their inflexible determination to honour fully their own individual sovereign signature and all their commitments to sustainable fiscal conditions and structural reforms.” As any parent knows, making concessions to one child while strictly forbidding the same concessions to the others is a fatal sign of weakness; and as the Greek economist Yiannis Varoufakis points out, expecting Portugal and Ireland (and Italy and Spain) to go on making pledges they can’t meet is an open invitation to speculators (and the rating agencies that serve them) to push up bond spreads, hedge their bets and keep the whole destructive cycle going.