Bridge of Sighs

July 18, 2012

Greece announced late yesterday that it would need a bridging loan to tide it over until it finds the nearly 12 billion euros of spending cuts demanded by the EU/IMF/ECB troika of inspectors, after which the next tranche of bailout money can flow, probably in September. The troika is due to return next week. There’s no doubt Athens will get the interim money. Jean-Claude Juncker, who chairs the group of euro zone finance ministers, said last week that nobody should fret about Greece’s finances in August. They would be shored up.

Today, Finance Minister Yannis Stournaras is expected to put a draft list of cuts to the leaders of the three parties comprising the country’s ruling coalition, who are rather hemmed in by pledges to voters not to fire civil servants and shun sweeping pensions and public sector wage cuts.

Italian Prime Minister Mario Monti threw in a curve ball last night, saying there was a real prospect that the autonomous island of Sicily could default. It accounts for about 5.5 percent of Italian GDP so shouldn’t wreck the country’s finances but it’s not a step in the right direction. If Italy’s debt mountain of 120 percent of GDP started rising rather than falling, it could be taken very badly by the markets.

With Monti saying he will not be a candidate in elections of spring next year, Italy could quickly eclipse Spain as the biggest threat to the euro zone. Monti has enacted some serious labour and structural reforms but already they are running into stiff opposition. Whether whoever replaces him next year would be willing and able to continue down the same path is a very big question.

Internal German politics offers a microcosm of the wider euro zone stand-off between rich countries who have had enough of bailing out the poor and profligate. Yesterday, the wealthy southern state of Bavaria – a stronghold of Merkel supporters – said it would ask the constitutional court to back its call for an overhaul of the federal system whereby it bankrolls poorer German states. This is a touchy subject for the Chancellor who finds herself of defending the sort of transfer payments domestically that she strongly opposes in the wider currency bloc. The court is already taking its time over ruling on the euro zone’s ESM bailout fund, delaying its inception until September at least.

Investors could pay for the right to hold two-year German paper for the first time ever at an auction this morning – a stark pointer to the extent of risk aversion out there.

For Spain, all eyes are on Thursday’s bond auction after a T-bill sale saw yields fall significantly on Tuesday. Portugal, which got a thumbs up from the IMF for its austerity drive earlier in the week, sells six- and 12-month T-bills today.

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