Tag Archives: Eurozone

Their efforts to manage the European Debt Problem

Greece Moves Closer to a Eurozone Exit

Once again Greece stands at the exit door of the Eurozone (EZ). In the past Greece’s possible exit had been discussed in hushed and guarded terms. The conversations behind the public displays of support for Greece indicated a growing impatience with the country’s failure get its finances in order. Quietly European leaders and financial institution have considered different scenarios that might result from a Greece exit from the EZ. United States banks and American financial companies have moved to limit their exposure  if Greece defaults. Hundreds of lawyers and financial advisers are reviewing legal documents and agreements in effort to protect their American clients’ interests. A Greek default would cause a wave of litigation which US companies hope would be heard under New York State or British law and the cases heard in friendly venues. More importantly; the banks do not want to be repaid in devalued currencies or worthless drachmas.

I have always argued that the EZ should not become involved in expensive and futile rescue attempts of the Greek economy.

Greek Prime Minister Antonis Samaras recently traveled to Germany and France for consultations with his counterparts over Greece’s implementation of the agreed upon austerity measures. The Greek leader’s coalition government was only formed upon the agreement that the country would renegotiate the terms of the bailout agreement(s).  Most Greeks are weary of the imposed austerity measures that were agreed to in exchange for having their economy rescued from default. The recent Greek presidential election was a protest vote against the austerity measures. Though the leaders of the more economically stable EZ countries have voiced support for Greece’s plight, there has never been much hope that the bloc would renegotiate  the bailout agreement. PM Samaras’ was tasked with requesting from his counterparts a two-year extension for Greece to carry out the required cost cutting. The measures are needed to qualify for the next 33.5bn-euro installment of its second 130bn-euro bailout. With the EZ teetering on the brink of another recession and other EZ members requesting bailouts, it might not have been the best time for Greece to ask for its money without having complied with the terms of the agreements.

The first high level meeting on PM Samaras’ schedule was with German Chancellor Merkel. The Greek leader had to appreciate the difficulty of his task in convincing the Germans to give his country more time to comply with the terms of the bailout agreement(s). Chancellor Merkel is credited with having successfully argued for the EZ’s austerity measures strategy of resolving the Europe’s debt crisis. After the meeting the two leaders held a joint new conference. PM Samaras stated the following in front of a gathering the international press:

“Greece will stick to its commitments and fulfil its obligations. In fact, this is already happening…We’re not asking for more money…(Greece) needed time to breathe”.

The German response did not surprise anyone; no decision would be made on Greece’s request nor would additionally funds be released until the Trioka’s September report has been received and reviewed. Chancellor Merkel reiterated her emotionally empty support for Greece’s continued membership in the EZ.  She expressed Germany’s position in clear and concise terms:

“For me, it’s important that we all stand by our commitments, and in particular await the [publication of] the troika report, to then see what the result is…But I will encourage Greece to follow the path of reform, which demands a lot of the Greek people.”

Some experts suggest that Ms. Merkel spoke in conciliatory terms  to prepare Germans for continued financial support for Greece. I disagree with this interpretation of her comments. Volker Kauder who is the leader of Chancellor Merkel’s political party stated that he had not problem with Greece exiting the EZ. The comments from leaders and financial experts, taken together, indicate that the Germans have grown resentful of mortgaging their future to rescue the economies of other member nations.

PM Samaras next arrived in France for face to face consultations with French President Hollande. The Greek leader again requested a two-year extension for Greece to implement the necessary cost cutting measures. I am sure that PM Samaras believed that President Hollande would be more understanding of Greece’s plight. President Hollande was recently elected to his office based on a platform of promoting growth versus cost cutting and austerity measures. The French leader expressed understanding for Greece’s difficulties but indicated that the country must carry out the austerity measures. President Hollande also said that any decision on Greece’s request would have to await until the September report of the Troika. It is a given that the Troika’s report will conclude that Greece has not made any real progress on implementing the requested measures. The Greeks must realize that they, likely, will not receive any more bailout funds.  

During his trip to Germany and France PM Samara’s failed to get any meaningful concessions for his tired and angry countrymen. It is inconceivable to me that he would have expected to receive more time to put Greece’s finances in order and, at the same  time, received additional bailout funding. His mission was doomed to fail from the start. It must be remembered that his coalition government is built upon Greek resistance and anger to the austerity measures.  The massive street protests cannot be explained away as isolated incidents of discontent. The Greek PM had to go to Germany and France on his hands and knees to ask for some breathing room. It is possible that Samara’s government will not withstand the failure to get concessions from the EZ. On the other hand Greece’s exit from the EZ is now a done deal.

The Euro 2012 Financial Competition

The financial markets reacted positively to last Friday’s news from the Eurozone (EZ) summit meeting The bloc’s political leaders again were meeting to discuss strategies and procedures for resolving the continent’s sovereign debt problem. The news coming from the meeting indicated that there were significant developments. The political leaders had agreed to tackle the continent’s debt problems by encouraging and stimulating growth of member nation’s economies. Apparently Germany had ceded some ground on it stance that austerity measures had to be implemented to resolve the continent’s debt problems. The details of the agreement must be worked out along with implementation procedures. From what I have read the leaders also agreed to make it easier for economically challenged governments to use bailout funds to buy their bonds. This understanding would make it easier for the governments to raise money while postponing a real solution to the problem of no private investor interest in the purchase of European sovereign debt.  Across the Atlantic the primary Wall Street indexes all closed higher on the news a European agreement. The NASDAQ gained the most by climbing 12.66%.

Upon the conclusion of past summits the markets have always surged slightly higher. Still, the commentators are suggesting that this summit has produced a game-changing consensus that might finally allow the EZ to right its financial ship. A joint statement issued by the negotiating leaders made it clear that they wanted to “break the vicious circle between banks and sovereigns.” I believe that the Friday’s meeting produced a political agreement that was driven by member nations’ domestic considerations. The debate and negotiations over building a strong financial union without the necessity for constantly rescuing the weaker economies was deferred for yet another summit. The agreement appears to address the political considerations at the cost of dealing with the bloc’s financial problems.

England does not use the euro. It is not a member of the EZ though it is a principal member of the European Union. British Prime Minister, David Cameron, who is often at odds many of the EZ political leaders, praised the agreement as a big step forward. He believed that the agreement to allow European bail-out funds to directly support banks in crisis-hit countries was the right move. PM Cameron also acknowledged the significance of relaxing some of he conditions for Spain’s receipt of monetary assistance from the fund. It is very likely that Spain, provided that certain conditions are met, will receive bailout funds deposited directly with designated banks. As clear concession to demands made by Italy, nations that want the EZ bailout fund to purchase their bonds will not longer have to be subjected to Greek-style monitoring programs.

The new crisis-fighting measures seem to be designed at assuaging domestic nationalistic concerns while preserving the bloc’s unity. It seems to me that the agreement pulls the EZ in the wrong financial direction.

The Financial Times ran an informative evaluation of the agreement in its June 29, 2011 edition, entitled “One Small Step for European Mankind.” The article discussed whether the European Council could forge a political agreement to use its policy tools to stabilize the EZ financial markets. It is conceded that the deal is subject to further interpretation and negotiations. According to the article the leaders made an effort to tie inextricably tie their fates together. At least for the moment, according to the article, the EZ’s demise has become more remote. What the members agreed to was a moving of the bloc towards a true euro banking union. The member states will give the European Central Bank power over their banks, which in return can be recapitalized directly by the EZ’s rescue fund. Will the banking industries of the member nations really cede power over the operations to a foreign entity?

There are concrete financial benefits to be derived from EZ’s tentative new agreement, as well as risks of sliding down into a dark financial and legal abyss. Obviously the economically challenged economies would love to have their banks recapitalized with fresh funds. These banks do not have access to private bond markets, their bonds being deemed to risky to buy. It is generally agreed that these troubled banks fell upon hard times because they were “required” to buy its nation’s toxic foreign debt. The agreement does not address the crucial question of how to attract private investors to purchase sovereign debt. We should not overlook the fundamental rule that investors invest to make money and not to be forced to take “haircuts.” Because individual nations of the EZ cannot devalue their respective currencies they must impose growth-sapping economic measures to regain competitiveness. This is the paradox that drives the European debt crises. In his article in the June 29, 2012 New York Times business section on private bond buyers, Landon Thomas Jr. concludes that “…Friday’s euphoria notwithstanding, economists and market participants remain doubtful that bond market fears can be permanently assuaged until the European Central Bank intervenes with the force and conviction shown by its peers in the United States and Britain…” The real question that must be addressed is can the bloc overcome strong nationalistic considerations to raise the necessary funds to forcefully stabilize the continent’s bond markets.