Friday, 26 February 2010

Germany, Greece and the 2010 version of Gresham's Law

The following which is being reported by Bloomberg raises the obvious prospect that all Eurozone nations that have failed to exercise prudence in their financial affairs, could now be looking for German guarantees when they try to sell their debt to investors:

Germany is considering buying Greek bonds through state-owned lender KfW Group, German lawmakers said today.

KfW is preparing measures that are part of a European plan to grant Greece as much as 25 billion euros ($34 billion) in aid should the need arise, said four lawmakers, who spoke on the condition of anonymity because the information is confidential.

KfW’s purchase of Greek bonds, backed by German government guarantees, would be an emergency measure as it risks inviting investors to speculate against other euro region countries, the lawmakers said. No decisions have been taken yet, they said.
This is yet another example of how none of the underlying problems caused by the Great Credit Implosion are really being resolved, but rather being shifted from weaker balance sheets to - at least for the time being - stronger balance sheets.

In yet another new twist to the ongoing systemic solvency crisis, if a sound German government owned bank comes to the rescue of the unsound central bank of one of its neighbors, there would be the fascinating prospect of creating a perverse, 21st century version of the scarcely remembered Gresham's Law from the Tudor period. Simplistically stated, the archaic law says that bad money eventually drives out good money.

For short hand in 2010, why not simply call this new exercise in the ongoing process of continuous debasement of the global money supply, Grecian's Law?

Exactly how the average German citizen who is typically prudent in his/her personal budgeting, credit card averse, not renowned for flipping ever more over-priced real estate to his/her fellow citizens and, historically, disdainful of fiscal recklessness, will feel about coming to the potential rescue of all of its profligate EZ neighbors, is probably best left as an exercise to German politicians and their EU counterparts in Brussels who will eventually be seeking re-election.

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