ANALYSIS:EU-IMF efforts to quell the debt crisis have unravelled and the problem just got bigger
LIKE A runaway train refusing to yield, the euro zone debt drama has entered a dangerous new phase as anxiety grows about the fate of Italy. Spain is under pressure too, and Greece remains a constant worry.
Four months after EU leaders settled on a new grand bargain for the euro zone, that bargain is unravelling rapidly.
By design, the €750 billion EU-IMF bailout fund for the euro zone was set up to confront the threat that Spain may need emergency aid. There was fear that Ireland and Portugal might need help, but Spain was always “the big one”.
Squabbling between Italian premier Silvio Berlusconi and his finance minister Giulio Tremonti have put paid to that. A record spike in their country’s borrowing costs adds a whole new dimension to the debacle.
The markets are in uproar again. Amid uncertainty over the scale and scope of the bid to secure a private creditor contribution to the second Greek bailout, an already-severe contagion impact on countries like Ireland has morphed in a matter of days into something else altogether. If Spain is held to be too big to fail and – simultaneously – too big to save, the growing threat of an Italian blowout carries with it the danger of catastrophe.
Hence a fresh debate about radical new steps to assert control over the situation. Months ago, Germany rejected proposals that the bailout fund could intervene in secondary bond markets, buying Greek bonds at a discount to their market price, thereby reducing the burden of its debt. Although the initial feedback from Berlin remains negative, this idea yet again is in vogue.
So too is the notion that bailout recipients have the interest on their loans slashed to something near the fund’s own borrowing cost, an idea that finds favour with Minister for Finance Michael Noonan. “I have consistently stated the need for a Europe-wide solution and not just for ad hoc country-by-country solutions,” he said, without disclosing exactly what he has in mind.
The tension is palpable. European Council president Herman van Rompuy convened unscheduled talks yesterday with European Central Bank chief Jean-Claude Trichet, euro group president Jean-Claude Juncker, European Commission chief José Manuel Barroso and his economics maestro Olli Rehn.
Van Rompuy insisted he had been planning the meeting for a week, but his two-paragraph statement afterwards was more notable for what it did not say than what it did.
“We discussed the issues related to the implementation of the decision of the European Council on a new programme for Greece and we also exchanged views on recent developments in the euro area.”
Clarity was not the objective with these remarks, which reflect a striking sense of apprehension about the immediate outlook and a sense of drift and disunity in the political response. They could hardly say they were concerned about Italy; neither could they say the opposite.
Here is the problem: Greece needs a new bailout but Germany, Finland and the Netherlands won’t sign up for that until private creditors agree to a substantial contribution. Plans are advanced but severe warnings from rating agents follow, raising the threat of default rating on Greece, something the ECB opposes due to contagion risk. That very danger proves real as EU leaders debate pushing ahead regardless with a plan that may lead to a selective default. Pressure on Italy and Spain inevitably follows.
Every brittle link in this chain is prone to failure, although it seems obvious now that serious contemplation of the default option should open the door to fresh discussion of less severe options. This helps explain why discounted bond buybacks by the rescue fund are again on the table, but will do nothing to appease anti-bailout dissenters in Berlin, The Hague and Helsinki.
Only nine days have passed since ministers decided to postpone their self-imposed deadline for a second Greek bailout until September. That reflected huge difficulty in the effort to enlist private investors, but served to amplify the sense of foreboding and fear.
Faced with a new bout of panic, the word last night was that the ministers might try to cobble together an outline deal for Greece but that the final agreement might not be reached until a further (as yet unscheduled) meeting later this month. Speculation also swirls about the possibility of an emergency summit before the August holiday. The outlook is as uncertain as ever.
