Euro crisis
January 22, 2012
When the financial ministers from European Union nations meet this coming Monday and Tuesday the agenda will be similar to last year's. Address the debt crisis in Greece, the European fiscal treaty, debt restructuring for banks, the looming credit crunch, downgraded credit ratings, and how to fund rescue packages.
Finance ministers from the 17 eurozone states, as well from as the 10 EU countries without the common currency, will try to move ahead on all fronts at once, since many problems are interrelated. The following week, EU heads of state will meet again at a special summit on the seemingly permanent euro crisis.
Intensive care for Greece
Currently, the so-called troika - consisting of the European Union, the European Central Bank and the International Monetary Fund - is checking again to see whether Greece has been attaining its goals, and will be able to take on the responsibilities necessary for the next bailout installment.
It's already clear that the Greek deficit is too high and its economic growth too low. German Chancellor Angela Merkel said she's assuming Greece won't be standing on its own two feet - that is, putting money back into the market - until 2020.
If Greece doesn't receive fresh funding from the EU and IMF by mid-March, it could go bankrupt.
Greek debt relief
Negotiations between the Institute of International Finance and the Greek government should have been concluded long ago but have been dragging on. Banks are supposed to forgive 103 billion euros ($132 million) worth of debt, about half of what's due.
In exchange, the banks receive a guarantee that the remaining 50 percent will be paid back. Terms and interest rates for the rest of the loans are still being negotiated.
Apart from this, some creditors have lost interest altogether in voluntary debt cuts. Because they're well insured against Greek insolvency, their may be more money to make in speculating on Greece's bankruptcy than accepting debt cuts.
Hedge funds speculate with government bonds that they bought for 40 percent of their face value, and can now exchange for bonds worth 50 percent - and turn an easy profit. What's still not clear is whether the entire 103 billion euros will materialize.
Second bailout for Greece?
The debt cuts are only part of a second stabilization package that's supposed to pull Greece out of its fiscal swamp. As long as the debt relief of private creditors isn't regulated, euro states would prefer not to decide on a second rescue package - originally, only 130 billion euros in credit was designated to flow out of Euoropean bailout funds over the next year.
Greece's first rescue package is coming out of a special pot of money, specially designed for Greece. The troika meeting in Athens will decide on payout of further installments.
Rescue funds EFSF and ESM
In order to finance further payments to Portugal and Ireland, eurozone countries will have to negotiate the contract for a permanent rescue fund called the European Stability Mechanism (ESM). The mechanism, into which eurozone states will pay as owners, is supposed to function from July 2012 onward.
Having been pushed up a year, negotiations are under a great deal of pressure, as national parliaments still have to sign off on any agreement. Cash investments by euro states are intended to increase the clout and solvency of the ESM.
The ESM could presumably procure cash on the capital market better than the European Financial Stability Facility (EFSF), the previous bailout mechanism. Cash there was only available via loan guarantees of eurozone states, which lent the money themselves.
Since Standard and Poor's just downgraded the credit rating of the EFSF to AA+, the mechanism's remaining borrowing firepower is not clear. Experts say that due to France's credit downgrade alone, EFSF loan volume has sunk from 440 billion euros to 270 billion euros.
Germany, as the remaining large holder of the AAA rating in the eurozone, would have to considerably bolster its guarantees for the EFSF to maintain the old volume.
German Finance Minister Wolfgang Schäuble, however, wants nothing to do with this. The funds have enough money until summer, Schäuble said in interviews last week.
Fiscal pact for all except Great Britain
The majority of EU heads of state worked to broker a new international treaty under pressure last December. With the endorsement of finance ministers, this fiscal treaty is supposed to ensure strict and uniform budget policies in the eurozone.
Merkel said she wants to sign off on the agreement at the special summit at the end of January. However, there's still infighting over certain provisions. The German government finds certain passages too lax; other states are resisting possible interventions in their national sovereignty.
The agreement for a permanent rescue fund will only be signed once the fiscal treaty has been approved. While the German government is pushing for it to be agreed on, the president of the Czech Republic, a euroskeptic, already announced that his country does not intend to endorse the treaty.
Italy, Spain and other crisis candidates
At present, the interest rates that Italy and Spain have to pay on government bonds are still at a bearable level.
Italian Prime Minister Mario Monti is calling for solidarity from the remaining euro states - he said he thinks that if Italy really fell into imbalance, the EFSF bailout fund would be too small to prevent tainting other countries with the "crisis virus."
That's why the countries are working as expeditiously as possible to establish a permanent aid mechanism. The ESM is supposed to offer more than 500 billion euros - although this amount will probably have to be increased once more in March, in order to calm the capital markets.
Author: Bernd Riegert / sad
Editor: Sean Sinico