The Greek conundrum

October 9, 2012

Euro zone finance ministers, apart from formally launching the ESM rescue fund, made little headway yesterday evening, holding what they called “robust” talks about Greece’s prospects but not coming up with anything to continue the pretence that the country can get back on track. The report from the troika of EU/IMF/ECB inspectors looks likely not to be complete until next month’s Eurogroup meeting.

There are signs of divisions between the euro zone and IMF, with the latter convinced only dramatic measures such as a big writedown on the Greek bonds held by European governments will make the numbers add up. “More needs to be done,” IMF head Christine Lagarde said pointedly last night.

Angela Merkel, who is visiting Athens today and could stir up public Greek anger by doing so, is apparently set on returning to her increasingly critical Bundestag just once more – with a sweeping package to deal with Greece, Spain, Cyprus and maybe Slovenia. Ergo, the lack of Greek progress means any Spanish move for aid is probably some way off. And given the chaotically mixed messages coming from Madrid, it’s not clear that the government there has fully realized it will have to do so at some point.

Since European Central Bank chief Mario Draghi changed the terms of the game, the bond market has cut Spain some slack. Spanish 10-year are around 5.75 percent. A lurch well above six percent for an extended period of time could force Spanish Prime Minister Mariano Rajoy’s hand. In Luxembourg, Eurogroup head Jean-Claude Juncker said there had been no discussion about Spain needing a sovereign bailout on top of the help being given to its banks. A ratings judgment by Moody’s is now overdue and could come any day. If it cuts Spain to junk, events could accelerate but if it does not, Madrid may have a little more breathing room.

The International Monetary Fund cut its global growth forecasts for the second time since April and, more locally, predicted Spain will miss its deficit targets both this year and next. The IMF forecast the euro zone economy would shrink by 0.4 percent this year, and grow by just 0.2 percent in 2012 – hardly an environment conducive to cutting debt, and a downgrade of its July numbers.

Merkel’s visit to the lion’s den is highly symbolic but is unlikely to move forward the Greek negotiations, given the troika’s ongoing work. But her trip represents a gesture of solidarity with her Greek counterpart, Antonis Samaras.  Police have banned protests in most of central Athens and readied 6,000 officers to provide security. The German Chancellor, having expressed some doubts earlier this year, now seems hell-bent on keeping Greece in the euro zone, at least until German elections in autumn of next year.

The other big setpiece of the day is Draghi’s lengthy testimony to the European Parliament. The ECB is somewhat hamstrung until Spain calls for aid – it cannot implement its bond-buying programme until a country first seeks help from the ESM – but Draghi rarely wastes an opportunity to keep the pot boiling. At the ECB’s monthly policy meeting last week he said the conditions Madrid would have to sign up to need not be painful, suggesting he hopes Rajoy will hope off the fence sooner rather than later. He also said the ECB was ready to go.

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