The signals from financial markets today suggest that European leaders and the IMF have -- for the moment -- dodged the bullet. The euro is stronger and the cost of insuring Greek bonds against default has fallen. That is a sign that, after months of wavering responses, the EU and the IMF have come up with a plan that is credible -- large and detailed enough to scare away bears in the financial markets who were expecting a default.
But at what cost?
The price of the package for Greece has zoomed upwards, from a planned $45 billion to something on the order of $120 billion. That will cover Greece's needs by effectively taking it out of the private-sector markets for sovereign debt. In other words, so dire is the country's predicament, that the rest of Europe simply opted to become a replacement for normal debt markets.
Another country came to mind as I absorbed the details of this rescue/bailout: the Dominican Republic. Early in the 20th century, as part of a long, winding story involving politics and commercial interests -- not necessarily in that order -- the U.S. assumed responsibility for the Caribbean country's debts and collected customs revenue, at that time the main source of income, to service them. In other words, the country was in bankruptcy, and the United States took on the role of trustee to restructure the country. Some American troops were involved, too.
There probably won't be an occupation of Greece (after all, the Germans already did that once as part of an, ahem, more ambitious plan for Europe) but the IMF and EU are doing the equivalent. We don't yet know the details of the plan for Greece to close its yawning budget deficit so it does not need any more bailouts, but you can bet the IMF will be watching closely, alongside the EU and its main paymaster, Germany.
It used to take an army to occupy a country; now all it takes is an IMF official. Okay, a delegation of IMF officials. But you get the point.
For the moment, that may not be a bad thing. Greece has proven repeatedly of late that it cannot very well manage its own affairs. In fact, not at all, which is why we can call it a failed state. Perhaps the Greek prime minister, George Papandreou, knows this deep down, and has called in the IMF and the EU to create some external leverage for change. In any case, Greece's destiny was in the hands of financial markets; now it's in the hands of the organizations that have come to its rescue.
It's not hard to image how this will affect business in Greece. Do you do business with the government? Prepare to get squeezed, since the IMF is going to be looking to root out the pervasive corruption in Greece. Shipping tycoon? Your political influence in Athens may be on the wane. How about if you are part of the shadow economy of Greece, the untaxed commerce that constitutes roughly a third of Greece's output? You are squarely in the IMF's crosshairs.
It's an ugly solution, but give the powers-that-be credit: it might be the only one possible.
Photo from philippe grangeaud via Flickr