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Euro crisis entering ‘make or break’ territory
By Jim Power
The euro crisis has moved into a new and arguably much more dangerous phase over the past couple of weeks.
It was one thing dealing with the small peripheral economies such as Greece, Portugal and Ireland, but it is an entirely different matter when the larger economies such as Spain and Italy start to get dragged in, in a serious way. That is exactly what has happened over the past week.Last weekend the eurogroup agreed to provide the Spanish government with €100bn in order to recapitalise its ailing banking system. The financial assistance will be provided by the EFSF (European Financial Stability Facility)/ESM (European Stability Mechanism).
The Fund for Orderly Bank Restructuring will act as an agent of the Spanish government and accept the funds and channel them to the financial institutions concerned as required. The number of acronyms that have fallen out of this crisis is quite mind-boggling, but there is no point in not being straight forward. The bottom line is that the bank funding will become part of Spain’s government debt — just like Ireland.
These funds are being provided to Spain without austerity strings attached, ostensibly because the Spanish government has already implemented significant fiscal and labour market reforms.
This has peed off a number of other recipients of funding such as Greece, Ireland and Portugal, whose funding came with very long strings attached. However, the funding being provided to Spain is being provided to the banking system only, although it will form part of Spain’s national debt.
However, it is alleged that there are strings attached for the recipient banks and it is envisaged that the banks will eventually pay back the money. Hard to see this happening, but that is the theory.
In terms of being seen as a big step in the resolution of the eurozone crisis, the injection of funding to the Spanish banks has not exactly been too effective. Spanish 10-year bond yields are hovering dangerously close to the 7% mark.
The view of the markets appears to be that despite this injection of €100bn into the banking system, further assistance will be required as the economy is moving into deep economic trouble, property prices are still falling and the extent of the losses in the banking system could escalate dangerously over the coming months. Spain’s government debt is now moving towards junk status.
Even more worrying is the fact that the even bigger Italian economy is now becoming a focus of seriously negative attention. Italian 10-year bond yields are trading well over 6%. The cause of Italy was not helped by comments from the Austrian finance minister that Italy might also need to be bailed out eventually. It is one thing holding this view, but it beggars belief why such an individual could possibly come out and express such a dangerous sentiment.
It all adds up to a very precarious situation for the eurozone, but it doesn’t stop there.
On Sunday the Greeks will go back to the polls, and if we get any outcome other than the election of a government that support the fiscal consolidation process, the future of Greece in the euro will really move centre stage again.
It is hard to see how Greece can possibly stay within the euro if a new government decides to turn its back on the conditions attached to the bailout of that country. If Greece goes, then the structure will start to look even more unstable than it currently is.
Regardless of what happens in Greece on Sunday, the EU summit at the end of June is assuming massive importance and could well represent a ‘make or break’ weekend for the future of the euro.
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