Markets have been rattled by reports in the German media that the Greek rescue deal contains two secret clauses. The package will be “immediately and irrevocably cancelled” if it is found to breach the EU Treaty’s “no bail-out” clause, either in a ruling by the European court or the constitutional courts of any eurozone state. While such an event is unlikely, it is not impossible. There are two cases already pending at Germany’s top court in Karlsruhe, perhaps Europe’s most “eurosceptic” tribunal.
The second clause said that if any country finds it cannot raise funding for the rescue at interest rates below the 5pc charge agreed for Greece, it may opt out of the bail-out. BNP Paribas said this would escalate quickly into a systemic crisis if Spain were in such a position, because the other countries cannot carry an ever-rising burden. The bank warned the euro project itself may start to disintegrate rapidly if these rescue provisions are ever seriously put to the test.
The second clause is particularly troubling: since most European countries will soon see massive hits to their GDP, resulting in inevitable spikes in borrowing costs, this becomes yet another example of a game theory arrangement where the benefit to the first defector is far greater than any dowside, with the last to defect left holding the bag on what would basically become a bail out of all of Europe. Many have wondered how arguably intelligent people could come up with a rescue package of Greece in which Greece itself is supposed to contribute to its own bailout. Now we know that this was the ploy all along. The second Portugal, Spain and Italy are dragged under by the vigilantes, their participation in the $1 trillion bailout ends. And when that happens, the full cost of the bailout will be borne by none other than the “richest” member of the IMF, the United States. Obviously, the incentive to blow up one’s borrowing costs in this arrangement are huge, now that both Germany and the US have no choice but to bail out each and every dropping domino. Which is why we are confident that in the very short term we will see credit spreads of the PIIGS blowing out yet again.
The bottom line is that all of Europe is now incentivized to blow itself up, and it doesn’t even have to put too much effort into it. All the borderline European countries have to do is raise their funding costs to above 5%: this is mere basis points away from where most are trading already. After all the US has no option but to bail them out.
Source: Zero Hedge