Euro zone gymnastics
Sometimes, a week away from the fray can bring perspective. Sometimes, you miss all hell breaking loose.
My last day in the office saw European Central Bank President Mario Draghi utter his “we will do whatever it takes” to save the euro declaration. The markets took off on that, only to sag when the ECB didn’t follow through at last Thursday’s policy meeting.
In fact, it was never that likely that the ECB would rush to act, particularly since Draghi’s verbal intervention had started to push Italian and Spanish borrowing costs lower and the troika of lenders was still musing over Greece. But it seems to me that, despite German reservations, the ECB president has shifted the terms of trade, something market action is beginning to reflect.
There can be little doubt now that the ECB will intervene decisively if required – and the removal of that doubt takes away the main question that has kept markets on edge every since a bumper first quarter evaporated. Yes, there are caveats – notably the fact that Draghi said the ECB would only step in if countries first request assistance. With that will come conditionality and surveillance but it seems highly unlikely that Spain, for example, will be required to come up with any further austerity measures given what it is already doing. Spanish premier Rajoy seemed to soften Madrid’s opposition to seeking help last week, though he said he wanted to know precisely what the ECB might do in return. Until now, seeking sovereign aid has been a taboo for Spain. If that’s changed, it’s also big news.
The fundamentals of the crisis remain the same – a full Spanish bailout would all but wipe out the euro zone rescue funds while one for Italy looks completely unaffordable. All roads point to September, once the German constitutional court has presumably cleared the way for the bloc’s ESM bailout fund to come into being. At some point after that, Spain could ask for help from the fund to lower its borrowing costs rather than seek a sovereign bailout and, from what Draghi has said, the ECB could pile in behind. If that joint action turned the tide in Madrid’s favour it’s possible that Italy, which after all is running a primary surplus, would be taken out of the firing line. A caveat of my own here – next spring’s Italian elections cast a long shadow. Without a credible leader to replace Mario Monti, Italy would leapfrog Spain to the top of the crisis list.
There’s an awful lot of ifs and buts there, but with Spain facing big debt redemptions in October, September is the month.
That is also when Greece is due to get its next tranche of bailout money. The troika of EU/IMF/ECB inspectors have left Athens and will return to deliver a final verdict next month. It’s hard to see Greece being cut loose given the delicate state of affairs and the work being done to try and shore up its euro zone partners. But the government has more work to do on the budget cuts and privatisation front. As sources have told us, the ECB is considering a writedown on Greek bonds held by euro zone central banks – something that could not be countenanced until now – so there seems even now to be strong will to keep the Greek show on the road, at least until its peers are in better shape.
The other utterly unchanged fact is that everything still rests on Germany. Angela Merkel, finance minister Schaeuble et al have been rather quiet since Draghi broke cover but clearly the Bundesbank is unhappy. Its chief, Jens Weidmann, would not support the ECB’s statement on bond-buying last week. It would be a big problem if the ECB tried to act without visible German support.
Austria’s Chancellor was out over the weekend opining that Merkel would drop her opposition to measures such as giving the ESM a banking licence so it can draw on ECB funds, if that was what it took to save the euro. It should be noted that even Draghi has been cool to that idea.