Financial commentators, like financial markets, move in herds. Is the herd wrong about Greece?
The herd takes the view that Greece will sooner or later have to restructure its debt. According to herd thinking, the €110bn rescue plan arranged for Greece by its eurozone partners and the International Monetary Fund merely buys some time for the Greek government – and for its European bank creditors. The herd predicts a “haircut”, or loss, for Greek bondholders of 30 to 50 per cent of the face value of their bonds. All this is likely to happen towards the end of 2011 or in early 2012, says the herd. Read more
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. Read more
Better late than never. That is one way of looking at the three-year, €110bn rescue plan for Greece that was announced on Sunday by eurozone governments and the International Monetary Fund. It took seven months of indecision, bickering and ever-mounting chaos on the bond markets for the eurozone to get there, but in the end it did – and it may just have saved European monetary union as a result.
Looked at in a different light, however, the rescue package does not appear to be such a masterstroke. For its underlying premises are, first, that there should under no circumstances be a restructuring of Greek government debt, and secondly, that Greece’s troubles are unique to itself and need not be considered in a context of wider eurozone instability. Both premises are open to question. Read more
With good reason the eurozone’s political leaders have been criticised for reacting too slowly to the Greek sovereign debt crisis. But what’s new about that? Slowness often seems to be a defining feature of Europe’s approach to policymaking.
Consider the proposals that are in the air for the creation of a European Monetary Fund to manage Greek-style crises in the future. There is widespread support for such a fund, ranging from the European Commission to Wolfgang Schäuble, Germany’s centre-right finance minister, and socialists in the European Parliament. Read more
George Papandreou, Greece’s socialist prime minister, is an honourable and courageous politician who has done a great deal in his career to improve his country’s image in the eyes of its European Union partners. So it cannot have been easy for him to announce today that he was requesting the activation of the €40bn-€45bn eurozone-International Monetary Fund financial rescue package for Greece.
No eurozone member-state has suffered such a humiliation since the euro’s launch in January 1999. But Papandreou must have feared, as soon as he took office after last October’s election, that emergency foreign assistance was going to be necessary. Read more
When they announced their provisional rescue package for Greece on Sunday, European officials pointed not only to its size – at least €30bn- but also its details. For euros and details are what the markets have been demanding these last frustrating weeks. Read more
You know that the European Union is in trouble when Russia offers more intelligent advice on the eurozone’s debt crisis than Spain, the country that holds the EU’s rotating presidency. Dmitry Medvedev, Russia’s president, disclosed the other day that he had recommended to George Papandreou, Greece’s prime minister, that the Greek government should request assistance from the International Monetary Fund to sort out its problems.
This is exactly the course of action advocated by several non-eurozone EU countries as well as a host of distinguished economists and, dare I say it, the editorial writers of the Financial Times. As it happens, I don’t agree – if by IMF assistance we mean financial help. The IMF will be involved, along with the European Central Bank, the European Commission and eurozone finance ministers, in monitoring Greece’s public finances and providing technical aid as required. Read more
There are two schools of thought on whether Latvia should devalue the lat, or fight tooth and nail to keep its currency peg to the euro. One, espoused by the Latvian government, the International Monetary Fund and the European Commission, is that devaluation would destabilise the Latvian banking system, wouldn’t really address the long-term challenges facing the Latvian economy, and would risk spreading shock waves beyond Latvia across the Baltic and into other parts of central and eastern Europe.
The other view, espoused by some of the world’s leading economists, such as Paul Krugman and Nouriel Roubini, can be summed up as: “Get Real”. Without devaluation, the only path that Latvia can go down to extract itself from crisis is massive deflation, through spending cuts and sharp falls in wages that will inflict terrible damage on society and will unnecessarily prolong Latvia’s recession. Read more