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Friday 12 February 2010 | Financial Crisis feed
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The Greek crisis has brought the muddle of the euro to light Photo: EPAThe white smoke has at last emerged from the Bibliotheque Solvay in Brussels, but global markets do not like its odour. The Greek rescue plan agreed by EU leaders after a week of leaks is strangely thin, raising suspicions that Germany, Holland and the creditor states of Northern Europe still cannot agree on the terms of any bail-out.
The euro tumbled 1pc to a nine-month low of $1.36 against the dollar and Club Med debt yields jumped as investors read the summit text, searching in vain for details of debt guarantees or bilateral loans, or guidance on an EU eurobond. All they found was an expression of "political will".
Related Articles Banks hit by lack of detail from Greek bail-out Greek crisis: the eurozone in numbers Greek crisis: Q&A Jeremy Warner: why UK won't be bailing Greece out Greek Ouzo crisis escalates into global margin call Germany and France back debt-crippled Greece"Euro area member states will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support," it read.
The 27 leaders never even discussed how they might shore up Greece or the rest of Club Med. German Chancellor Angela Merkel said she was not willing to broach the subject at all. The only relevant topic was whether Greece was complying with Treaty obligations, and how the country would slash its budget deficit from 12.7pc to 8.7pc this year – in a slump.
"They offered nothing," said Jochen Felsenheimer, a credit expert at Assenagon in Frankfurt. "It was just words without any concrete measures, hoping to buy time."
Whether the EU has time is an open question. Credit Suisse says Greece must raise €30bn (£26bn) in debt by mid-year, mostly in April and May. Greek banks have been shut out of Europe's inter-dealer markets, forcing them to raise money at killer rates. They are suffering an erosion of deposits as rich Greeks shift money abroad. This could come to a head long before April.
"Economically, we are in a very risky situation. Greece is close to default. We face systemic risk like the Lehman collapse and unless there is a bail-out for Greece, there will have to be a bail-out for the whole European banking system within two or three months," he said.
Yet they are damned if they don't, and damned if they do. "A Greek bail-out increases the risk of EMU break-up, because monetary union can only work if everybody sticks to the rules," Mr Felsenheimer said.
French banks have $76bn of exposure to Greece, the Swiss $64bn, and the Germ
By Ambrose Evans-Pritchard, International Business Editor Published: 9:49PM GMT 11 Feb 2010
Comments 45 | Comment on this article
The white smoke has at last emerged from the Bibliotheque Solvay in Brussels, but global markets do not like its odour. The Greek rescue plan agreed by EU leaders after a week of leaks is strangely thin, raising suspicions that Germany, Holland and the creditor states of Northern Europe still cannot agree on the terms of any bail-out.
The euro tumbled 1pc to a nine-month low of $1.36 against the dollar and Club Med debt yields jumped as investors read the summit text, searching in vain for details of debt guarantees or bilateral loans, or guidance on an EU eurobond. All they found was an expression of "political will".
"Euro area member states will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support," it read.
The 27 leaders never even discussed how they might shore up Greece or the rest of Club Med. German Chancellor Angela Merkel said she was not willing to broach the subject at all. The only relevant topic was whether Greece was complying with Treaty obligations, and how the country would slash its budget deficit from 12.7pc to 8.7pc this year – in a slump.
"They offered nothing," said Jochen Felsenheimer, a credit expert at Assenagon in Frankfurt. "It was just words without any concrete measures, hoping to buy time."
Whether the EU has time is an open question. Credit Suisse says Greece must raise €30bn (£26bn) in debt by mid-year, mostly in April and May. Greek banks have been shut out of Europe's inter-dealer markets, forcing them to raise money at killer rates. They are suffering an erosion of deposits as rich Greeks shift money abroad. This could come to a head long before April.
"Economically, we are in a very risky situation. Greece is close to default. We face systemic risk like the Lehman collapse and unless there is a bail-out for Greece, there will have to be a bail-out for the whole European banking system within two or three months," he said.
Yet they are damned if they don't, and damned if they do. "A Greek bail-out increases the risk of EMU break-up, because monetary union can only work if everybody sticks to the rules," Mr Felsenheimer said.
French banks have $76bn of exposure to Greece, the Swiss $64bn, and the Germans $43bn. But this understates cross-border links. There are large loans between vulnerable states. The exposure of Portuguese banks to Spain and Ireland equals 19pc of Portugal's GDP. Interlocking claims within the eurozone zone are complex. Contagion can spread fast.
Marc Touati, of Global Equities in Paris, said the "haemorrhage of Greece" must be stopped to prevent a domino effect. "We have to move fast, above all to keep Greece in the eurozone. If not, Spain, Portugal, and Italy will be next. It could reach France," he said.
French President Nicolas Sarkozy drew an explicit parallel with Lehman Brothers in his press conference with Chancellor Merkel, saying EU leaders had given a cast-iron pledge that no eurozone member would be allowed to fail, just as they promised during the financial crisis that no big bank would be allowed to fail.
Details can be thrashed out later, in this case by finance ministers next week. The talk is of a "coalition of the willing", a group of states acting outside the EU Treaty structure. Britain would not be obliged to help. The IMF would bring "expertise" but not set policy.
Each country will choose its own way of helping, perhaps using state banks or sovereign wealth funds to buy Greek debt. In Germany's case this might be KFW: for France in might be Caisse des Depots. The arm's-length solution is elegant but it does not hide the fact that such action amounts to a debt guarantee for a serial violator of EMU rules. It implicitly opens the door to bail-outs for a string of countries in crisis.
BNP Paribas said any rescue confined to Greece is doomed to fail. "The market would only concentrate on its next 'victim', which would be Portugal," it said. Put another way, investors will demand a similar guarantee for Iberian debt.
It is this worry over open-ended liability that made Germany hesitate. Such help would need approval by the German Bundestag – and some other national parliaments. If Germany finances an unpopular rescue that merely puts off the day of reckoning, or if Athens squanders the aid, the deal will come back to haunt Mrs Merkel.
There was an element of bluff in Thursday's accord, as if the EU leaders hope to muddle through with "constructive ambiguity", fingers crossed that their vague political pledge will never be tested. Bluff is a valid tool of statemanship, but in this case their bluff could be called very soon.
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Comments: 45
Psittakos on February 12, 2010 at 06:08 AM “Angela Merkel seems to be stepping back from any understanding with France, and I don't think the Bundestag wants to approve a bailout. (Maybe someone from Germany can comment on this impression.)” Yes, we would need the Bundestag to finally approve a bailout because, unlike the views promoted by many in the UK, the EU parliament cannot overrule sovereign states in matters of vital importance to them. It is called subsidiarity. If the Greeks make a serious effort and are seen to take their medicine, like the Irish, and then still help is needed, help will be provided. If they continue to lie and cheat, they can go swing, as somebody else put it so aptly in one of these columns. Meantime, we have no problem with a weaker Euro. It was no problem at a dollar rate of 125 or at 0.84 in Nov. 2000. It would not be a problem at a dollar rate of 1 : 1 as a result of this crisis. It would be a blessing in disguise, since we export more than we import in Euroland and the internal market is 70% of total trade. So what, if the Euro falls dramatically. Buy Gold now and sell it later!
Not sure why Ireland is lumped in with the rest of the club med. As a nation it has shown a willingness to deal with its debt, that no one else has. As Spain, Portugal and Greece head towards the precipice, Ireland is doing its damndest. People on this site sneer at Ireland as a so cold PIIG nation, but at least its genuinely trying to do something about it, unlike our erstwhile friends and numbers 10 and 11.
I think the problem in this crisis has been that a lot of people don't understand EU (and euro) government. It really is all for one, one for all when there is a crisis. So let me say that: It is all for one, one for all in case of attack.
In response to Peter Rogers - why do banks keep making the same lending mistakes. For the same reason the electorate keep making the same voting mistakes or governments keep making the same legislative mistakes. And we blame everyone else for our own failings. At the heart of this crisis is a complete inability of people to deal with responsibility. Look at our parliament, for example. How many of us will turn up at the next election and put a box not by the best candidate but next to the party of our choice? These MPs know that they are elected as party delegates rather than representatives and conduct their business accordingly - screw the electorate for thousands personally and cost it billions by failing to hold the governing parties to account. The government's ministries fail to account for their competences and their competences (FSA, BofE, etc) all fail to do their job. How many shareholders hold their boards to account? How many boards hold their CEOs to account? This goes on and on. What is happening is that the dumb and blind markets are slowly looking for weaknesses that have developed because of the above. Every time they find it government’s act, not to solve the problem, but to treat the symptom. There are literally trillions of dollars out there worth nothing - and the markets will make it out eventually. The trouble is with the idiots who helped create the crisis - i.e. nearly every single one of us - instead of taking it on the chin now we are putting off the final decision and making it harder eventually. The UK (and all other nations) is like someone who has smoked for 40 years who gets a cough. Instead of going to a doctor, we go to a pharmacist and are dosing ourselves with ever stronger amounts of Codeine to stop the cough. So far it has worked but when we finally cave in and set a proper quack we will get the shock of our lives and we can't bring ourselves to admit the awful truth. We shouldn't have started smoking, we should have stopped much earlier and we should have had taken the cancer therapy as soon as symptoms emerged and cut out the habit and all the cancerous growth. What we did instead was ignore it and in our own perverse way feed it. We should have let the banks fail and take all the fools who bought into the foolishness with them. We should vote out every sitting incumbent MP, we should bring in legislation that governments should never, ever, plan to borrow money - unless mandated for by 2/3rds majority of 2 democratically elected houses. Borrowings should only ever be for contingencies – bad weather, disasters, WWII and then paid back with clearly identifiable taxes. We should remove control of the currency from the government and put in charge of an independent and plenary body independent of the vagaries of political fortune. We should either bring in a PR system where voting for the party is the basis or grow up and stop voting for members of parties. A political party is merely a tool for running another tool; government. If you start feeling warm thoughts about the Conservatives or bad thoughts about Labour; you are, quite simply, a lunatic. And therein lies the problem; the lunatics have been running the shop for far too long thinking that they are sane and all their gainsayers are nuts.
It seems to me that any Greek rescue package will take time before it is dished out to the Greek government. Generally it takes some time for the EU to take such decisions. Germany on its own might consider a rescue package, perhaps with France and the Netherlands, who both have very large exposures to Greece. But the conditions will be harsh as the German govt must sell any rescue to the German people. The Germans themselves hold pretty simple views on economics and would not accept paying large subsidies if there would be no big changes in Greece and tangible benefits to Germany. For instance Germany is phasing in a retirement age of 67 while the Greeks refuse to retire by the age of 62 or 63. Any such issue will prolong confusion and indecision on what to do. Might actually be better to bring in the IMF. Talk about the imminent demise of the euro is total humbug. The currency itself has nothing to do with the debt problems of the members states. Greece might very well default on its debt, this would lead to higher interest rates across the board (even for non-euro states like the UK), but that's about it.
Mr Lee mentioned the reaction of the Irish. I fear that the Germans, pop 82.3m, are not all that interested in Ireland (pop 4.2m) or Greece, pop 10.7m. Only when they appear to threaten a key German project will their interests appear on the radar. After all, our interests were not considered in 1992 when the incompetent Tories completely misunderstood German attitudes and we are a bit larger and a major market for German goods. But then we are no kind of threat to anyone. The Greeks have quite a bit of leverage at the moment but that will pass very soon.
@ Dr Jonathan Wilson 0649 I am not sure of the validity of an UKIP press realease that EU membership costs £1980 per person in the UK. If this number is correct,my wife and I pay £3960 per annum for membership. This figure is nearly double our annual contribution to BUPA for private healthcare. It is nearly equivalent to our annual BUPA and Council Tax bill combined.
Peter Rogers, the reason why banks keep on making the same mistakes is that they can. Because of implicit taxpayer guarantees, there is no downside risk, even to their astonishing bonuses. This has to stop, but politicians won't do it for fear of the consequences - a lending drought as banks would apply the strict criteria that they should have all along. Houses of cards have been constructed, and await an unfavourable breeze.
Tie yourself to lead weights and it gets hard to swim. There has to be a mood now inside Germany to leave the Euro. The largely socialist politicians in the PIGS were allowed by the EU to fudge their entry stability data by painting over their real performances and it cannot be a surprise, even to politicians, that the rust now shows through. It is exactly the same rust that made these countries desperate to join the Eurozone in the first place but after their reprieve in time they did nothing over the past decade to fix their underlying problems(nor did Brown of the UK). The average real asset to debt ratio and the low export value of the whole Eurozone has been forced down by the PIGS and this is increasingly reflected in the Euro’s value.
Why do the banks keep making the same lending mistakes decade after decade?
Of course what the European leaders have failed to address is the question of how the people of Greece will react to a substantial cut in their salaries, benefits and working conditions. It's all very well for Madame Lagarde to talk on TV last night about 'solidarity' but if the people refuse austerity packages in Greece, Portugal, Spain etc then no amount of 'solidarity' from the leaders in Brussels will help. In a way it shows the undemocratic nature of Brussels, and certainly the extent to which the bureaucrats have lost touch with the people of Europe. I think the most likely outcome is that the governments of Greece, Portugal Spain etc will be unable to implement the austerity packages and any incoming government will look to devaluation as a more painless way of getting out of trouble. Could we then have different Euros? A Greek euro worth say 40% less than a German euro? This would cause chaos at first, but ultimately could work. What the knock -on effect in countries like Latvia, Estonia, Lithuania, Ukraine etc will be is quite frightening to think about.
Well, what about this stage play is on the program: Romano Prodi said as much in a moment of candour as commission president. "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created," (Financial Times, 4 December 2001). Of course, nobody of the main actors will go into reflections what are the premises for single currency area.
The problem is not simply the level of debt ,it is also the level of growth expected that will generate the revenue to pay that debt.Herein of course is the real gloabl problem the huge imbalance in global trade that has arisen because of currency manipulation. For those looking at Greece and the Eurozone as the accident I'd suggest they widen their gaze. It's inevitable that the Euro must decline significantly against the USD$ because by doing so it will also decline against the many currencies in Asia and Latin America that peg and intervene against the USD$. In doing so the big losers to recent trends will be those countries who have grown on the back of their competitiveness linked to their currencies. Against those the Eurozone will pullback competitiveness ,increase it's growth rate relative to recent trends and indeed will turn inwards more in terms of satisfying it's domestic consumption. It will be hard times all round because the Eurozone will suffer higher yields whilst this process gets underway ,but that hardship will also be felt by those countries who have milked it for theirown growth. Asia etc will at some point have to float more freely and also turn more inwards looking to inflate their domestic consumption as their exports take a hit. Japan may have to stop looking West and start pegging themselves to the Yuan and so forth redirecting their export industries much closer to home.
For Jon Livesey: "An economy like the UK, on the other hand, has for the last two decades consistently grown faster than the EU, and pays interest rates below expected growth, and as a bonus has a lot of long-dated debt, so unless something unexpected happens, even our current high level of debt will gradually decline, slowly at first, and then faster with time. It's just arithmetic." You've put your finger on a critical point, Jon. The problem for the Greeks is that much of their debt is short-term. They have to pay off £26 billion of debt this year alone. The structure of British debt is entirely different, and much of it is long-term and more manageable. We overspend but our very kind creditors won't come a'knocking with their IOUs for a while.
For Richard Jessop: I thought your contribution interesting, Richard, but you don't really have to read "War and Peace" to know that you're right. The basic truth is that markets always correct themselves over time. Sometimes the process is short, sharp and very painful; sometimes it is long and protracted. The most profoundly worrying of all is how the great imbalance between America and the rest of the world, in particular China, will correct itself. Clearly, clearly, clearly, America cannot go on borrowing on such a colossal scale forever. We have no idea how this will end. It is unimaginable. My own guess - laughed to scorn by many - is that there will be an American default, about which the rest of the world will be able to do absolutely nothing. I believe this will be the best of all possible outcomes, and we can only hope that America will treat Britain - one of the biggest holders of US paper - on favourable terms when this happens.
"These people eat the dishes of their children" What a great way of expressing what we've all been doing for the past decade or more!
Will markets call EU bluff on Greek rescue? Not really a question, which should be even mulled over, as either way nothing matters much. The Euro, is not a monetary unit as such, it is a political project devised by the Political Class of Europe to embed their right to rule into the psyche of all EU subjects. There is no upper limit to the cost of affecting this project; as everyone knows it will not be the Political Class that pays, as they have immunity.
For Roland: "For Germany the choice is clear if stark: 1. Save the Euro or 2. Save your own reputation for sound finance It seems Merkel, bound by domestic politics and the German constitutional court, is veering towards the second choice." Come on, Roland - it isn't about saving the Euro, it's about saving German hegemony. OF COURSE the Germans will bail out the Greeks. At the moment it's all Mr Huff-and-Puff from the Germans, hoping speculators will go away if they look stern enough. But they'll fold. They'll try to disguise their abject retreat with smoke and mirrors but you can bet the farm on it.
One of the most interesting aspects of this crisis is the reaction of the Irish. They actually bit the bullet and are now suffering great economic pain. How will they react if they see that the Greeks are allowed to continue with their sloppy, overspending ways simply by going onto the streets?
@jon livesey (2350) Exactly.Pure Mr.Micawber and unarguable. Well said.
@jon livesey (2350) Exactly.Pure Mr.Micawber and unarguable. Well said.
And a slightly weaker euro against the dollar is a bad thing because? A year ago it was at $1.25 or so. Hardly a collapse, then. Oh, and against the pound the euro is practically unchanged. Looks like the Market doesn't share A E-P's derranged view of modern reality. Can't you just write one balanced, objective, piece?
Ambrose The Euro as we know it will collapse. That debate is over. The real debate is what happens next. How will each of the countries within the defunct EMU react? How should Britain use the opportunities arising from the collapse to her national advantage? What risks to Britain will arise from the collapse? How can the European realist’s world view rapidly come to the fore as the Progressives / Marxists / Maoists fall back and before they can regroup? But first the risks, because there really are a number of major risks to Britain as a result of the collapse of EMU. The immediate risk is to British banks as they take a 40% haircut on exposure to Club Med countries. This loss will mean a further bailout by UK taxpayers of British banks and this bailout will probably precipitate a sovereign downgrade. Radical cuts in British spending on education, NHS and social payments is the proper response to this threat - cuts that can be made without detriment to front line services. Moving these industries holus bolus into the private sector will provide the required cuts and simultaneously generate real job opportunities. With regard to broader risks these arise from a fundamental realignment within Europe. Greece and the Eastern orthodox countries will have every reason to align themselves more closely with Russia after the failure of EMU. Russia will not be slow to capitalize on these opportunities in their natural sphere of influence. But what of France and Germany? Let us consider France first. France will come out badly weakened on three fronts. First their banking system is unlikely to sustain the hits from their loan exposure to Club Med. An IMF loan will probably be needed - imagine the French political indigestion of that. The second hit France will take is a collapse of agricultural subsidies and EU transfer payments - why? - Because traditional payers will be seeking their own debt-ridden survival. The worst problem for France is the explosive social unrest that will result as the 20% Islamic population see a weakened French state as an opportunity to gain concessions. The same applies to French farmers and the French unions of every hue. How does France extricate themselves from this mess? I do not know. But a dictatorship of some kind is not beyond reasonable consideration. As for Germany there will be a strong pull, based on the failure of their French “partnership”, to abandon alignment with the US sphere and align themselves with the East and Russia in particular. An internally weakened Germany would make Russian proposals a lot easier to sell. So what must Britain do? In the short term be radical in restructuring the economy towards a much smaller state through debt reduction, and higher productivity through relying on unhindered British innovation incentivized by low taxes. Continental Europe will always trade with the UK but the UK must seek to renew neglected relationships elsewhere and in particular with the USA and Canada as continental Europe broadly veers in the direction of socialist dictatorships in the aftermath of EMU.
Andrew at 10:43pm: "Ambrose, I'd like to pass on something that I was very surprised had taken me 47 years to realize: Holland is not the same as the Netherlands, just as England is not the same as Britain" And some of the Kingdom of the Netherlands isn't even in the EU (go and look it up on Google)
Ambrose - I know you've been longing for the end of the euro for years, and so have I. But hasn't evereyone else been welcoming this bail-out as a success story? Maybe that's MSM spin. Time and history wil tell, I guess.
The safe thing to do will be to move money out of Greek banks, preferably before regulators try to suspend shorting (again). It is thought the capital ratios of Greek banks is 'ok' but ratios can change extremely quickly to 'bad' when deposits start run down.
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