MacroScope

The IMF is ratcheting up the pressure on the euro zone again, telling it to deepen financial and fiscal ties as a matter of urgency to restore confidence in the global financial system. Despite the European Central Bank’s recent statement of intent, the Fund said the risks to financial stability had risen over the past six months and it raised its prediction of how much European banks are going to have to offload as part of a deleveraging process that has a long way to run.

An eye-watering $2.8 trillion of assets now needs to be cut over two years, which could further choke off credit to the currency bloc’s weaker members, deepen recessions and push up unemployment. Despite recent steps, the euro area is still threatened by a “downward spiral of capital flight, breakup fears and economic decline”.

Gloomy stuff and particularly noteworthy since the growing view in Europe is that on break-up fears at least, the ECB’s promise to buy sovereign bonds in unlimited amounts, once a country seeks help from the ESM rescue fund, had fundamentally turned a corner.

The Fund is also, of course, a key player in the interminable Greek bailout negotiations. Angela Merkel’s visit to Athens yesterday signalled Germany’s new commitment to keep Greece in the euro zone, at least until German elections in a year’s time. But the country’s debt numbers still look ghastly and the IMF and euro zone appear to be at odds about what to do. Greek finance minister Stournaras said last night that the lenders were considering giving two years more time to meet debt reduction targets but it seems the IMF is also pushing for euro governments to take a writedown on Greek government bonds they hold, which they are reluctant to do.

Big setpiece of the day is a Franco-Spanish summit featuring President Francois Hollande and Spanish premier Mariano Rajoy. We know the French have been pressing Madrid to seek sovereign help, presumably to reduce the chances of France getting dragged into the mire, but given all the mixed messages from the Spanish government it is in entirely unclear that it has yet reconciled itself to doing so. Its debt refinancing numbers still dictate that it will probably have to before the year is out.

Once again European efforts to contain crisis have fallen short. It was perhaps reasonable to hope that the European Central Bank’s commitment to provide nearly a trillion dollars in cheap three-year funding to banks would, if not resolve the crisis, contain it for a significant interval. Unfortunately, this has proved little more than a palliative. Weak banks, especially in Spain, have bought more of the debt of their weak sovereigns, while foreigners have sold down their holdings. Markets, seeing banks holding the dubious debt of the sovereigns that stand behind them, grow ever nervous. Again, Europe and the global economy approach the brink.

The architects of current policy and their allies argue that there is insufficient determination to carry on with the existing strategy. Others argue that failure suggests the need for a change in course. The latter view seems to be taking hold among the European electorate.

This is appropriate. Much of what is being urged on and in Europe is likely to be not just ineffective but counterproductive to maintaining the monetary union, restoring normal financial conditions and government access to markets, and re-establishing economic growth.

Greeks smashing windows and setting fire to shops and banks in a fury of opposition to yet more austerity is gripping.  But it is hardly unique. A few years ago there were similar scenes for weeks after police shot a 15-year old schoolboy.  And back when I lived there, U.S. President Bill Clinton was treated to a similar welcome -- mainly because of his military assault on Serbia (a fellow Christian Orthodox nation) during the Kosovo conflict.

There are doubtless degrees. The latest level of destruction was the worst since widespread riots in 2008 -- and austerity being imposed on Greeks is very painful. But it is worth noting that there are two underlying elements than make such uprisings more common in Greece than elsewhere.

The first is a division in Greek society that goes back to at least the end of the second world war. The civil war that followed the end of the German occupation was brutal and split the country between those wanting western free market democracy and those favouring Soviet-style communism. This carried though into the 1967-74 junta.

By Gordon Brown
The views expressed are his own.

It was said of European monarchs of a century ago that they learned nothing and forgot nothing.  For three years, as a Greek debt problem has morphed into a full blown euro area crisis, European leaders  have been behind the curve, consistently repeating the same mistake of doing too little too late. But when they meet on Sunday, the time for small measures is over. As the G20 found when it met in London at the height of the  2009 crisis, only a demonstration of policy intent that shows irresistible force will persuade the markets that leaders will do what it takes. An announcement on a new Greek package will not be enough. Nor will it be sufficient to recapitalize the banks. European leaders will have to announce a comprehensive -- around 2 trillion euro -- finance facility; set out a plan to fundamentally reform the euro; and work with the G20 to agree on a coordinated plan for growth.

For three years it has suited leaders across Europe to disguise Europe’s banking problems and, citing the blatant profligacy of Greece, they have defined the European problem as simply a public sector debt problem. And it has suited Europe’s leaders to call for austerity (and if that fails, more austerity) and forget how the inflexibility of the euro is itself dampening prospects for growth, keeping unemployment unacceptably high and weakening Europe’s competitive position in the world today. Indeed, Europe’s share of world output has now fallen to just 18 percent.  And it is a measure of how it is losing out in the growth markets of the future that just 7.5 percent of Europe’s exports go to the emerging markets that are responsible for 70 percent of the world’s growth.

When I attended the first ever meeting of the euro group of leaders in October 2008 there was astonishment when I reported that Europe's banks had bought half America’s subprime mortgages and there was incredulity when I said that European banks were far more at risk than U.S. banks because they were far more highly leveraged. Since 2008, as American banks have tackled their toxic assets, they have written off 4 percent of their loans and raised the equivalent of another 4 percent in new equity.  But euro area banks have written off just 1 percent of their loans, and have raised their capital base by only 0.7 percent, leaving them highly vulnerable even before their exposure to sovereign debt has become a central issue.  Their vulnerability is increased because they have always been far more dependent for their funding on the short term and confidence-dependent wholesale markets, and  countries within the euro zone are able to do far less in the face of capital flight than, say, Britain.

They finally realised how serious it was. With stock markets tumbling, bond yields on vulnerable debt blowing out and the euro in danger of failing its first big stress test,  the European Union and International Monetary Fund came out with a huge rescue plan.

At 750 billion euros (500 billion from the EU; 250 billion from the IMF), the rescue package is the equivalent of taking a huge mallet to a loose tent peg.  Add to that an agreement among central banks to help out and the actual purchase of euro zone bonds by Europe’s central banks and you turn the mallet into a pile driver.

That tent is not going anywhere for now.

Does this remind anyone of anything? How about a lot of small attempts to stop the subprime/Lehman crisis failing, only to be followed by the  likes of the $700 billion Troubled Asset Relief Program in the United States?

Greece’s decision to ask for help from its European Union partners and the International Monetary Fund has triggered a new wave of notes on where the country’s debt crisis stands and what will happen next. For the most part, they have managed to avoid groan-inducing headlines referencing marathons, tragedies, Hellas having no fury or even Big Fat Greek Defaults.

Perhaps this is because the latest reports are pointed. They focus on the need to solve the Greek debt crisis before it spreads to bring down others and even shake Europe’s monetary framework loose.

Barclays Capital reckons the 45 billion euros or so of aid Greece is being promised is a drop in the bucket and that twice that will be needed in a multi-year package. JPMorgan Asset Management, meanwhile, says that to bring its 130 percent debt to GDP ratio under control Greece will need the largest three-year fiscal adjustment in recent history.

The International Monetary Fund has done what it was bid by the G20  and come up with proposals for getting banks to pay for the government help they receive when they get in trouble.  You can read the actual wording here, but it comes down to this:

1) A “Financial Stability Contribution” which would be pooled into a fund that would use it to help weak banks, or just go into general government revenues.

2)  A “Financial Activities Tax” — perhaps intentionally known as FAT — to be levied on combined bank profits and remuneration (for which read “bonuses”) and paid to governments.

The rescue plan put together for Greece by its European Union partners was not working anyway — at least as far as financial market speculation was concerned. But then up pops Axel Weber, Bundesbank chief and European Central Bank governing council members.

Athens, Weber is said to have told German politicians, may need up to 80 billion euros in assistance in the coming years. That’s quite a bit more than the 30-billion euro aid mechanism agreed about a week ago.

Result:  The spread between Greek and German 10-year bonds flew out to a new euro lifetime high. It might also have been helped along by the International Monetary Fund Global Financial Stability Report saying:

In the realm of  long-term economic things to worry about, there is not much that can rival youth unemployment in the greater Middle East and North Africa. Some years ago, for example, the World Bank  estimated that the region’s population rise was such that jobs needed to grow by some 3.5 percent  per year if unemployment along the lines of one-in-four was to be avoided over the next couple of decades. There has been nothing of great note to change this forecast.

The International Monetary Fund has just weighed into the issue with a post on the subject and some startling figures on the depth of the problem. As author Masood Ahmed writes:

Simply put, the region is facing unparalleled demographic pressures. Population growth over the past two generations has been among the fastest in the world: the region’s work force is projected to reach 185 million in 2020, 80 percent higher than in 2000. And the region is one of the most youthful in the world—with about 60 percent of the population less than 25 years old.