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Saturday, June 16, 2012
Tomorrow is the start of a critical few weeks forEurope when the fate of Greece, the euro and the weaker eurozone countries could well change for ever.
Finance ministers from the 17 eurozone countries and the ECB will have their fingers on the buzzer, ready to take action to quarantine Greece if a decidedly anti-EU group of politicians are elected.
Measures to control bank runs will be put in place. In theory, it could extend to any country where they fear the public will react and bolt like frightened horses.
Nerves are frayed in the finance ministries across the eurozone as yet more measures — this time a €100bn banking bailout for Spain — appears not to be reassuring markets.
At the moment, everyone is airily suggesting Spain and Italy can handle paying up to 7% for their borrowings, but everyone knows this is going in one direction only unless something happens to convince markets the euro is as good as gold.
But the first issue to be dealt with now is who gets elected in Greece.
If the centre-right New Democracy is first past the post, they will get a bonus 50 seats to help them form a government. A sizeable victory for them, or the less likely outcome of the left-leaning Pasok coming in first, will ensure the finance ministers’ conference call is short.
While New Democracy has told the voters it will try to temper the terms of their €240bn bailout, they are unlikely to go as far as Syriza, that has said it will tear up the memorandum of understanding (MoU).
If Syriza is the largest party, or form a sizeable part of a new government, then all bets are off as markets and politicians are unclear about exactly how far they are willing to go.
German politician Andrej Hunko, a member of the left Die Linka party, who met Alexis Tsipras, leader of Syriza recently, said he wants to change the MoU, and renegotiate repayments.
Having already cut private investors by €100bn, any rescheduling of the loans would implicate all.
According to economist Daniel Gros, all eurozone countries would be hit because of their shares in the EFSF bailout fund and the ECB. For Ireland this amounts of €4bn.
If Greece was given a 10-year grace period and 20 years to repay at 1.5% interest taking both private and public debt, the weakest countries would suffer the most since they have to pay more for their own debt. Ireland would stand to lose €2.4bn, or 1.5% of GDP, while Germany would lose the least at 0.3% of GDP.
There is little likelihood that Greece would be thrown out of the eurozone because there is no legal mechanism to do this. They could be forced, but this could have implications for other crisis countries as the markets assume that others would follow Greece.
All the EU leaders have made it clear that if the new Greek government tears up the MoU, then the bailout money will not be paid out.
To ensure the electricity is not immediately switched off in the country’s hospitals, there is talk of a type of humanitarian aid package being put together for them by the eurozone.
Merrill Lynch believes in the four-week period after the election, Greece will not exit the euro and Spain or Italy probably will not have a sovereign crisis. There could be an initial market rally that would temporarily strengthen the euro even.
The French general election, also on Sunday, should give François Hollande his majority in parliament and set the scene for a changed relationship with German chancellor Angela Merkel.
She has promised a growth pact to her Socialist opposition in return for their support for the fiscal treaty and the ESM which is also Mr Hollande’s demand.
Ms Merkel and Germany are being increasingly pressurised to take new steps to stem the crisis. She will face more pressure at the G20 summit in Mexico on Monday and Tuesday and again when she meets Mr Hollande, Italian prime minister Mario Monti, and Spain’s Mariano Rajoy on Jun 22. The day before, the Spanish banks audit will be published and finance ministers will meet to finalise proposals for the leaders summit.
But anybody expecting a big-bang solution will be disappointed. Germany insists it will not and cannot take part in anything where they shoulder the burden.
Their definitions of a banking union and a debt resolution fund are very different to the sharing and solidarity others have in mind. Instead they are pushing for full political and fiscal union.
However, with Germany’s exports and growth slowing, markets continuing to feed off eurozone countries and the possibility of a new government in the Netherlands in September and a Socialist coalition with Merkel in Germany a year later — if the euro can survive that long, the future may look different.
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