“We is well an’ truly init, matey peeps.”
We may be thinking that Hector Sants’ late-night departure from the FSA is today’s most important financial news but it seems as if a more worrying storm is brewing on the financial markets – and it will eventually affect us.
The euro is under siege — and the next few days will be crucial.
Financial markets are betting heavily that Greece’s crushing debt could drag down the entire eurozone, and that could force reluctant EU leaders into an embarrassing bailout. The handouts to Haiti will be nothing compared to what the Greeks need and George Michael might as well get into the studio now and start recording the Greek Charity single.
If EU leaders don’t take some kind of decisive action this week at their summit meeting, the euro will continue its slide — and Greece’s economic woes could spread to other flailing countries in the 16-nation eurozone. Countries like Portugal, Spain or even heavily indebted Italy and Belgium.
European Union leaders will issue a statement on Greece after the meeting, officials said today, but added that the contents had not yet been discussed and would not say if it would lay out details of a bailout.
This Thursday’s EU summit is the real litmus test and if it fails to come up with any debt restructuring package or quasi-bailout, then the pressure on the euro will increase.
The Greek experience will highlight exactly how inextricably linked the euro states are.
Investors have turned increasingly pessimistic on the outlook for the euro, so much so that speculative traders’ short positions, or bets against the single currency, have reached a record.
(Borrow one million Euros, sell them for dollars. Watch the price of the euros drop and buy them all back at the cheaper price with just some of the dollars that you received in the first place. Hand the Euros back to where you borrowed them. That gives you a dollar profit)
A new commission — the EU government — has been formally approved by the European parliament, and must immediately confront a gathering sense that the euro’s fundamental weakness has been exposed.
The fundamental weakness is quite…. well… fundamental. The countries which have the euro as their currency have no common fiscal policy.
The European Union’s own government-backed lender has said that its rules do not permit it to bail out Greece or any other European country that can’t pay its debts. That certainly narrows the leaders’ options and will probably mean either a rule change or perhaps the remaining states will act as some sort of guarantor for the Greek government.
The euro is now trading near an eight-month low . European stocks have inched up slightly on speculation that heads of state and government will have to announce something at Thursday’s summit.
The bounce in European stocks followed news that European Central Bank President Jean-Claude Trichet had left a banking conference in Australia to attend the summit, stoking expectations of some kind of bailout for Greece.
Some were sceptical that the meeting could stop the slide in sentiment.
Jittery markets are piling the pressure on EU nations to state clearly what they would do if a euro member defaulted. There is, as yet, no written-down policy on state defaults.
There have been repeated assurances from both the EU and the Greek government that Greece can pull itself out of its debt crisis with a harsh austerity program but the markets remain unconvinced. Probably because so far, there has been a lot of talking but not enough of the right kind of action.
A bailout could be expensive, but a default would be worse. The downside of market scepticism is that Greece and other troubled countries will have to pay higher interest rates to borrow, making it even harder to dig themselves out of trouble.
The same will happen when the speculators train their beady eyes on the United Kingdom and the States.
The crisis shows one of the vulnerabilities of the 10-year old currency union, in that it lacks an effective central authority to enforce limits on budget spending by its individual members .
With budgets in the hands of 16 separate governments, the euro relies on a set of rules limiting deficits to 3 percent of gross domestic product. Large deficits can undermine the currency and that of course will affect all participating countries.
Greek Prime Minister George Papandreou has held government talks on accelerating cuts to pensions and wages in a desperate effort to show the markets that Greece can and will make long-term spending reductions and not need a bailout. However, it could be too late and speculators may continue to dump the euro. In addition, Papandreou is risking civil unrest which the markets never find comfortable.
The EU’s executive commission has backed the Greek programme and says that no bailout will be needed. European Union nations say the same, rejecting reports that they are talking about possible bailout plans.
The bailout options are limited — but not impossible and everyone’s protestations are doing nothing to ease market jitters.
European Union agencies — such as the European Commission — can’t take on debt for governments. It is not allowed to do so under its own rules. Neither can the EIB, it said. It has 75 billion euros to lend for infrastructure and economy-related projects, usually to the poorer EU nations. That fund cannot be used as bailout money.
Three EU members that don’t use the euro — Hungary, Latvia and Romania — have secured bailouts from the International Monetary Fund and the EU. But EU officials have said that IMF help won’t be needed for a euro country.
They may live to regret such macho posturing.
That leaves the ball firmly in the EU governments’ court. Legally, governments can rally round if a member state “is seriously threatened with severe difficulties caused by … exceptional occurrences beyond its control.”
What remains is deciding how to structure a bail-out — and what taking on Greek debt could do to the richer nations.
EU governments could cut the costs of Greek spreads overnight by agreeing to jointly underwrite Greece’s debt — but this could hike the cost of their own borrowings because technically they will all have taken-on more debt – even if technically, it is not their own.
They could also provide a loan to Greece — but it is uncertain that they could or would provide enough to give Greece long-term relief. Greece is looking to borrow some euro 51 billion from bond markets to plug its budget gap for this year.
Another option would be bonds (IOUs), issued jointly by European governments to raise money from markets. EU and ECB officials have talked this down but European socialists are keen — including Greece’s current government — because it could ease harsh spending cuts.
What is clear is that EU governments do not want to let Greece off the hook — and that any option would force Greece to make long-delayed reforms to endemic rife tax evasion, rigid labour market rules and an inefficient and high-spending pension and health care system.
Such are the costs and consequences of uncontrolled Socialism.
Perhaps the Greeks are wishing that they had held onto the Drachma?