Business
Pyotr Iskenderov
September 1, 2012
© Photo: Public domain

The patterns behind the conduct of the European stock market indexes over the past several weeks has grown markedly cyclic. Recurrent expressions of confidence in the expediency and boundless future of the European integration and the Eurozone voiced by political leaders and financial world's heavyweights automatically echoed with upward market trends which then broke down after a couple of days of cautious optimism. Every time, the slide reinvigorated the media debates centered around the basic question: does Brussels actually have a serious anti-crisis plan up the sleeve? The truth, however, is that even if the plan exists, it evokes a series of further questions. 

Der Spiegel added a crucial touch to the picture when it wrote that the European Central Bank had invented a new approach to restoring the buoyancy of the Eurozone, the point being to impose a bracket on yields from sovereign bonds issued by the financially embarrassed EU countries. The roll-out of the novelty is delayed till mid-September, which adds to the intrigue considering how much criticism the Brussels bureaucracy draws over being slow to respond to mounting problems. 

The finance ministers of the healthier of the EU economies took to putting together an anti-crisis plan in the spring of 2010. At the time they decided to set up the European Financial Stability Facility (EFSF) and rather modestly estimated the weight of the upcoming mitigative package at Euro 75b. Somehow, no real steps followed, and the strange inaction sent the cost climbing. 

By the end of 2011, the EU had to recognize that the necessary infusions in Greece alone would total Euro 130b, but the process was supposed to take months as the availability of funds became contingent on Greece's progress towards austerity targets. Accordingly, the EFSF swelled to Euro 1 trillion and is expected to eventually morph into the European Stabilization Mechanism (ESM). 

The anti-crisis machinery failed to fully come into play, and a domino effect started to spill over parts of the Eurozone's periphery – the Mediterranean region and Ireland. Measures to rescue the Spanish financial sector – with a hefty Euro 100bn as the price tag – had to be appended to the EU agenda, but the tendency of the costs of borrowing to rise unacceptably not only for Greece, but similarly for Italy, Spain, and Portugal signaled the spread of the problem. The rates for Greek and Portuguese bonds broke the 7% ceiling prescribed by the EU administration, and those for Spanish and Italian – inched frighteningly close to it. European Central Bank chief Mario Draghi was quick to mention a crisis bonds bailout using the EU budget and the issuance of some sort of European anti-crisis bonds, but Berlin rebelled as it was clear that Germany would be the country to pick up the tab and cover the costs of cleaning up after the financial bubbles collapsed across South Europe. 

At the moment, the EU is visibly divided at the face of the crisis. One of the camps comprises the embattled Mediterranean countries plus the predominantly agrarian Ireland, all of whom are sinking into a debt crisis which their populations begin to blame on secret global forces which allegedly engineered the crisis and massively benefit from bailout-linked speculations rather than on their respective national governments. The other camp – Germany, the Netherlands, and Finland – slam their EU southern peers over reckless policies and spendings… 

It currently depends on a panel of experts dispatched to Athens with a verification mission by the European Council, the European Central Bank, and the IMF whether more aid money goes to Greece. The findings will not be released before October, but chancellor Merkel dovishly pledged following a conversation with Greek premier Antonis Samaras that the international program helping Athens make ends meet will carry on [1]. Merkel credited the Greek government with implementing the austerity measures as promised, but, in the meantime, a hardline coalition of German ministers with Bundesbank president Jens Weidmann on board expressed strong opposition to the idea of the European Central Bank's interventions aimed at absorbing toxic bonds. The Financial Times quoted Weidmann as saying that “We should not underestimate the danger. Central bank financing can be as addictive as a drug” [2]. The skepticism expressed by executive secretary of the Christian Socialist Union of Bavaria Alexander Dobrindt is even deeper – he “sees no way around a Greek exit” from the Eurozone and therefore believes that any attempts at rescuing the country a priori make no sense [3]. 

It is fair to say that right now chancellor Merkel may be under even tighter pressure than the Greek leadership – the latter are shifting the blame onto the US as the epicenter of the crisis, the EU which mishandled plenty of issues, or the global financial sector which supposedly plays a greedy game of its own, while Merkel must be permanently mindful of the 2013 elections in Germany and act accordingly. She has to demonstrate that concerns over how the Bundesbank feels are also her concerns and maintains that disputes within the European Central Bank are a completely normal phenomenon. 

It is so far unclear what shape the concerted EU reaction will take. Draghi's idea is that, instead of the constant 7% limit, the yield for government bonds would be capped by a floating figure exceeding by a fixed amount the benchmark interest rate for German sovereign bonds. The rule should apply to Spanish and Italian bonds, which seems to indicate that pulling Greece Portugal, and Ireland out of trouble already looks like an overly extravagant pursuit to the European Central Bank. 

The logic behind the plan is that the European Central Bank should start purchasing the bonds as soon as the rates on them pass the critical level. Obviously, Germany would have to dish out the funds, that is why so many in Berlin reject the scheme. Merkel suggests to at least wait for the verdict on the compatibility of the ESM with the German constitution to be issued by the Constitutional Court. Eurozone as is stands no chance if the Court which will convene on September 12 says No, and Brussels has the time till the deadline for bargaining, the options being to sacrifice Greece and Portugal. 

Somewhat unexpectedly, Finland is claiming a bigger role in the debate over the Eurozone rescue. The Economist argues that it is going to be the country hit worst financially by the bailouts looming on the horizon and that, while keeping Greece in the EU tops the worries list for the European Central Bank and other EU institutions, Finland might freely stage a walk out. According to the IMF records, next year the Eurozone indebtedness total will peak at 91% of the EU cumulative GDP. Finland's debt to GDP ratio is only 53%, an excellent result at which, these days, only Estonia and Luxembourg look in the rear mirror. With the ill bonds purchasing cost distributed uniformly across the EU, Helsinki's grievances would be even more legitimate than Berlin's. It should be taken into account as well that the Finish economy is traditionally interwoven with those outside of the EU. Only 31% of the Finnish export – less, than in the case of Great Britain – lands in the Eurozone. Five of Finland's key trade partners, including Russia, Sweden, and Norway, are not in the Eurozone. Given the above, Finland's motivation to preserve the Eurozone may prove fairly low, especially since the share of Finnish banks in the European toxic assets is minimal (if, indirectly, the buy-in reflects the extent of Eurointegration, Finland appears to be more of a standalone country than the Euro-free Sweden and Norway). 

Finland’s finance minister Jutta Urpilainen said bluntly that the country “would not hang itself to the Euro at any cost”. Moreover, Helsinki wants the EU to provide insurance coverage for the Finnish contribution to the bailout funds extended to Greek and Spanish banks, a demand unheard of even in Berlin [4].

Governments in the EU countries are waiting tensely for the team of experts from the European Council, the European Central Bank, and the IMF to air their assessments based on which the financial assistance to Greece will either continue or terminate. The analysts' consensus estimate for the probability of a messy default in Greece, imminent in the latter case, is 75%, which is roughly the likelihood of the ejection of Greece from the Eurozone. Portugal already hosts a similar tour of inspection, meaning that its EU membership outlook in the long term is just as bleak. 

The yields on Portugal's bonds – 9% against the 7% threshold – are bad news for the country. For the European Central Bank, the arithmetics reads as an indicator that a bailout might be requested shortly. Eurostat measured unemployment in Portugal at 15.2% last May – in Europe tighter job markets occur only in Estonia, Latvia, and Greece, but Latvia is not in the EU and Estonia still fares better than Portugal according to the majority of economic barometers [5]. 

Back in the spring of 2011, Jose Sokratish, Portuguese premier at the time, admitted that the country could use financial assistance from the EU in the amount of Euro 80b. In October, 2011, Moody's downgraded nine Portuguese banks citing “the deterioration of their unsupported financial strength”. The agency said that recapitalisation and deleveraging would restore confidence in the banks but added that "these plans face significant implementation risks" [6].

Quite possibly, the EU will have to rely entirely on its own resources in dealing with the unfolding domino effect. Senior policy analyst with the Brussels-based European Policy Center Janis Emmanouilidis warns that the IMF, a key Eurozone donor, earnestly considers abandoning Greece regardless of the impression the team of experts gets from visiting the country. A lot will depend on the balance within the EU, explains Emmanouilidis: a hybrid solution may be attained in the nearest future to combine the retention of Greece and Portugal with a relative consensus across the EU concerning the anti-crisis packages. The EU leaders are discussing, among other things, a new round of debt cancellations pertinent to Greek bonds. The step could both avert defaults in the shakiest economies and make it easier for the European Central Bank to reach accord with Germany which does not want the financial assistance to Greece to be renewed indefinitely. From a wider perspective, steps like the above could help the staggering economies offload the intolerable debt burden, launch the long-overdue structural reforms, resume investing, and thus overcome the crisis [7]. 

If the rescue of Greece and Portugal is about politics, this must be even more true of lifting Cyprus out of trouble. The country counts on international support to prop up its banking system, and its government made it clear on multiple occasions that it would welcome the assistance not only from the EU, but also from Russia, hopefully in the form of a Euro 5b loan. The terms Russia can offer sound better to Nicosia as borrowings from Russia would come with no strings attached, whereas the EU has developed a habit to impose crippling austerity programs parallel to pouring money into national economies. However, it is an easy guess that the EU would frown on Cyprus's deeper engagement with Russia, considering that Greece and Portugal might follow the lead, giving Moscow unprecedented influence in Europe. 

The unanticipated prolongation of the expert team's stay in Greece attests to the intensity of the battles raging in the EU over the assistance to troubled countries. The job was originally supposed to be done by August 31, but as of late the experts intend to revisit Athens early in September. The European Commission spokesman Simon O'Connor projects the new tour to last a few weeks [8]. The earliest time when further information about the EU plans for Greece will surface is October 8, the date the Eurogroup – an assembly of the EU finance ministers – meets in Luxembourg. Portugal and Cyprus, therefore, must patiently wait till the time.

 

To be continued

 

 

[1] REUTERS 0938 270812 GMT

[2] The Financial Times, 27.08.2012

[3] Der Spiegel, 27.08.2012

[4] The Economist 23.08.2012

[5] http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-02072012-AP/EN/3-02072012-AP-EN.PDF

[6] http://www.bbc.co.uk/news/business-15211230

[7] REUTERS 0938 270812 GMT

[8] AFP 271050 GMT AUG 12

The views of individual contributors do not necessarily represent those of the Strategic Culture Foundation.
EU Drift – Destination Unknown (I)

The patterns behind the conduct of the European stock market indexes over the past several weeks has grown markedly cyclic. Recurrent expressions of confidence in the expediency and boundless future of the European integration and the Eurozone voiced by political leaders and financial world's heavyweights automatically echoed with upward market trends which then broke down after a couple of days of cautious optimism. Every time, the slide reinvigorated the media debates centered around the basic question: does Brussels actually have a serious anti-crisis plan up the sleeve? The truth, however, is that even if the plan exists, it evokes a series of further questions. 

Der Spiegel added a crucial touch to the picture when it wrote that the European Central Bank had invented a new approach to restoring the buoyancy of the Eurozone, the point being to impose a bracket on yields from sovereign bonds issued by the financially embarrassed EU countries. The roll-out of the novelty is delayed till mid-September, which adds to the intrigue considering how much criticism the Brussels bureaucracy draws over being slow to respond to mounting problems. 

The finance ministers of the healthier of the EU economies took to putting together an anti-crisis plan in the spring of 2010. At the time they decided to set up the European Financial Stability Facility (EFSF) and rather modestly estimated the weight of the upcoming mitigative package at Euro 75b. Somehow, no real steps followed, and the strange inaction sent the cost climbing. 

By the end of 2011, the EU had to recognize that the necessary infusions in Greece alone would total Euro 130b, but the process was supposed to take months as the availability of funds became contingent on Greece's progress towards austerity targets. Accordingly, the EFSF swelled to Euro 1 trillion and is expected to eventually morph into the European Stabilization Mechanism (ESM). 

The anti-crisis machinery failed to fully come into play, and a domino effect started to spill over parts of the Eurozone's periphery – the Mediterranean region and Ireland. Measures to rescue the Spanish financial sector – with a hefty Euro 100bn as the price tag – had to be appended to the EU agenda, but the tendency of the costs of borrowing to rise unacceptably not only for Greece, but similarly for Italy, Spain, and Portugal signaled the spread of the problem. The rates for Greek and Portuguese bonds broke the 7% ceiling prescribed by the EU administration, and those for Spanish and Italian – inched frighteningly close to it. European Central Bank chief Mario Draghi was quick to mention a crisis bonds bailout using the EU budget and the issuance of some sort of European anti-crisis bonds, but Berlin rebelled as it was clear that Germany would be the country to pick up the tab and cover the costs of cleaning up after the financial bubbles collapsed across South Europe. 

At the moment, the EU is visibly divided at the face of the crisis. One of the camps comprises the embattled Mediterranean countries plus the predominantly agrarian Ireland, all of whom are sinking into a debt crisis which their populations begin to blame on secret global forces which allegedly engineered the crisis and massively benefit from bailout-linked speculations rather than on their respective national governments. The other camp – Germany, the Netherlands, and Finland – slam their EU southern peers over reckless policies and spendings… 

It currently depends on a panel of experts dispatched to Athens with a verification mission by the European Council, the European Central Bank, and the IMF whether more aid money goes to Greece. The findings will not be released before October, but chancellor Merkel dovishly pledged following a conversation with Greek premier Antonis Samaras that the international program helping Athens make ends meet will carry on [1]. Merkel credited the Greek government with implementing the austerity measures as promised, but, in the meantime, a hardline coalition of German ministers with Bundesbank president Jens Weidmann on board expressed strong opposition to the idea of the European Central Bank's interventions aimed at absorbing toxic bonds. The Financial Times quoted Weidmann as saying that “We should not underestimate the danger. Central bank financing can be as addictive as a drug” [2]. The skepticism expressed by executive secretary of the Christian Socialist Union of Bavaria Alexander Dobrindt is even deeper – he “sees no way around a Greek exit” from the Eurozone and therefore believes that any attempts at rescuing the country a priori make no sense [3]. 

It is fair to say that right now chancellor Merkel may be under even tighter pressure than the Greek leadership – the latter are shifting the blame onto the US as the epicenter of the crisis, the EU which mishandled plenty of issues, or the global financial sector which supposedly plays a greedy game of its own, while Merkel must be permanently mindful of the 2013 elections in Germany and act accordingly. She has to demonstrate that concerns over how the Bundesbank feels are also her concerns and maintains that disputes within the European Central Bank are a completely normal phenomenon. 

It is so far unclear what shape the concerted EU reaction will take. Draghi's idea is that, instead of the constant 7% limit, the yield for government bonds would be capped by a floating figure exceeding by a fixed amount the benchmark interest rate for German sovereign bonds. The rule should apply to Spanish and Italian bonds, which seems to indicate that pulling Greece Portugal, and Ireland out of trouble already looks like an overly extravagant pursuit to the European Central Bank. 

The logic behind the plan is that the European Central Bank should start purchasing the bonds as soon as the rates on them pass the critical level. Obviously, Germany would have to dish out the funds, that is why so many in Berlin reject the scheme. Merkel suggests to at least wait for the verdict on the compatibility of the ESM with the German constitution to be issued by the Constitutional Court. Eurozone as is stands no chance if the Court which will convene on September 12 says No, and Brussels has the time till the deadline for bargaining, the options being to sacrifice Greece and Portugal. 

Somewhat unexpectedly, Finland is claiming a bigger role in the debate over the Eurozone rescue. The Economist argues that it is going to be the country hit worst financially by the bailouts looming on the horizon and that, while keeping Greece in the EU tops the worries list for the European Central Bank and other EU institutions, Finland might freely stage a walk out. According to the IMF records, next year the Eurozone indebtedness total will peak at 91% of the EU cumulative GDP. Finland's debt to GDP ratio is only 53%, an excellent result at which, these days, only Estonia and Luxembourg look in the rear mirror. With the ill bonds purchasing cost distributed uniformly across the EU, Helsinki's grievances would be even more legitimate than Berlin's. It should be taken into account as well that the Finish economy is traditionally interwoven with those outside of the EU. Only 31% of the Finnish export – less, than in the case of Great Britain – lands in the Eurozone. Five of Finland's key trade partners, including Russia, Sweden, and Norway, are not in the Eurozone. Given the above, Finland's motivation to preserve the Eurozone may prove fairly low, especially since the share of Finnish banks in the European toxic assets is minimal (if, indirectly, the buy-in reflects the extent of Eurointegration, Finland appears to be more of a standalone country than the Euro-free Sweden and Norway). 

Finland’s finance minister Jutta Urpilainen said bluntly that the country “would not hang itself to the Euro at any cost”. Moreover, Helsinki wants the EU to provide insurance coverage for the Finnish contribution to the bailout funds extended to Greek and Spanish banks, a demand unheard of even in Berlin [4].

Governments in the EU countries are waiting tensely for the team of experts from the European Council, the European Central Bank, and the IMF to air their assessments based on which the financial assistance to Greece will either continue or terminate. The analysts' consensus estimate for the probability of a messy default in Greece, imminent in the latter case, is 75%, which is roughly the likelihood of the ejection of Greece from the Eurozone. Portugal already hosts a similar tour of inspection, meaning that its EU membership outlook in the long term is just as bleak. 

The yields on Portugal's bonds – 9% against the 7% threshold – are bad news for the country. For the European Central Bank, the arithmetics reads as an indicator that a bailout might be requested shortly. Eurostat measured unemployment in Portugal at 15.2% last May – in Europe tighter job markets occur only in Estonia, Latvia, and Greece, but Latvia is not in the EU and Estonia still fares better than Portugal according to the majority of economic barometers [5]. 

Back in the spring of 2011, Jose Sokratish, Portuguese premier at the time, admitted that the country could use financial assistance from the EU in the amount of Euro 80b. In October, 2011, Moody's downgraded nine Portuguese banks citing “the deterioration of their unsupported financial strength”. The agency said that recapitalisation and deleveraging would restore confidence in the banks but added that "these plans face significant implementation risks" [6].

Quite possibly, the EU will have to rely entirely on its own resources in dealing with the unfolding domino effect. Senior policy analyst with the Brussels-based European Policy Center Janis Emmanouilidis warns that the IMF, a key Eurozone donor, earnestly considers abandoning Greece regardless of the impression the team of experts gets from visiting the country. A lot will depend on the balance within the EU, explains Emmanouilidis: a hybrid solution may be attained in the nearest future to combine the retention of Greece and Portugal with a relative consensus across the EU concerning the anti-crisis packages. The EU leaders are discussing, among other things, a new round of debt cancellations pertinent to Greek bonds. The step could both avert defaults in the shakiest economies and make it easier for the European Central Bank to reach accord with Germany which does not want the financial assistance to Greece to be renewed indefinitely. From a wider perspective, steps like the above could help the staggering economies offload the intolerable debt burden, launch the long-overdue structural reforms, resume investing, and thus overcome the crisis [7]. 

If the rescue of Greece and Portugal is about politics, this must be even more true of lifting Cyprus out of trouble. The country counts on international support to prop up its banking system, and its government made it clear on multiple occasions that it would welcome the assistance not only from the EU, but also from Russia, hopefully in the form of a Euro 5b loan. The terms Russia can offer sound better to Nicosia as borrowings from Russia would come with no strings attached, whereas the EU has developed a habit to impose crippling austerity programs parallel to pouring money into national economies. However, it is an easy guess that the EU would frown on Cyprus's deeper engagement with Russia, considering that Greece and Portugal might follow the lead, giving Moscow unprecedented influence in Europe. 

The unanticipated prolongation of the expert team's stay in Greece attests to the intensity of the battles raging in the EU over the assistance to troubled countries. The job was originally supposed to be done by August 31, but as of late the experts intend to revisit Athens early in September. The European Commission spokesman Simon O'Connor projects the new tour to last a few weeks [8]. The earliest time when further information about the EU plans for Greece will surface is October 8, the date the Eurogroup – an assembly of the EU finance ministers – meets in Luxembourg. Portugal and Cyprus, therefore, must patiently wait till the time.

 

To be continued

 

 

[1] REUTERS 0938 270812 GMT

[2] The Financial Times, 27.08.2012

[3] Der Spiegel, 27.08.2012

[4] The Economist 23.08.2012

[5] http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-02072012-AP/EN/3-02072012-AP-EN.PDF

[6] http://www.bbc.co.uk/news/business-15211230

[7] REUTERS 0938 270812 GMT

[8] AFP 271050 GMT AUG 12