debt crisis

It is a pre-summit tradition in Brussels for the heads of state to divide up and huddle with their fellow partisan big-wigs for a few hours before the main event. The idea is that they are “coordinating their positions” – although one suspects they are probably trading gossip. 

The big excitement this afternoon will be at the gathering of the centre-right European People’s Party in a suburb outside Brussels. The expected attendees include the European Union’s heaviest heavyweights – German Chancellor Angela Merkel, French President Nicolas Sarkozy, Italian prime minister Silvio Berlusconi and Jose Manuel Barroso, the European commission president, to name a few.

Back in town – and just down the road from the Council building – a handful of Liberal Democrat leaders will congregate, including Ireland’s Brian Cowen, the Netherlands’ Mark Rutte and Finland’s Mari Kiviniemi. 

But one group has called off its pre-summit powwow this time around. That would be the Socialists. A party spokesman said the group had taken the decision because its leaders met just last week at their party conference in Warsaw. Instead, they will make do with a simple pre-summit conference call. 

Rumours are flying thick and fast that the troubles of Spain’s banking sector will require emergency attention at Thursday’s summit of European Union leaders in Brussels.  But it appears highly improbable that Spain will ask for help from the emergency financial stabilisation fund that EU finance ministers agreed to set up last month.  For one thing, the fund is not yet fully up and running.  For another, the Spanish government is emphatically not shut out of credit markets – a point underlined this morning by the successful issuance of €5bn worth of short-term government bills.

Spain’s economic vulnerabilities are obvious, and the implications of a Spanish crisis for the rest of the eurozone are no less clear.  French and German banks alone are exposed to some $450bn of Spanish debt, according to a report just published by the Bank for International Settlements.

But it is worth repeating that Spain is not Greece.  The Greek crisis originated in decades of mismanagement of the public finances, plus an unhealthy culture of corruption and use of the state for political patronage.  Although such practices are not unknown in Spain – and not unknown in the US, China and numerous other countries, for that matter – they have never attained Greek levels. 

For anyone wondering why Europe’s leaders are so determined to avoid a restructuring of Greek sovereign debt, I recommend a remarkable piece of research published on Monday by Jacques Cailloux, the Royal Bank of Scotland’s chief European economist, and his colleagues.  (Unfortunately, it seems not to be easily available on the internet, so I’m providing links to news stories that refer to the report.)

The RBS economists estimate that the total amount of debt issued by public and private sector institutions in Greece, Portugal and Spain that is held by financial institutions outside these three countries is roughly €2,000bn.  This is a staggeringly large figure, equivalent to about 22 per cent of the eurozone’s gross domestic product.  It is far higher than previous published estimates.  It indicates that, if a Greek or Portuguese or Spanish debt default were allowed to take place, the global financial system could suffer terrible damage. 

I take it that everyone has seen the insulting picture on the cover of the February 22 edition of Focus, a lightweight German news magazine?  Under the headline ”Swindlers in the euro family”, it shows the Venus de Milo statue, a monument of ancient Greek civilisation, sticking up a middle finger at Germany.  In this way the magazine’s editors convey, as offensively as possible, the idea that debt-ridden Greece is robbing Germany blind by forcing it to come to Greece’s financial rescue.

The Greek response has been predictably furious.  The Greek consumers’ federation has called for a boycott of German goods, commenting that Greeks were creating timeless works of art like the Venus de Milo at a time when Germans were “eating bananas in the trees”.