Europe's jerks - this tells it all

“Europe’s jerks once again!” ran the headline today on the front page of Bild, Germany’s biggest-selling newspaper. “750 billion for bankrupt neighbors, but tax cuts canned,” it said. “It’s beyond belief!”

Bloomberg Business Week

Clearly, there is growing tension in the EU over the aid package to Greece. Creditors who have been more conservative and saved have had enough. There is the perception that they have to throw more of their money at the problem without a chance of getting paid back. Greeks riots make it seem more unlikely that the government will be able to force the austerity programs that are need to get control of the deficit.

The ECB has had to step in to purchase bonds to provide liquidity which creates a toxic combination of problems. Monetary policy will have to be eased which means that the ECB will have to be focused on fiscal issues and not price stability. Its creditability is shot. The aid plan does not solve the root cause of the fiscal problems so at best, it is considered a stop-gap.

The reaction is expected. The euro has continued to slide. Credit swaps and bond spreads have tightened but not to levels seen last month. The uncertainty still leaves a premium in the market.