EMERGENCY MEASURES:Euro zone members are taking concerted action to protect the currency from speculators, writes PAT McARDLE
SPECULATION IS like a bush fire. Catch it early and you can extinguish it by throwing your coat on it. Let it go and it could take 100 fire brigades.
Let it continue for months, as the EU has done, and it might require the services of all the fire brigades in the 27 member states.
Some people object to the term speculation, and it is true the nature of the conflagration changes. It may start with a hedge fund betting on vulnerability perceived by only a few a couple of years ago, when Greek credit default swaps could be purchased for little more than those of the major countries.
Once the ball starts rolling, however, others are sucked in.
Which of us would not want our fund manager to take action if our pension fund was invested in Greek bonds which were falling in price by the day?
At time of writing, EU economic and financial affairs council ministers (Ecofin) were still putting finishing touches to what one minister described as defending the euro against the “wolfpack”.
Euro-zone leaders issued a remarkably strong statement on Friday night. They promised further consolidation of the public finances, support for the European Central Bank (code that the ECB would take action), and announced the commission would propose a European Stabilisation Fund mechanism at an extraordinary Ecofin meeting yesterday, with a view to having it in place when the markets opened today.
There are, thus, a number of different strands under consideration. The stabilisation fund has attracted the most attention. It appears to have two elements. An existing mechanism for balance of payments support for non-euro member states in severe difficulty due to natural disasters or exceptional circumstances would be extended to all and boosted in size, possibly by €60 billion, which could be leveraged up to €600 million.
This would be supplemented by a separate mechanism of intergovernmental loans, as already used to assist Latvia and Hungary, scaled up.
The next element would consist of ECB action. Here, the main speculation was that this would involve quantitative easing, or printing of money, as the ECB bought government bonds to keep their prices up and the associated interest rates down, thereby easing pressure on borrowers. The ECB is prohibited from lending directly to governments, but can buy government bonds already issued and held by the private sector.
ECB president Jean-Claude Trichet put the cat among the pigeons last Thursday when he said this had not even been discussed at their meeting that morning. It is possible, therefore, that the ECB will go for something less than this “nuclear” option, but the explicit reference to them in the euro-zone leaders’ statement is a signal that they will be involved.
All these, however, treat the symptoms rather than the problem. The real issue is to reduce debt and deficits. The euro-zone leaders are aware of this, and their statement reaffirmed their commitment to meet their fiscal targets this year and in the years ahead.
Clearly, slippage is no longer allowed and if tax revenues fall short, the gap will have to be made good immediately by more cuts or higher taxes. This applies to Greece but it could, equally, apply to us also.
Minister for Finance Brian Lenihan’s weekend statement that there will be no supplementary budgets is contingent on tax revenue remaining on target.
Even this will not be enough for some of the more delinquent members, and Portugal recognised this on Saturday when it cut its 2010 deficit from 8.3 per cent to 7.3 per cent to bring it closer to the EU average.
It is possible that other peripheral countries, including Ireland, will come under pressure to take similar action.
It is not possible to say whether this will be sufficient to quell speculation and calm the markets.
On the plus side, there is the clear intent in the statement by the heads of government, easily the strongest and most radical since the crisis started.
Basically, the markets need to be convinced that the will and firepower of the authorities is such as to make it not worthwhile to take them on.
If the measures outlined above, including a significant role for the ECB, are delivered, then this could be the turning point.
The risk is that the announcements were premature and that legal or other obstacles prevent some member states from signing up to them. Britain’s refusal to participate in euro-area financing, announced yesterday, was effectively an opt-out.
A similar attitude by a large euro member state would scupper the deal.
The stakes are high. The future of the euro experiment is at stake.