Euro zone facing autumn crunch?
Spain remains the focus for the markets but here comes Greece racing up on the outside lane. Officials told us exclusively yesterday that Athens is way, way off the targets set by its bailout programme and a further restructuring will be needed. If so, it’s almost inevitable this time that euro zone governments and the ECB will have to take a hit. Are they prepared to? There’s little sign of it so far although a key ally of German Chancellor Angela Merkel said last night that a second haircut was an option.
CDU budget expert Norbert Barthle said Greece would do its level best to stay in the euro zone, and given the losses associated with its departure and the fact that it could also prove a tipping point for Spain, there are powerful reasons to hope that’s true. But, but, but it’s pretty apparent that Athens has little chance of delivering the cuts being asked of it without completely wrecking its economy even if it is cut a bit more slack. And the latter is a big “if” too. It’s hard to see Merkel telling the German public they are going to face another bill to keep Greece afloat. As Barthle said, a second debt write off “would cost us a lot of money”. He also flagged up another problem that has been aired in recent days – that the IMF would probably not stump up any more funds given Greece has not met its stipulations.
The euro zone has indicated it will keep Greece afloat through August while the troika of EU/IMF/ECB inspectors assess the situation but we could be approaching a crunch point in September or October and if we get there the big “contagion” question is back – would a full Greek default or euro zone exit (and by the way some policymakers have floated the possibility of allowing Greece to default within the euro zone because it would be slightly less chaotic) lead to a collapse of confidence in Spain?
The ESM rescue fund is in abeyance until the German constitutional court delivers its verdict in mid-September and even once in place it has only a few hundred billion euros at its disposal – not enough for a full sovereign Spanish bailout. So some big decisions may have to be taken pretty quickly such as dramatically beefing up the rescue fund and/or the ECB drops all its objections to taking on the bond market and intervenes with real muscle.
The big point about all this is that muddling through has almost had its day. Serious red lines may well have to be crossed – either by giving Greece yet more money to keep that show on the road, or by refusing to do that and having to quickly reinforce the structures to prevent Italy and Spain getting swept away in the backwash.
Interestingly, French Foreign Minister Laurent Fabius said yesterday that, while he hoped it wouldn’t be necessary, an increase in the euro zone’s firewalls or a dramatic intervention by the ECB could be needed. This morning, ECB policymaker Ewald Nowotny has suggested the ESM rescue fund could get a banking licence so that it could draw on virtually unlimited central bank funds. That proposal has been flatly rejected in the past but would be a serious game changer.
Even without the Greek factor, Spain is in serious bother. The advantage Madrid built up by frontloading its debt issuance in the first half of the year when the market was more benign has been shattered by soaring borrowing costs, climbing regional debts and higher deficit targets to the extent that it still needs to raise a further 50 billion euros this year – a target that will be very difficult without outside help. Again, October looms large. In the last three days of that month, 20 billion euros of debt matures. None of this necessarily means a full bailout is imminent. The ESM could be deployed to buy bonds in the primary market to keep Madrid afloat –- as agreed at the June EU summit — but that’s yet another call on its limited resources.
Having met German Finance Minister Wolfgang Schaeuble last night, Spanish Economy Minister Luis de Guindos – who appears to be the key player here – moves on to Paris for talks with French counterpart Moscovici.