Risks grow by the day, but clarity is absent as to what happens next
IT WAS the same as ever in Luxembourg as EU finance ministers gathered for two days of talks on the debt crisis. As they struggle to make headway in the swamp, all the most pressing questions remain unanswered.
These centre on the possibility of a Greek default, the extent of a new overhaul of the European Financial Stability Facility (EFSF) bailout fund, and the growing clamour for a big recapitalisation of the euro zone’s weakest banks.
Risks grow by the day, but clarity is absent as to what happens next and the mood is increasingly gloomy. Like shifting shapes behind translucent glass, however, some movement is evident. Where it leads to eventually remains in doubt. In this unsavoury scene, the potential remains for Ireland’s rescue to be thrown off course.
Will Greece default? No, insists euro-group president Jean-Claude Juncker. Yet still he delays payment of the country’s next loan and then he raises the prospect of bigger “haircuts” for private holders of its debt.
The situation in Athens prompts only despair. Despite coaxing words of encouragement, there appears to be little confidence in the country’s power to put its house in order. The push for deeper austerity follows yet another forecast of missed deficit targets and concern to avoid being seen to cave in to any plea for wriggle room from Athens.
Whether a further swathe of cuts is remotely feasible politically is another thing. Fears linger that the Papandreou administration could soon buckle under the weight of the unpopular austerity drive. The 2012 budget remains to be passed by an increasingly restive parliament. Given Greek claims that the country will run out of money this month, the ministers’ decision to delay payment of new €8 billion loans until November marks yet another desperate ploy in an outsized game of chicken.
The EU-ECB-IMF “troika” remains confident that there is still enough money in the coffers, but the ministers’ demarche raises the stakes. Greece is unlikely to get the cash until November, meaning weeks of tension are in store.
Then there is the “haircut” question. When the second Greek bailout was agreed in July, the deal was done only on the basis that the country’s private creditors voluntarily agree to accept a 21 per cent loss on their investment in Greek bonds.
The arrangement was generous enough to the banks that hold Greek debt, particularly those in France, which have the biggest exposure to the country.
It has won the support of the major lenders involved in the Institute of International Finance, the global lobby group which brokered the deal, but the wider market and many EU governments now believe it to be an insufficient balm for the over-indebted Greek state.
“As far as the PSI [private- sector involvement] is concerned, we have to take into account the fact that we have experienced changes since the decisions we took on July 21st, so we are considering technical revisions,” Juncker told reporters early yesterday morning.
He gave no more away but it was enough to set the ball rolling. The market says only a 50 per cent haircut will do, but that’s default by another name. It’s not straightforward at all and the contagion risks are many.
Political sources say it will fall to the troika in its latest report to assess the country’s debt sustainability in the light of its quickening recession. It is on that basis that creditors might be “invited” to bear bigger losses.
The risks here are manifold, and immediate. As ministers shuffled around in an airless Luxembourg conference centre, they did so as shares in Franco- Belgian bank Dexia went into freefall. Other French banks are on the ropes too, intensifying pressure on Paris to bring forward an unappealing recapitalisation campaign.
Dexia’s brush with mortality illustrates just how vulnerable the banking system is to the uncertainty over Greece. The flipside of the argument is that a big-bang recapitalisation, however painful that proves to be, could reinforce confidence in the weakest lenders as a deeper haircut looms for Greek creditors.
There is no agreement on any of this, however. The ECB remains implacably opposed to default and it holds the ace here in its power to cut off Greek banks from its liquidity lifeline. Still, the political direction is clear enough at this point.
The same goes for efforts to “leverage” the assets of the EFSF. There appears to be general agreement on the principle but none on the mode and scope. However, ECB and German resistance to cross-guarantees for ECB sovereign bond purchases has scotched that particular notion.
Thoughts are turning now to a scheme in which the EFSF insures investors in new bonds issued by the likes of Italy or Spain against any losses. This could boost confidence, but leaves big EFSF backers like Germany on the hook for the weaknesses of others.
That transfer of risk is one of the key conundrums thrown up by the crisis. For all the talk of rapid action, it helps explain the glacial pace of progress.
