MacroScope

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.

Spain calls for bank aid

Things are on the move in Spain although nothing is set in stone yet.
Treasury minister Montoro’s call yesterday for “European mechanisms” to be involved in the recapitalization of Spain’s debt-laden banks – a reversal of Madrid’s previous insistence that it could sort its banks alone – unleashed a barrage of whispers in Europe’s corridors of powers.

Our sources say that the independent of audit of Spanish banks’ capital needs, the first phase of which is due by the end of the month, will be a key moment after which things could move quickly.

The hitch is that Madrid still doesn’t want the humiliation of asking for a bailout and Germany will not countenance the bloc’s rescue funds lending to banks direct. One possible solution floated last night –  the EFSF or ESM bailout funds could lend to Spain’s FROB bank rescue fund, which could be viewed as tantamount to lending to the state but would give the government some political cover to say it wasn’t asking for the money. This is anything but a done deal and there would still be some strings attached which could be tough for Prime Mininster Mariano Rajoy to swallow.