The Great Debate UK
Another week, another E.U. bailout agreement
By Mark Hillary. The opinions expressed are his own.
Once again German Chancellor Angela Merkel has had to dig deep to ensure that the euro zone can limp along for a little longer without any single nation defaulting.
And this story changes day by day. No sooner has Germany rescued the euro, Greece apologises and says they can’t meet the deficit targets – no more savings can possibly be achieved through austerity.
But as economists chart the course of this rollercoaster ride of expected default and the potential catastrophe of the entire European single currency project unwinding, is anyone paying attention to the social effect of all this uncertainty?
I don’t mean the pain of the middle classes ruing the days their house would increase in value week by week, I mean the potential for a completely different system of politics.
from The Great Debate:
Europe’s Lehman moment
By Jeffry A. Frieden
The opinions expressed are his own.
Europe is in the midst of its variant of the great debt crisis that hit the United States in 2008. Fears abound that if things go wrong, the continent will face its own “Lehman moment” – a recurrence of the sheer panic that hit American and world markets after the collapse of Lehman Brothers in October 2008. How did Europe arrive at this dire strait? What are its options? What is likely to happen?
Europe is retracing steps Americans took a couple of years ago. Between 2001 and 2007 the United States went on a consumption spree, and financed it by borrowing trillions of dollars from abroad. Some of the money went to cover a Federal fiscal deficit that developed after the Bush tax cuts of 2001 and 2003; much of it went to fund a boom in the country’s housing market. Eventually the boom became a bubble and the bubble burst; when it did, it brought down the nation’s major financial institutions – and very nearly the rest of the world economy. The United States is now left to pick up the pieces in the aftermath of its own debt crisis.
from Felix Salmon:
Europe’s lethal uncertainty
As markets plunge again today, ostensibly on existential worries about the eurozone, you might want a plain-English explanation of what the root of the problem is. And John Lanchester is a great place to turn for such things:
On 16 August, Nicolas Sarkozy and Angela Merkel had an emergency meeting to decide what to do about the Eurozone crisis. After it, they gave a press conference at which they spoke in platitudes about the need for Europe to improve its ‘economic governance’, avoiding all specifics. They precisely and explicitly ruled out the only two things which would have helped: the creation of ‘eurobonds’, i.e. debts backed by the full economic weight of all the countries inside the eurozone; and the extension of the €440 billion European Financial Stability Facility. It’s easy to see why they did this, and their reasons are entirely to do with the domestic unpopularity of giving more aid to the indebted and severely struggling ‘Club Med’ countries of Southern Europe. Unfortunately, Merkel and Sarkozy’s inaction is a recipe for certain disaster. Everybody and his cat knows that the eurobond is the only way out of the crisis for the eurozone in the medium term; as for the necessary size of the short-term bailout facility, Gordon Brown’s guesstimate was €2 trillion. That ‘could have convinced the markets that Europe meant business’. Huge, sustained and manifestly undeflectable government intervention on that scale is the only thing which will cause the speculators and hedge-funders and ‘hot money’ types to back off. Instead, nothing.
A make-or-break month for the euro zone
By Kathleen Brooks. The opinions expressed are her own.
For over a year now people have been calling for the collapse of the euro zone. Either one of the bailed out nations would leave, or the more fiscally sound northern European states would form their own version of a union. Regardless of what the outcome would be, the harsh reality was that the Eurozone’s massive floor - allowing countries like Greece to borrow for nearly a decade at German-style interest rates without some limit on spending or enforcement of fiscal rules – meant that it could not survive.
But after 18 months of stop gap solutions, emergency weekend summits and hastily constructed bailout plans it feels more and more like September may be the swan song for the currency bloc.
Germany at the crossroads
By Laurence Copeland. The opinions expressed are his own.
Baby-boomers like me, who grew up in the shadow of World War II, have to acknowledge with gratitude that the Germany which again dominates Europe is in most respects a model democracy – multiracial, prosperous and contented. However, there is one worrying aspect of the German mentality which seems to have survived intact from its unhappy history, and it is an aspect which is likely to be tested to the full in the coming weeks and months.
From the moment when the Maastricht Treaty was dreamed up in the early 1990s to the inception of the euro zone in 1998, Germany had any number of opportunities to kill the project off and indeed, time and again, policymakers in Bonn or Berlin or Frankfurt voiced their reservations in public. The Bundesbank, in particular, with its overwhelming prestige, spoke out forcefully against what it saw as the dangers of premature monetary union.
Could Europe be on the cusp of a Lehman moment?
By Kathleen Brooks. The opinions expressed are her own.
The euro zone debt crisis has now spread from the sovereigns – after the ECB came in and purchased Italian and Spanish debt – to the banking sector. Although the EU authorities put in place a short-selling ban, which has another week to run, the banking sector is back at the pre-ban levels or in some cases even lower.
Europe’s banks are by and large less capitalised than their U.S. peers. They are also exposed to Europe’s sovereign debt and European loan books. Even if a member state manages to avoid a default, growth is now slowing and we could be in line for another recession that would most likely increase bad debts and further erode banks’ profits.
from Breakingviews:
Greek rescue: pig in a poke
By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
A deal was better than a disaster. But last week's planned rescue of Greece has the astonishing by-product of increasing its debts. It also lets private creditors off lightly while making taxpayers elsewhere in the euro zone pay through the nose. It doesn't even mark the end of the crisis.
from Felix Salmon:
The curious Greek bond price chart
Many thanks to Van Tsui and Scott Barber for putting this chart together for me. We're all used to seeing yield curves -- charts which show the yield, for any given credit, at various points along the maturity spectrum. This chart is different: it's a price curve. It just shows the price at which Greek bonds are trading, plotted according to their maturity.
And it's really odd.
To understand just how odd this chart is, it's important to realize that in the Greek bond exchange, there's only one menu of options for anybody holding a Greek bond. It doesn't matter if your bond is maturing in six months or if it's maturing in 26 years, the instruments you're given the choice of swapping into are all exactly the same.
from Breakingviews:
Greek rescue bizarrely increases its debts
By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Listen to the politicians and one might think that Greece’s debts will fall as a result of last week’s provisional rescue by euro zone leaders and private-sector creditors. In fact, they go up. Athens’ borrowings will increase by 31 billion euros under the rescue scheme, according to an analysis by Reuters Breakingviews. This increase, equivalent to 14 percent of GDP, will push the country’s estimated peak debt/GDP ratio next year to 179 percent.
Greece deal is a compromise and, once again, the banks have won
By Laurence Copeland. The opinions expressed are his own.
Whenever I see photos of Chancellor Merkel these days, I’m reminded of the lugubrious features of the creature in the Restaurant at the End of the World, as it recommended to guests which part of its own anatomy they should eat. The details of the “Deal to Save the Euro” are still mysterious and have been given a misleading spin in the official releases, but one or two points seem clear.
First, the package is a compromise – a little bit of default (as required by a reality check) plus assistance to Greece which looks very generous but is still not enough to give it a realistic chance of paying its remaining debts. So the can has been kicked further down the same road yet again.
