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Obama Administration Works to Delay Greek “October Surprise”

Rumors are rampant today that Spain will accept a rescue program from the EU, which would pave the way for a bond-buying program from the European Central Bank to commence. This could merely be part of the pressure campaign on the Spanish government to request the bailout and submit to the conditions. Spanish bond yields have trended lower in recent days and now sit well below 6%. And the Italian undersecretary for finance announced that neither his country nor Spain would request a bailout unless market conditions demanded it.

“There won’t be any nation that voluntarily, with a pre- emptive move, even if rationally justified, would go to an international body and say, ‘I give up my national sovereignty,’” Gianfranco Polillo, undersecretary of finance, said in an interview in Rome late yesterday. “I rule it out for Italy and for any other country.” […]

The program “will be activated only when the single countries have the water up to their necks,” Polillo said.

At the same time, the pressure on these countries to submit to outside conditions must be enormous. The ECB certainly doesn’t want their intention to purchase bonds to stand in for the bond purchases themselves; then they lose all the leverage to force long-sought labor market changes. It really depends on whether the bond market cooperates with the ECB.

I should add that even if this were to go into effect, the idea that grabbing sovereignty away from Spain and Italy will “save” Europe is misguided, as Daron Acemoglu and James Robinson explain at the link.

As for Greece, there’s an even more interesting development. International inspectors were supposed to deliver a report in October that would have almost certainly shown that Greece cannot meet its obligations under the conditions imposed on them for their bailout. Those conditions set targets for the budget that the Greek government won’t come close to honoring. The “troika” – the ECB, EU and IMF – would then have to either relax their conditions, or force Greece into bankruptcy by withholding additional bailout payments. This would probably lead to a Greek exit from the euro, though the mechanism is unclear.

However, that report may be delayed until November, and the reason could be the Obama Administration’s desire to get through the election, according to Reuters:

An EU-IMF report into whether Greece’s debt is manageable looks set to be delayed until after November 6 because policymakers want to avoid any shock to the global economy before the U.S. election, EU officials and diplomats said […]

Differences inside the troika about the precise extent of Greece’s debt problems, combined with political pressure to hold off for another few weeks, look likely to mean a delay until mid-November. In the meantime, Greece will be kept afloat by issuing short-term treasury bills and its banks will get access to emergency funds from the Greek central bank.

“The Obama administration doesn’t want anything on a macroeconomic scale that is going to rock the global economy before November 6,” a senior EU official told Reuters, adding that previous troika reports had also slipped.

I don’t think it’s a particularly good idea to cut off Greece anyway, though their only shot is to exit the euro, so from a self-interested standpoint, Greece would probably be happier to rip off the band-aid. But the priority ordering here is completely wrong. Obviously the US election should have nothing to do with EU policymaking.

The best that any US officials could say in response was that the US wanted no “downside surprises” from the global economy generally. So is their position that Greece should just keep getting their bailout payments? They should express that then.

Anyway, this is just another example of the power of incumbency. I’ll leave it to you as to the propriety of it.

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David Dayen

David Dayen