Greasing the Wheels

It seems that Greece still fails to understand the difference between liquidity and solvency.  Here's an explanation for you - with last night's European Union & IMF rescue plan, Greece solves their LIQUIDITY problem.  They did nothing to solve their SOLVENCY problem.   Liquidity is cash flow - solvency is balance sheet.  This rescue plan addresses the cash flow, but does nothing to remedy the damaged Greek balance sheet.

Now, obviously, the hope is that with the time they just bought themselves, Greece will be able to work out some sort of plan to address the solvency side of the equation - but that remains to be seen. 

Even more troubling is the continued rhetoric coming from Greek Prime Minister Papandreou (via Nemo)

“After the latest developments, with the terms now set, the gun on the table will be loaded,” Papandreou told To Vima daily in an interview to be published on Sunday.

“Speculators will know this,” the PM said, according to excerpts of the interview that appeared on a website operated by To Vima’s parent media group.

“The question is whether this mechanism will persuade the markets purely as a gun on the table. If it does not, it is a mechanism that exists and could be used,” he added.

The continued anti-speculator rhetoric coming out of Greek mouthpieces is troubling. Will someone please tell Papandreou that this has nothing to do with speculators - it has to do with the fact that his country needs more money than they have!

See, the goal of this rescue package is to placate investors into buying Greek debt at lower rates.  If the E.U. and IMF stand ready to fund Greece at near 5%, the hope is that investors will do the same, instead of demanding the nearly 7% interest rates that markets were trading at.  In other words, the hope is that the E.U. doesn't actually have to lend the money to Greece - but rather that this guarantee will stimulate investors to pick up the Ponzi - I mean - the bag - themselves.   

To bring back an old favorite quote, from Tommy Boy:

"Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. "  

Thanks for the mark of approval, European Union!

for more, see Simon Johnson on the problems Greece didn't solve, and Nemo on the rehash of the "loaded gun" threat.

-KD