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.