Thursday, 29 April 2010

Greece's path out of the eurozone

Never quite believed it until today. The markets can see it. The EU seemingly hasn't quite accepted it. But Greece is on a path heading out of the eurozone.

The prospects for the EU's embattled currency have worsened considerably in the last couple of days. First Greek debt was further downgraded to junk status and then it emerged that its problems are causing a loss of debt confidence for other eurozone countries.

Both Portugal and Spain have suffered new credit status downgrades and the OECD secretary general went so far as to describe the potential for contagion as 'like ebola'.

Markets and politicians once thought that the banks were too big to fail. Now it seems they are starting to realise that they have made the same false assumption about the euro.

Fears confirmed

The continued testing of the sustainability of Greek debt shows how market suspicions have lingered that the much-promised EU-IMF bailout was all for show, announced in the hope that real action would not be needed.

Those suspicions have only been reinforced by the German Chancellor, Angela Merkel, yesterday making it clear that, despite the precarious situation, discussions about the Greek cash injection are going to continue for several days yet.

One of the EU's plethora of 'presidents', Herman van Rompuy, perhaps feeling a little neglected from this process, has even been talking about an 'emergency' summit. But not until 10 May.

Standard, slow-moving EU - far too slow for the 21st century world.

The empty reality behind the EU's currency-without-government is nothing new to EU-watchers, but the real surprise is that the markets have bought the euro charade for so long.

Bailout blocks

That the markets have had little faith in the EU's words about backing Greece and have continued to test the situation can be no surprise, given the number of obstacles in the path to Greece avoiding a debt spiral and default.

First, for the eurozone countries to approve their €30bn share of the bailout (the further €15bn coming from the IMF) will involve many already themselves struggling with high debt, sluggish economies and bad-tempered public stumping up large sums for Greece.

This will only worsen others' debt problems, hamper economic recovery and cause further public unrest.

Second, as many are warning, the initial €45bn may buy Greece time but that amount will be far from the end of the financial support the country will need. Is there an appetite elsewhere in the eurozone for further bailouts and larger amounts in the future?

Third, even if the EU - propped up by the IMF - finally agrees to hand over the cash, the accompanying demands for further drastic cutbacks in public spending in Greece are likely to be so stringent that an already distressed and protesting public will not accept them.

Greece's umbrella private sector union, the GEEE, has already called a general strike for 5 May to protest against the "neoliberal extortion and demands [of the EU and IMF] to flatten the financial and job rights of workers" and other major unions have agreed to join in.

Fourth, there seems to be a clear case that the eurozone cash injection for Greece would breach the 'no bailout' clause in the EU treaty - a legal situation that a group of German professors are threatening to test, if the bailout is approved.

An injunction from the German Constitutional Court would freeze all aid for Greece while the case is pending, which may take weeks or months.

Finally, in any case, is Greece's total debt burden now too high for cash injections and such 'internal deflation' methods to restore competitiveness? Many are coming around to the view that a debt spiral is already underway and billions injected now would be just throwing money away.

Final shot

Only the fact that French and German banks are up to their eyes in Greek debt suggests the EU's bailout efforts will continue to the bitter end.

The EU's final shot at calming the market may involve offering far larger amounts than the present €45bn - amounts that may be seen by the markets as offering a more realistic long-term solution for Greece.

But in the absence of major IMF involvement - a situation against which the EU has a pompous, ideological objection - doubts will still linger about the capacity of eurozone countries to afford, and to deliver politically, such levels of cash.

Greek choice

What becomes clear from looking at the questions and obstacles above is that Greece is out of options other than default or voluntary, Uruguay-style (pdf) debt 'reprofiling'.

The key question for the euro comes in the implications of this outcome for economically connected countries, especially those sharing a currency.

Ireland has already felt the implications of currency connection, seeing their borrowing costs rise so far by €3m a year as a result of the Greek crisis. Greece is already dragging the eurozone down with it.

Worse, unless there is a clear isolation of Greece from the eurozone, it's hard to see how a restructuring of Greek debt will avoid knocking the confidence of buyers of other eurozone government bonds, provoking even bigger crises in other already finely balanced economies like Spain and Portugal.

The question that the EU and IMF may be struggling with, that is taking them so long to resolve, may be: might the billions of Greek aid on the table be better spent backing a 'new drachma' and curbing inflation - giving the country's economy a real competitive boost - than trying fruitlessly to ward off an inevitable debt default?


William Palfreman said...

Yep. Shouldn't be long now. I've got a bet on about a Greek exit and I got that on when yields were only 6.5%.

The obvious time would be the first month interest payments are due after any foolish EU bailout. The Germans know this full-well and seem to be hoping it all falls apart before any money is put up by them, so will prevaricate for as long as they possilby can. Lookout for lots of faux-respect for the constitutional court in Karsruhe

The Democracy Movement said...

If the delay in approving the bailout is just a German-led euro devaluation strategy, to aid their exports, they're playing a very dangerous game indeed with eurozone stability. Let's hope it's more down to the IMF confronting the EU over the viability of Greece's continued euro membership, if they are to recover.