Greece causes headache for holidaying leaders
By Sarah Collins | Wednesday 25 July 2012
With politicians fleeing the cities and investors fleeing Spanish and Italian debt markets, a repeat of the financial panic that gripped the eurozone in summer 2011 is now almost a certainty. Greece, which kickstarted last summer’s market rout, continues to trouble eurozone officials, who are working on a solution to make sure the government can pay off or defer a 20 August bond redemption. However, the real test of the eurozone’s mettle will come later in the month, when a troika of EU and IMF officials releases a report on how far astray the country’s debt and deficit targets have slipped since two rounds of elections in May and June.
“Everybody knows they are not on track,” said one eurozone source close to the talks. “The question is what to do,” said another, who did not wish to be named. The IMF has failed to deny reports that it is threatening to pull additional funding from Athens if it emerges that the government will not be able to reduce its debt mountain to 120% of GDP by 2020. The European Central Bank is now refusing to accept Greek government bonds as collateral for loans (after a collateral arrangement with the European Financial Stability Facility ended on 20 July), leaving Greek banks to borrow more expensively from the Greek central bank. And creditor countries, especially Germany, have hardened their rhetoric, insisting that Greece will see no further aid payments until it can identify an extra €11 billion in budget cuts, the details of which Greece’s three governing coalition parties are still struggling to agree. Meanwhile, the country is waiting on a €31.3 billion tranche of the bailout - €29.6 billion of which is to come from the EFSF, but which it is not possible to pay out until a troika of EU and IMF officials, which arrived in Athens on 24 July, completes their assessment. They are expected to be there for most of the month of August, and will return in September, the European Commission confirmed, on 25 July.
Greece’s government is seeking an extra two years to bring its deficit down below 3% of GDP - the EU’s maximum - but has so far stopped actively pushing it, preferring to concentrate on getting the bailout back on track before it asks for concessions. Meanwhile, the economy is predicted to shrink 7% this year after a similar contraction last year, making bailout targets - which are based on GDP ratios - even harder to achieve. The questions officials are now grappling with are how to deal with a third bailout - which is inevitable if Greece is given more time to meet its deficit targets - or a default, which could see the country being ejected from or choosing to leave the single currency. “The risk of an exit by Greece from the euro area has increased,” said ratings agency Moody’s in a press release, on 24 July, adding that it would “pose a material threat to the euro”. Economists at the Centre for European Policy Studies (CEPS) in Brussels have estimated that eurozone countries alone are on the hook for at least €297 billion
SPAIN AND ITALY
The most immediate problems facing EU leaders, however, are the spiralling debt crisis in Spain, where bond yields (the amount investors charge the government to buy their bonds) spiked to new highs, on 25 July. Spanish Finance Minister Luis de Guindos has held emergency meetings with his French and German counterparts over the last two days, insisting, on 25 July, that Spanish bond yields “do not reflect the fundamentals of the Spanish economy, its growth potential or the sustainability of the public debt”.
Italian bonds yields have also continued to rise, prompting an outcry from MEPs and economists. German Chancellor Angela “Merkel and the German Bundestag must face the prospect of financial collapse of the eurozone as the dominoes begin to fall one after the other, or stand by those countries currently showing signs of instability,” said Guy Verhofstadt, the leader of the Alliance of Liberals and Democrats group (ALDE) in the European Parliament, who called for the setting up of a debt redemption fund to help weaker economies pay off their maturing debts.