21 Jul 2011 The three rescued countries of Greece, Ireland and Portugal have in turn been offered a lifeline out of crippling debt-deflation. The tetchy negotiations dragged on for hours, with an irascible Finland at one point demanding that Greece offer the Parthenon, the Acropolis and its islands as collateral for the second €159bn rescue package. France and its allies abandoned their long struggle to prevent a Greek default, opening the way for the first sovereign insolvency in Western Europe since the Second World War. Objections from the European Central Bank were swept aside. Germany has obtained its fig leaf concession: burden-sharing for bankers. As a quid pro quo, Germany has dropped its vehement opposition to debt sharing and crossed the line in the sand towards fiscal federalism. It has agreed to turn the eurozone's €440bn bail-out fund (EFSF) into what amounts to a European Monetary Fund, and arguably into an EU Treasury in embryo. The EFSF will be allowed to "intervene in the secondary markets". It may fund "recapitalisation of financial institutions through loans to governments including in non programme countries", code for Italy and Spain. The full weight of the German-led creditor bloc will stand behind south Europe's banking system. The wording lets the EFSF intervene pre-emptively to cap Spanish and Italian bond yields, whatever the cost of moral hazard. These countries can therefore piggy-back on the AAA credit rating of the EMU core. This was the crucial measure needed to calm nerves after 10-year Italian and Spanish yields punched through the systemic danger line of 6pc last week. Global markets surged as the details of the EU statement leaked. Credit default swaps measuring bond risk on Ireland and Portugal saw the biggest one-day fall on record. Commission chief Jose Manuel Barroso said politicians and markets had finally "come together" for the first time since the crisis began. Chancellor Angela Merkel said the goal was to "go to the root of the problems", but she may not find it easy to secure political assent for such sweeping concessions from her own parliament. The accord is a spectacular volte-face. Her mantra until now has always been that "collectivisation of risks" would be a grave error. The terms overstep a resolution passed by the Bundestag limiting how far she could go in committing Germany to any form of transfer union or pooling of debts. The use of the EFSF as a fiscal fund without treaty authority further complicates a ruling by the German constitutional court on the legality of the bail-outs expected in September. Such changes to the EFSF will require ratification by each of the EU's 27 parliaments. It may require an amendment to the Treaties, greatly raising the bar in Germany. EU officials hope that a debt rollover plan for Greece can be limited to a short technical default. The ECB has backed down on its threat to reject Greek bonds as collateral. The formula will not be extended to Portugal and Ireland. It is understood that rating agencies will hold fire for the sake of global stability. However, there is no disguising that a major taboo has been broken, even if French leader Nicolas Sarkozy continued to insist that Greece would pay "all its debts". Florian Toncar, deputy chief of the Free Democrats (FDP) in Mrs Merkel's coalition said it was "unthinkable that a state in default could remain in monetary union". The summit deal will extend the maturity of EFSF loans from seven years to 15 years and slash the penal rate of interest to 3.5pc for Greece, Ireland and Portugal, nearer the fund's own cost of borrowing. Greece currently pays 5pc and Ireland pays 5.8pc. The interest relief brings the EU strategy closer into line with IMF packages, which offset harsh austerity with an easing of the debt burden to allow countries to claw their way back to viability. The mix of lower rates and a debt restructuring of up to €120bn for Greece changes the outlook dramatically. The EU medicine of austerity without any reflief over the past 18 months has clearly failed. It has taken the country to the brink of civil disorder and caused the debt trajectory to spiral towards 160pc of GDP. The communique called for a "Marshall Plan" to bring the Greek economy back to life. "Greece is in a uniquely grave situation in the Euro area. It requires an exceptional solution," said the document. Questions abound. The EFSF is not yet big enough to handle the threat facing southern Europe. "To be credible, the EFSF needs to be proportional to the scale of contagion: we think €2 trillion is needed," said Silvio Peruzzo at RBS. "We are not yet ready to say this is the full stop that ends the crisis." Europe's economic recovery is sputtering out. Markit's PMI surveys for the eurozone in July showed a preciptious fall to a 23-month low, with "deeper contraction" in the southern bloc. Howard Archer from IHS Global Insight said eurozone growth is "in serious danger of grinding to a halt". The risk is that Spain and even Italy tip back into recession, with knock-on effects for their debt trajectories. The root of Europe's debt crisis is the gap that has built up over 15 years between North and South, which itself reflects the disparate characters of these countries. This economic chasm cannot be bridged by bail-out funds or loans guarantees. 21 Jul 2011 Judging by the agreement reached by euro area leaders in Brussels on Thursday night, there will be no “grand depart” for Mr Trichet, or indeed any other member of the European policy-making elite. There’s progress here, but not enough to resolve matters. What’s more, in attempting to quell the economic crisis, policymakers may only have succeeded in creating an almighty political one. For months now, eurozone leaders have been promising to do whatever it takes to save the euro. Yet up until now they have failed to match words with actions, if only because what needs to be done to keep the show on the road – move towards some form of fiscal union – has been politically unacceptable to the nations who must sign the cheques. Now, finally, we have some movement. Thursday’s package of measures to ease Greece’s debt burden and enhance the scope of the bailout fund was rather more comprehensive than I’d been expecting. It’s not quite what some are portraying it as – the day that Europe signed up to the creation of a superstate – but it’s another big step in that direction. The more positive mood in markets on Thursday suggests that it might even buy some temporary respite. Yet any analysis of the detail immediately reveals the package to be shot through with difficulties and ambiguities, both political and economic. It’s messy and incoherent, as well as falling some way short of what’s ultimately required to knock the wider euro crisis on the head. By creating extreme moral hazard through ultra low interest rates for the afflicted nations, it also threatens to sow the seeds for an even worse eurozone debt crisis at some stage in the future. Agreement on the package is one thing, deliverability is quite another. Once Germans realise that what is being proposed is a transfer union by stealth, you have to wonder what political future there is for the leaders who agreed it. Angela Merkel is staring election defeat in the face, rather in the way that agreeing to German participation in the euro was arguably what did for Chancellor Helmut Kohl back in the late 1990s. The same might be said of the recipient nations. What future for political and social stability among the newly enslaved once it is realised the price that has to be paid is loss of fiscal sovereignty together with years of externally imposed austerity? The agreement refers to a “European Marshall Plan” to restore competitiveness to Greece. This doesn’t appear to mean money. Instead it seems to refer to the provision of “exceptional technical assistance to help Greece implement its reforms”. In other words, someone else will be running Greece’s affairs. That might be regarded as a positive development. Greece has, after all, proved quite incapable of running them for itself. Democracy has nevertheless been suspended. The package proposed on Thursday was essentially the same as that put forward by the European Commission as far back as last February, but which up until now has been consistently blocked by Germany. Ms Merkel had dug her heels in and said that never would Germans agree to the collectivisation of Europe’s debts. She’s not the only one being forced to perform a giant U-turn. The European Central Bank must also drop its opposition to any kind of default. Jean-Claude Trichet must eat his words. The lines European policymakers drew in the sand have proved to be no more than posturing. The dam has been breached, and the European Financial Stability Facility (EFSF) is to be given wide-ranging powers to intervene across eurozone bond markets, including those of Italy and Spain, where spreads have widened precipitously in recent weeks. As yet, the fund is obviously not big enough to mount an effective support operation for the Italian bond market, but the logic is inescapable. If Greece, Ireland and Portugal, all essentially insolvent, can be promised a lowly interest rate on their EFSF loans of 3.5pc, then logically Spain and Italy must be able to access the same, favourable terms. It is obviously right that the burden is reduced for countries with unsustainable debt, yet normally this is done through default and devaluation. It then takes the defaulting nation years to regain the trust of markets and be able to access them again on reasonable terms. Yet because outright default is apparently unacceptable within the eurozone – for the central bank to accept defaulted bonds as collateral is to besmirch the currency – the distressed nations are instead to be offered a subsidised interest rate not much higher than that paid by Britain, the US, France and Germany. Far from being punished for its profligacy, Greece is to be rewarded. It makes no sense, and locks Germany into indefinite subsidy of the eurozone fringe. All this as the eurozone economy as a whole takes another turn for the worse, a development which only further challenges the already stretched debt dynamics of Italy and Spain. Despite the compromises won from reluctant political leaders, this crisis is far from over.Europe steps up to the plate
Europe's leaders have grasped the nettle. Faced with a spiralling bond crisis in
Italy and Spain and the greatest threat to the EU project for 50 years, they have
ripped up their bail-out strategy and taken a large stride towards a "liability union".
Eurozone debt crisis: Remorseless logic
takes Europe closer to fiscal union, but this
crisis is far from over
If Jean-Claude Trichet, president of the European Central Bank, had been
planning on his usual break in La Rochelle this summer, he might as well
cancel right now.
Friday 22 July 2011
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