Greece is taking a page out of Henry Paulson’s playbook
Greece’s negotiators have taken a page out of former U.S. Treasury Secretary Henry Paulson’s playbook—the one about using market shocks as bargaining chips.
During the depths of the financial crisis back in 2008, the U.S. Congress was initially reluctant to give former Treasury Secretary Henry Paulson authority to stabilize the financial sector by buying toxic assets off banks’ balance sheets—a program known as the Troubled Asset Relief Program, or TARP.
The U.S. House of Representatives voted the program down on Sept. 29, 2008, fearing the voter backlash that they believed a bank bailout would trigger.
After the vote, stock-market declines quickly accelerated, sparking a panic that changed legislators’ minds. On Sept. 29, the Dow Jones Industrial Average fell 777.68 points to 10,365.45, a 7% drop. Four days later, on Oct. 3, TARP passed both houses of Congress and was signed into law by President Bush.
Eurozone markets, which had retained their buoyancy in recent weeks, fell on Monday, with German and French shares suffering their worst losses since Nov. 1, 2011. Both markets are adding to those losses on Tuesday.
“The leaders of other European countries do NOT want to be seen throwing money after Greek pensioners,” said Doug Borthwick, head of foreign exchange at Chapdelaine & Co. “However a healthy market correction would give them leeway to give Greece all that it wants.”
These moves are nowhere near the magnitude of what the U.S. saw during the financial crisis. There’s also no sign that French President François Hollande or German President Angela Merkel are particularly worried about the stock moves.
Economists believe that the European Central Bank‘s bond purchases, and its program of Outright Monetary Transactions, have contained the contagion risk posed by Greece.
But there’s still tremendous political will to keep Greece in the euro. On Tuesday, Greek negotiators asked for a third bailout program. Eurogroup finance ministers are set to discuss the proposal on a phone call beginning at 1 p.m. Eastern.
We’ll see how the call plays out.