Europe Will Give Up on Greece; Don't Give Up on Europe
The rude treatment that Treasury Secretary Timothy Geithner received from his European Union hosts last week shows just how frustrated the financial crisis has left official Europe, as a post earlier this week noted. Geithner encouraged euro-area countries to let the European Central Bank expand the European Financial Stability Facility, the program set up to try to rescue states struggling with excessive debt.
As much as Europe's economy may need a further jolt of central bank-fueled liquidity, national politics make it a very tall order. It's not a coincidence that the tart remarks aimed at Geithner came from officials from Austria, Luxembourg and Germany.
Those countries are all haves in the euro area, and it's getting increasingly less tenable politically for leaders to sell the idea of ponying up money for the have-nots. The have-nots don't seem especially grateful for the help or eager to make an effort to dig themselves out of a hole of their own making. That is especially true for the most desperate basket case, Greece, which needs a big chunk of cash in the next few weeks to avoid default.
Three-Time Loser?
An expanded rescue operation will have to be financed by Germany more than any other country, and Germans will be less willing to open their wallets than other euro-area citizens. You can't blame them; the famously frugal Germans had to dole out a fortune to absorb their brethren from what was East Germany. Then they agreed to enter the euro at an exchange rate unfavorable to the exporters that are the mainstay of the country's economy.
All the same, if there is one thing that Europeans can be counted on, it's an ability to cobble together a deal bringing countries in the region closer together, if only to keep them from drifting farther apart. If an accord is reached to provide more money for Greece, Spain, Italy and the other shaky economies and financial systems, or to form some sort of shared fiscal policy, deeply oversold European stock markets are likely to recover.
A Third Way
That could happen even if official Europe tries a middling - and more sensible, fairer and more likely to succeed - approach. Greece cannot be saved. Investors who are pricing something like a 90 percent chance of default into bond and derivative prices have gotten the message, and heads of government no doubt understand it too.
One money manager well versed in the economics and politics of sovereign debt markets argued the other day that the decision to let Greece go - before the end of 2011 - has already been made. As this investor, who was speaking to MoneyWatch off the record, sees things developing, Greece will get enough money to keep it functioning for the next month or so while various mechanisms are put in place to limit the risk of contagion across the Mediterranean.
Adequate funding for credit lines for banks must be arranged. The way also must be paved for the ECB to be able to print enough euros to dish out to enfeebled countries to keep their financial systems in one piece.
Buy the Dip
What does it mean for stock markets in the region if this manager is right? There's a good chance of a sharp sell-off - at first.
But not for long. Greece really is the worst of the euro-area weaklings. Providing significant further aid is throwing good money after bad. Once that stops and investors realize that assistance will go only to salvageable economies, a radical attitude adjustment should occur.
An orderly Greek default (pardon the oxymoron) will be taken as the other shoe having finally dropped, leaving Europe, its banks and the euro suddenly on firmer footing. With stocks already oversold and investors panicky and expecting the worst, it could provide a tremendous buying opportunity - even though it won't feel like one at the time.