Austerity backing prompts currency boost
BACKING from the Greek parliament for the country’s austerity package has prompted a so-called “relief rally” in the markets pushing the euro to over $1.45, that is, to a level around 10 cents higher than that prevailing when Lehman Brothers collapsed in September 2008 triggering a global financial meltdown.
But many economists remain convinced that this relief will prove short-lived and that economic and social meltdown in Athens could spark an uncontrolled default on sovereign debts, provoking an international banking crisis and a possible break up of the eurozone.
This week, it emerged that the British bank Standard Chartered had cut its exposure to other European banks, withdrawing tens of billions from the interbank market, sparking memories of the 2008 crisis when banks stopped lending to each other.
Fears have grown about the possible impact of an uncontrolled Greek default on the international financial system, given the indirect insurance related exposure of institutions in New York and London on top of the direct exposures borne, in particular, by banks and pension funds in France and Germany.
Mario Draghi, incoming ECB president, has warned that the possible contagion effects from a default are unknowable.
The London-based thinktank, Open Europe, insists that a Greek default is on the cards, given the country’s debt-to-GDP ratio of over 150%. No country in modern history has avoided a default while suffering such levels of debt.
Open Europe calls for Greece to restructure its debts now as the costs of such a move can only increase.
However, US economist Jeffrey Sachs, writing in the Financial Times yesterday, claims that “Greece could probably service its debts in the long term without default if a low interest rate is locked in place and repayments are stretched over 20 years. Such low interest rates could be put in place through Europe wide guarantees on Greece’s debt service.”
This could be funded in part by EU taxes on the financial sector, he says.
“A gradual repayment at low interest rates is worth a try. In the worst case, Greece defaults without a banking panic or a breakdown of the single currency.”
The French and Germans have moved to roll over Greek debt and key EU leaders such as Luxembourg prime minister Jean Claude Juncker and German finance minister Wolfgang Schauble are calling for burden sharing by financial institutions. Some suggest an effective restructuring can be engineered.
For now at least, the crisis has taken a holiday, but for how long?
“The French plan (to extend the term of the Greek debt) is really just buying time. It is equivalent to a life belt in a rough sea. It doesn’t address the long-term solvency issues.”
He questions whether the Greeks have the stomach for the austerity coming down the tracks.
“I see a controlled Greek default coming in late 2012, or early 2013.” The alternative of an uncontrolled default triggering a breakup of the Eurozone is unthinkable yet cannot be ruled out.
“Think about a Eurozone breakup and what it implies in terms of economic chaos, legal/technical issues. It is almost impossible to envisage the politicians allowing this to happen yet there will be huge concerns that jingoistic elements could prevail.”
“A further escalation of the crisis is likely before something radical is done. A solution will entail closer ties across the Eurozone, with a larger EU central budget and closer supervision, but then the long arm of the law is already in place across much of the EU.”
“Contagion is the big fear.
“The Greek debt situation looks unsustainable.
If Greece falls off the edge, I would expect the eurozone to radically raise its game.”
And the alternative?
“Germany would be the biggest loser from a eurozone collapse. The euro has made Germany competitive.
“This is why the eurozone will survive — it is not just an ideology.”
O’Brien believes that there will be a move in the next couple of years towards closer co-operation across Europe, with the introduction of Euro bonds.
“There will be a lot more interference from the centre, but I don’t think Europe is ready for tax coordination.
“The alternative — breakup of the euro — is just not palatable.
“The big economies will realise this.”
“It is highly likely there will be some sort of restructuring of Greek debt, in the form of a selective default, something that does not trigger a major credit event. Uruguay did it in 2003, and was back in the markets in four to five months.” It will not be that easy to engineer.
There is a fine line between agreed and compulsory ‘burden sharing.’
“The IMF and the US will twist the arms of the ratings agencies... the US would be a big loser in a default. Their insurers would have to pay out through credit default swaps on the loans. There will be a rollover restructuring within three to six months.”
McQuaid believes that Ireland would be better placed if the restructuring were to be pushed out to 2012-2013 as it would have more time to put its economy back in order. “If Greece were to default tomorrow, the markets will assume that Ireland and Portugal will follow. There would be carnage in the markets, but they always get back on track.”
“A default won’t happen immediately, but I don’t see a solution to problems in Greece which are entirely budgetary. A (uncontrolled) default would impact primarily on the Greek people. There would be no money to pay welfare, or public servants. The banking system could stand a default, but it would be very messy.” And the impact, here? “Ireland is a very different economy. Exports are growing. The Euro could depreciate — which would not be that bad from our point of view.”
Exiting the eurozone would not be a pancea: “It doesn’t get rid of the debt.”
Durcan believes that a move towards fiscal union is on the cards as the alternative would be a Japanese style “drift” over the next 10 to 20 years. Given the absence of a European Government, a greater role for the European Central Bank will be required, he argues.
And he adds, the Government could do more to inject certainty by giving more precise indications about the taxes and charges it must introduce.
Greece joins the euro — cost of debt falls and borrowing by individuals and businesses surges.
Public sector wages double and pensions of up to 92% of pay are provided.
Eurostat reveals discrepancies in budget statistics — the first sign that Greece “cooked the books”. September 2008: Global credit crunch following collapse of Lehman Brothers.
Greece enters recession after 15 years of economic growth.
Ratings agency S&P downgrades Greece.
Leftist Pasok party gains power on a fiscal stimulus platform. New prime minister George Papandreou reveals the government finances need to be restated. Austerity drive follows.
Deficit revised up from 3.75 to 12.7%. Later revised up to 15.4% December 21,
Greek bond yields hit 6%.
Greek sovereign debt crisis rocks market.
Yield reaches 10% — Greece calls for eurozone support.
First bailout package.
New austerity package.
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