Austerity promises by three new governments fail to stem euro crisis
The news that Hungary had applied to the EU and the IMF for precautionary funding served as a reminder that countries outside the eurozone were prone to contagion, as various moves which Budapest made over the past year failed to protect them.
But Greek prime minister Lucas Papademos managed to convince Brussels of his government’s commitment to the deal struck on October 26 sufficiently to have eurozone finance ministers agree at their meeting next Tuesday to pay the sixth loan tranche worth €8 billion, said EU Council president Herman Van Rompuy.
The biggest scare came from Moody’s warning yesterday that it did not like the state of the French sovereign deficit or its banks, that continued to be hit by wary investors taking flight yesterday, strengthening the likelihood that its negative warning will turn into a downgrade in the not too distant future.
Growing warnings of a vicious cycle between austerity perceived as needed to calm markets but engendering slower growth, higher unemployment and worsening governments’ balance sheets were seen in action in the French situation.
This prompted market analysts to warn that it was time for deeper intervention, with some calling on the European Central Bank to act now while others predicted that increasingly hostile markets will force France and Germany to agree a deal on fiscal union in the next few weeks.
European Commission president Jose Manuel Barroso was anxious to ensure there was not much difference between his attitude and that of Germany when he said that his proposals tomorrow for stability bonds would make sense when “appropriate levels of discipline and integration” are achieved.
Mr Barroso hopes to put his proposals before the EU leaders summit in Brussels on December 9.
Credit Swisse analyst Jonathan Wilmot believes the commission’s three different options for mutually guaranteed eurobonds will set off the final debate.
While this may give some short-term relief, what the London-based strategist sees as high-stakes brinkmanship will lead to more market turmoil in the meantime.
They will need to strike a deal by mid January on fiscal union, “to prevent the progressive closure of all eurozone sovereign bond markets,” Mr Wilmot said.
He adds that only then will the ECB provide the bridge finance needed to prevent systemic collapse.
ECB president Mario Draghi made it clear last week that the ball is in the politicians’ court.
The guidelines for leveraging the bailout fund, the European Financial Stability Facility, to provide €1bn are due to be completed for the eurogroup meeting on November 29, but BRIC (Brazil, Russia, Indian and China) and other nations are reportedly reluctant to commit to buying into them in advance. This adds to pressure on the ECB to intervene in the secondary markets and commit to longer term funding for banks.
Economist Sony Kapur warned Italy cannot escape a downward spiral without substantially higher external support from the ECB while even more austerity in Spain could send unemployment spiralling. “The ECB’s intervention in sovereign bond markets is less than a tenth of what the Bank of England has done for the UK. All additional ECB intervention can do is to stem the immediate panic and buy one-three years for troubled sovereigns.”
